Self-Regulatory Organizations; Order Approving Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to the NASD's Free-Riding and Withholding Interpretation

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35059; File No. SR-NASD-94-15]

Self-Regulatory Organizations; Order Approving Proposed Rule

Change by National Association of Securities Dealers, Inc. Relating to

the NASD's Free-Riding and Withholding Interpretation

December 7, 1994.

On March 18, 1994, the National Association of Securities Dealers,

Inc. (``NASD'' or ``Association'') filed with the Securities and

Exchange Commission (``SEC'' or ``Commission'') a proposed rule change

pursuant to Section 19(b)(1)\1\ of the Securities Exchange Act of 1934

(``Act''), and Rule 19b-4 thereunder.\2\ The proposed rule change

amends the Free-Riding and Withholding Interpretation, an

Interpretation of the NASD's Board of Governors under Article III,

Section 1 of the Association's Rules of Fair Practice

(``Interpretation'').\3\

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\1\15 U.S.C. 78s(b)(1).

\2\17 CFR 240.19b-4.

\3\NASD Manual, Rules of Fair Practice, Art. III, Sec. 1 (CCH)

2151.06.

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Notice of the proposed rule change, together with the substance of

the proposal, was provided by the issuance of a Commission release

(Securities Exchange Act Release No. 34485, Aug. 3, 1994) and by

publication in the Federal Register (59 FR 40933, Aug. 10, 1994). Four

comment letters generally favoring the proposed rule change were

received in response to the Commission release.\4\ This order approves

the proposed rule change.

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\4\See letter from Weil, Gotshal & Manges (``Weil'') to Jonathan

G. Katz, Secretary, SEC, dated August 31, 1994; letter from James P.

Dowd, Senior Vice President and Associate General Counsel, Paine

Webber Incorporated (``Paine Webber'') to Jonathan G. Katz,

Secretary, SEC, dated September 1, 1994; letter from Sullivan &

Cromwell (``Sullivan'') to Jonathan G. Katz, Secretary, SEC, dated

September 12, 1994; and letter from Daniel W. Sasaki, Vice President

and Corporate Counsel, CS First Boston Corporation (``CSFB'') to

Jonathan G. Katz, Secretary, SEC, dated September 14, 1994.

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I. Overview of the Free-Riding and Withholding Interpretation

The purpose of the Interpretation is to protect the integrity of

the public offering system by ensuring that members make a bona fide

public distribution of ``hot issue'' securities and do not withhold

such securities for their own benefit or use the securities to reward

other persons who are in a position to direct future business to the

member. Hot issues are defined by the Interpretation as securities of a

public offering which trade at a premium in the secondary market

whenever such trading commences. The Interpretation prohibits members

from retaining the securities of hot issues in their own accounts and

prohibits members from allocating such securities to directors,

officers, employees and associated persons of members and other

brokerdealers. It also restricts member sales of ``hot issue''

securities to the accounts of specified categories of persons,

including among others, senior officers of banks, insurance companies,

registered investment companies, registered investment advisory firms

and any other persons within such organizations whose activities

influence or include the buying or selling of securities. These basic

prohibitions and restrictions are also made applicable to sales by

members of hot issue securities to accounts in which any such persons

may have a beneficial interest and, with limited exceptions, to members

of the immediate family of those persons restricted by the

Interpretation.

In May 1992, the NASD Board of Governors appointed a special

committee (the ``Committee'') to revisit the Interpretation to

determine whether changes in securities markets called for amendments

to the Interpretation's restrictions, definitions and obligations. The

Committee also examined various interpretative issues that had been

raised with the NASD.

In June 1993, the NASD published for comment proposed modifications

to the Interpretation based on its review and suggestions received. The

NASD received 36 comment letters on the proposed modifications. The

Committee considered the comments and made final recommendations to the

National Business Conduct Committee (``NBCC'') in November 1993. The

Board considered and approved the NBCC's recommendations in November

1993.

The proposed rule change includes language clarifications to

facilitate understanding of the Interpretation's application, as well

as substantive modifications.

II. Substantive Modifications

The NASD proposed several substantive modifications to the

Interpretation, including changes in connection with limited business

broker-dealers, investment partnerships and corporations, stand-by

arrangements, venture capital investors, securities offerings covered

by the Interpretation, and issuer-directed securities. The substantive

changes are intended to clarify the scope of the Interpretation and

remedy certain unintended effects the Interpretation has had in its

present form. Specifically, the NASD believes that the Interpretation

has prohibited transactions which do not implicate the Interpretation's

objective of a bona fide distribution of hot issue securities to the

public, and may have created unduly burdensome restrictions and expense

for NASD members and their customers. The substantive changes,

described further below, are intended to restrict prohibited persons

from receiving hot issues without engendering unintended restrictions

inconsistent with the purpose of the Interpretation.

A. Stand-by Arrangements

The Interpretation currently prohibits the sale of a hot issue to a

group of stand-by purchasers if any purchaser is restricted under the

Interpretation and has a beneficial interest in the stand-by account.

This prohibition may affect the successful completion of an offering in

which some of the offered securities are not otherwise purchased during

the offering period. The NASD proposed to permit restricted accounts to

purchase hot issue securities pursuant to a stand-by arrangement (i.e.,

an agreement to purchase securities not purchased during the offering

period) under certain conditions. The Commission believes that the

proposed conditions (prospectus disclosure, a formal agreement, absence

of any other purchaser, and a three month holding period) will ensure

that no NASD member will withhold such securities for its own benefit

or use the securities to reward other persons who are in a position to

direct future business to that member, while facilitating a bona fide

distribution of the securities offered.\5\

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\5\When the securities are sold by stand-by purchasers, the

stand-by purchasers would need to comply with all applicable

regulatory requirements including prospectus delivery pursuant to

Section 5 of the Securities Act of 1933 (``Securities Act'') and

Rule 10b-6 under the Act.

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B. Definition of Immediate Family

The Interpretation presently restricts immediate family members of:

(i) persons enumerated in Paragraph 2 (persons associated with broker-

dealers) (``absolutely restricted persons''); and (ii) Paragraphs 3 and

4 of the Interpretation (persons having a connection to the offering

and individuals related to banks, insurance companies and other

institutional type accounts) (collectively, ``conditionally restricted

persons'') from participating in hot issue distributions. The

Interpretation defines immediate family members very broadly and

includes such persons as father-, mother-, brother-in-law. An immediate

family member of an absolutely restricted person is prohibited from

purchasing hot issues to the same degree as the absolutely restricted

person, unless it can be demonstrated that the absolutely restricted

person does not contribute directly or indirectly to the support of the

immediate family member. In the latter circumstance, the immediate

family member of the absolutely restricted person may purchase a hot

issue under the same conditions as conditionally restricted persons.

Specifically, such persons may purchase hot issues if: (1) The

securities were sold to such persons in accordance with their normal

investment practice with the member making the distribution; and (2)

the securities sold are insubstantial and not disproportionate in

amount as compared to sales to members of the public and that the

amount sold to any one such person is insubstantial.

The Committee determined that in its present form, the immediate

family member provisions often place inequitable restrictions on a

person with a fairly attenuated connection to a restricted person named

in the Interpretation (e.g., the sister-in-law of a bank vice-

president), and often result in unduly burdensome compliance

difficulties for members monitoring whether such persons are restricted

or become restricted. The modifications to the immediate family member

provisions are intended to ensure that: (i) those persons with a

substantial nexus to a restricted person will be similarly restricted

under the Interpretation; (ii) NASD members may determine more easily

whether such persons are restricted; and (iii) the Interpretation no

longer will apply to persons not intended to be restricted.

The modifications:

(a) retain the investment history exemption, and expand it to

include the use of investment history at firms other than the member

making the allocation. The burden of obtaining such information will

remain with the firm making the sale;

(b) eliminate the immediate family restrictions on conditionally

restricted persons and clarify that the Interpretation will apply only

to conditionally restricted persons and to persons who are supported

directly or indirectly to a material extent by that conditionally

restricted person; and

(c) with respect to absolutely restricted persons, continue to

apply the immediate family restrictions to persons supported by the

restricted individual and to allocations by the restricted individual's

firm, but no longer will prohibit sales to non-support family members

of an absolutely restricted person by a broker-dealer that does not

employ the absolutely restricted person, where the absolutely

restricted person has no ability to control the allocation of the hot

issue.

There will continue to be a violation if it can be determined that

the restricted person has a beneficial interest in the account to which

an allocation was made.

C. Venture Capital Investors

The Committee determined that the Interpretation should permit bona

fide venture capital investors to purchase a hot issue to maintain

their percentage ownership in an entity, notwithstanding that the

venture capital investor may be a restricted person, or that such

person may have a beneficial interest in the venture capital account.

Venture capital investors often play a pivotal role in the continued

viability of an entity prior to its public offering. Therefore, such

investors should be allowed to maintain their ownership interest after

the entity completes its public offering.

The venture capital investor, in order to purchase the hot issue

without implicating the Interpretation's restrictions, must meet the

following conditions:

(a) One year of preexisting ownership in the entity;

(b) No increase in the investor's percentage ownership above that

held for the three months prior to the filing of a registration

statement in connection with the initial public offering;

(c) A lack of special terms in connection with the purchase; and

(d) The venture capital investor cannot assign, sell, pledge,

hypothecate or otherwise dispose of the securities for a period of

three months following the effective date of the registration statement

in connection with the offering.

The conditions imposed on the venture capital investor are intended

to ensure that the securities can be purchased by a bona fide venture

capital investor who has had an on-going interest in an entity, and

protect against any attempt to circumvent the Interpretation's

restrictions by investing in an entity shortly before its public

offering.

D. Investment Partnerships and Corporations

The Interpretation generally disallows sales of a hot issue to an

investment partnership or corporation, or similar account (``investment

partnership'') if a restricted person has a beneficial interest in the

entity. Thus, an investment partnership with several limited partners

would be ``tainted'' due to the limited partnership interest of the

restricted person. In August 1992 and October 1993 Notices to Members,

the NASD announced it would allow investment partnerships, on an

interim basis, to use a ``carve out'' mechanism to prevent restricted

persons with an interest in an investment partnership from

participating in hot issue allocations. This ``carve out'' mechanism

requires the NASD member making such allocation to set up a separate

account for these transactions and obtain from the investment

partnership and its accountants documentation that indicates that the

restricted persons are prevented from participating in a hot issue

allocation.

The carve-out methodology has been codified in the Interpretation.

The NASD intends that the carve-out procedure not allow a person

restricted under the Interpretation to receive a hot issue allocation

inconsistent with the Interpretation's provisions without inequitably

penalizing those not restricted under the Interpretation due to their

interest in an investment partnership in which a restricted person also

has an interest.\6\ The carve-out procedure will allow the limited

partnership to purchase the hot issue by properly allocating the hot

issue away from the restricted limited partner rather than restricting

the whole limited partnership.

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\6\A typical scenario is where a limited partnership with a

large number of limited partners is restricted under the

Interpretation because one of the limited partners is an officer of

an insurance company, and therefore restricted under Paragraph 4 of

the Interpretation.

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In addition, the NASD is amending the Interpretation to provide

that a beneficial interest, as defined under the Interpretation, will

not be created by the receipt of a management fee based on the

performance of an account. The Commission understands that investment

partnerships and other similar accounts typically require that the

management fee structure of such accounts include a performance-based

component. Thus, an investment advisor restricted under Paragraph 4 of

the Interpretation could restrict an entire investment partnership, in

which no restricted persons have an interest, based solely on the

investment advisor receiving a fee based on the performance of the

securities in the investment partnership account. The Beneficial

Interest provision of the Interpretation is intended to address those

accounts in which a restricted person has a substantive, albeit not

necessarily direct, ownership interest that should be appropriately

restricted. The receipt of a performance-based fee, without the

existence of any other beneficial interest, should not create such an

interest.

E. Definition of Public Offering

The Interpretation currently defines ``public offering'' to include

virtually any and all distributions of securities, whether registered

or unregistered under the Securities Act. The definition has imposed

the Interpretation's restrictions on bona fide private placements of

securities which do not present the potential abuses against which the

Interpretation is intended to guard. The amendment will not apply the

Interpretation to a traditional private placement of securities because

such distributions generally are limited in scope and have holding

periods placed on the privately placed securities, thereby limiting the

potential for restricted persons to purchase the securities and resell

or ``flip'' them in a short period of time.

F. Associated Person Definition

Article I, Section (m) of the NASD By-Laws defines a ``person

associated with a member'' to include a partner of a broker-dealer and

any person who is directly or indirectly controlling or controlled by

such member, whether or not such person is registered with the

Association. A certain degree of confusion exists as to the status of

passive investors in broker-dealers, such a broker-dealer limited

partners, equity owners, or subordinated lenders.

Certain passive investors lack the necessary element of control.

Therefore, the Interpretation has been amended to provide that a person

who owns or has contributed 10% or less to a broker-dealer's capital

should not be construed to be an associated person if: (i) such

ownership interest is a passive investment; (ii) the person does not

receive hot issues from the member in which she has the interest; and

(iii) the broker-dealer is not in a position to direct hot issues to

the person. These conditions are intended to prevent such persons from

attempting to use their ownership interests in a broker-dealer to

effect the purchase of hot issues, and circumvent the Interpretation's

objective of a bona fide distribution of a hot issue.

G. Persons Associated With Limited Business Broker-Dealers

Certain broker-dealers transact a securities business that is

limited to direct participation programs or investment company/variable

product securities. Persons associated with such limited broker-dealers

are not in a position to sell, distribute, or withhold hot issue

securities. The Interpretation has been amended to recognize that such

persons would not be in a position to inhibit a bona fide distribution

of a hot issue security. Specifically, the Interpretation has been

modified so that persons associated with broker-dealers whose business

is limited to direct participation programs or investment company/

variable product securities are not restricted under the Interpretation

to the same extent as those persons associated with broker-dealers with

a more comprehensive securities business. The modification applies only

to a person associated with such a limited broker-dealer, and not to

the broker-dealer itself, as it is inappropriate for any NASD member to

purchase a hot issue security for its own account, regardless of the

extent of its securities business.

H. Issuer Directed Securities

Presently, an employee of an issuer, who also is restricted under

the Interpretation, must receive permission from the NASD Board of

Governors in order to purchase hot issue securities of its employer, if

the employee does not have the requisite investment history with the

NASD member making the securities distribution. For example, an

employee of a manufacturing company who is married to the senior

officer of a bank would be restricted under the Interpretation because

he or she is the immediate family member of a restricted person under

Paragraph 3 of the Interpretation. Under the proposed changes to

Paragraph 3 of the Interpretation, the employee would still be

restricted if the senior officer of the bank directly or indirectly

supports the employee. If permission is granted by the Board of

Governors, the employee is allowed to purchase the securities of the

employer without meeting the investment history requirement, but the

amount purchased would still have to meet the insubstantial and not

disproportionate tests described above.

Issuer-directed share programs are viewed as a valuable tool in

employee development and retention, and are not likely to pose the risk

of members using these securities to reward other persons who are in a

position to direct future business to the member. Thus, the

modifications to the Issuer Directed Securities section of the

Interpretation will allow employees of issuers to purchase hot issue

securities of the employer under the same terms and conditions as

persons associated with NASD members are permitted in connection with

purchases of securities issued by the member, pursuant to an exemption

provided in Section 13 of Schedule E to the NASD's By-Laws.

I. Cancellation Safe Harbor

It will not be a violation if a NASD member makes an allocation of

a hot issue to a restricted person or account, so long as the member

cancelled the trade and reallocated the security at the public offering

price to an unrestricted account, prior to T+1 of the initial

transaction. The clarification is intended to remedy concerns caused by

inadvertent violations of the Interpretation that are corrected by the

NASD member making the distribution. Sales following cancellation would

need to be made in compliance with applicable laws, including section 5

of the Securities Act.

Whether a particular cancellation and reallocation for purposes of

compliance with the Interpretation will raise an issue under Rule 10b-6

will depend upon the facts and circumstances involved in that

cancellation and reallocation. For purposes of Rule 10b-6, a

distribution includes ``the entire process by which in the course of a

public offering the block of securities is dispensed and ultimately

comes to rest in the hands of the investing public.''\7\ Thus, a

distribution continues if a broker-dealer withholds any part of an

offering in proprietary or nominee accounts and later sells those

securities to the public after secondary trading has begun.\8\ However,

a cancellation of a bona fide purchase order will not reopen the

distribution where there is no reason for the underwriter to believe

that the purchase order would be cancelled.\9\

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\7\R.A. Holman & Co. v. SEC, 366 F.2d 446, 449 (2d Cir. 1966),

modified on other grounds, 377 F.2d 665 (2d Cir. 1966), cert.

denied, 389 U.S. 991 (1967).

\8\Wall Street West, Inc, 47 S.E.C. 1003, 1005 (1984).

\9\Cf. Id.

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III. Comments

A. Investment Partnerships

Weil, Sullivan and CSFB believe that the carve-out methodology

proposed by the NASD remains unduly restrictive. Weil argues that the

proposal is unduly restrictive with respect to those investment

partnerships in which conditionally restricted persons hold beneficial

interests. Weil notes that members may sell directly to conditionally

restricted persons if such sales are made in conformity with the

investment history exemption. Weil suggests that members be permitted

to sell hot issues to investment partnerships in which conditionally

restricted persons hold beneficial interests if the sales conform to

the normal investment practice of the investment partnership and such

sales meet the ``insubstantial'' and ``not disproportionate'' tests.

The NASD notes that it interprets the Interpretation to permit

sales to investment partnerships or corporations in which conditionally

restricted persons with the requisite investment history have a

beneficial interest if the member can demonstrate that the percentage

ownership of the hot issue security attributable to the conditionally

restricted person is not greater than the amount that that person would

have been allowed to purchase directly.\10\ The Commission believes

that this interpretation ensures that conditionally restricted persons

are not treated less favorably if they hold an indirect interest in a

hot issue purchased by an investment partnership than they are if they

directly purchase a hot issue.

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\10\See Letter from T. Grant Callery, Vice President and General

Counsel, NASD, to Mark P. Barracca, Branch Chief, Over-the-Counter

Regulation, SEC, dated November 10, 1994.

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Weil also suggests that the Interpretation permit an investment

partnership that has created a ``hot issue'' to ``journal'' securities

in the hot issue account to the regular account upon completion of the

offering. Weil states that such a transfer of accounts, after the

completion of the distribution of the issue, would have no bearing upon

the adequacy of the distribution to the public. Sullivan suggests that

the NASD dispense with the ``hot issue'' account entirely, instead

permitting investment funds to segregate new issue purchases on their

internal records.

The NASD believes that such a mechanism would make it unnecessarily

difficult to enforce compliance with the carve-out provisions. The

Commission notes that the carve-out mechanism is not necessary when no

conditionally restricted person would obtain an interest in a hot issue

that is greater than the amount that that person would have been

allowed to purchase directly. Therefore, the Commission agrees that a

journaling mechanism is not necessary.

Sullivan also argues that the NASD should permit restricted persons

who manage investment partnerships to maintain a de minimis equity

investment in the managed entities. It argues that federal tax laws

require a general partner to keep a specified minimum interest in the

partnership in order to ensure that it qualifies for taxation as a

partnership under the Internal Revenue Code. It also argues that the

NASD proposes to permit managers to accept performance fees, which

often will greatly exceed any amounts that a manager may earn from its

de minimis investment.

The NASD responds that the Committee that reviewed the

Interpretation explored various de minimis provisions and determined

that: (i) any de minimis amount necessarily would be an arbitrary

figure; and (ii) monitoring accounts to ensure compliance with a de

minimis provision would be difficult.

The Commission acknowledges that on many occasions, performance

fees will greatly exceed any amounts that a manager may earn from its

de minimis investment. However, the Commission agrees with the NASD

that de minimis provisions are arbitrary and that monitoring accounts

to ensure compliance would be difficult.\11\

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\11\The Commission notes that a partnership is not the only

structure that permits flow-through tax treatment.

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Sullivan and CSFB argue that the NASD should permit absolutely

restricted persons to hold a de minimis indirect financial interest in

an investment partnership without triggering the ``carve out''

requirement. Sullivan and CSFB argue that it is possible for an

absolutely restricted person to have an indirect beneficial interest in

an investment partnership because the person is an officer of a member

affiliated with the general partner of the partnership and may benefit

from the partnership's performance solely by virtue of his status as a

shareholder of an entity which owns the member and which receives a

portion of the profits allocated to the general partner.

The NASD objects to this de minimis proposal for the same reasons

that it objected to the other de minimis proposals, namely: (i) any de

minimis amount necessarily would be an arbitrary figure; and (ii)

monitoring accounts to ensure compliance with a de minimis provision

would be difficult.

The Commission notes that the NASD has justified the payment of

performance-based fees because such fees are not deemed to be the

substantive, albeit not necessarily direct ownership, interest that the

Interpretation is intended to restrict. The examples used by Sullivan

and CSFB also present interests which are not substantive. However, not

all such situations may be as innocuous as those posed by Sullivan and

CSFB. The Commission agrees with the NASD that de minimis guidelines

are arbitrary and that monitoring accounts to ensure compliance would

be difficult.

B. Application of Interpretation to Offerings of Straight Debt

Securities

PaineWebber and Sullivan argue that the Interpretation should not

apply to investment-grade straight-debt securities, because the manner

in which they trade would make it impossible for a restricted person to

earn a free-riding premium at the expense of public investors.

PaineWebber states that investment-grade debt is priced relative to the

interest rate of U.S. Treasury securities of comparable maturity. Both

state that such securities are considered fungible with other non-

convertible securities with comparable economic terms and credit

ratings. Alternatively, PaineWebber suggests that the Interpretation

apply to such securities only in those instances in which there has

been a material narrowing in yield spread versus the comparable

maturity U.S. Treasury security between the initial offering yield

spread and the yield spread when the issue is freed to trade in the

secondary market.

The NASD states that PaineWebber and Sullivan have raised

legitimate concerns regarding the treatment of investment-grade

straight-debt securities and that the NBCC should revisit the issue.

However, it believes that these issues can be addressed in another

proposed rule change. The Commission agrees that consideration of these

comments should not delay implementation of the beneficial

modifications contained in this proposed rule change.

C. Application of Interpretation to Offerings of Equity Securities for

Which a Secondary Trading Market Exists

Sullivan suggests that the Interpretation should not apply to most

common stock offerings by issuers whose common stock is currently

listed on a national securities exchange or traded over-the-counter,

because the stock already is traded publicly and the public offering

price will reflect the stock's market price. It suggests that the

Interpretation should apply only in those instances when the public

offering price reflects a discount greater than a specified percentage

from the closing price on the pricing date or when the stock has become

hot for a reason other than increased demand for the issuer's stock

generally.

The NASD states that Sullivan has raised legitimate concerns

regarding the treatment of equity securities for which a secondary

trading market exists and that the NBCC should revisit the issue.

However, it believes that these issues can be addressed in another

proposed rule change. The Commission agrees that consideration of these

comments also should not delay implementation of the beneficial

modifications contained in this proposed rule change.

D. Definition of Public Offering

Sullivan also suggests that the definition of ``public offering''

for purposes of the Interpretation expressly exclude offerings made in

reliance on Rule 144A and should exclude ``exchange offers'' and

``offerings made pursuant to a merger or acquisition.''

The NASD states that it interprets the Interpretation not to apply

to offerings made in reliance on Rule 144A. In addition, it states that

it does not apply the Interpretation to ``exchange offers'' and

``offerings made pursuant to a merger or acquisition'' but to other

distributions made in connection with these types of offerings.

IV. Discussion

The Commission finds that the proposed rule change is consistent

with the requirements of the Act and the rules and regulations

thereunder applicable to the NASD and, in particular, the requirements

of Section 15A(b)(6) of the Act.12 Section 15A(b)(6) requires,

inter alia, that the NASD's rules be designed to prevent fraudulent and

manipulative acts, promote just and equitable principles of trade, and

protect investors and the public interest. The Commission believes that

the amendments to the Interpretation further the goals of Section

15A(b)(6) because the amendments ensure that the Interpretation will

continue to prohibit those transactions which present an undue risk

that a member will withhold ``hot issue'' securities for its own

benefit or use the securities to reward other persons who are in a

position to direct future business to the member. At the same time, the

Commission believes that the amendments will permit certain

transactions that the Interpretation previously prohibited, but which

do not pose a risk of undercutting the Interpretation's objective of a

bona fide distribution of hot issue securities to the public. The

Commission finds that the proposed rule change will facilitate the

capital raising process by removing restrictions and compliance burdens

imposed by the Interpretation with respect to certain transactions

where application of the Interpretation does not enhance investor

protection or the public interest, e.g., stand-by purchasers, venture

capital investors and issuer-directed transactions). The Commission

also finds that the changes in the definition of immediate family and

associated person ensure that the Interpretation continues to apply to

those allocations which are likely to benefit the member or are likely

to be used as a quid pro quo for persons in a position to direct future

business to the member, while permitting allocations to categories of

persons who are not likely to direct future business to the member.

Finally, the Commission recognizes that the Interpretation will

continue to prohibit or restrict certain transactions which are not

likely to conflict with the objective of the transaction. However, the

Commission believes that permitting those transactions would pose an

undue risk that the NASD will be unable to effectively monitor

compliance with the Interpretation. Therefore, the Commission believes

that the Interpretation should continue to apply on a prophylactic

basis to these categories of transactions.

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\1\215 U.S.C. 78o-3.

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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,

that File No. SR-NASD-94-15 be, and hereby is, approved.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority, 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-30709 Filed 12-13-94; 8:45 am]

BILLING CODE 8010-01-M