Self-Regulatory Organizations; Filing of Proposed Rule Change by National Association of Securities Dealers, Inc. to the Corporate Financing Rule at Article III, Section 44 of the Rules of Fair Practice Regarding Rights of First Refusal

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35961; File No. SR-NASD-95-29]

Self-Regulatory Organizations; Filing of Proposed Rule Change by

National Association of Securities Dealers, Inc. to the Corporate

Financing Rule at Article III, Section 44 of the Rules of Fair Practice

Regarding Rights of First Refusal

July 12, 1995.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on June 1, 1995, the National

Association of Securities Dealers, Inc. (``NASD'' or ``Association'')

filed with the Securities and Exchange Commission (``SEC'' or

``Commission'') the proposed rule change as described in Items I, II,

and III below, which Items have been prepared by the NASD. The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons.

\1\ 15 U.S.C. 78s(b)(1) (1988).

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The NASD is proposing to amend Article III, section 44 of the Rules

of Fair Practice regarding rights of first refusal. Proposed new

language is in italics; proposed deletions are bracketed.

Rules of Fair Practice, Article III, The Corporate Financing Rule,

Underwriting Terms and Arrangements

Section 44

* * * * *

(c) Underwriting Compensation and Arrangements

* * * * *

(3) Items of Compensation

(A) For purposes of determining the amount of underwriting

compensation received or to be received by the underwriter and

related persons pursuant to paragraph (c)(2) above, the following

items and all other items of value received or to be received by the

underwriter and related persons in connection with or related to the

distribution of the offering, as determined pursuant to paragraph

(c)(4) below shall be included:

* * * * *

(ix) any right of first refusal provided to the underwriter and

related persons to underwrite or participate in future public

offerings, private placements or other financings [by the issuer],

which will have a compensation value of 1% of the offering proceeds

or that dollar amount contractually agreed to by the issuer and

underwriter to waive or terminate the right of first refusal;

* * * * *

(6) Unreasonable Terms and Arrangements

* * * * *

(B) Without limiting the foregoing, the following terms and

arrangements, when proposed in connection with the distribution of a

public offering of securities, shall be unfair and unreasonable:

* * * * *

(v) any right of first refusal provided to the underwriter and

related persons [regarding] to underwrite or participate in future

public offerings, private placements or other financings which:

(1) has a duration of more than [five (5)] three (3) years from

the effective date of the offering; or

(2) has more than one opportunity to waive or terminate the

right of first refusal in consideration of any payment or fee;

(vi) any payment or fee to waive or terminate a right of first

refusal regarding future public offerings, private placements or

other financings provided to the underwriter and related persons

which:

(1) has a value in excess of the greater of one percent (1%) of

the offering proceeds in the public offering where the right of

first refusal was granted (or an amount in excess of one percent if

additional compensation is available under the compensation

guideline of the original offering) or five percent (5%) of the

underwriting discount or commission paid in connection with the

future financing (including any overallotment option that may be

exercised), regardless of whether the payment or fee is negotiated

at the time of or subsequent to the original public offering; or

(2) is not paid in cash.

Subsection (vi)-(xii) are renumbered (vii)-(xiii).

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the NASD included statements

concerning the purpose of and basis for the proposed rule change and

discussed any comments it received on the proposed rule change. The

text of these statements may be examined at the places specified in

Item IV below. The NASD has prepared summaries, set forth in sections

(A), (B), and (C) below, of the most significant aspects of such

statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

Background

The NASD developed its policy on the valuation of rights of first

refusal in the early 1970s. Rights of first refusal are typically

negotiated in connection with an issuer's initial public offering and

grant the underwriter a right to underwrite or participate in any

future public offerings, private placements, or other financings by the

issuer for a certain period of years. The NASD values rights of first

refusal as a non-cash item of compensation at one

[[Page 37118]]

percent of the offering proceeds and currently limits the duration of

the right to 5 years.\2\ To the extent that an underwriting agreement

includes a provision specifying a dollar amount for the waiver or

termination of a right of first refusal, it has been the policy of the

NASD Corporate Financing Department (``Department'') under the

Corporate Financing Rule to value the right of first refusal on the

basis of the specified dollar amount in place of the one percent

valuation.

\2\ See, Corporate Financing Rule at Article III, Section 44 of

the Rules of Fair Practice (Corporate Financing Rule), section

(c)(3)(A)(ix) and section (c)(6)(B)(v). NASD Manual, paragraph 2200D

at pages 2206 and 2209.

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The NASD believes that members should be permitted to negotiate to

waive or terminate a right of first refusal in the event that the

issuer wishes to use a different underwriter to subsequently raise

additional capital through a public or private offering of its

securities, provided that amounts negotiated are limited to an amount

that has some relation to the size of the subsequent offering in which

the member is not participating. Because use of right of first refusal

are primarily confined to certain underwriters of companies that are

generally small and without significant operating history, the NASD has

found that issuers negotiating with an underwriter for the first time

in connection with an initial public offering often may not fully

comprehend that they have agreed to extend their relationship with the

underwriter for as many as five years, nor be in a position to

influence the terms of the right. In addition, the NASD has observed

that certain underwriters routinely negotiate to receive rights of

first refusal at the time of an initial public offering and later

negotiate to waive or terminate their rights, apparently without any

original intent to actually underwrite any subsequent offering of

securities by the issuer.

The NASD is concerned that underwriters not be permitted to avoid

underwriting compensation limits by negotiating to waive or terminate a

right of first refusal with no limitation whatsoever on the amount of

compensation they might negotiate to receive. The NASD is also

concerned that an issuer may find it difficult to negotiate appropriate

underwriting compensation with a new underwriter, where the issuer has

determined to sever its relationship with its former underwriter and

the former underwriter requires a substantial payment to waive or

terminate its right of first refusal. Finally, the NASD believes that

the policy on rights of first refusal should also protect investors,

who ultimately incur the cost when an issuer compensates an underwriter

for waiving or terminating a right of first refusal.

Description of Proposed Rule Change

Three-Year Duration

Currently, the NASD Corporate Financing Rule at section

44(c)(6)(B)(v) to Article III of the Rules of Fair Practice prohibits,

as unreasonable, any ``right of first refusal'' regarding future public

offerings, private placements or other financings that has a duration

of more than five (5) years from the effective date of the offering.

The NASD is concerned that smaller issuers entering into these

agreements may not be in a position to fully evaluate the ramifications

of agreeing to a right of first refusal with a term of five years. In

addition since the NASD staff rarely, if ever, sees a right of first

refusal with a term less than five years, the duration of rights may

not be freely negotiated by the issuer and the underwriter. The NASD

has determined that a right of first refusal with a duration of five

years is overreaching and that a three-year period is more appropriate.

The NASD is proposing to modify section 44(c)(6)(B)(v) to Article III

of the Rules of Fair Practice to reduce the duration of the right of

first refusal from five years to three years. That portion of

subparagraph (v) referring to the proposed three-year limitation is

proposed to be separated and numbered as new subparagraph (v)(1).

Number of Payments for Waiver/Termination

The NASD finds that certain underwriters routinely negotiate to

receive rights of first refusal at the time of an initial public

offering and later negotiate, repeatedly, to waive or terminate their

rights, apparently without any original intent to actually underwrite

any subsequent offerings of securities by the issuer. The NASD is

concerned over underwriters receiving a ``stand-aside'' payment for

each subsequent offering by an issuer that has established a

relationship with a new underwriter, where the original underwriter is

no longer providing any bona fide services to the issuer.

The NASD also is concerned that multiple stand-aside payments by

the issuer to a member result in difficulty for both the member and the

NASD in tracking the payments received over the term of the right. Such

tracking is important in order to insure compliance with the Corporate

Financing Rule's compensation guidelines for the original offering.\3\

\3\ The NASD anticipates that the former underwriter will

contact the NASD Corporate Financing Department when it is

negotiating a waiver or termination of a right of first refusal to

obtain information on whether additional compensation is available

under the compensation guideline applicable to the original

offering.

The NASD, therefore, proposes to add a new subparagraph (v)(2) to

section 44(c)(6)(B) to Article III of the Rules of Fair Practice to

limit a member to one opportunity to waive or terminate a right of

first refusal in consideration of any payment or fee. The NASD notes

that an underwriter not wishing to terminate its right of first refusal

for future offerings may preserve its right by waiving its

participation in a particular offering without accepting payment for

such waiver.

Limitation on Waiver/Termination Compensation

The NASD believes that members should be permitted to negotiate to

waive or terminate a right of first refusal in the event that the

issuer wishes to use a different underwriter to subsequently raise

additional capital through a public or private offering of its

securities. However, the NASD believes that the amounts negotiated for

the waiver or termination of the right should be limited to an amount

that has some relation either to the original offering or to the

subsequent offering in which the member is not participating.

The NASD is concerned that the cost to the issuer of raising

additional capital may become excessive where the issuer's former

underwriter requires an excessive payment to waive or terminate its

right of first refusal. The NASD, therefore, proposes to limit the

amount of such waiver/termination payments by adding a new subparagraph

(vi) to section 44(c)(6)(B) to Article III of the Rules of Fair

Practice. New subparagraph (vi)(1) would prohibit any payment to waive

or terminate a right of first refusal that has a value in excess of the

greater of 1% of the original offering (or a higher amount if

additional compensation is available under the compensation guideline

applicable to the original offering) or 5% of the underwriting discount

or commission paid in connection with the future offering (including

any overallotment option that may be exercised), regardless of whether

the payment or fee is negotiated at the time of or subsequent to the

original public offering.

The proposed provision is intended to balance the interests of

former underwriters and issuers by prescribing

[[Page 37119]]

a formula for waiver/termination payments that allows former

underwriters to participate in the success of issuers, while at the

same time not jeopardizing that success with a payment so large that it

harms an issuer's ability to conduct and realize the benefits of a

secondary offering.\4\ The proposed one percent limitation reflects the

NASD's belief that it is appropriate that the former underwriter be

permitted to negotiate a fee that is at least equal to the valuation of

the right of first refusal in connection with the NASD's review of the

original offering in the event that the issuer wishes to sever its

relationship with the former underwriter.\5\ The five percent

alternative limitation reflects the NASD's belief that the former

underwriter that assumed the risk of distributing the issuer's IPO

should be allowed to participate or equitably benefit in the issuer's

subsequent offering of securities, including any overallotment option

that may be exercised, regardless of whether the payment or fee is

negotiated at the time of or subsequent to the original public

offering.

\4\ The NASD does not include the payment to waive or terminate

a right of first refusal as compensation in connection with its

review of the subsequent offering of securities. The proposed rule

change does not modify this practice.

\5\ For example, where the offering proceeds of the original

offering were $10 million and the new offering is to be $150

million, with a discount of 6 percent or $9 million, the member

could negotiate a fee for waiver or termination of the right of

first refusal of up to $450,000 (5 percent of $9 million), which is

greater than 1 percent of $10 million, or $100,000.

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Cash Payment Requirement

The NASD also proposes adding provision (2) to the new subparagraph

(vi) of section 44(c)(6)(B) to Article III of the Rules of Fair

Practice to specify that compensation to members for waiving or

terminating a right of first refusal must be in the form of cash. The

NASD believes this provision will limit the waiver/termination payment

to a percentage of the capital raised in the secondary offering and

protect the company's shareholders from dilution resulting from the

issuance of shares to a former underwriter.

Additional Clarifications

The proposed rule change would revise subparagraph (ix) to section

44(3)(A) and subparagraph (v) to section 44(6)(B) to Article III of the

Rules of Fair Practice to make the rule language consistent. The rule

change to subparagraph (ix) to section 44(c)(A) would clarify policy

that any right of first refusal provided to the underwriter and related

persons to underwrite or participate is applicable to all future

``public'' offerings and ``private placements or other financings.''

The proposed rule change would also revise subparagraph (v) to

section 44(6)(B) to Article III of the Rules of Fair Practice to

clarify current policy that all unreasonable terms and arrangements

cited under subparagraph (v) to section 44(6)(B) shall apply to any

right of first refusal ``provided to the underwriter and related

persons to underwrite and participate in'' future public offerings,

private placements or other financings.

Implementation of Rule

The NASD is proposing to make the proposed rule change applicable

to filings made with the Corporate Financing Department of the NASD

that are not yet effective with the SEC on the date of implementation

of the rule change announced by the NASD in a Notice to Members

following SEC approval. The implementation date announced by the NASD

will not be more than 90 days following SEC approval of the rule

change. Thus, offerings filed with the Corporate Financing Department

that have not become effective with the SEC on the date of

implementation announced by the NASD will be required to comply with

the proposed rule change, regardless of whether the Corporate Financing

Department has previously issued an opinion that it has no objections

to the terms and arrangements. It is the intention of the Corporate

Financing Department after the proposed rule change has been published

for comment to include a notification with all correspondence with

counsel to members regarding this proposed amendment to the Corporate

Financing Rule.

The NASD believes that the proposed rule change is consistent with

the provisions of section 15A(b)(6) of the Act which provides that the

proposed rule change be designed to prevent fraudulent and manipulative

acts and practices, to promote just and equitable principles of trade,

to remove impediments to and perfect the mechanism of a free and open

market and a national market system, and, in general, to protect

investors and the public interest in that the proposed rule change will

preserve ``rights of first refusal'' as a valuable item of compensation

to an underwriter, while protecting issuers and investors from

excessive payments to waive or terminate a right of first refusal

granted to a former underwriter.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The NASD does not believe that the proposed rule change will result

in any burden on competition that is not necessary or appropriate in

furtherance of the purposes of the Act, as amended.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants, or Others

The proposed rule change was published for comment in Notice to

Members 94-82 (Oct. 1994). Four comments were received in response

thereto and were generally opposed to the proposed rule.\6\

\6\ Comment letters were submitted by Lew Lieberbaum and Co.,

Inc.; Spelman & Co., Inc.; Kelley Drye and Warren; and Bachner,

Tally, Polevoy and Misher.

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The major issues raised by the commenters can be generally

categorized as follows: (1) The duration of a right of first refusal,

(2) the number of payments permitted for waiver or termination of a

right, (3) limits on waiver/termination compensation, (4) the cash

payment requirement, and (5) the valuation of rights of first

refusal.\7\

\7\ Notice to Member 94-82 incorrectly stated that the NASD is

proposing to amend the methodology employed by the NASD for valuing

a right of first refusal, which as currently valued for compensation

purposes is 1% of the gross proceeds of the offering, or the amount

specified in the underwriting contract to waive or terminate the

right. The incorrect rule language would have limited the

compensation value of a right of first refusal to the ``lesser of''

1% of the gross offering proceeds on the contracted amount. The NASD

is not considering such a proposed rule change and the comments

opposing this proposal, therefore, are not discussed in this filing.

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Duration of the Right of First Refusal

The proposed rule change would limit the term of a right of first

refusal to a maximum of three years.\8\ Two commenters argued that

early stage companies operate unprofitably for more than three years

after an IPO and, as a result, limiting a right of first refusal to

three years could prevent the underwriter from realizing the benefits

of underwriting an offering for a financially stable issuer. Two

commenters also argued that securities offerings of smaller issuers are

inherently riskier for the underwriter than securities offerings of

more financially-stable companies. Typically, small early-stage

companies are not well known to the public market and, because of the

size and limited

[[Page 37120]]

resources of the underwriter or restrictions as a result of state blue

sky laws, the offering is limited with regard to possible purchasers of

the securities. These commenters believe, therefore, that the

underwriter should be compensated commensurate with the greater risk of

the IPO. One commenter suggested that there is no downside to the

issuer to a five-year right of first refusal. The issuer is not

obligated to use the services of the original underwriter, but rather

is merely prevented from undertaking an offering with another

underwriter without compensating the original underwriter. Furthermore,

one commenter argued that the issuer and underwriter are free to

negotiate a right of first refusal of lesser duration, and to limit

expressly duration to three years would hinder the ability of an early

stage company to gain access to the public capital markets by reducing

the incentive to underwrite such a company's securities.

\8\ Two commenters expressed concern with the proposed reduction

in the maximum permissible duration of a right of first refusal from

five years to three years and one commenter generally agreed that

the 3-year limit was reasonable, and one commenter expressed no

view.

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In response to the above comments, the NASD remains concerned that

smaller issuers entering into these agreements may not be in a position

to evaluate fully the ramifications of agreeing to a right of first

refusal with terms of five years. The NASD also has concluded that such

issuers are often not in a position to influence such terms. In support

of this belief, the NASD finds that it rarely if ever sees a right of

first refusal with a term of less than five years. The five-year

maximum term is routinely included in letters of intent and

underwriting agreements and appears to be presented to issuers as a

usual and customary underwritten arrangement that is non-negotiable.

One commenter suggested that offerings that meet the definition of

``small business issuer'' under Regulation S-B of the Securities Act of

1933 (the ``Securities Act'') and offerings conducted under Regulation

A of the Securities Act be permitted to retain a five year right of

first refusal while rights in offerings of all other issuers would be

limited to three years. The commenter argues that the NASD has

historically acknowledged the inherent risk of underwriting small

issuers by permitting a greater percentage of underwriting compensation

for smaller offerings, and proposes that a comparable analysis be

applied to the duration of a right of first refusal.

In response, the NASD believes the commenter's suggestion would

exempt from the proposed rule change those smaller issuers who are most

unable to evaluate the ramifications of the rights of first refusal and

who have the least ability to influence the right's terms. Upon review,

the NASD also does not believe the 3-year limitation will reduce the

ability of smaller issuers to obtain financing from members.

One commenter agreed that the three-year limitation appeared

reasonable but that there should be room for exceptions. For example,

the commenter suggests that if an issuer does exceptionally well during

this period and issues securities of an affiliated company in a spinoff

transaction, the underwriter's three-year time period should begin anew

as vis-a-vis the spinoff. The NASD notes that exceptions to the

Corporate Financing Rule may be granted by a Hearing Subcommittee of

the Corporate Financing Committee in connection with a member's request

for review of a staff determination that proposed offering terms and

arrangements are unfair and unreasonable. With regard to the

commenter's example, the NASD does not believe the contractual

obligation of a company to its original underwriter under a right of

first refusal should automatically become the obligation of that

company's affiliate when it goes public through a spin-off transaction.

Number of Payments for Waiver/Termination

The proposed rule change would permit only one payment to a member

for waiving a right of first refusal in connection with a subsequent

financing. Upon such payment, the right would be deemed to be

terminated.\9\

\9\ Three of the four commenters were opposed to limiting the

receipt of compensation for waiving or terminating a right of first

refusal to one time.

Commenters argued that such a limitation unfairly penalizes the

underwriter and that one payment should not affect subsequent offerings

during the term of the right. Despite such arguments, the NASD's

concerns remain regarding underwriters receiving a ``stand-aside''

payment for each subsequent offering by an issuer that has established

a relationship with a new underwriter when the original underwriter is

no longer providing any bona fide services to the issuer. In addition,

the NASD believes that multiple payments result in greater difficulty

for both the member and the NASD in terms of tracking the amounts

received over the term of the right in order to insure compliance with

the compensation guideline of the original offering. The NASD also

notes that an underwriter not wishing to terminate its right of first

refusal for future offerings may preserve its right by waiving its

participation in a particular offering without accepting payment for

such waiver.

One commenter argued that the NASD is unnecessarily interfering

with the contractual relationship between the issuer and the

underwriter, who are free to negotiate a termination of the right if

they so desire. In response, the NASD notes that the Corporate

Financing Rule is intended to regulate certain contractual provisions

between underwriters and issuers to protect the investors in these

issues. The NASD believes this provision of the proposed rule change

will protect the investors of smaller issuers who are less likely to be

able to influence or negotiate the termination of the right of first

refusal.

One commenter argued that this provision of the proposed rule

change would force members to relinquish their right for very small

payment because the secondary offering is not likely to be as large as

the example cited in Notice to Members 94-82 and in footnote 3 of this

filing (where the original offering was $10 million and the new

offering is $150 million). The commenter argues that an underwriter may

be willing to accept substantially less to waive its right in order to

allow an issuer other financing options if the right of first refusal

were to remain intact with respect to future financings. In response,

the NASD notes that under the proposed rule change, underwriters may

waive their right to an unlimited number of times if they do not

receive a payment. Therefore, an underwriter not wishing to terminate

its right of first refusal for future offerings may preserve the right

by waiving its participation in an offering and by not accepting

payment for the waiver.

Limits on Waiver/Termination Compensation

The proposed rule change would limit the amount of any payment or

fee to waive or terminate a right of first refusal to the greater of 1

percent (1%) of the original offering proceeds or 5 percent (5%) of the

commission paid with respect to the subsequent offering. One commenter

argued that there should be no limitation on the amount of the

permitted fee for waiving or terminating a right and that any fee

should be determined by arms-length negotiation between the issuer and

the underwriter, who are uniquely capable of judging the value of the

right. The commenter states that in many cases the right of first

refusal has no value to the member because many early-stage issuers do

not achieve a level of growth sufficient to warrant a subsequent

offering of their securities and, therefore, the member has forfeited

1% of the original offering

[[Page 37121]]

to obtain a right for which it derives no related benefit.

As discussed above, the NASD remains concerned about the initial

capacity of smaller issuers to understand the ramifications of the

right of first refusal in an IPO and its ability to influence the terms

of the right. Moreover, to protect the investors in the issuer, the

NASD has concluded that its concerns necessitate the restrictions

contained in the proposed rule change.

The commenter also argues that it is the issuer that has the upper

hand in setting the terms of the secondary offering and if the member

does not agree to these terms, the issuer is free to arrange for the

secondary offering to be underwritten by another member. In response,

the NASD considers it unlikely that issuers intentionally set the terms

of their secondary offerings to discourage the initial underwriter. The

NASD believes the normal priority for issuers when setting the terms of

their secondary offerings is optimum capital formation. In particular,

the typical secondary offering of a small business issuer is

considerably larger than the issuer's initial public offering.

The above commenter, while opposing a payment limitation, suggested

in lieu of the proposed limitation that the NASD adopt a range of

permissible cash payments as a percentage of the subsequent offerings

depending on the size and stage of development of the issuer and the

dollar amount of the offering. The commenter considers the 5 percent

limitation arbitrary and suggested that payments up to 20% of the

underwriting compensation of the subsequent offering be permitted to be

received by underwriters of small business issuers or of offerings of

less than $25 million in order to allow a fair compensation to the

member. In response, the NASD believes that a payment equal to 20% of

the underwriting compensation of a subsequent offering would create a

hardship for smaller issuers, and consequently their investors, in

terms of reduced net proceeds and/or the ability to attract a new

underwriter. The NASD's determination to base the percentage at 5% was

not arbitrary but determined after considerable deliberation to balance

the interests of the former underwriter and the issuer and arrive at a

percentage that allowed the former underwriter to participate in the

success of the issuer, while not jeopardizing the success with a

payment so large that it affects the issuer's ability to conduct and

realize the benefits of a secondary offering.

One commenter stated that this is an ideal proposal that serves

both parties. It ensures that the original underwriter is justly

rewarded if the issuer becomes highly successful by preventing the

issuer from severing all ties with the original underwriter without

compensating it in a manner that is consistent with the underwriter's

previously provided services and interests. At the same time, the

proposed provision would permit the issuer to ascertain the actual cost

of terminating or waiving the right at the time of the original and

subsequent offering. The commenter also supported this proposal on the

basis that it is appropriate to base the amount of payment to the

original underwriter on the amount of the new underwriter's

compensation.

Cash Payment Requirement

The proposed rule change specifies that compensation to members for

waiving or terminating a right of first refusal must be in the form of

cash. One commenter argued that the proposal to require only cash

payments in consideration of the waiver or termination of a right would

work to the detriment of both underwriters and issuers since early-

stage companies often lack the liquidity to make substantial cash

payments. The commenter believes that requiring issuers to make

payments in cash could reduce working capital and damage a small

company's ability to meet payment obligations, thus jeopardizing the

company's ability to function as a going concern. In response, the NASD

believes that a company should have sufficient cash available from the

proceeds of the subsequent offering to make any necessary payment to a

former underwriter holding a right of first refusal. The NASD also

believes this provision of the proposed rule change is appropriate to

protect the company's shareholders from the dilution resulting from the

issuance of securities to a former underwriter.\10\

\10\ Any such securities would, moreover, be in addition to

securities that the former underwriter previously acquired in

connection with the original public offering.

Other Comments

Two commenters addressed the NASD's statements that issuers

negotiating with an underwriter often may not be in a position to

influence the terms of the right of first refusal or fully comprehend

that they have agreed to extend their relationship with the underwriter

for five years. One commenter noted, specifically, that issuers are

represented by counsel and that most issuers have knowledgeable,

competent officers who are aware of the terms of their agreement with

the underwriter. This commenter argued that the proposed rule change

imposes undue restrictions on the ability of underwriters and issuers

to negotiate a mutually acceptable arrangement. In spite of such

arguments, the NASD's concerns remain that small issuers, even with

counsel, may not understand the ramifications of the right of first

refusal, nor be able to influence the terms of these agreements. The

NASD has often found that issuer's counsel is generally experienced in

corporate law and inexperienced in securities law matters. The NASD

reiterates the regulatory purposes of the Corporate Financing Rule is

to protect investors in such issuers. One commenter stated that it

appears that the committees of the NASD are representative of major

sized firms putting forth recommendations for rule changes that will

eventually give the major underwriters and wire houses more and more

control of the industry. In response, the NASD notes that the standing

Committees of the NASD Board of Governors consist of members from both

large and small firms. The Corporate Financing Committee was the review

committee for the proposed rule change and, at the time this matter was

considered, was chaired by an individual representing a very small NASD

member.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

A. By order approve such proposed rule change, or

B. Institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

Copies of the submission, all subsequent amendments, all written

statements with respect to the proposed rule change that are filed with

the

[[Page 37122]]

Commission, and all written communications relating to the proposed

rule change between the Commission and any person, other than those

that may be withheld from the public in accordance with the provisions

of 5 U.S.C. 552, will be available for inspection and copying in the

Commission's Public Reference Room. Copies of such filing will also be

available for inspection and copying at the principal office of the

NASD. All submissions should refer to File Number SR-NASD-95-29 and

should be submitted by August 9, 1995.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\11\

\11\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-17731 Filed 7-18-95; 8:45 am]

BILLING CODE 8010-01-M