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98-4 Reminder Of Members' Obligations To Comply With Rule15c2-4

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98-004 Attachment


Corporate Finance
Legal & Compliance

Executive Summary

NASD Regulation, Inc. (NASD RegulationSM) requests that members review their compliance procedures with respect to Securities and Exchange (SEC) Rule 15c2-4, which is applicable to public and private offerings of securities distributed on a best-efforts basis. In order to assist members in their review, attached to this Notice is Notice to Members 84-7, which sets forth in questions-and-answer format interpretations of the SEC with respect to Rule 15c2-4.

Questions concerning this Notice should be directed to Suzanne E. Rothwell, Chief Counsel, Corporate Financing, NASD Regulation, at (202) 974-2747.


Recently, NASD Regulation has considered a number of disciplinary actions in which it found violations of SEC Rule 15c2-4, adopted under the Securities Exchange Act of 1934. This rule applies to public and private offerings of securities that are distributed by members on a bestefforts basis. Subsection (b) of Rule 15c2-4 applies to those best-efforts offerings that include a contingency that may result in the return of investors' funds if the contingency is not met.

Members are urged to review their compliance procedures with respect to Rule 15c2-4. In Notice to Members 84-7 (January 30, 1984), the National Association of Securities Dealers, Inc. (NASD®) published SEC staff interpretations of Rule 15c2-4 set out in question-and-answer format.1 NASD Regulation is attaching to this Notice a copy of Notice to Members 84-7 in order to provide guidance to members in their efforts to comply with this rule. In particular, members should note the position of the SEC in Question 7, that a broker/dealer affiliated with the issuer may only deposit investors' funds in an escrow account with a bank independent of the issuer and the broker/dealer; Question 10, that no person other than a bank may act as an escrow agent; and Question 11, that the member's attorney may not act as the "agent or trustee" of a separate bank account.2


1 In that Notice there is a reference to net capital requirements of $5,000 and $25,000 to differentiate between members that are prohibited from or permitted to hold funds, securities and accounts, which have subsquently been amended. See Notice to Members 92-72 (December 15, 1992).

2 The NASD also issued Notice to Members 84-64 (November 26, 1984) publishing an interpretive letter of the SEC with respect to the application of Rule 15c2-4 to public and private offerings of direct participation programs. In addition, the NASD issued Notice to Members 87-61 (September 10, 1987) that contained suggested escrow agreement provisions and suggested language for the member's Selected Dealers Agreement with respect to compliance with Rule 15c2-4. Members are urged to consult with their attorney, however, with respect to the drafting of any escrow agreement or Selected Dealers Agreement.

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