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83-26 Adoption of Amendments to Interpretation on Free-Riding and Withholding

TO: All NASD Members And Interested Persons

The Association has adopted amendments to its Interpretation on Free-Riding Withholding in order to clarify the application of the Interpretation to offerings in which there is a delay between the commencement of the offering and the beginning of a secondary market. These amendments have been approved by the Securities and Exchange Commission on a temporary basis for sixty days effective June l, 1983. After the sixty day period) the Commission will consider approval of the amendments as permanent rules. The text of the amendments are attached to this notice.

The Association has, in the past, consistently applied the "Free-Riding Interpretation" to any public offering which trades at a premium in the secondary market whenever the secondary market begins. However, in a recent case before the Commission, the Commission found that the language of the "Free-Riding Interpretation" failed to clearly specify its application to public offerings where the secondary market does not begin until well after the commencement of the offering. 1/ In its decision the Commission recommended that the Interpretation be conformed "to the Association's existing policy. These amendments, therefore, are intended to conform the Interpretation to the Association's existing policy and specifically provide that the interpretation applies to public offerings where the issue trades at a premium in the secondary market whenever such secondary market begins. Thus, the Interpretation applies no matter how long the period of time between the commencement of the offering and the beginning of a secondary market.

Sincerely,

Frank J. Wilson
Executive Vice President
Legal and Compliance

Attachment

TEXT OF AMENDMENTS TO INTERPRETATION ON FREE-RIDING AND WITHHOLDING

(new language is underlined, deleted language is stricken through)

"FREE-RIDING AND WITHHOLDING"

Introduction

The following Interpretation of Article III, Section 1 of the Association's Rules of Fair Practice is adopted by the Board of Governors of the Association pursuant to the provisions of Article VII, Section 3(a) of the Association's By-Laws and Article I, Section 3 of the Rules of Fair Practice.

This Interpretation is based upon the premise that members have an obligation to make a bona fide public distribution at the public offering price of securities of a public offering which immediately alter the distribution process is recommended trade at a premium in the secondary market whenever such secondary market begins (a "hot issue") regardless of whether such securities are acquired by the member as an underwriter, as a selling group member, or from a member participating in the distribution as an underwriter or a selling group member, or otherwise. The failure to make a bona fide public distribution when there is a demand for an issue can be a factor in artificially raising the price. Thus, the failure to do so, especially when the member may have information relating to the demand for the securities or other factors not generally known to the public, is inconsistent with high standards of commercial honor and just and equitable principles of trade and leads to an impairment of public confidence in the fairness of the investment banking and securities business. Such conduct is, therefore, in violation of Article III, Section 1 of the Association's Rules of Fair Practice and this Interpretation thereof which establishes guidelines in respect to such activity.

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Interpretation

Except as provided herein, it shall be inconsistent with high standards of commercial honor and just and equitable principles of trade and a violation of Article III, Section l of the Association's Rules of Fair Practice for a member, or a person associated with a member, to fail to make a bona fide public distribution at the public offering price of securities of a public offering which immediately trade at a premium in the secondary market whenever such secondary market begins regardless of whether such securities are acquired by the member as an under writer" a selling group member or from a member participating in the distribution as an underwriter or selling group member, or otherwise.

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Scope and Intent of Interpretation Investment Partnerships and Corporations

A member may not sell securities of a public offering which immediately after the distribution process commenced, trade at a premium in the secondary market whenever such secondary market begins ("hot issue"), to the account of any investment partnership or corporation, domestic or foreign (except companies registered under the Investment Company Act of 1940) including but not limited to, hedge funds, investment clubs, and other like accounts unless the member receives from such account, prior to the execution of the transaction, the names and business connections of all persons having any beneficial interest in the account, and if such information discloses that any person enumerated in paragraphs (1) through (4) hereof has a beneficial interest in such account, any sale of securites to such account must be consistent with the provisions of this Interpretation; provided, however, that if the disclosure of such information by the account is prohibited by law, then in such case, the member must receive written assurance from the account that no person enumerated in paragraphs (1) through (4) hereof has a beneficial interest in such account.

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Violations by Registered Representative Executing Transaction

The obligation which members have to make a bona fide public distribution at the public offering price of securities of a public offering which immediately after the process is commenced trade at a premium in the secondary market whenever such secondary market begins ("hot issue"), as stated above, is also an obligation of every person associated with a member who causes a transaction to be executed. Therefore, where sales are made by such persons in a manner inconsistent with the provisions of this Interpretation, such persons associated with a member will be considered equally culpable with the member for the violations found taking into consideration the facts and circumstances of the particular case under consideration.

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Definitions

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"Public Offering"

The term "public offering" shall mean all distributions of securities whether underwritten or not? whether registered, unregistered or exempt from registration under the Securities Act of 1933, and whether they are primary or secondary distributions, including intrastate distributions and Regulation "A" issues, which sell at a immediate premium, in the secondary market whenever such secondary market begins. It shall not mean "exempted securities" as defined in Section 3(a)(l2) of the Securities Exchange Act of 1934.


1/ In the Matter of Lowell H. Listram & Company, Inc., Sec, Ex. Act. Rel, No. 19414 (Jan. 10f 1983)



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