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83-25 Request for Comments on Amendment to Corporate Financing Filing Requirements

TO: All NASD Members and Other Interested Persons

The National Association of Securities Dealers, Inc. ("Association" or "NASD") is requesting comments on proposed amendments to the Corporate Financing filing requirements which would exempt from those requirements all debt and equity securities registered with the Securities and Exchange Commission ("SEC" or "Commission") on Registration Statement Form S-3. The exemption for debt securities registered on Form S-3 would replace the present NASD exemption for debt rated "B" or better by a recognized rating service. The background and details of the amendment are discussed below.

BACKGROUND

For several years, the Association has required its members to file most public offerings with the Corporate Financing Department for a review of the underwriting terms and arrangements. Those filing requirements presently appear in the Interpretation of the Board of Governors — Review of Corporate Financing ("Corporate Financing Interpretation") under Article III, Section 1 of the Rules of Fair Practice (NASD Manual (CCH) para. 2151 at page 2024).

In Notice-to-Members 83-24 (May 19, 1983), the Association submitted to the membership for vote a new Corporate Financing Rule ("Rule") which, when approved by the SEC, will replace the Corporate Financing Interpretation. Subsection (c)(3)(F) of the Rule exempts from the filing requirements securities registered as part of a "shelf" registration on Form S-3 issued by a registrant which meets the requirements of Form S-3 as those requirements were in effect on March 1, 1983.

Historically, the Association, through its filing requirements, has tried to identify offerings in which review of the underwriting terms and arrangements would be most meaningful. The filing requirements currently encompass most public offerings of equity and debt securities which involve member participation.

Offerings of debt securities rated "B" or better by a recognized rating service are exempt from the filing requirements. This reflects the nature of the debt market during the late 1960's when the filing requirements were developed. At that time, most outstanding debt was rated "B" or better. There was a small amount of debt rated below "B" which was of significantly lesser quality. The exemption from the filing requirements for debt rated "B" or better reflects a determination that market forces could be relied upon to assure the fairness of underwriting terms and arrangements.

Recently, the Association has re-examined its filing requirements in light of the adoption by the SEC of the Form S-3 eligibility criteria. Form S-3 is the most streamlined of SEC registration statement forms and permits issuers to incorporate by reference substantial amounts of information from annual reports and other periodic filings. The Commission devoted substantial resources to identifying those securities and issuers which were widely followed and subject to sufficiently meaningful market forces as to assure that adequate information was readily available in the marketplace.

To use Form S-3, both the registrant and the transaction must meet specified qualifications. Form S-3 may be used by a U.S. registrant which has been a reporting company for 36 months prior to the filing, and has made timely filings for 12 months preceding the filing date. In addition, neither the registrant nor its subsidiaries may have defaulted in the payment of required dividends or any material obligations since the end of its last audited year.

Form S-3 may be used for primary offerings of such registrants which have outstanding voting stock held by non-affiliates with an aggregate market value of $150 million, or alternatively, $100 million aggregate market value and annual trading volume of three million shares. Primary offerings by qualified registrants of "investment grade" non-convertible debt and preferred securities may also be registered on Form S-3. Investment grade debt is defined as those securities rated by a nationally recognized statistical organization in the four highest categories (e. g. "AAA" through "BBB" by Standard & Poor's). Secondary offerings of outstanding securities by any person other than the issuer may be registered on Form S-3 if the securities are quoted on NASDAQ or listed on a national securities exchange. Finally, rights offerings, dividend and interest reinvestment plans, and offerings of securities upon conversion and the exercise of warrants may be registered on Form S-3.

Having observed the operation of the integrated disclosure system for over a year, the Corporate Financing Committee and Board of Governors have concluded that it is appropriate to amend the NASD filing requirements to reflect the new structure of SEC registration requirements.

EXPLANATION OF PROPOSED AMENDMENTS

The proposed amendments significantly alter present NASD filing requirements for both debt and equity securities. With respect to equity offerings, i.e. offerings which have any attribute of equity ownership, the number of offerings which would be required to be filed would be substantially reduced. Currently, most equity offerings are required to be filed with the Association. Under the proposed amendment, any equity offering registered with the SEC on Form S-3 (or an equivalent successor form) will no longer be required to be filed. As explained above, primary offerings of equity securities can generally be registered on Form S-3 when the issuer has outstanding voting stock held by non-affiliates with an aggregate market value of $150 million or such stock has an aggregate market value of $100 million and a trading volume of three million shares. The market value and trading volume requirements are inapplicable to preferred offerings, rights offerings, dividend and interest reinvestment plans and offerings upon conversion and the exercise of warrants.

With respect to debt offerings, i.e. offerings with no equity characteristics, the proposed amendments would require a greater number of such offerings to be filed than at present. Under the present Corporate Financing Interpretation, any public offering of "straight debt" rated "B" or better by a nationally recognized rating agency is exempt from filing. This reflects the experience with respect to debt securities which existed at the time the filing requirements were developed in the late 1960's. At that time, most outstanding debt was rated as "investment grade" with any debt rated below "B" signifying lesser quality. The volume of issues rated "B" or better which were below "investment grade", e.g. issues rated "B" or "Ba" by Moody's or "B" or "BB" by Standard & Poor's, was small. It was concluded that market forces, particularly competition regarding money market rates, were sufficient that those forces could be relied upon to assure fairness of underwriting compensation and arrangements.

In today's market, however, the nature of debt instruments is significantly different. There has been a proliferation of types and levels of quality debt. The Corporate Financing Committee concluded, therefore, that it was appropriate to review the Association's filing requirements for debt instruments in view of these evolving changes. As part of this process, it was noted that the SEC has devoted substantial effort in identifying a class of debt securities which could reasonably be permitted to utilize Form S-3. As explained above, this includes securities in which at least one nationally recognized statistical rating organization has rated in one of its four highest categories (e.g. "AAA", "AA", "A", or "BBB" by Standard & Poor's).

Pursuant to the proposed amendment, the present exemption for debt rated "B" or better would be eliminated. In its place, an exemption for debt registered on Form S-3 (or an equivalent successor form) would be adopted. Generally speaking, therefore, debt instruments rated "B", "BB" or "Ba" would become subject to NASD filing requirements. It is believed that it is appropriate to subject these instruments to review by the Association to assure the fairness and reasonableness of their overall underwriting terms and arrangements.

In recommending this proposed change, the Corporate Financing Committee concluded that the competitive market forces which ordinarily affect a public offering by an issuer qualified to use Form S-3 are effective in assuring that the underwriting terms and arrangements generally are fair and reasonable. In addition, the Committee noted that rapid access to the marketplace has become increasingly critical for certain issuers and that such access has been facilitated by SEC policies which permit offerings to become effective without detailed review. The Association has long been committed to expediting its review of offerings where rapid market access was critical. It is therefore appropriate that the Association take steps to assure ready access to the marketplace so long as investor protection is assured.

It is important to note that the proposed amendments relate only to filing requirements and do not constitute exemptions from the substantive requirements of the Corporate Financing Interpretation or the proposed Rule. Members will still be expected to assure compliance with those requirements in any offerings in which they participate. Additionally, the proposed exemptions relate only to filing requirements under the Corporate Financing Interpretation (and proposed Corporate Financing Rule); these exemptions do not extend to offerings which are subject to Schedule E to Article IV, Section 2 of the NASD By-Laws concerning offerings by members of their own securities or those of affiliates.

The text of the proposed amendments is attached. It is assumed that the new Corporate Financing Rule will become effective prior to, or concurrently with, the proposed amendment and the language of the amendment is therefore shown as a change to that Rule.

REQUEST FOR COMMENTS

The authority for this proposal is contained in Section 15 A of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78o-3), and Article VII of the Association's By-Laws.

The Association is requesting comments on the proposed amendments prior to final Board consideration. All comments received during this comment period will be reviewed by the Corporate Financing Committee and changes to the amendments will be recommended as deemed appropriate. The Board of Governors will then consider the amendments again. If the Board approves the amendments, they must be filed with, and approved by, the Securities and Exchange Commission before they become effective.

All written comments should be addressed to the following:

S. William Broka, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N. W.
Washington, D. C. 20006

All comments must be received by June 24, 1983. All comments received will be made available for public inspection.

Any questions regarding this notice may be directed to Dennis C. Hensley of the Corporate Financing Department at (202) 728-8258.

Sincerely,

Frank J. Wilson
Executive Vice President
Legal and Compliance

Attachment

Text of Proposed Amendment */

Subsection (c): Filing Requirements

(1) General
No member or person associated with a member shall participate in any manner in any public offering of securities unless documents and information as specified herein relating to such offering have been filed with and reviewed by the Association for compliance with this section. For purposes of this section, participation in a public offering shall include participation in the preparation of offering or other documents, participation in the distribution of the offering on an underwritten, non-underwritten or any other basis, or participation in any advisory capacity related to the offering.

• • •

(3) Excepted Offerings
The provisions of paragraph (1) notwithstanding, documents and information shall not be required to be filed with respect to offerings of the following types of securities:
(A) securities which are defined as "exempt securities" in Section 3(a)(12) of the Securities Exchange Act of 1934, as amended;
(B) securities of investment companies registered under the Investment Company Act of 1940, as amended, except securities of a management company defined as a "closed-end company" in Section 5(a)(2) of that Act;
(C) variable contracts as defined in Article III, Section 29(b)(l) of the Rules of Fair Practice;
(D) nonconvertible debt securities or preferred stock which is rated "B" or better by a national rating agency recognized by the Association;
(E)
(D) securities issued pursuant to a competitively bid underwriting arrangement meeting the requirements of the Public Utility Holding Company Act of 1935, as amended;
(F)
(E) securities registered as part of a "shelf" registration, provided that said securities are registered with the Securities and Exchange Commission on registration statement Form S-3 or a similar form promulgated in lieu of Form S-3 and are issued by an issuer which presently meets the issuer requirements of Form S-3 as those requirements were in effect on March 1, 1983; and provided further, that said securities are reasonably expected to be offered pursuant to Rule 415 adopted under the Securities Act of 1933, as amended, as that rule was in effect on March 1, 1983;
(G)
(F) private offerings which are exempt from registration under Section 4(1), 4(2) or 4(6) of the Securities Act of 1933, as amended; and
(H)
(G) tender offers made pursuant to Regulation 14D adopted under the Securities Exchange Act of 1934, as amended, as that regulation was in effect on March 1, 1983.

National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006
(202) 728-8000

May 12, 1983

TO: All NASD Members and Selected NASDAQ Companies

RE: SEC Government-Business Forum on Small Business Capital Formation

As you may know, the NASD has long been involved in efforts to improve the environment for small business financing. In this regard, the NASD participates in a wide variety of cooperative efforts on both a regular and on an ad hoc basis. One such effort involves participation in the Securities and Exchange Commission's Government-Business Forum on Small Business Capital Formation (the "Forum").

The SEC is under mandate pursuant to the Small Business Investment Incentive Act to conduct an annual forum in order to develop suggestions that will assist small businesses in the capital formation process. The Forum is organized by an Executive Committee chaired by SEC Commissioner John R. Evans and comprised of representatives of government agencies, major small business organizations and other individuals and groups concerned about small business. The first Forum, which was conducted in 1982, resulted in the presentation of 37 recommendations to a joint congressional/small business hearing and is the subject of considerable legislative and regulatory activity.

This year, the Executive Committee has announced plans to conduct a series of five local forums during June and July. A panel of Executive Committee members, including representatives of key federal agencies and departments, will conduct each local forum. During the forums, small business persons, bankers, financial advisers, venture capitalists, pension fund managers and other interested parties will be given an opportunity to present their views on problems and specific proposed remedies relating to tax, credit, access to financial institutions, securities and other areas of importance in the capital formation process. Each participant will be required to submit a written summary or outline of his presentation five days in advance of an appearance at a forum. This summary will facilitate an informed dialogue between the Executive Committee members and those making presentations. Later this year, the Executive Committee will prepare its report of the local forums, including proposed legislative and regulatory recommendations, to be presented to Congress and appropriate regulatory agencies.

The local forums will be conducted in the following cities:

  • Washington (during the week of June 6);
  • Houston (during the week of June 13);
  • St. Louis (during the week of June 20);
  • San Francisco (during the week of June 27); and,
  • Boston (during the week of July 11).

Persons or groups interested in participating in a local forum should contact Paul A. Belvin, Forum Staff Director, or H. Steven Holtzman, Forum Special Counsel, at (202) 272-2644, or write to the following address:

1983 Small Business Forum
Office of Small Business Policy
U. S. Securities and Exchange Commission
450 Fifth Street, N. W.
(Stop 3-11)
Washington, D. C. 20549

Sincerely

Gordon S. Macklin
President


1/ New material is underlined; deleted material is stricken. Changes shown are to the proposed corporate financing rule as submitted for approval by the NASD membership on May 19, 1983. (See Notice-to-Members 83-24.)



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