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88-34 Adoption of New Section 67 of the NASD Uniform Practice Code Regarding Delayed Closings Effective June 12, 1988
TO: All NASD Members and Other Interested Persons
The Securities and Exchange Commission recently approved the NASD's adoption of new Section 67 to the NASD's Uniform Practice Code. This section requires the syndicate manager of a public offering underwritten on a "firm commitment" basis to immediately notify the NASD's Uniform Practice Department of any delay in the anticipated closing date.
The text of the new rule is attached.
The NASD Uniform Practice Code (Code) applies to over-the-counter transactions between NASD member firms. Within the scope of the Code are transactions in securities that are the subject of an initial or secondary public offering in the period between the effective date of the offering and the date of the closing of the offering. Securities sold pursuant to an offering underwritten on a "firm commitment" basis by a member can be traded in the secondary market on a "regular way" basis from the inception of the secondary market because "firm commitment" offerings generally close five days following the effective date. Thus, such secondary-market transactions are generally within the scope of a regular-way contract, which requires payment for the delivery of securities on the fifth business day following the date of the transactions since the securities are considered issued upon closing of the offering on the fifth business day following the effective date1/
Situations have occurred in which the closing of an offering underwritten on a "firm commitment" basis has been delayed past the anticipated closing date cited in the prospectus and, in a few cases, the closing was eventually cancelled. When the NASD Uniform Practice Department was not notified of a delay in closing until after the anticipated closing date, the securities generally traded on a "regular way" basis from the the effective date of the offering.
Whenever the Uniform Practice Department is advised of a delay in the closing of an offering underwritten on a "firm commitment" basis, it issues an advisory notice to members to change previously executed "regular way" trades to "when, as, and if issued." 2/ Such changes impose an extensive bookkeeping burden on members.
The NASD determined that the NASD Uniform Practice Department should be assisted in its efforts to ensure orderly trading by requiring notification of any delay in the anticipated closing of a public offering underwritten on a firm-commitment basis.
On March 14, 1988, the Securities and Exchange Commission 3/ approved the NASD's adoption of new Section 67 to the Uniform Practice Code to require the syndicate manager of a public offering underwritten on a firm-commitment basis to immediately notify—no later than the scheduled closing date—the NASD's Uniform Practice Department of any anticipated delay in the closing of the offering beyond the closing date in the offering document or beyond the delayed date previously reported to the NASD in compliance with this provision. Thus, if the syndicate manager has previously reported to the Uniform Practice Department that the closing was to be delayed, the syndicate manager is obligated to provide reports on any additional delays of the closing date. The Uniform Practice Department can then ensure that all transactions in the market trade on a "when, as, and if issued" basis, rather than on a "regular way" basis if the closing is significantly delayed or, if no closing is to occur, the transactions can be cancelled.
The new rule is effective June 12, 1988.
Questions concerning this notice can be directed to the NASD Uniform Practice Department, at (212) 858-4341.
Executive Vice President
and General Counsel
NASD UNIFORM PRACTICE CODE*
Settlement of Underwritten Public Offerings
The syndicate manager of a public offering underwritten on a "firm commitment" basis shall, immediately, but in no event later than the scheduled closing date, notify the Uniform Practice Department of the NASD of any anticipated delay in the closing of such offering beyond the closing date in the offering document or any subsequent delays in the closing date previously reported pursuant to this section.
1/ Section 4(b) of the Uniform Practice Code, NASD Manual (CCH), 113504.
2/ Section 4(e) of the Uniform Practice Code, NASD Manual (CCH), H 3504.
3/ Release No. 25459 (March 14, 1988).
*New language is underlined.