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09-49 SEC Approves Amendments to Modernize and Simplify NASD Rule 2720 Relating to Public Offerings in Which a Member Firm With a Conflict of Interest Participates; Effective Date: September 14, 2009

04-13 SEC Approves Amendments to Rule 2710 (Corporate Financing Rule) and Rule 2720 (Distribution of Securities of Members and Affiliates-Conflicts of Interest)

97-30 NASD Regulation Requests Comments On Amendments To The Free-Riding And Withholding Interpretation

95-44 Request For Comments On Proposed Amendments To The Exception To The Qualified Independent Underwriter Requirement In Schedule E To The NASD By-Laws;

94-45 SEC Approves Schedule E Conflict-Of-lnterest Provisions

92-58 SEC Approval of Amendment to Section 13, Schedule E to the NASD By-Laws Effective October 1, 1992

92-57 Proposed Amendments to Schedule E to the NASD By-Laws Regarding Potential Conflicts of Interest; Last Voting Date: December 21, 1992

90-39 Amendments to Schedule E to the NASD By-Laws Regarding Potential Conflicts of Interest; Last Date for Comment: July 5, 1990

88-100 Mergers by Members With Blind-Pool Companies

88-98 Proposed Amendment to Schedule E Re: Exemption From the Pricing Requirements For Shelf Offerings to Institutional Investors

88-89 Amendment to Schedule E of the NASD By-Laws Re: Definition of Qualified Independent Underwriter - Effective December 1, 1988

88-33 Adoption of Amendments to Schedule E to the NASD By-Laws Effective Immediately

86-28 Request for Comments on Proposed Amendments to Schedule E of the NASD By-Laws

83-45 Adoption of Amendments to Schedule E on Self-Underwriting

2720. Distribution of Securities of Members and Affiliates — Conflicts of Interest

Past version: effective from Aug 1 2006 - Sep 13 2009.
To view other versions open the versions tab on the right.

(a) General

(1) No member or person associated with a member shall participate in the distribution of a public offering of debt or equity securities issued or to be issued by the member, the parent of the member, or an affiliate of the member and no member or parent of a member shall issue securities except in accordance with this Rule.

(2) No member or person associated with a member shall participate in the distribution of a public offering of debt or equity securities issued or to be issued by a company if the member and/or its associated persons, parent or affiliates have a conflict of interest with the company, as defined herein, except in accordance with this Rule.

(3) In the case of an exchange offer, merger and acquisition transaction, or similar corporate reorganization, this Rule shall only apply if the offering is described in:

(A) Rule 2710(b)(9)(H) and the issuance of securities is by a member or the parent of a member; or

(B) Rule 2710(b)(9)(I).

(b) Definitions
For purposes of this Rule, the following words shall have the stated meanings:
(1) Affiliate
(A) The term "affiliate" shall mean a company which controls, is controlled by or is under common control with a member;

(B) The term affiliate is presumed to include, but is not limited to, the following for purposes of subparagraph (A), above:

(i) a company will be presumed to control a member if the company beneficially owns 10 percent or more of the outstanding voting securities of a member which is a corporation, or beneficially owns a partnership interest in 10 percent or more of the distributable profits or losses of a member which is a partnership;

(ii) a member will be presumed to control a company if the member and persons associated with the member beneficially own 10 percent or more of the outstanding voting securities of a company which is a corporation, or beneficially own a partnership interest in 10 percent or more of the distributable profits or losses of a company which is a partnership;

(iii) a company will be presumed to be under common control with a member if:

a. The same natural person or company controls both the member and company by beneficially owning 10 percent or more of the outstanding voting securities of a member or company which is a corporation, or by beneficially owning a partnership interest in 10 percent or more of the distributable profits or losses of a member or company which is a partnership; or

b. A person having the power to direct or cause the direction of the management or policies of the member or the company also has the power to direct or cause the direction of the management or policies of the other entity in question.

(C) The provisions of subparagraphs (A) and (B) hereof notwithstanding, none of the following shall be presumed to be an affiliate of a member for purposes of this Rule:

(i) an investment company registered with the Commission pursuant to the Investment Company Act of 1940, as amended;

(ii) a "separate account" as defined in Section 2(a)(37) of the Investment Company Act of 1940, as amended;

(iii) a "real estate investment trust" as defined in Section 856 of the Internal Revenue Code;

(iv) a "direct participation program" as defined in Rule 2810; and

(v) a corporation, trust, partnership or other entity issuing financing instrument-backed securities which are rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories.

(2) Beneficial ownership — the right to the economic benefits of a security.

(3) Bona fide independent market — a market in a security that:

(A) is registered pursuant to the provisions of Sections 12(b) or 12(g) of the Act or issued by a company subject to Section 15(d) of such Act, unless exempt from those provisions;

(B) has a market price as of the close of trading on the trade date immediately preceding filing of the registration statement or offering circular of five dollars or more per share, and which has traded at a price of five dollars or more per share in at least 20 of the 30 trading days immediately preceding the filing of the registration statement or offering circular;

(C) for at least 90 calendar days immediately preceding the filing of the registration statement or offering circular with the department:

(i) has been listed on and is in compliance with the requirements for continued listing on a national securities exchange; and

(ii) with respect to a security listed on the Nasdaq Stock Market LLC, has had at least two bona fide independent market makers for a period of at least 30 trading days immediately preceding the filing of the registration statement and the effective date of the offering; and

(D) for the 90 calendar day period immediately preceding the filing of the registration statement or offering circular:

(i) has an aggregate trading volume of at least 500,000 shares; or

(ii) has outstanding a minimum of 5,000,000 publicly held shares.

(4) Bona fide independent market maker — a market maker that:

(A) is registered as a market maker with NASD or Nasdaq in the security to be distributed pursuant to this Rule;

(B) is not an affiliate of the entity issuing securities pursuant to paragraph (c) of this Rule and, together with its associated persons, does not in the aggregate beneficially own, at the time of the filing of the registration statement and at the commencement of the distribution, five percent or more of the outstanding voting securities of such entity which is a corporation or beneficially own a partnership interest in five percent or more of the distributable profits or losses of such entity which is a partnership; and

(C) is not a recipient of any of the net proceeds of the offering.

(5) Common equity — the total number of shares of common stock outstanding without regard to class, whether voting or non-voting, convertible or non-convertible, exchangeable or non-exchangeable, redeemable or non-redeemable, as reflected on the consolidated financial statements of the company.

(6) Company — a corporation, a partnership, an association, a joint stock company, a trust, a fund, or any organized group of persons whether incorporated or not; or any receiver, trustee in bankruptcy or similar official or any liquidating agent for any of the foregoing, in his capacity as such.

(7) Conflict of interest — shall be presumed to exist when:

(A) a member and/or its associated persons, parent or affiliates in the aggregate beneficially own 10% or more of the outstanding subordinated debt of a company;

(B) a member and/or its associated persons, parent or affiliates in the aggregate beneficially own 10% or more of the common equity of a company which is a corporation, or beneficially own a general limited or special partnership interest in 10% or more of the distributable profits or losses of a company; or

(C) a member and/or its associated persons, parent or affiliates in the aggregate beneficially own 10% or more of the preferred equity of a company.

(D) The provisions of paragraphs (A), (B) and (C) hereof notwithstanding, the conflict of interest provisions of this Rule shall not apply to:

(i) an offering of securities exempt from registration with the Commission under Section 3(a)(4) of the Securities Act of 1933;

(ii) an investment company registered with the Commission pursuant to the Investment Company Act of 1940, as amended;

(iii) a "separate account" as defined in Section 2(a)(37) of the Investment Company Act of 1940, as amended;

(iv) a "real estate investment trust" as defined in Section 856 of the Internal Revenue Code;

(v) a "direct participation program" as defined in Rule 2810;

(vi) an offering of financing instrument-backed securities which are rated by a nationally recognized statistical rating organization in one of its four (4) highest generic rating categories;

(vii) an offering of a class of equity securities for which a bona fide independent market as defined in paragraph (b)(3) exists as of the date of the filing of the registration statement and as of the effective date thereof; and

(viii) an offering of a class of securities rated in one of the four highest generic rating categories by a nationally recognized statistical rating organization.

(8) Effective date — the date on which an issue of securities first becomes legally eligible for distribution to the public.

(9) Immediate family — the parents, mother-in-law, father-in-law, spouse, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, and children of an employee or associated person of a member, except any person other than the spouse and children who does not live in the same household as, have a business relationship with, provide material support to, or receive material support from, the employee or associated person of a member. In addition, the immediate family includes any other person who either lives in the same household as, provides material support to, or receives material support from, an employee or associated person of a member.

(10) Parent — any entity affiliated with a member from which member the entity derives 50 percent or more of its gross revenues or in which it employs 50 percent or more of its assets.

(11) Person — any natural person, partnership, corporation, association, or other legal entity.

(12) Preferred equity — the aggregate capital invested by all persons in the preferred securities outstanding without regard to class, whether voting or non-voting, convertible or non-convertible, exchangeable or non-exchangeable, redeemable or non-redeemable, as reflected on the consolidated financial statements of the company.

(13) Public director — a person elected from the general public to the board of directors of a member or its parent which has made a public distribution of an issue of its own securities. Such person shall not beneficially own five percent or more of the outstanding voting securities of the member or its parent and shall not be engaged in the investment banking or securities business or be an officer or employee of the member or its parent, or be a member of the immediate family of an employee occupying a managerial position with a member or its parent.

(14) Public offering — any primary or secondary distribution of securities made pursuant to a registration statement or offering circular including exchange offers, rights offerings, offerings made pursuant to a merger or acquisition, straight debt offerings, offerings pursuant to SEC Rule 504, and all other securities distributions of any kind whatsoever, except any offering made pursuant to an exemption from registration under Sections 4(1), 4(2) or 4(6) of the Securities Act of 1933, as amended, or pursuant to SEC Rule 504 if the securities are "restricted securities" under SEC Rule 144(a)(3), SEC Rule 505, or SEC Rule 506 adopted under the Securities Act of 1933, as amended. The term public offering shall exclude exempted securities as defined in Section 3(a)(12) of the Act.

(15) Qualified independent underwriter* — a member which:
(A) is actively engaged in the investment banking or securities business and which has been so engaged, in its present form or through predecessor broker/dealer entities, for at least five years immediately preceding the filing of the registration statement;

(B) as of the date of the filing of the registration statement and as of the effective date of the offering:

(i) if a corporation, a majority of its board of directors or, if a partnership, a majority of its general partners, are persons who have been actively engaged in the investment banking or securities business for the five-year period immediately preceding the filing of the registration statement;

(ii) if a sole proprietorship, the proprietor has been actively engaged in the investment banking or securities business for the five-year period immediately preceding the filing of the registration statement;

(C) has actively engaged in the underwriting of public offerings of securities of a similar size and type for at least the five-year period immediately preceding the filing of the registration statement. For purposes of this subparagraph (15), the above requirement shall be satisfied if the member:

(i) with respect to a proposed debt offering, has acted as manager or co-manager of public offerings of debt securities within the previous five years, including offerings each with gross proceeds of not less than 25% of the anticipated gross proceeds of the proposed offering;

(ii) with respect to a proposed equity, has acted as manager or co-manager of public offerings of equity securities (or of securities convertible into equity securities) within the previous five years, including offerings each with gross proceeds of not less than 50% of the anticipated gross proceeds of the proposed offer;

(iii) has acted as manager or co-manager of public offerings of securities within the previous five years, including offerings each with gross proceeds of not less than $50 million; or

(iv) demonstrates that it has acquired experience within the previous five years involving the pricing and due diligence functions comparable to that of a manager or co-manager of public offerings of securities in the above amounts;

(D) no person associated with the member in a supervisory capacity responsible for organizing, structuring or performing due diligence with respect to corporate public offerings of securities:

(i) has been convicted within five years prior to the filing of the registration statement of a violation of the anti-fraud provisions of the federal or state securities laws, or any rules or regulations promulgated thereunder, in connection with the distribution of a registered or unregistered offering of securities;

(ii) is subject to any order, judgment, or decree of any court of competent jurisdiction entered within five years prior to the filing of the registration statement permanently enjoining or restraining such person from engaging in or continuing any conduct or practice in violation of the anti-fraud provisions of the federal or state securities laws, or any rules or regulations promulgated thereunder in connection with the distribution of a registered or unregistered offering of securities; or

(iii) has been suspended or barred from association with any member by an order or decision of the Commission, any state, the Association or any other self-regulatory organization within five years prior to the filing of the registration statement for any conduct or practice in violation of the anti-fraud provisions of the federal or state securities laws, or any rules, or regulations promulgated thereunder, or the anti-fraud rules of any self-regulatory organization in connection with the distribution of a registered or unregistered offering of securities; or

(E) is not an affiliate of the entity issuing securities pursuant to paragraph (c) of this Rule and does not beneficially own five percent or more of the outstanding voting securities, common equity, preferred equity or subordinated debt of such entity which is a corporation or beneficially own a partnership interest in five percent or more of the distributable profits or losses of such entity which is a partnership; and

(F) has agreed in acting as a qualified independent underwriter to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act of 1933, specifically including those inherent in Section 11 thereof.

(16) Registration statement — a registration statement as defined by Section 2(8) of the Securities Act of 1933; notification on Form 1A filed with the Commission pursuant to the provisions of SEC Rule 255 under the Securities Act of 1933; or any other document, by whatever name known, initiating a registration or similar process for an issue of securities which is required to be filed by the laws or regulations of any federal or state agency.

(17) Settlement — the distribution of the net proceeds from an offering to the issuer or selling stockholders.

(18) Subordinated debt — includes (A) debt of an issuer which is expressly subordinate in right of payment to, or with a claim on assets subordinate to, any existing or future debt of such issuer; or (B) all debt that is specified as subordinated at the time of issuance. Subordinated debt shall not include short-term debt with maturity at issuance of less than one year and secured debt and bank debt not specified as subordinated debt at the time of issuance.

(c) Participation in Distribution of Securities of Member or Affiliate

(1) No member shall underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of an issue of debt or equity securities issued or to be issued by the member or an affiliate of the member, or of a company with which the member or its associated persons, parent or affiliates have a conflict of interest, unless the member is in compliance with subparagraphs (2) and (3) below.

(2) In the case of a member which is a corporation, the majority of the board of directors, or in the case of a member which is a partnership, a majority of the general partners or, in the case of a member which is a sole proprietorship, the proprietor as of the date of the filing of the registration statement and as of the effective date of the offering shall have been actively engaged in the investment banking or securities business for the five year period immediately preceding the filing of the registration statement.

(3) If a member proposes to underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of its own or an affiliate's securities, or of securities of a company with which it or its associated persons, parent or affiliates have a conflict of interest, one or more of the following three criteria shall be met:

(A) the price at which an equity issue or the yield at which a debt issue is to be distributed to the public is established at a price no higher or yield no lower than that recommended by a qualified independent underwriter which shall also participate in the preparation of the registration statement and the prospectus, offering circular, or similar document and which shall exercise the usual standards of "due diligence" in respect thereto; provided, however, that:

(i) an offering of securities by a member which has not been actively engaged in the investment banking or securities business, in its present form or as a predecessor broker/dealer, for at least the five years immediately preceding the filing of the registration statement shall be managed by a qualified independent underwriter; and

(ii) the provision of this subparagraph (3) which requires that the price or yield of the securities be established based on the recommendation of a qualified independent underwriter shall not apply to an offering of equity or debt securities if:

a. the securities (except for the securities of a broker/dealer or its parent) are issued in an exchange offer or other transaction relating to a recapitalization or restructuring of a company; and

b. the member that is affiliated with the issuer or with which the member or its associated persons, parent or affiliates have a conflict of interest is not obligated to and does not provide a recommendation with respect to the price, yield, or exchange value of the transaction; or

(iii) in any exchange offer, merger and acquisition transaction, or similar corporate reorganization subject to this Rule under paragraph (a)(3) above, the provision of this paragraph which requires that the price or yield of the securities be established based on the recommendation of a qualified independent underwriter shall not apply and, instead, the exchange value of the securities being offered in the transaction shall not be less than that recommended by a qualified independent underwriter; or

(B) the offering is of a class of equity securities for which a bona fide independent market exists as of the date of the filing of the registration statement and as of the effective date thereof; or

(C) the offering is of a class of securities rated Baa or better by Moody's rating service or Bbb or better by Standard & Poor's rating service or rated in a comparable category by another rating service acceptable to the Association.

(d) Disclosure

(1) Any member offering its securities pursuant to this Rule shall disclose in the registration statement, offering circular, or similar document a date by which the offering is reasonably expected to be completed and the terms upon which the proceeds will be released from the escrow account described in paragraph (e)(1).

(2) All offerings included within the scope of this Rule shall disclose in the underwriting section of the registration statement, offering circular or similar document that the offering is being made pursuant to the provisions of this Rule, that the offering is either being made by a member of its own securities or those of an affiliate, or those of a company in which the member or its associated persons, parent or affiliates own the common stock, preferred stock or subordinated debt of the company, the name of the member acting as qualified independent underwriter, if any, and that such member is assuming the responsibilities of acting as a qualified independent underwriter in pricing the offering and conducting due diligence.

(e) Escrow of Proceeds; Net Capital Computation

(1) All proceeds from an offering by a member of its securities shall be placed in a duly established escrow account and shall not be released therefrom or used by a member in any manner until the member has complied with subparagraph (2) hereof.

(2) Any member offering its securities pursuant to this Rule shall immediately notify the Association when the offering has been terminated and settlement effected and it shall file with the Association a computation of its net capital computed pursuant to the provisions of SEC Rule 15c3-1 under the Act (the net capital rule) as of the settlement date. If at such time its net capital ratio as so computed is more than 10:1 or, net capital fails to equal 120 percent of the minimum dollar amount required by Rule 15c3-1 or, in the event the provisions of Rule 15c3-1(f) are utilized in making such computation, the net capital is less than seven percent of aggregate debit items as computed in accordance with Rule 15c3-3a, all monies received from sales of securities of the offering must be returned in full to the purchasers thereof and the offering withdrawn, unless the member has obtained from the Commission a specific exemption from the net capital rule. Proceeds from the sales of securities in the offering may be taken into consideration in computing net capital ratio for purposes of this paragraph.

(f) Audit Committee
Any member or parent of a member which makes a public offering of an issue of its securities shall be required to establish within twelve months of the effective date of said offering an audit committee composed of members of the board of directors (except that it shall not include the chief accounting or chief financial officer of the member or its parent) and the functions of the audit committee shall include the following:

(1) to review the scope of the audit;

(2) to review with the independent auditors the corporate accounting practices and policies and recommend to whom reports should be submitted within the company;

(3) to review with the independent auditors their final report;

(4) to review with internal and independent auditors overall accounting and financial controls; and

(5) to be available to the independent auditors during the year for consultation purposes.

(g) Public Director
Any member or parent of a member which makes a public offering of an issue of its securities shall cause to be elected to its board of directors within twelve months of the effective date of said offering a public director who shall serve as a member of the audit committee.

(h) Periodic Reports
Any member which makes a distribution to the public of an issue of its securities pursuant to this Rule, shall send to each of its shareholders or, in the case of debt offerings, to each of its investors:

(1) quarterly, a summary statement of its operations; and

(2) annually, independently audited and certified financial statements.

(i) Offerings Resulting in Affiliation or Public Ownership of Member
If an issuer proposes to direct all or part of the proceeds from a public offering to a member or exchange securities by means of a public offering for an interest in a member, and the member is, or as a result of the proposed transaction would be, an affiliate of the issuer, or if an issuer proposes to engage in any offering which results in the public ownership of a member, or if an issuer proposes to utilize the proceeds from a public offering to become a member or form a broker/dealer subsidiary to become a member, or if a member proposes simultaneously or subsequent to a public offering to enter into a transaction with the issuer or an affiliate of the issuer and as a result of the transaction would be an affiliate of the issuer, the offering shall be subject to the provisions of this Rule to the same extent as if the transaction had occurred prior to the filing of the offering.

(j) Registration Statements for Intrastate Offerings
Any member offering its securities pursuant to an exemption under Section 3(a)(11) of the Securities Act of 1933 shall disclose in the registration statement at a minimum that information suggested by the Commission in Securities Act Release No. 5222 (January 3, 1972).

(k) Suitability
Every member underwriting an issue of its securities, or securities of an affiliate, or the securities of a company with which it has a conflict of interest, pursuant to the provisions of paragraph (c) hereof, who recommends to a customer the purchase of a security of such an issue shall have reasonable grounds to believe that the recommendation is suitable for such customer on the basis of information furnished by such customer concerning the customer's investment objectives, financial situation, and needs, and any other information known by such member. In connection with all such determinations, the member must maintain in its files the basis for its determination.

(l) Discretionary Accounts
Notwithstanding the provisions of Rule 2510, or any other provisions of law, a transaction in securities issued by a member or an affiliate of a member, or by a company with which a member has a conflict of interest shall not be executed by any member in a discretionary account without the prior specific written approval of the customer.

(m) Filing Requirements; Coordination with Rule 2710
(1) Notwithstanding the provisions of Rule 2710 relating to factors to be taken into consideration in determining underwriter's compensation, the value of securities of a new corporate member succeeding to a previously established partnership or sole proprietorship member acquired by such member or person associated therewith, or created as a result of such reorganization, shall not be taken into consideration in determining such compensation.

(2) All offerings of securities included within the scope of this Rule shall be subject to the provisions of Rule 2710, and documents and filing fees relating to such offerings shall be filed with the Association pursuant to the provisions of that Rule. The responsibility for filing the required documents and fees shall be that of the member issuing securities, or, in the case of an issue of an affiliate, the managing underwriter or, if there is none, the member affiliated with the issuer.

(3) All offerings included within the scope of this Rule are required to be filed with the Association, with the appropriate documents and filing fee referred to under subparagraph (2), above, notwithstanding the fact that the offering may otherwise be expressly exempted from filing under the provisions of Rule 2710.

(n) Predominance of Rule 2720
If the provisions of this Rule are inconsistent with any other provisions of the Association's By-Laws or Rules, or of any interpretation thereof, the provisions of this Rule shall prevail.

(o) Requests for Exemption from Rule 2720
Pursuant to the Rule 9600 Series, the Association may in exceptional and unusual circumstances, taking into consideration all relevant factors, exempt a member unconditionally or on specified terms from any or all of the provisions of this Rule which it deems appropriate.

(p) Violation of Rule 2720
A violation of the provisions of this Rule shall constitute a violation of Rule 2110, and possibly other Rules, especially Rules 2120 and 2310, as the circumstances of the case may indicate.


* In the opinion of the Association and the Commission the full responsibilities and liabilities of an underwriter under the Securities Act of 1933 attach to a "qualified independent underwriter" performing the functions called for by the provisions of paragraph (c) hereof.

Amended by SR-NASD-2005-087 eff. Aug. 1, 2006.
Amended by SR-NASD-2000-04 eff. March 22, 2004.
Amended by SR-NASD-2002-97 eff. July 29, 2002.
Amended by SR-NASD-99-02 eff. Dec. 7, 1999.
Amended by SR-NASD-97-95 eff. Aug. 17, 1998.
Amended by SR-NASD-97-38 eff. Dec. 15, 1997.
Amended by SR-NASD-97-45 eff. Sept. 10, 1997.
Amended by SR-NASD-97-28 eff. Aug. 7, 1997.
Amended by SR-NASD-96-17 eff. Aug 15, 1996.
Amended by SR-NASD-92-46 eff. May 10, 1994.
Amended by SR-NASD-94-12 eff. Mar. 7, 1994.
Amended eff. Feb. 8, 1971; Dec. 29, 1971; Sept. 1, 1972; Mar. 21, 1972; Apr. 1, 1974; May 19, 1977; June 2, 1983; Feb. 22, 1984; Mar. 29, 1988; Oct. 24, 1988; Oct. 16, 1992; Jan. 28, 1993.

Selected Notices: 75-14, 77-13, 80-3, 80-39, 83-45, 86-28, 88-33, 88-89, 88-98, 88-100, 90-39, 92-57, 92-58, 94-45, 95-44, 96-53, 04-13.

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