Interpretive Letter to James Hermann, William Blair & Company, LLC

May 19, 2003

James Hermann
Vice President, Compliance
Compliance Department
William Blair & Company, LLC
222 West Adams Street
Chicago, IL 60606-5312

Dear Mr. Hermann:

I am responding to your e-mail inquiry dated September 3, 2002, in which you ask if certain securities transactions are part of a primary offering and therefore are not required to be reported to the NASD’s TRACE system (TRACE System) under the exception provided in Rule 6230(e)(1).

Background

William Blair and Company, Inc. ("William Blair"), a registered broker-dealer and an NASD member, offers and sells certain medium term notes, which may be offered and sold on a frequent basis, such as weekly. The medium term notes are TRACE-eligible debt securities and are registered under Rule 415 of the Securities Exchange Act of 1934. William Blair, one of several selling agents, purchases the medium term notes from a Purchasing Agent during the offering period and re-sells the notes to customers at the offering price. The offering price is shown on the pricing supplement to the prospectus.

Two examples of the medium term notes that William Blair sells are Caterpillar Financial Services Corporation PowerNotes ("Caterpillar PowerNotes") and SmartNotes by GMAC ("GMAC SmartNotes"). William Blair provided a pricing supplement for each of these notes. In the Caterpillar PowerNotes pricing supplement, for trades occurring on October 17, 2002, the "Price to Public" is listed as 100%, with the following footnote modifying the entry: "Expressed as a percentage of aggregate principal amount. Actual Price to public may be less, and will be determined by prevailing market prices at the time of purchase as set forth in the confirmation sheet." Similarly, in the GMAC SmartNotes, the pricing supplement states that the "Price to Public" is 100%, with the following footnote modifying the entry: "Actual Price to Public may be less, and will be determined by prevailing market prices at the time of purchase as set forth in the confirmation sheet." You ask if the sales of such securities to William Blair customers are considered part of the primary distribution of the securities and therefore are not required to be reported under the exception to reporting stated in Rule 6230(e)(1).

Discussion

Rule 6230 requires a member that is a party to a debt securities transaction involving a TRACE-eligible security to report the transaction to NASD. Rule 6230 is drafted broadly to require the reporting of almost all such transactions. There are certain exceptions. Under Rule 6230(e)(1), transactions that are part of a primary distribution by an issuer are an exception to the broad and general requirement to report debt securities transactions found in Rule 6230(a), (b) and (c).

The transactions you describe are transfers of debt securities that occur routinely during a primary offering. William Blair purchases these securities from one of the Purchasing Agents during the offering period and re-sells them to customers during the offering period at the offering price stated on the pricing supplement, or, as stated in the footnote, at a price that is less than the price stated on the pricing supplement. For purposes of the TRACE reporting requirements, based on the facts as you have represented them, we interpret these sales as occurring during the primary distribution and, therefore, under Rule 6230(e)(1), the transactions are not required to be reported. We note that our conclusion might be different if William Blair had the right during its participation in the offering of the medium term notes to re-sell the notes at varying prices that would serve, at least in part, in determining its compensation in the transaction. In such instances, we may view such transactions as analogous in character, manner and nature to secondary market transactions with concomitant importance and relevance for price discovery purposes and, therefore reporting would be required.

I hope this letter is responsive to your inquiry. Please note that the opinions expressed in this letter are staff opinions only and have not been reviewed or endorsed by the Board of NASD. This letter responds only to the issues you have raised based on the facts as you have described them in your communications, and does not necessarily address any other rule or interpretation of NASD or all the possible regulatory and legal issues involved.

Very truly yours,

Sharon K. Zackula