Notice To Members 86-27

Amendments to Corporate Financing Filing Requirements Effective Immediately

Published Date:

TO: All NASD Members and Other Interested Persons

ATTN: Corporate Financing Department

The National Association of Securities Dealers, Inc. (NASD), has adopted amendments to the Filing Requirements Section of the Interpretation of the Board of Governors — Review of Corporate Financing, Article III, Section 1 of the NASD Rules of Fair Practice (Corporate Financing Interpretation) which are effective immediately. The new text of the Filing Requirements Section is attached to this notice.

The amendments modify the number and types of documents required to be filed with the NASD Corporate Financing Department and differentiate those offerings exempt from compliance with the Corporate Financing Interpretation from those that are exempt from filing. The one substantive change is a new exemption for mortgage pass-through securities rated investment grade. In addition, the current exemption for debt and equity offerings of corporate issuers that have non-convertible debt or preferred securities rated investment grade has been amended to require that the debt securities have a term of at least four years to qualify for the exemption.

The Corporate Financing Interpretation requires that most public offerings of debt and equity securities that involve member participation be filed with the Corporate Financing Department of the NASD for a review of the underwriting terms and arrangements of the offering. These requirements are contained in the Filing Requirements Section of the Corporate Financing Interpretation which begins at page 2024 and ends at page 2026 of the NASD Manual. The Filing Requirements Section contains information with respect to when documents are required to be filed for review, the number and types of documents required to be filed for review and which offerings are exempt from filing. In addition, the section includes a listing of offerings that are subject to review.

Time of Filing

The NASD has amended the Filing Requirements Section in its entirety by combining the separate headings for interstate, intrastate and Regulation A offerings into one section that references both registration statements and other types of offering documents. To eliminate problems with respect to late filings of offerings with the Corporate Financing Department, the amendments clarify that offerings must be filed with the NASD concurrent with the filing of any of the enumerated documents with the appropriate regulatory authority. Further, the amendments clarify that an offering subject to review by a regulatory authority other than the Securities and Exchange Commission or a state must be filed concurrent with the filing of such offering "with any other regulatory authority," e.g., the Federal Savings and Loan Insurance Corporation or the Federal Home Loan Bank Board.

Documents Filed

With respect to the number and types of documents to be filed, the amendments require: (1) five copies of the registration statement or any other offering document; (2) five copies of each pre-effective and post-effective amendment to the registration statement or any other offering document, with one copy marked to show the changes; (3) three copies of any underwriting agreement or related documents; (4) three copies of any modified underwriting agreement or related documents, with one copy marked to show the changes; and (5) three copies of the final registration statement or other offering document; a list of the members of the underwriting syndicate, if not indicated therein; and one copy of the final underwriting documents and any other documents submitted to the NASD for review.

Exemptions from Filing

The Filing Requirements Section also has been amended to differentiate between offerings exempt from compliance with the Corporate Financing Interpretation or Appendix F to Article III, Section 34 of the NASD Rules of Fair Practice (Appendix F) and those offerings merely exempt from filing. The new provision lists those public offerings exempt from the filing requirements and provides that such offerings are required to be made in compliance with the provisions of the Corporate Financing Interpretation or Appendix F. In addition, the new provision clarifies that exempted offerings remain subject to the filing requirements of Schedule E to the NASD By-Laws — the NASD's self-underwriting rule.

The new provision includes as item (1) the current exemption from filing for debt and equity offerings of corporate issuers that have "senior" non-convertible debt or preferred securities rated investment grade. This exemption has been amended to delete the unnecessary word "senior" and to include a requirement that the investment-grade rated debt securities have a term of at least four years to qualify for the exemption. The NASD believes that in order for an investment-grade rating to give rise to an exemption, it should be based on the issuer's ability to pay principal and interest amounts over a sufficient period. In addition, the new provision includes as item (2) an exemption previously approved for offerings registered with the SEC on Registration Statement Form S-3 and made pursuant to SEC Rule 415. 1/ Item (3) of the new provision includes a previously approved exemption from filing for redemption .standby arrangements registered with the SEC on Registration Statement Form S-3. 2/

Finally, item (4) of the new provision contains a new exemption from filing for mortgage pass-through securities that are rated investment grade by a nationally recognized statistical rating organization. A "mortgage pass-through security" is an equity interest in a pool of securities backed by mortgages or other financing instruments. The equity interest is issued by a partnership or trust. Financing instruments of this type have been created for home mortgages and automobile loans. Because the investment vehicle provides for flow-through tax treatment of ownership, mortgage pass-through securities are reviewed pursuant to Appendix F, which applies to direct participation programs. Although an equity interest, mortgage pass-through securities have been rated similar to debt instruments and are generally sold to institutional investors. Thus, offerings of mortgage pass-through securities do not contain regulatory issues with respect to suitability, due diligence or underwriting compensation which normally arise in the context of a direct participation program offering. Therefore, the NASD concluded that a direct participation program interest in a pool of financing debt instruments rated investment grade should be exempt from filing with the NASD.

Corporate Financing Interpretation Exemptions

The amendments also contain a list of offerings that are not only exempt from the Filing Requirements Section but also are exempt from compliance with the Corporate Financing Interpretation. Included as item (1) is an exemption for private placements under Sections 4(1), 4(2) and 4(6) of the Securities Act of 1933 and pursuant to SEC Rules 505, 506 and 504 (where the security is not public in the states where offered). Further, changes to clarify language have been made to the current exemptions in items (2), (3) and (4) for "exempt securities" under Section 3(a)(l2) of the Securities Exchange Act of 1934, open-end investment companies and variable contracts. Exemptions for municipal securities, cash tender offers, competitively bid utilities offerings, which were contained in Notice to Members 81-17 (April 15, 1981), are also included as items (5) through (7).

Offerings Required to be Filed

Finally, the amendments expand the enumerated list of offerings that are required to be filed for review. These include intrastate offerings that are considered public offerings in the state where offered, public offerings pursuant to SEC Rule 504, and securities offered by a bank, savings and loan association, church or other charitable institution, or a common carrier, even though such offerings may be exempt from registration with the Securities and Exchange Commission.

* * * * *

The amendments to the Filing Requirements Section are effective immediately. It is suggested that members closely examine these amendments. In particular, members should note the new requirements relating to the number and types of offering and underwriting documents required to be filed for review with the NASD Corporate Financing Department.

Any questions concerning this notice may be directed to Suzanne E. Rothwell, Associate Director, NASD Corporate Financing Department, at (202) 728-8258.

Sincerely,

Frank J. Wilson
Executive Vice President
Legal and Compliance

Attachment

. . . INTERPRETATION OF THE BOARD OF GOVERNORS

REVIEW OF CORPORATE FINANCING

Article III, Section 1 of the NASD Rules of Fair Practice

Filing Requirements*

All documents and other information required hereby to be filed with the Association, or any communications or inquiries pertaining thereto, shall be submitted to the Director, Corporate Financing Department at the Executive Office of the Association, 1735 K Street, N.W., Washington, D.C., 20006.

(Filing Fees Required—Schedule A to the By-Laws.)

The following documents relating to all proposed public offerings of securities shall be filed for review concurrent with the filing of any of such documents: (i) with the Securities and Exchange Commission; (ii) with the state securities commission (by whatever name known); (iii) with any other regulatory authority; or (iv) if not filed with any regulatory authority, at least fifteen (15) business days prior to the anticipated offering date:

(1) Five (5) copies of the registration statement, offering circular, offering memorandum, notification of filing, notice of intention, application for conversion and/or any other document used to offer securities to the public;
(2) Three (3) copies of any underwriting agreement, agreement among underwriters, selected dealers agreement, agency agreement, purchase agreement, letter of intent, consulting agreement, warrant agreement, escrow agreement, and any other document which describes the underwriting or other arrangements in connection with or related to the distribution, and the terms and conditions relating thereto; and any other information or documents which may be material to or part of the said arrangements, terms and conditions and which may have a bearing on the Committee's review;
(3) Five (5) copies of each pre- and post-effective amendment to the registration statement or other offering document, one copy marked to show changes; and three (3) copies of. any other amended document, one copy marked to show changes; and
(4) Three (3) copies of the final registration statement or other offering document and a list of the members of the underwriting syndicate, if not indicated therein; one (1) copy of the final underwriting documents and any other document submitted to the Association for review.

Documents related to the following public offerings need not be filed with the Association for review, unless subject to the provisions of Schedule E to the By-Laws, provided, however, it shall be deemed a violation of Article III, Section 1 of the Rules of Fair Practice, or Appendix F to Article III, Section 34 of the Rules of Fair Practice if a direct participation program, for a member to participate in any way in such public offerings if the underwriting or other arrangements in connection with the offering are not in compliance with this Interpretation or Appendix F, as applicable:

(1) securities offered by a corporate, foreign government or foreign government agency issuer which has non-convertible debt with a term of issue of at least four years, or non-convertible preferred securities, rated by a nationally recog nized statistical rating organization in one of its four highest generic rating categories;
(2) securities registered with the Securities and Exchange Commission on registration statement Form S-3 and offered pursuant to Rule 415 adopted under the Securities Act of 1933, as amended;
(3) securities offered pursuant to a redemption standby "firm commit ment" underwriting arrangement registered with the Securities and Exchange Com mission on Form S-3; and
(4) direct participation program interests in a pool of financing instru ments which are rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories.

The following offerings are exempt from this Interpretation and documents relating to such offerings need not be filed for review:

(1) securities exempt from registration with the Securities and Exchange Commission pursuant to the provisions of Sections 4(1), 4(2) and 4(6) of the Securities Act of 1933, as amended, and pursuant to Rule 504 (unless considered a public offering in the states where offered), Rule 505 and Rule 506 adopted under the Securities Act of 1933, as amended;
(2) securities which are defined as "exempt securities" in Section 3(a)(12) of the Securities Exchange Act of 1934, as amended;
(3) securities of investment companies registered under the Investment Company Act of 1940, as amended, except securities of a management company defined as "closed-end company" in Section 5(a)(2) of that Act;
(4) variable contracts as defined in Article III, Section 29(b)(l) of the Rules of Fair Practice;
(5) offerings of municipal securities as defined in Section 3(a)(29) of the Securities Exchange Act of 1934, as amended;
(6) tender offers made pursuant to Regulation 14D adopted under the Securities Exchange Act of 1934, as amended; and
(7) securities issued pursuant to a competitively bid underwriting arrangement meeting the requirements of the Public Utility Holding Company Act of 1935, as amended.

Documents relating to all other public offerings including, but not limited to, the following must be filed with the Association for review:

(1) direct participation programs as defined in Article III, Section 34(d)(2) of the Rules of Fair Practice;
(2) securities offered pursuant to Regulation B adopted under the Securities Act of 1933, as amended;
(3) mortgage and real estate investment trusts;
(4) rights offerings;
(5) securities exempt from registration with the Securities and Exchange Commission pursuant to Section 3(a)(ll) of the Securities Act of 1933, as amended, which is considered a public offering in the state where offered;
(6) securities exempt from registration with the Securities and Exchange Commission pursuant to Rule 504 adopted under the Securities Act of 1933, as amended, which is considered a public offering in the states where offered;
(7) securities offered by a bank, savings and loan association, church or other charitible institution, or common carrier even though such offering may be exempt from registration with the Securities and Exchange Commission;
(8) securities offered pursuant to Regulation A adopted under the Securities Act of 1933, as amended; and
(9) any offerings of a similar nature.

1/ Notice to Members 83-12 (March 8, 1983).

2/ Notice to Members 81-17 (April 15, 1981).

* The Filing Requirements Section, effective immediately, is completely revised and replaces all material at pp. 2024 to 2026 of the NASD Manual.