Request for Comments on Amendments to the Filing Requirements of the Interpretation of the Board of Governors — Review of Corporate Financing; Last Date for Comments: July 1, 1991

EXECUTIVE SUMMARY

The NASD requests comment on amending the filing requirements of the Interpretation of the Board of Governors — Review of Corporate Financing to exempt offerings of Canadian issuers filed on proposed SEC Form F-9, and on Form F-10 if the securities are distributed pursuant to SEC Rule 415. The text of the proposed amendment follows this notice.

BACKGROUND

The Securities and Exchange Commission, (SEC or "Commission") has published a proposal intended to facilitate cross-border offerings of securities. The proposal is referred to as the "Multi-Jurisdictional Disclosure and Modification to the Current Registration and Reporting System for Canadian Issuers" ("MJDS"). Under MJDS, the SEC has proposed four new registration statement forms (F-7, F-8, F-9, and F-10) and has developed criteria regarding both the issuers that may utilize the registration statements and the types of securities that may be offered. The NASD's Corporate Financing Committee considered the SEC's proposal and recommended to the Board of Governors that it would be appropriate to amend the NASD's filing requirements to exempt offerings by Canadian companies in the United States on Forms F-9 and F-10 from review by the Corporate Financing Department ("Department").

BACKGROUND ON MJDS

The Commission states that the purpose of MJDS is to remove unnecessary impediments to transnational capital formation by creating a disclosure system that would permit Canadian issuers meeting certain eligibility criteria to satisfy securities registration and reporting requirements in the United States by providing disclosure documents prepared in accordance with the requirements of Canadian regulatory authorities. The Ontario Securities Commission and the Commission des Valeurs Mobilieres du Quebec have also issued for comment proposals that would establish MJDS in Canada.

MJDS is a hybrid of two approaches — mutual recognition and harmonization of disclosure standards — designed to enhance the efficiency of multinational capital formation. Canada was chosen as the first partner for MJDS, in part, because of the similarities in United States and Canadian investor protection mandates and disclosure requirements. MJDS would permit single jurisdiction regulation of certain security offerings (due to the fact that the SEC will not review the registration statements) so that cross-border security offerings in the United States and Canada could be made more efficient and less expensive.

Initially, MJDS will be limited to large Canadian issuers or to certain types of offerings, rather than providing for multi-jurisdictional registration and disclosure for any offering by a Canadian issuer. MJDS would extend to two general categories of registered public offerings: (1) rights offerings, exchange offers, and business combinations by Canadian foreign private issuers and crown corporations; and (2) "substantial" Canadian foreign private issuers and crown corporations. In addition, a Canadian issuer would generally be required to have a three-year reporting history as a public company in Canada and be in compliance, at the time of filing, with the Canadian reporting requirements as administered by Canadian securities regulatory authorities.¹

BACKGROUND ON FILING REQUIREMENTS

The NASD requires members to file most public offerings with the Corporate Financing Department for review of the fairness and reasonableness of the underwriting terms and arrangements. Historically, the NASD has tried to identify offerings in which review of the underwriting terms and arrangements would be most meaningful. The NASD has exempted from the filing requirements certain issuers and offerings of certain securities based on the premise that factors inherent in the securities markets tend to competitively limit the underwriting compensation to levels acceptable to the NASD.

The NASD believes that it is appropriate to facilitate cross-border offerings of securities of Canadian issuers so long as the NASD is certain that the securities markets will act to similarly limit the underwriting compensation and terms and arrangements entered into by NASD members with Canadian issuers. Therefore, the Board of Governors has decided that the NASD should seek comment on exempting certain offerings of securities of Canadian issuers from NASD review.

REQUEST FOR COMMENTS

Registration Statement Form F-10

The NASD is requesting comment on an exemption from the filing requirements of the Interpretation for any public offering of securities registered with the SEC by Canadian issuers on Registration Statement Form F-10. The NASD believes that requirements for Form F-10, which is restricted to those issuers with a common stock market value of at least (CN) $360 million and a public float of (CN) $75 million, ensures that the Canadian company utilizing the form will be a seasoned company with experience in raising capital from a public market. Additionally, such issuers are likely to be followed by a number of research analysts and have a number of investment banking relationships with NASD members. These factors should act to ensure that an issuer will be able to negotiate fair and reasonable terms with an underwriter in connection with any public distribution.

The NASD also requests comment on extension of the current exemptions from the filing requirements for securities registered on Forms S-3 and F-3 to securities registered by Canadian issuers on Registration Statement Form F-10. The terms of the exemption would be limited to those offerings to be distributed on a delayed or continuous basis pursuant to SEC Rule 415. This would have the effect of treating securities registered by Canadian issuers on the same basis as securities offered by domestic companies on Form S-3 that are offered pursuant to SEC Rule 415.

The NASD also seeks comment on a proposed exemption for securities offered pursuant to a redemption standby firm-commitment underwriting arrangement. This would extend the exemption currently contained within the Interpretation for redemption standby firm-commitment underwriting arrangements for issuers utilizing Form S-3 to Canadian issuers eligible to offer securities registered pursuant to Form F-10.

In connection with the proposed amendments, the NASD is clarifying that foreign companies registering an offering of securities pursuant to Registration Statement Form F-3 to be distributed by a member pursuant to SEC Rule 415, or in connection with a "firm commitment" redemption standby obligation, are exempt from the filing requirements of the Interpretation. The NASD has over the years consistently indicated that members that propose to distribute securities of foreign issuers registered on the Form F-3 may utilize the exemptions contained within the Interpretation for domestic companies utilizing Form S-3.

Registration Statement Form F-9

The NASD is also requesting comment on an exemption from filing for issuers utilizing Form F-9. Registration Statement Form F-9 is available to Canadian issuers that are offering nonconvertible debt and nonconvertible preferred stock that, at the time of effectiveness of the registration statement, is rated investment grade by at least one nationally recognized statistical rating organization as that term is used by the SEC in Rule 15c3-1.

In addition, a Canadian issuer will be permitted to utilize Form F-9 to issue debt or preferred stock that is convertible if such convertibility cannot occur prior to one year from the date of issuance. The issuer also must have a total market value for its common stock of at least (CN) $180 million and have a public float of (CN) $75 million.

In requesting comment, the NASD recognizes that a current exemption from the filing requirements of the Interpretation for securities offered by a corporate issuer that has nonconvertible debt with a term of issue of at least four years, or non-convertible preferred securities rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories, may presently be utilized by foreign corporate issuers distributing securities in this country. When the NASD amended the Interpretation to include this exemption in 1984, it made clear that foreign private issuers could rely on this exemption.² The NASD has also interpreted this exemption to cover a current offering of investment-grade-rated debt or preferred securities.

In soliciting comment on an exemption for debt and preferred securities registered by a Canadian issuer on Form F-9, the NASD recognizes that the exception would realistically expand the scope of an existing exemption only to include investment-grade-rated convertible debt and convertible preferred securities.

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The NASD notes that MJDS may be extended in the future to foreign issuers of jurisdictions other than Canada. While the NASD generally believes that it is appropriate to extend to foreign issuers the same exemptions from the filing requirements enjoyed by domestic issuers, it is not yet prepared to extend the exemptions contained in the Interpretation to issuers of jurisdictions other than Canada. The NASD believes that it is appropriate to carefully scrutinize any expansion of MJDS to determine if the same treatment can be accorded to issuers of other countries.

It should also be noted that the NASD has decided not to amend the provisions of Schedule E to the By-Laws as it may relate to foreign offerings. Schedule E is meant to address potential conflicts of interest that exist when a member participates in the public distribution of its own securities or those of an affiliate. The NASD believes that the comprehensive protections against conflicts of interest under Schedule E continue to be appropriate. Therefore, Schedule E would be applicable to offerings filed on Forms F-7, F-8, F-9, and F-10.

REQUESTS FOR COMMENTS

The Board of Governors asks all members and interested persons to comment on the proposed amendment. Comments should be directed to:

Stephen D. Hickman,
Secretary National Association of
Securities Dealers, Inc.
1735 K Street, NW
Washington, DC 20006-1506.

Comments must be received no later than July 1, 1991. Comments received by this date will be considered by the NASD's Corporate Financing Committee, other appropriate standing committees, and the NASD Board of Governors. If the Board approves the proposed amendments to the filing requirement of the Interpretation of the Board of Governors — Review of Corporate Financing, it must be filed with and approved by the SEC before it can become effective.

Questions concerning this notice may be directed to Richard J. Fortwengler, Associate Director, or Carl R. Sperapani, Assistant Director, NASD Corporate Financing Department, at (202) 728-8258.

INTERPRETATION OF THE BOARD OF GOVERNORS — REVIEW OF CORPORATE FINANCING

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Filing Requirements (Note: New language is underlined.)

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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 For further details regarding MJDS, members may refer to Securities Act Release No. 6879, October 16, 1990.

² See Securities Act Release No. 34-21480, November 14, 1984.