July 16, 1990
TO: SEC RULES MEMBERS NO. 50-90
RE: INSTITUTE COMMENTS ON NASD PROPOSED AMENDMENTS
CONCERNING CONFLICTS OF INTEREST
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The NASD recently proposed amendments to Schedule E of its
By-laws, which regulates the potential conflicts of interest that
exist when an NASD member participates in the public distribution
of its own securities or the securities of an affiliate. The
proposed amendments would apply the provisions of Schedule E to
any public distribution of the securities of an issuer when a
member that proposes to participate in the distribution or its
associated persons, parent, or affiliates own 10 percent or more
of the debt, preferred stock or of the combined voting and
nonvoting common stock of an issuer.
When Schedule E was first adopted, the NASD exempted
investment companies by excluding them from the definition of
"affiliate". However, the proposed amendments expand the
coverage of Schedule E to conflicts of interest between the
member firm and the issuer which are deemed to exist when the
member owns more than 10 percent of the debt or equity of the
issuing company. Thus, literally read, the proposed amendments
would apply to the distribution of investment company shares.
In its comment letter, the Institute requested the NASD to
clarify that the proposed changes were not intended to cover
investment companies. The Institute noted that the drafters of
Schedule E intended to exclude investment companies and that
there is no justification to repeal or modify this exclusion.
Any change in the investment company exclusion would require a
complete revamping of the way in which investment company shares
are currently distributed. We also explained that conflicts of
interest involving investment companies are already regulated
under the Investment Company Act.
Attached is a copy of the Institute's comment letter and
the proposed changes to Schedule E. We will keep you informed of
developments.
Amy B. Rosenblum
Assistant General Counsel
Attachment