June 23, 1993
TO: CLOSED-END FUND COMMITTEE NO. 17-93
COMPLIANCE COMMITTEE NO. 12-93
INVESTMENT ADVISERS COMMITTEE NO. 15-93
SEC RULES COMMITTEE NO. 55-93
RE: NASD PROPOSES AMENDMENTS TO FREE-RIDING AND WITHHOLDING
INTERPRETATION
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The NASD has proposed amendments to the Free-Riding and Withholding
Interpretation of the Board of Governors under Article III, Section 1 of its
Rules of Fair Practice. The proposed amendments were developed by a special
committee (the Free-Riding Committee) established to determine if the
Interpretation's restrictions, definitions and obligations are relevant in
today's securities markets. Attached is Special NASD Notice to Members 93-40,
dated June 15, 1993, which includes the full text of the Interpretation and the
proposed amendments thereto.
The purpose of the Interpretation is to protect the integrity of the
markets by ensuring that NASD members make a bona fide public distribution of
"hot issue" securities and neither withhold such securities for their own benefit
nor use the securities to reward other persons in a position to direct future
business to the member. "Hot issues" are defined as securities of a public
offering that trade at a premium in the secondary market when such trading
commences.
The Interpretation restricts member sales of hot-issue securities to the
accounts of specified categories of persons including, among others, senior
officers of registered investment companies, registered investment advisory
firms, and any other persons within such organizations whose activities influence
or include the buying or selling of securities. Investment companies registered
under the Investment Company Act of 1940 are expressly excluded from the
categories of persons to whom member firms are prohibited from selling hot-issue
securities.
The Free-Riding Committee has proposed amendments to specific provisions
of the Interpretation and requested comment on whether other parts of the
Interpretation should be amended. Among other things, an amendment has been
proposed to exempt from the categories of restricted persons individuals with
limited purpose registrations, such as persons registered as representatives or
principals in registration categories limited to investment company securities.
Comment is requested on the propriety of adopting such an exemption and, if
appropriate, the proper scope of the exemption.
In addition, comment is requested on whether foreign mutual funds which are
subject to a similar scheme of regulation as that governing domestic funds should
be exempted from the restricted persons categories and, if so, the proper scope
of such an exemption and the appropriate methodology for determining the
similarity of regulation.
Comment is also solicited on the types of securities that should be covered
by the Interpretation. The Interpretation currently applies to both equity and
debt securities. Comment is solicited on whether the Interpretation should be
applied to "straight" debt securities and whether "rated" debt should be excluded
from the Interpretation. In the discussion of the scope of the Interpretation's
coverage, it is noted that the Free-Riding Committee believes that shares of
closed-end investment companies should remain covered by the Interpretation.
Comments on the proposed amendments are due to the NASD by July 31, 1993.
If you have any comments on the specific proposed amendments or on the
Interpretation generally, please provide them to me by July 21, 1993. My direct
number is 202/955-3523.
Amy B.R. Lancellotta
Associate Counsel
Attachment