December 22, 1994
TO: CLOSED-END FUND MEMBERS No. 46-94
COMPLIANCE COMMITTEE No. 25-94
INVESTMENT ADVISER MEMBERS No. 60-94
SEC RULES MEMBERS No. 91-94
UNIT INVESTMENT TRUST MEMBERS No. 46-94
RE: SEC APPROVES AMENDMENTS TO NASD'S FREE-RIDING AND
WITHHOLDING INTERPRETATION
______________________________________________________________________________
In June 1993, the National Association of Securities Dealers, Inc. proposed amendments to the
Free-Riding and Withholding Interpretation of its Board of Governors under Article III, Section 1 of
the NASD's Rules of Fair Practice (the "Interpretation"). These amendments were recently approved by
the Securities and Exchange Commission. A copy of the Commission's release is attached.
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 the ability of members to sell 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 Interpretation has been amended to reflect changes in the marketplace since it was first
adopted and to clarify the language in the Interpretation to facilitate understanding of its application. Of
particular interest to investment companies is the change to exempt from the categories of restricted
persons individuals associated with broker-dealers whose business is limited to investment company
securities because such persons "are not in a position to sell, distribute, or withhold hot issue securities."
The release clarifies that "The modification applies only to a person associated with such a limited
broker-dealer, and not to the broker-dealer itself, as it is inappropriate for any NASD member to
purchase a hot issue security for its own account, regardless of the extent of its securities business."
Amy B.R. Lancellotta
Associate Counsel
Attachment