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NASD Proposes Rule Relating to Trading in "Hot" Equity Offerings
Washington, DC, January 19, 2000 - The National Association of Securities Dealers (NASD), through its wholly owned subsidiary NASD Regulation (NASDR), has filed with the Securities and Exchange Commission a proposed rule change to establish a new rule, Rule 2790, relating to trading in hot equity offerings, to replace its Interpretation IM-2110-1. The purpose of the proposed rule is to ensure that NASD members make a bona fide public offering of securities at the public offering price; ensure that members do not withhold securities in a public offering for their own benefit or use these securities to reward certain persons who are in a position to direct future business to the member; and ensure that industry "insiders," including members and their associated persons, do not take advantage of their "insider" position in the industry to purchase hot issues for their own benefit at the expense of public customers. Comments on the proposal are due to the SEC no later than February 8.
Among other changes the proposed rule would make, the term "hot issue" would be defined with reference to a threshold premium. In particular, the proposed rule change defines a hot issue as any security that is part of a public offering if the volume weighted price during the first five minutes of trading in the secondary market is five percent or more above the public offering price. (The current interpretation defines a "hot issue" as any security that trades "at a premium" whenever secondary market trading begins. The NASD and the SEC have stated that any premium, no matter how small, makes an offering a hot issue.) The proposing release states that NASDR recognizes that the selection of any threshold is to an extent arbitrary, and expects to receive comments on whether five percent is the correct premium.
The proposed rule also would apply to equity offerings only. Specifically, the proposed rule incorporates the definition of "equity security," as the term is defined in Section 3(a)(11) of the Securities Exchange Act. The interpretation has applied to equity and debt securities. The proposed rule also differs from the interpretation in that it would apply to all secondary offerings. The proposing release states that in light of the decision to define a hot issue as requiring a five percent premium, NASDR believes that it is no longer appropriate to exclude all secondary offerings as a class.
Investment companies registered under the Investment Company Act of 1940 are expressly exempt from the categories of persons to whom member firms would be prohibited from selling hot issue securities. The proposed rule also would exempt persons associated with "limited business broker/dealers" from the categories of restricted persons. A limited business broker-dealer includes a broker-dealer whose authorization to engage in the securities business is limited solely to the purchase or sale of investment company securities.