Interpretive Letter to Alan M. Wolper, Esq., Sutherland Asbill & Brennan LLP
Services rendered in acting as a Designated Advisor for Disclosure (DAD) for Pink Sheets’ new OTCQX listing may fall within the exception of Rule 2460(b), which permits a member to accept payment for bona fide services; however, this conclusion will depend upon the specific payments made and services that ultimately are rendered.
October 6, 2006
Alan M. Wolper, Esq.
Sutherland Asbill & Brennan LLP
999 Peachtree Street, NE
Atlanta, GA 30309-3996
Re: Rule 2460
Dear Mr. Wolper:
This responds to your letter dated April 25, 2006, which seeks interpretive guidance regarding Rule 2460 on behalf of Spartan Securities Group, Ltd. Specifically, you ask whether an NASD member may accept payment from an issuer for acting as a Designated Advisor for Disclosure (DAD) for Pink Sheets' new OTCQX listing and at the same time, make a market in the issuer's security under the exception in Rule 2460(b). As set forth below, NASD believes that services rendered in acting as a DAD may fall within the exception of Rule 2460(b); however, this conclusion will depend upon the specific payments made and services that ultimately are rendered.
As described in your letter, OTCQX is a new tiered listing that offers a premier trading, quotation and disclosure venue for over-the-counter securities in the US markets. Each OTCQX company must have a DAD to assist the issuer in gathering current information and advising the issuer on meeting requirements for inclusion in the tier. You assert that "[b]ecause Pink Sheets' DAD is modeled after the London Stock Exchange's NOMAD, which is recognized as a valid investment banking service, a market maker broker-dealer providing DAD services and receiving compensation for those services should fall within Rule 2460(b)(1)."
Based on information available at www.otcqx.com, the selection of a DAD is designed to bolster investor confidence in the quality of OTCQX issuer disclosure. In order to qualify to act as a DAD, the advisor must be either a US resident securities attorney or an NASD member investment-banking firm. A DAD may not be an employee or officer of the issuer and any conflict of interest the DAD may have must be disclosed. OTCQX will make available a list of approved DADs on Pink Sheets' website.
Generally, Rule 2460(a) prohibits members and persons associated with members from receiving payment or other consideration from an issuer for publishing a quotation, acting as a market maker or submitting an application in connection therewith. Rule 2460(b) contains an exception for members receiving payment for bona fide services, including but not limited to, investment banking services.
The Rule was designed to assure that members act in an independent capacity when publishing a quotation or making a market in an issuer's securities. As the SEC release approving the Rule notes, "if payments to broker-dealers by promoters and issuers were permitted, investors would not be able to ascertain which quotations in the marketplace are based on actual interest and which quotations are supported by issuers or promoters."1
Based on the foregoing, NASD staff believes that services rendered in acting as a DAD, such as assisting the issuer in gathering current information and advising the issuer on meeting requirements for inclusion in the tier, may fall within the exception of Rule 2460(b), which permits a member to accept payment for bona fide services. However, this conclusion would depend upon the specific payments made and services that ultimately are rendered and at a minimum, would require that such payments and services be unrelated to publishing a quotation or acting as a market maker or submitting an application therewith.
In all cases, a market maker acting as a DAD must maintain records sufficient to demonstrate that any payment received in connection with its role as a DAD is for bona fide services provided as a DAD and is not related to market making activities. For example, a member acting as a DAD cannot accept payment for preparing and submitting a Form 211 pursuant to NASD Rule 6640. All such payments must be supported by detailed invoices (or similar documentation) for specific work performed and the compensation must be commensurate with the services provided. Payments made by an issuer for future services will be presumed to be payments for market making unless the member can fully demonstrate otherwise. Payments that cannot be substantiated by invoices and other documentation reflecting services rendered as a DAD will be deemed payments for market making.
In addition, the DAD arrangement may never be conditioned on an agreement by the member to make a market or publish a quotation for the issuer's securities or submit an application therewith. In furtherance of this requirement, members should ensure that information barriers have been established and are maintained that are sufficient to separate the activities of the DAD from the trading desk. It is important to note that nothing in this letter or Rule 2460 changes a member's obligation to comply with applicable rules regarding disclosure of conflicts of interest and the provisions of Section 17(b) of the Securities Act of 1933. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the NASD Board of Governors. This letter responds only to the issues you have raised based on the facts as you have described them and does not address any other rule or interpretation of NASD, or all the possible regulatory and legal issues involved. Any changes in the facts or services of the DAD as you have described them will require further consideration and may cause us to reach a different conclusion.
Lisa C. Horrigan
Assistant General Counsel
1 See SEC Exchange Act Release No. 38812 (July 3, 1997), 62 FR 37105 (July 10, 1997) (order approving SR-NASD-97-29).