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Notice To Members 83-12

Clarification of NASD Filing Requirements for Offerings Made Pursuant to SEC Rule 415

Published Date:

TO: All NASD Members and Other Interested Persons

Recent changes to certain Securities and Exchange Commission ("SEC" or "Commission") requirements for the filing of public offerings have raised interpretive questions concerning the Association's filing requirements. In 1982, the SEC adopted new forms for registering securities, Forms S-l, S-2, and S-3, as well as new eligibility criteria for those forms. The Commission also adopted, on a temporary basis, Rule 415 governing the offering of securities on a delayed or continuous basis ("shelf offerings). Unlike its predecessor rule, Rule 415 permits issuers to make shelf offerings of securities to the public.

The Association is issuing this notice to clarify that offerings registered on Form S-3 and distributed pursuant to Rule 415 are not required to be filed with the Association for review.


The new SEC registration forms establish new categories of issuers. M order to qualify to register on Form S-3, an issuer must meet a float and/or volume, or investment grade debt test and must have been a reporting company for three years with no payment default since its last fiscal year. Issuers which have been reporting companies for three years but do not meet the float, volume or investment grade test must register on Form S-2, with other issuers required to register on Form S-l.

The Interpretation of the Board of Governors — Review of Corporate Financing ("Corporate Financing Interpretation") under Article III, Section 1 of the Rules of Fair Practice (NASD Manual (CCH) Para. 2151) requires that most public offerings be filed with the Association for a review of the underwriting terms and arrangements. In the past, certain types of offerings have been exempted from the filing requirements where market forces or other constraints were present to assure the fairness and reasonableness of underwriting terms and arrangements, including specifically the amount of underwriting compensation. These exemptions were most recently clarified in 1981, prior to the adoption of Rule 415. (See Notice to Members 81-17 (April 15, 1981).)

An exemption from NASD filing requirements has long been recognized for:

"shelf registrations filed with the Commission on Form S-16 which do not involve an underwriting agreement. (Notice to Members 81-17 (April 15, 1981) at 3.)

This exemption was adopted because it was believed that NASD advance review of these transactions would serve little regulatory purpose. In the absence of an underwriting arrangement, a "shelf" distribution was expected to take the form of a series of brokerage transactions, with compensation limited to normal brokerage commissions. In the case of an issuer qualified to register on a Form S-16, the amount of such brokerage commissions would ordinarily be determined under very competitive circumstances. By limiting the exemption to securities registered on Form S-16, the Association could reasonably assume that the issuer would be closely followed and that the market would efficiently determine a fair price for the securities being issued.

With the replacement of Form S-16 by Form S-3 (with certain revised criteria) and the adoption of Rule 415, the NASD Corporate Financing Committee ("Committee") has now reviewed the existing exemption to determine its applicability under the changed rules. In considering the changes in the qualification requirements for Form S-3 as compared to a Form S-16, the Committee determined that the rationale for extending the exemption to issuers qualified for Form S-16 is equally applicable to issuers qualified to use Form S-3. Indeed, the Commission's adoption of the integrated disclosure system seems to provide greater support for the Association's reliance upon market forces to assure fair compensation and pricing.

In comparing offerings under Rule 415 with those "shelf offerings which were exempted under the prior policy, the Committee concluded that Rule 415 transactions on Form S-3 are comparable to "shelf offerings on Form S-16, except that offerings may be made by the registrant, which was not generally permissible before. The Committee noted that offerings under Rule 415 on Form S-3 generally do not involve traditional underwriting arrangements, with securities usually offered in broker's transactions which are virtually indistinguishable from ordinary secondary trades. Based on observation of market activity under Rule 415, the Committee concluded that market pressures often result in the amount of underwriting compensation being determined through a virtual competitive bidding process which helps to achieve its reasonableness. The Committee noted that, even in those transactions which eventually include a traditional underwriting agreement, the competitive pressures which come into play in the negotiations preceding the execution of that agreement usually can be relied upon to achieve the overall fairness of the arrangement.


In view of the above considerations, the Association is issuing this Notice to clarify the scope of the exemption presently available to offerings under Rule

federal register

February 7, 1983

Part V

Office of the Vice President

Federal Regulation of Financial Services; Request for Comments


Federal Regulation of Financial Services

AGENCY: Office of the Vice President.

ACTION: Request for comments.

SUMMARY: The Task Group on Regulation of Financial Services is undertaking a study of the problems of the existing system of Federal regulation of financial institutions and services. Within a period of approximately nine months the Task Group intends to complete its review of the current regulatory system and to make a report to the President concerning any desirable areas for change.

In order to gather the information necessary for this study and to encourage public participation in the process all interested parties are being invited today to present their views on the issues discussed below, or on any other relevant issues they may wish to bring to the attention of the Task Group.

DATE: Comments must be received by March 14, 1983.

ADDRESS: Interested parties are invited to submit two copies of written data, views, or arguments concerning the problems of the existing Federal regulatory structure and suggesting alternatives to the Task Group on Regulation of Financial Services, Room 1060, Department of the Treasury, 15th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20220.

FOR FURTHER INFORMATION CONTACT: Richard C. Breeden, Deputy Counsel to the Vice President (202-156-6445).

SUPPLEMENTARY INFORMATION: On December 13, 1982, Vice President George Bush announced the formation of a Task Group on Regulation of Financial Services, charged with reviewing the Federal government's regulatory structure for financial institutions and proposing any desirable legislative changes to the existing system.

The Vice President of the United States is Chairman of the Task group. Other members are the Secretary of the Treasury (Vice-chairman); the Attorney General; the Director of the Office of Management and Budget; the Chairman of the Council of Economic Advisers; the Assistant to the President for Policy Development; the Chairman of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance. Corporation, Federal Home Loan Bank Board, National Credit Union Administration, Securities and Exchange Commission and Commodity Futures Trading Commission; and the Comptroller of the Currency.

Need for Regulatory Relief and Reorganization

The current system of Federal regulation of financial institutions and services is highly complex, and the type and nature of regulatory requirements vary significantly among different types of institutions and the products they may offer. This situation has developed as a result of an historic series of piecemeal changes to the system. As the financial system itself became more complex with the appearance of new types of financial intermediaries, markets and products, the regulatory system became correspondingly more complex with the creation of new agencies or the expansion of historic agency responsibilities.

Although each part of the current system may have been created in response to specific problems or perceived needs, recent trends in the financial system as a whole have highlighted problems with the current regulatory structure. These include:

1. Differential Treatment. As many types of institutions and the products which they offer have become more similar and come into increasingly direct competition with one another, differences in regulatory controls are much more likely to influence artificially the behavior of savers, investors of consumers. In some cases, such as interest rate limitations, the effect of differences in regulatory controls may be so great as to induce significant shifts of consumer behavior, and thereby to alter materially the opportunities of the competing institutions. In addition to altering competitive advantages artificially, differences among regulatory agencies which may have common or overlapping jurisdiction can prevent transactions which might otherwise occur or sharply increase non productive overhead in order to comply with conflicting government policies. Finally, to the extent that historic types of institutions become more similar, there may be less justification for continuing to maintain entirely separate regulatory agencies.
2. Excessive Regulatory Controls. In some areas particular regulatory requirements, whether created by statute or regulations, may impose costs which far exceed any public benefits derived there from. For example, depository institutions are currently required to obtain regulatory approval in advance before conducting certain types of ordinary corporate activities, such as opening or closing offices, forming holding companies or engaging in types of activities which are expressly permitted. Such requirements could be repealed or modified simply to require notice to the appropriate regulatory authority. The current system may also impose inordinately burdensome record keeping or information collection requirements, excessive or ambiguous disclosure obligations and many other highly detailed controls which result in substantial costs to borrowers, savers or investors. Excessive regulatory controls may exist both with respect to types of transactions as well as basic operations of certain types of institutions.
3. Overlap and Duplication. In some areas the jurisdictions of regulatory agencies may in fact overlap so that institutions may be forced to adhere to multiple sets of operating requirements, accounting or record-keeping policies and reporting obligations, as well as being subjected to multiple examinations or supervisory reviews. Such duplication may consume significant employee and officer time, as well as require unnecessarily large expenditures for internal or external professional services.
4. Agency Responsiveness. For a variety of reasons significant delays may occur in obtaining regulatory approval for otherwise permissible transactions or activities. For example, delays may be created because of confusion as to whether a given agency has jurisdiction, or in resolving opposing viewpoints of two or more agencies which possess concurrent jurisdiction. Such delays may represent a significant burden for institutions which seek to respond to competitive developments, take advantage of business opportunities or reduce activities in a given area. In addition to raising the costs of individual transactions significantly, general regulatory policies of an agency may also raise the cost of normal operations through unnecessary paperwork or other similar requirements in particular areas. The costs of delays and reporting requirements may have a disproportionately severe impact on smaller institutions.
5. Difficulties in Management of Shared Responsibilities. The existing allocation of agency responsibilities frequently requires that several agencies cooperate when addressing certain financial institution issues. Problems of failing institutions, the regulation of bank holding companies and their subsidiaries, mergers and acquisitions, efforts to develop inter-agency uniformity in examinations and the deregulation of interest rate controls are all cases in point. Problems of inter-agency coordination may unnecessarily delay favorable resolution of such issues, imposing needless costs on the institutions and their customers and undermining confidence in the financial system.
6. Overlap and Conflict between State and Federal Requirements. Because of the dual system for chartering and supervising depository institutions, Federal controls over state-chartered entities may represent an unnecessary layer of regulation and an area where greater deference could be given to state regulatory responsibilities.

Previous Reorganization Proposals

Since the late 1930s numerous proposals have been put forward by both governmental bodies and private groups for reorganization of the Federal agencies regulating commercial banks and other depository institutions. For example, in 1949 the Commission on Organization of the Executive Branch of Government (the Hoover Commission) suggested that: (1) The Office of the Comptroller of the Currency (OCC) more properly belonged under the Federal Reserve Board than in the Treasury Department; (2) the functions of the Federal Deposit Insurance Corporation (FDIC) should be transferred to the Federal Reserve System (FRS); and (3) all Federal bank supervision should be combined, preferably in the FRS. In 1961, the Commission on Money and Credit recommended that the supervisory functions of the OCC and the FDIC be transferred to the FRS. In 1971, the Hunt Commission recommended that: (1) An "Administrator of National Banks" assume the OCC's supervisory responsibilities; (2) an "Administrator of State Banks" assume the supervisory responsibilities of the FRS and the FDIC; and (3) a "Federal Deposit Guarantee Administrator" assume the FDIC's insurance responsibilities. In 1975, the FINE Study recommended combining the supervisory and examination functions of the FDIC, FRS, OCC, the Federal Home Loan Bank Board (FHLBB) and the National Credit Union Administration (NCUA) into a single "Federal Depository Institutions Commission." In 1981, legislation (S. 1721) was proposed which would have consolidated the FDIC, the Federal Savings and Loan Insurance Corporation (FSLJC) and the National Credit Union Share Insurance Fund (NCUSIF) into one Federal deposit insurance fund. Finally, the Futures Trading Act of 1982 (H.R. 5447) largely resolved a jurisdictional dispute over financial futures between the Securities and Exchange Commission and Commodity Futures Trading Commission. The Act codified an agreement reached a year earlier between the two Commissions on a range of issues which, among other things, clarified the statutes administered by the agencies and set forth procedures enhancing cooperation between the agencies.

The reorganization proposals enumerated above, although by no means exhaustive, suggest the scope and nature of the proposals for Federal regulatory reorganization to date. While these proposals have generally centered on depository institutions, ongoing developments in the financial services markets suggest that this restricted focus is no longer appropriate, as depository and non-depository institutions have come to take on similar powers and compete in the same markets.

Traditional Arguments For and Against Reorganization

Arguments For: Proponents of reorganization have based their case on a variety of considerations, among which the following have frequently been cited:

1. Elimination of the duplication of activities among the several agencies will permit cost savings and enhance operating efficiency for the private sector.
2. Having fewer agencies would clearly fix responsibility for regulation of financial institutions and provide a focal point for Administration, Congressional, and public concerns regarding regulatory policy.
3. Agency reorganization would facilitate the handling of problem institution cases, which frequently require extensive coordination among several regulatory agencies.
4. Reorganization would remove inconsistencies in the regulation of bank holding companies and their subsidiary banks. Under the existing system, the FRS regulates all bank holding companies, while one of the other agencies usually has responsibility for the banking subsidiaries. Thus, it is difficult for a single agency to get a complete picture of the relationship between holding company and subsidiary, and the institution as a whole is subjected to at least two different sets of rules and regulators.
5. The existing division of responsibilities among agencies permits differential treatment of different institutions, giving rise to inequities. The several agencies have differed among themselves in their policies toward mergers and in their supervisory practices and requirements. According to some observers, the multi-agency structure tends to foster a "competition in laxity" as one agency or another seeks to maintain or increase it share of regulated institutions by adopting a more permissive regulatory posture.

Arguments Against: Arguments against reorganization have generally centered on the following themes:

1. Creation of fewer agencies would tend to concentrate power within a reduced number of government entities, raising the danger of arbitrary or inflexible behavior. Agency pluralism may be useful, since it subjects the regulators to checks and balances. A related commonly-voiced concern is that concentrating Federal regulation would tend to favor Federally chartered institutions over state-chartered institutions, thus undermining the "dual banking system" and "states rights." The power of a single Federal regulator, chartering and supervising all national institutions and regulating all Federally insured state-chartered institutions, would quickly dwarf that of state regulatory authorities even for state- chartered institutions.
2. Agency diversity increases the chances that innovative approaches to policy problems will emerge. The exchange of ideas resulting from different approaches to similar problems and sometimes even competition among regulators to achieve basic regulatory innovations may be superior to the single agency approach. A sole regulator, not subject to challenge from other agencies, might tend to be entrenched, conservative and shortsighted. In addition, there is a danger that its regulatory policies would tend to favor the type of institution making up the bulk of its regulatees.
3. The existing structure in any case works quite well despite its apparent cumbersomeness. Coordination among the agencies has improved, and little more of consequence could be achieved through consolidation or other extensive reorganization. Potential cost savings through consolidation are minimal.
4. Recent major legislative changes should be absorbed before structural changes in the regulatory system are considered.

The Impact of Deregulation of Financial Institutions

Deregulation of financial institutions is bringing about changes both in the functions of the regulatory agencies and in the structure of the country's financial system. At the same time, significant private sector innovations—such as the ; development of financial conglomerates which may offer credit, real estate, brokerage and insurance services, among others—also call into question the appropriateness of the current Federal regulatory structure. While the precise details of the future cannot be known, it is reasonable to expect three broad sets of changes to be particularly relevant to questions of agency structure.

First, most restrictions on prices and products offered by depository institutions will end. As a result, many if not all of the legal distinctions between the traditional categories of these institutions will disappear, although individual institutions may continue to specialize.

Second, the distinctions between depository and other financial services institutions will continue to erode, as depositories increasingly enter activities traditionally limited to investment banking, brokerage and insurance firms and vice-versa.

Third, depository institutions will continue to expand their geographic scope of operations through increased electronic services, expansion of subsidiary activities and expanded inter-state branching as a result of merger and acquisition activity.

The foregoing changes will tend to. intensify the problem of inequities arising from the current differential treatment of financial institutions. They will also cause increasingly severe problems of conflicting regulatory policies and duplication as more and more institutions become subject to multiple regulatory agencies. Without modification, however, the current system may be unable to resolve the conflicts and inequities which have already occurred among financial institutions, and such problems can only be expected to worsen over time.

In sum, ongoing and prospective changes in the regulatory and economic environments appear to strengthen the traditional arguments for agency reorganization, transfers of regulatory authority or elimination of regulatory controls on particular activities. In a deregulated environment characterized by more diversified institutions, there may be a much greater need for a system which can flexibly accommodate new products and services and technological developments, while at the same time providing consistency and uniformity in agency treatment of financial institutions. Under these circumstances, greater coherence among regulatory agencies and a more precise definition of agency responsibilities may be much more important to the overall integrity and efficiency of financial markets than has previously been the case.

Comments: In order to gather information pertinent to this study the Task Group on Regulation of Financial Services invites representatives of the financial services industries, the broader business community, governmental and community bodies and interested members of the general public to preset their views. Two copies of written comments on the issues discussed above, and other relevant concerns, would be appreciated. The following outline of issues and options may be helpful to respondents, although it should not be considered exhaustive of the possibilities the Task Group or respondents to this notice may consider.

Problems, Issues and Options of Financial Regulatory Agency Structure

I Goals of Financial Regulation
The goals and purposes underlying the regulation of financial institutions, instruments, and markets in the United States have been identified by various observers to include the following:
1. Assuring safety and soundness of financial institutions, and of the financial system as a whole, both to protect individual depositors and to avoid or limit secondary effects of a failed institution.
2. Avoiding conflicts of interest, fraud, and consumer abuses.
3. Promoting orderly markets to encourage savings and capital formation and to support macro-economic stability.
4. Avoiding excessive concentrations of economic and financial resources.
Should these goals be reappraised in light of emerging realities in the marketplace?
Has the evolution of the financial system changed the weight that public policy should place on these goals? Are there additional goals that should receive new attention in the framing of government regulatory policies and in organizing the financial regulatory agencies? Would other less costly regulatory approaches achieve these or alternative goals?
II. Assessment of the Existing Structure
1. Differential Treatment.—Are there differences in policies and procedures among the several regulatory agencies which result in differential treatment of institutions engaged in similar activities or which, absent unnecessary restrictions, would engage in similar activities? Are there overlapping responsibilities which may give rise to significant jurisdictional or policy conflicts among agencies or create dual jurisdictions with actual or potential conflict in operating requirements?
2. Excessive Regulatory Controls.— What specific regulatory or legislative controls or other requirements, procedural or substantive, could be eliminated, reduced or modified to reduce overall costs, increase efficiency or promote better services for consumers? What does compliance with current regulatory requirements cost on an annual basis, as a percentage of operating expenses or in absolute dollars? Give as much detail as possible concerning the costs of compliance with particular statutes or regulatory programs.
3. Overlap and Duplication.—Are there unnecessary costs and inefficiencies entailed by the performance of similar or identical functions by different regulatory agencies? What specific areas of duplication result in higher costs, excessive paperwork or record-keeping or reduced competitive activity?
4. Agency Responsiveness.—Does the complexity of the existing structure cause confusion or undue delay in completing transactions or otherwise impose unnecessary costs or burdens on the institutions and public which must deal with the agencies? In what specific areas do current regulatory controls result in unnecessary delays in completing ordinary transactions?
5. Management of Shared Responsibilities.—Do different agencies work together effectively in areas where their statutory responsibilities require such cooperation—as in regulating bank holding companies and their subsidiaries, administering securities margin regulations or handling problem institution cases? Do current inter-agency coordinating groups, such as the Depository Institutions Deregulation Committee (DIDC) and Federal Financial Institutions Examination Council (FFIEC) reduce or increase costs and efficiency? Do inter-agency agreements such as that between the Securities and Exchange Commission and the Commodity Futures Trading Commission offer a means of resolving jurisdictional tensions in other areas?
6. State and Federal Requirements.— In which areas do Federal controls over state-chartered entities represent an unnecessary layer of regulation?
7. What aspects of the current regulatory system are most important to preserve?
III. Reform Issues and Options
1. Reorganization of Depository Regulators.—If reorganization is called for, what agencies should be included or excluded and what regulatory functions should any such agency or agencies perform? Should reorganization result in a new regulatory authority lodged in one of the existing agencies or in a newly created one? If the latter, what form should the new agency take, how should it be administered and how should it be integrated, if at all, with other parts of the government? If reorganization results in a reduction of the current number of agencies, which should be the surviving regulatory agencies and what should be the scope of their authorities? Is regulation by function feasible instead of regulation by institutions? Finally, if a substantial reorganization of structure is desirable, should changes be introduced in stages, or in one comprehensive measure?
2. Organizational Issues Pertaining to Non-Depository Regulators.—What reorganization, consolidation or coordination would be desirable between the regulatory agencies dealing with securities trading, commodity futures trading and/or depository institutions? Does the current system adequately identify agency responsibilities and priorities in the event of conflicting rules or policies among such agencies?
3. Deposit Insurance.—Should any or all of the three Federal deposit insurance funds be consolidated? Please indicate the reasons for or against merging the funds. Is it appropriate to consider the Securities Investor Protection Corporation in this regard? What is the appropriate role for the deposit insurance agencies in the regulation of depository institutions and their holding companies?
4. Coordinating Mechanism.—Apart from or in addition to agency reorganizations, could increased regulatory effectiveness be obtained through the creation or elimination of interagency committees? Alternatively, could the current system be improved by transferring particular responsibilities to different agencies or by designating primary agencies in particular areas in the event of conflict? Should enforcement of consumer protection laws continue to be divided among agencies, or centralized in one consumer-oriented agency, e.g., the Federal Trade Commission (FTCJ?
5. Elimination of Regulatory Overlap and Conflict.—To what extent can the problems of the existing structure be rectified without new organizational arrangements—for example, through statutory changes designed to define more clearly the respective areas of responsibility of the different agencies? Should depository institution regulators have authority over mergers and acquisitions by regulated institutions, and if so to what extent?
6. Monetary Authority Regulatory Role.—What involvement in regulation of financial institutions is necessary to execute responsibilities for monetary policy, to act as the lender of last resort and to provide a framework for stability of the overall system? What information and experience with the ongoing activities of institutions is required to fulfill these roles and can this information or experience be obtained other than by direct regulation of banks and holding companies?
7. Securities Regulation Issues.—To what extent should the current system for establishing margin requirements and practices be changed? What changes would be desirable in current laws and regulations governing investment companies and investment advisors to reduce costs to consumers or to harmonize such regulation with pooled investment media maintained by insurance companies or depository institutions? In what other ways should current regulatory controls over securities issuers, underwriters or markets be reduced?
8. Additional Regulatory Relief Possibilities.—Apart from or in addition to agency reorganization, what current regulatory or statutory restrictions on financial institutions or their holding companies should be eliminated or modified to reduce direct and indirect costs to consumers, to improve the services available to the public or for any other reason? (Please be specific.) What safeguards against conflicts of interest, harmful intra-company transactions or unsafe practices by depository institutions and their holding company affiliates would be preferable to current regulatory controls, reporting requirements and examinations? Could improved public disclosure replace certain agency reporting and regulatory requirements?
IV. Other

Dated: February 3, 1983.

Richard C. Breeden,
Deputy Counsel to the Vice President.

[FR Doc. 83-3292 Filed 2-4-33; 8:45 am]




February 15, 1983

Mr. Norman T. Wilde, Jr.
Nat. Assn. of Sec. Dealers
1735 K St., N.W.
Washington, D.C. 20006

Dear Mr. Wilde:

As you may know, the Administration has formed a Task Group on Regulation of Financial Services to review the existing system of Federal regulation of financial institutions and services. In addition to myself, as chairman, members of the Task Group include the Secretary of the Treasury (Vice Chairman), the Attorney General, the Director of the Office of Management and Budget, the Chairman of the Counsel of Economic Advisers, the Assistant to the President for Policy Development, the Chairmen of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Federal Home Loan Bank Board, Securities and Exchange Commission, Commodity Futures Trading Commission and National Credit Union Administration, and the Comptroller of the Currency.

Although the participants in the Task Group are all members of the government, we are extremely interested in the views of interested organizations and individuals concerning the issues which we intend to review. We particularly hope to obtain information on how much it costs institutions, and thereby consumers, to comply with the plethora of statutory and regulatory requirements which comprise the current system. We also hope to obtain specific suggestions on how best to reform or streamline the federal regulatory structure, including areas in which the role and responsibilities of self-regulatory institutions could be enhanced.

In order to obtain outside analysis of these and other issues, the Task Group recently published a request for public comments in the Federal Register, a copy of which is enclosed with this letter. We believe it is very important to obtain responses not just from industry groups, but also from the largest possible number of individuals, institutions and organizations with different perspectives. Consequently, I am writing to request your assistance by informing your members of our request for public comments and urging as many of them as possible to respond individually or collectively.

It will not be easy to change a system which is so complex, and which so directly affects such a critical sector of our economy. Nevertheless, I am convinced that by streamlining the current system and removing duplication and unnecessary governmental requirements we can obtain potentially enormous benefits for consumers and institutions. This can only be accomplished with your assistance and support, however, and I sincerely request your participation in this very important endeavor.


George Bush