Notice To Members 88-33

Adoption of Amendments to Schedule E to the NASD By-Laws Effective Immediately

Published Date:

May 12, 1988

TO: All NASD Members and Other Interested Persons

EXECUTIVE SUMMARY

The SEC has approved amendments to Schedule E to the NASD By-Laws governing the public offering of securities issued by a member, the parent of a member, or an affiliate of a member. With the exception of an exemption from Schedule E for investment grade securities, eollateralized by financing instruments, the remaining changes to Schedule E involve clarifying amendments.

The text of the amendments is attached.

BACKGROUND

On March 29, 1988, the Securities and Exchange Commission (SEC) approved amendments to Schedule E to the NASD By-Laws (see SEC Release No. 34-25525 (March 29, 1988)) that are intended to clarify the scope and application of the Schedule. Schedule E contains a number of requirements intended to address conflicts of interest experienced by a member that engages in a public offering of its own securities or the securities of the member's parent, or participates in a public offering of securities of an affiliate. The major conflicts of interest addressed relate to the conduct of due diligence with respect to the offering document, the pricing of the securities offered, and the suitability of investors. Most of the amendments merely clarify certain provisions and incorporate interpretations of Schedule E. However, one substantive amendment exempts investment grade financing instrument backed securities from compliance with Schedule E.

EXPLANATION OF AMENDMENTS

Exemption for Financing Instrument-Backed Securities

The NASD amended Subsection 2(a)(3) to exempt from Schedule E distributions by members of securities issued by affiliates of members, regardless of the form of legal entity of the affiliate, organized solely for the purpose of offering investment grade securities to the public eollateralized with a specified portfolio of financing instruments. Although such securities are generally backed by mortgage obligations, public offerings have also occurred of securities backed by loan obligations for automobiles, boats, and credit card receivables.

When an offering of financing instrument-backed securities rated investment grade is not issued by a member's affiliate, such offering is currently exempt from NASD review pursuant to an exemption incorporated in the Interpretation of the Board of Governors—Review of Corporate Financing, under Article III, Section 1 of the NASD Rules of Fair Practice (Corporate Financing Interpretation). This exemption reflects the NASD's view that competitive market forces that ordinarily affect investment grade debt can be relied upon to ensure the fairness and reasonableness of underwriting compensation. In reviewing whether offerings of financing instrument-backed securities issued by a member's affiliate should be subject to Schedule E, the NASD determined that the conflicts of interest experienced by the affiliate member that are addressed by Schedule E, related to the pricing of the offering, the member's due diligence obligation, and the suitability of investors, are absent in distributions of financing instrument-backed securities that have received an investment grade rating. Such rating reflects the confidence of the rating agency regarding the ability of the issuing entity to pay dividends and to redeem the obligation. In addition, the investment grade rating of securities usually results in their sales to investors that are of an institutional or financially sophisticated nature.

Other Amendments

Section 1 — General

The NASD amended Section 1 to clarify that Schedule E applies to offerings by a parent of a member, as defined in Subsection 2(h)* of Schedule E, regardless of whether the member participates in the offering. Further, this provision has been amended to clarify that Schedule E applies to both debt and equity public offerings of securities.

Section 2 — Definitions

Affiliate. Section 2(a) defines when an issuer is considered to be an affiliate of a member firm. The NASD is concerned that members and their counsel may look to the presumptions contained in Subsection 2(a) as the sole bases upon which affiliation may be found. Therefore, the NASD amended the introductory language of Subsection 2(a)(2) to clarify that the term "affiliate" is presumed to include, but is not limited to, those situations described in the enumerated presumptions.

Beneficial Ownership. For purposes of determining affiliation, Subsection 2(a)(2) bases a presumption of affiliation on the beneficial ownership of 10 percent or more of the outstanding voting securities of one entity by the other entity. The NASD amended Schedule E to include in new Subsection 2(b) a definition of the term "beneficial ownership" that provides that beneficial ownership is based on the "right to the economic benefits of a security."

Immediate Family. The NASD amended the term "immediate family" in Subsection 2(g) to include the son-in-law or daughter-in-law and any other person who is supported, directly or indirectly to a material extent by an employee of, or person associated with, a member, to incorporate language similar to that contained in the Interpretation of the Board of Governors—Free-Riding and Withholding, under Article III, Section 1 of the NASD Rules of Fair Practice (Free-Riding and Withholding Interpretation).

Public Offering. The NASD amended the definition of "public offering" in current Subsection 2(k) to reflect exemptions from Schedule E for offerings pursuant to Section 4(6) of the Securities Act of 1933, Rule 504 (unless considered a public offering in the states where offered), Rule 505, and Rule 506 of Regulation D adopted by the SEC.

Section 3 — Experience, Pricing, and Due Diligence

The NASD amended this section by deleting Subsection 3(d) and amended Subsection 3(a) in coordination therewith. Subsection 3(d) is now unnecessary as Subsection 3(e) was previously modified to require the participation of only one qualified independent underwriter and to permit the affiliated member to participate to an unlimited extent in the offering.

Section 4 — Escrow of Proceeds

Subsection 4(b) requires disclosure in the offering document of the date when a member expects to complete its offering of a security and the terms under which the proceeds will be released from escrow. The NASD amended Section 4 to redesignate Subsection (b) as Subsection (a) and to add new Subsection (b) to clarify disclosure requirements with respect to all offerings subject to Schedule E. The new provision requires disclosure in the offering document that the offering is of a member's securities or those of an affiliate, that the offering is being made pursuant to Schedule E, the name of the qualified independent underwriter, if any, and that such underwriter has assumed the responsibility of pricing and due diligence. Finally, the title of Section 4 has been changed to "Disclosure."

Section 5 — Net Capital Computation

The NASD amended this section to include as new Subsection (a) the provision previously in Subsection 4(a) that requires a member issuing its own securities to place the offering proceeds in an escrow account. The current language of Section 5 is being retained in new Subsection 5(b). Finally, the NASD has changed the title of Section 5 to "Escrow Proceeds; Net Capital Computation."

Section 9 — Offerings Resulting in Affiliation or Public Ownership of a Member

Section 9 currently provides a basis for applying Schedule E to an offering by an issuer that is not an affiliate of a member at the time of filing the offering, but as a result of the offering will be a member's affiliate. In addition, Section 9 requires compliance with Schedule E when the offering would result in the public ownership of a member. The NASD amended Section 9 to provide that Schedule E applies to those situations where the issuer proposes to utilize the proceeds from an offering to become a member or to form a broker-dealer subsidiary to become a member and where a member would become an affiliate of the issuer as the result of a transaction with the issuer or its affiliate that occurs simultaneously or subsequent to the public offering. This amendment codifies the NASD's current interpretation of Section 9.

In addition, the NASD amended Section 9 to clarify that an offering within that section is subject to Schedule E "to the same extent as if the transaction had occurred prior to the filing of the offering." Thus, if a transaction occurs simultaneously with an offering that results in the issuer becoming a parent of a member, the offering would be subject to Schedule E as if the offering were by a parent of a member. In comparison, if the issuer proposes to utilize the proceeds of the offering to become a member of the NASD, the offering would be subject to Schedule E as if by a member firm.

Section 13 — Sales to Employees — No Limitations

Section 13, which provides an exemption from the NASD's Free-Riding and Withholding Interpretation for sales to employees of a member, is amended to clarify that employees of a member are only permitted to purchase securities of the member or those of the member's parent. In addition, Section 13 has been amended to reduce from six to five months, following the effective date of the offering, the lock-up period on securities acquired by a person associated with a member when an independent market does not exist for such securities.

Section 14 — Filing Requirements

The NASD adopted new Subsection 14(c) to clarify that members are required to file public offerings subject to Schedule E with the NASD for review, notwithstanding the fact that such offerings may not be required to be filed pursuant to an exemption from filing under the Corporate Financing Interpretation.

* * * * *

Questions regarding this notice can be directed to either Suzanne E. RothwelL, NASD Associate General Counsel, at (202) 728-8247, or the NASD Corporate Financing Department at (202) 728-8258.

Sincerely,

Frank J. Wilson
Executive Vice President
and General Counsel

Attachment

AMENDMENTS TO SCHEDULE E TO THE NASD BY-LAWS*

Distribution of Securities of Members and Affiliates

Section 1—General

No member or person associated with a member shall participate in the distribution of a public offering of debt or equity securities issued or to be issued by the member, the parent of the member, or an affiliate of the member and no member or parent of a member shall issue securities except in accordance with this Schedule.

Section 2—Definitions

For purposes of this Schedule, the following words shall have the stated meanings:

(a) Affiliate—

(1) a company which controls, is controlled by or is under common control with a member;

(2) The term affiliate is presumed to include, but is not limited to, the following [F] for purposes of subsection 2(a)(l) [hereof,]:

(i) a company will be presumed to control a member if the company beneficially owns 10 percent or more of the outstanding voting securities of a member which is a corporation, or beneficially owns a partnership interest in 10 percent or more of the distributable profits or losses of a member which is a partnership;

(ii) a member will be presumed to control a company if the member and persons associated with the member beneficially own 10 percent or more of the outstanding voting securities of a company which is a corporation, or beneficially own a partnership interest in 10 percent or more of the distributable profits or losses of a company which is a partnership;

(iii) a company will be presumed to be under common control with a member if:

(1) the same natural person or company controls both the member and company by beneficially owning 10 percent or more of the outstanding voting securities of a member or company which is a corporation, or by beneficially owning a partnership interest in 10 percent or more of the distributable profits or losses of a member or company which is a partnership; or

(2) a person having the power to direct or cause the direction of the management or policies of the member or the company also has the power to direct or cause the direction of the management or policies of the other entity in question.

(3) The provisions of paragraphs (1) and (2) hereof notwithstanding, none of the following shall be presumed to be an affiliate of a member for purposes of this Schedule E:

(i) an investment company registered with the Securities and Exchange Commission pursuant to the Investment Company Act of 1940, as amended;

(ii) a "separate account" as defined in Section 2(a)(37) of the Investment Company Act of 1940, as amended;

(iii) a "real estate investment trust" as defined in Section 856 of the Internal Revenue Code;

(iv) a "direct participation program" as defined in Article III, Section 34 of the Rules of Fair Practice; and

(v) a corporation, trust, partnership or other entity issuing financing instrument-backed securities which are rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories.

(b) Beneficial ownership—the right to the economic benefits of a security.

[(b)](c) Bona fide independent market—a market in a security which:

(1) is registered pursuant to the provisions of Sections 12(b) or 12(g) of the Securities Exchange Act of 1934 or issued by a company subject to Section 15(d) of such Act, unless exempt from those provisions;

(2) has an aggregate trading volume for the 12 months immediately preceding the filing of the registration statement of at least 100,000 shares;

(3) has outstanding for the entire twelve-month period immediately preceding the filing of the registration statement, a minimum of 250,000 publicly held shares [of the class of securities being offered]; and

(4) in the case of over-the-counter securities, has had at least three bona fide independent market makers for a period of at least 30 days immediately preceding the filing of the registration statement and the effective date of the offering.

[(c)](d) Bona fide independent market maker—a market maker which:

(1) continually maintains net capital as determined by Rule 15c3-l of the General Rules and Regulations under the Securities Exchange Act of 1934 of $50,000 or $5,000 for each security in which it makes a market, whichever is less;

(2) regularly publishes bona fide competitive bid and offer quotations in a recognized interdealer quotation system;

(3) furnishes bona fide competitive bid and offer quotations to other brokers and dealers on request; and

(4) stands ready, willing and able to effect transactions in reasonable amounts, and at his quoted prices, with other brokers and dealers.

[(d)](e) Company—a corporation, a partnership, an association, a joint stock company, a trust, a fund, or any organized group of persons whether incorporated or not; or any receiver, trustee in bankruptcy or similar official or any liquidating agent for any of the foregoing, in his capacity as such.

[(e)](f) Effective date—the date on which an issue of securities first becomes legally eligible for distribution to the public.

[(f)](g) Immediate family—parents, mother-in-law, father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, and children, or any [relative] other person [to whom financial support is contributed directly or indirectly by an employee of, or person associated with, a member] who is supported, directly or indirectly, to a material extent by an employee of, or person associated with a member.

[(g)](h) Parent—any entity affiliated with a member from which member the entity derives 50 percent or more of its gross revenues or in which it employs 50 percent or more of its assets.

[(h)](i) Person—any natural person, partnership, corporation, association, or other legal entity.

[(i)](j) Public director—a person elected from the general public to the board of directors of a member or its parent which has made a public distribution of an issue of its own securities. Such person shall not beneficially own five percent or more of the outstanding voting securities of the member or its parent and shall not be engaged in the investment banking or securities business or be an officer or employee of the member or its parent, or be a member of the immediate family of an employee occupying a managerial position with a member or its parent.

[(j)](k) Public offering—any primary or secondary distribution of securities made pursuant to a registration statement or offering circular including exchange offer[ing]s, rights offerings, offerings made pursuant to a merger or acquisition, straight debt offerings and all other securities distributions of any kind whatsoever, except any offering made pursuant to an exemption under Sections 4(1), [or] 4(2), or 4(6) of the Securities Act of 1933, as amended, or pursuant to Rule 504 (unless considered a public offering in the states where offered), Rule 505 or Rule 506 adopted under the Securities Act of 1933, as amended.

[(k)](l) Qualified independent underwriter* — a member which:

(1) is actively engaged in the investment banking or securities business and which has been so engaged, in its present form or through predecessor broker-dealer entities, for at least five years immediately preceding the filing of the registration statement;

(2) in at least three of the five years immediately preceding the filing of the registration statement has had net income from operations of the broker- dealer entity or from the pro forma combined operations of predecessor broker- dealer entities, exclusive of extraordinary items, as computed in accordance with generally accepted accounting principles;

(3) as of the date of the filing of the registration statement and as of the effective date of the offering:

a. if a corporation, a majority of its board of directors or, if a partnership, a majority of its general partners, are persons who have been actively engaged in the investment banking or securities business for the five-year period immediately preceding the filing of the registration statement;

b. if a sole proprietorship, the proprietor has been actively engaged in the investment banking or securities business for the five-year period immediately preceding the filing of the registration statement;

(4) has actively engaged in the underwriting of public offerings of securities for at least the five-year period immediately preceding the filing of the registration statement;

(5) is not an affiliate of the entity issuing securities pursuant to Section 3 of this Schedule; and

(6) has agreed in acting as a qualified independent underwriter to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act of 1933, specifically including those inherent in Section 11 thereof.

[(l)](m) Registration statement—a registration statement as defined by Section 2(8) of the Securities Act of 1933; notification on Form 1A filed with the Securities and Exchange Commission pursuant to the provisions of Rule 255 of the General Rules and Regulations under the Securities Act of 1933; or any other documents by whatever name known, initiating a registration or similar process for an issue of securities which is required to be filed by the laws or regulations of any federal or state agency.

[(m)](n) Settlement—the distribution of the net proceeds from an offering to the issuer or selling stockholders.

Section 3—Participation In Distribution of Securities of Member or Affiliate

(a) No member shall underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of an issue of debt or equity securities issued or to be issued by the member or an affiliate of the member unless the member is in compliance with subsection 3(b) and [either] subsection 3(c) [or 3(d)] below [, depending on the nature of the member's participation],

(b) In the ease of a member which is a corporation, the majority of the board of directors, or in the case of a member which is a partnership, a majority of the general partners or, in the ease of a member which is a sole proprietorship, the proprietor as of the date of the filing of the registration statement and as of the effective date of the offering shall have been actively engaged in the investment banking or securities business for the five year period immediately preceding the filing of the registration statement.

(c) If a member proposes to underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of [debt or equity] its own or an affiliate's securities subject to this Section without limitation as to the amount of securities to be distributed by the member, one or more of the following three criteria shall be met:

(1) the price at which an equity issue or the yield at which a debt issue is to be distributed to the public is established at a price no higher or yield no lower than that recommended by a qualified independent underwriter which shall also participate in the preparation of the registration statement and the prospectus, offering circular, or similar document and which shall exercise the usual standards of "due diligence" in respect thereto; provided, however, that an offering of securities by a member which has not been actively engaged in the investment banking or securities business, in its present form or as a predecessor broker-dealer, for at least the five years immediately preceding the filing of the registration statement shall be managed by a qualified independent underwriter; or

(2) the offering is of a class of equity securities for which a bona fide independent market exists as of the date of the filing of the registration statement and as of the effective date thereof; or

(3) the offering is of a class of securities rated Baa or better by Moody's rating service or Bbb or better by Standard & Poor's rating service or rated in a comparable category by another rating service acceptable to the [Association] Corporation.

[(d) A member may participate as a member of the underwriting syndicate or selling group in the distribution of a public offering of debt or equity securities subject to this Section without regard to the requirements of subsection (c) if the member restricts its participation to an amount not exceeding ten percent of the total dollar amount of the offering and the offering is underwritten on a firm commitment basis and managed by a qualified independent underwriter.]

Section 4—[Escrow of Proceeds] Disclosure

[(a) All proceeds from an offering by a member of its securities shall be placed in a duly established escrow account and shall not be released therefrom or used by a member in any manner until the member has complied with Section 5 hereof.]

[(b)](a) Any member offering its securities pursuant to this Schedule shall disclose in the registration statement, offering circular or similar document a date by which the offering is reasonably expected to be completed and the terms upon which the proceeds will be released from the escrow account described in subsection !3(a) [hereof].

(b) All offerings included within the scope of this Schedule shall disclose in the underwriting section of the registration statement, offering circular or similar document that the offering is being made pursuant to the provisions of this Schedule, that the offering is being made by a member of its own securities or those of an affiliate, the name of the member acting as qualified independent underwriter, if any, and that such member is assuming the responsibilities of acting as a qualified independent underwriter in pricing the offering and conducting due diligence.

Section 5—Escrow of Proceeds; Net Capital Computation

(a) All proceeds from an offering by a member of its securities shall be placed in a duly established escrow account and shall not be released therefrom or used by a member in any manner until the member has complied with subsection 5(b) hereof.

(b) Any member offering its securities pursuant to this Schedule shall immediately notify the Corporation when the offering has been terminated and settlement effected and it shall file with the Corporation a computation of its net capital computed pursuant to the provisions of Rule 15c3-l of the General Rules and Regulations under the Securities Exchange Act of 1934 (the net capital rule) as of the settlement date. If at such time its net capital ratio as so computed is more than 10:1 or, net capital fails to equal 120 percent of the minimum dollar amount required by Rule 15c3-l or, in the event the provisions of Rule 15c3-l(f) are utilized in making such computation, the net capital is less than seven percent of aggregate debit items as computed in accordance with Rule 15c3-3a, all monies received from sales of securities of the offering must be returned in full to the purchasers thereof and the offering withdrawn, unless the member has obtained from the Securities and Exchange Commission a specific exemption from the net capital rule. Proceeds from the sales of securities in the offering may be taken into consideration in computing net capital ratio for purposes of this section.

Section 6—Audit Committee[s]

Any member or parent of a member which makes a public offering of an issue of its securities shall be required to establish within twelve months of the effective date of said offering an audit committee composed of members of the board of directors (except that it shall not include the chief accounting or chief financial officer of the member or its parent) and the functions of the audit committee shall include the following:

(a) to review the scope of the audit;

(b) to review with the independent auditors the corporate accounting practices and policies and recommend to whom reports should be submitted within the company;

(d) to review with internal and independent auditors overall accounting and financial controls; and

(e) to be available to the independent auditors during the year for consultation purposes.

Section 7—Public Director

Any member or parent of a member which makes a public offering of an issue of its securities shall cause to be elected to its board of directors within twelve months of the effective date of said offering a public director who shall serve as a member of the audit committee.

Section 8—Periodic Reports

Any member who makes a distribution to the public of an issue of its securities pursuant to this Schedule, shall send to each of its shareholders or, in the case of debt offerings, to each of its investors:

(1) quarterly, a summary of its operations; and

(2) annually, independently audited and certified financial statements.

Section 9—Offerings Resulting in Affiliation or Public Ownership of Member

If an issuer proposes to direct all or part of the proceeds from a public offering to a member or exchange securities by means of a public offering for an interest in a member, and the member is, or as a result of the proposed transaction would be, an affiliate of the issuer, or if an issuer proposes to engage in any offering which results in the public ownership of a member, or if an issuer proposes to utilize the proceeds from a public offering to become a member or form a broker-dealer subsidiary to become a member, or if a member proposes simultaneously or subsequent to a public offering to enter into a transaction with the issuer or an affiliate of the issuer and as a result of the transaction would be an affiliate of the issuer, the offering shall be subject to the provisions of this Schedule [E] to the same extent as if the [offering were of securities issued by the member] transaction had occurred prior to the filing of the offering.

Section 10—Registration Statements for Intrastate Offerings

Any member offering its securities pursuant to an exemption under Section 3(a)(ll) of the Securities Act of 1933 shall disclose in the registration statement at a minimum that information suggested by the Securities and Exchange Commission in Securities Act Release No. 5222 (January 3, 1972).

Section 11—Suitability

Every member underwriting an issue of its securities, or securities of an affiliate, pursuant to the provisions of Section 3 hereof, who recommends to a customer the purchase of a security of such an issue shall have reasonable grounds to believe that the recommendation is suitable for such customer on the basis of information furnished by such customer concerning the customer's investment objectives, financial situation, and needs, and any other information known by such member. In connection with all such determinations, the member must maintain in its files the basis for its determination.

Section 12—Discretionary Accounts

Notwithstanding the provisions of Article III, Section 15 of the Corporation's Rules of Fair Practice, or any other provisions of law, a transaction in securities issued by a member or an affiliate of a member shall not be executed by any member in a discretionary account without the prior specific written approval of the customer.

Section 13—Sales to Employees — No Limitations

Notwithstanding the provisions of the Board of Governors' Interpretation With Respect To "Free-Riding And Withholding," a member may sell securities issued by a member [or an affiliate] a parent of a member, or by an issuer treated as a member or parent of a member under [which is subject to] Section 9 hereof to the member's employees; potential employees resulting from intended mergers, acquisitions, or other business combination of members resulting in one public successor corporation, or persons associated with it; and the immediate family of such employees or associated persons without limitation as to amount and regardless of whether such persons have an investment history with the member as required by that Interpretation; provided, however, that in the ease of an offering of equity securities for which a bona fide independent market does not exist, such securities shall not be sold, transferred, assigned, pledged or hypothecated for a period of [six] five months following the effective date of the offering.

Section 14—Filing Requirements; Coordination with Corporate Financing Interpretation

(a) Notwithstanding the provisions of the "Interpretation of the Board of Governors—Review of Corporate Financing" relating to factors to be taken into consideration in determining underwriter's compensation, the value of securities of a new corporate member succeeding to a previously established partnership or sole proprietorship member acquired by such member or person associated therewith, or created as a result of such reorganization, shall not be taken into consideration in determining such compensation.

(b) All offerings of securities included within the scope of this Schedule shall be subject to the provisions of the "Interpretation of the Board of Governors—Review of Corporate Financing" and documents and filing fees relating to such offerings shall be filed with the Corporation pursuant to the provisions of that Interpretation. The responsibility for filing the required documents and fees shall be that of the member issuing securities, or, in the case of an issue of an affiliate, the managing underwriter or, if there is none, the member affiliated with the issuer.

(c) All offerings included within the scope of this Schedule are required to be filed with the Corporation, with the appropriate documents and filing fee referred to under subsection 14(b), notwithstanding the fact that the offering may otherwise be expressly exempted from filing under the provisions of the "Interpretation of the Board of Governors—Review of Corporate Financing."

Section 15—Predominance of Schedule E

If the provisions of this Schedule E are inconsistent with any other provisions of the Corporation's By-Laws, Rules of Fair Practice or Uniform Practice Code, or of any interpretation thereof or resolution of the Board of Governors, the provisions of this Schedule shall prevail.

Section 16—Requests for Exemption from Schedule E

The Corporate Financing Committee of the Board of Governors, upon written request, may in exceptional and unusual circumstances, taking into consideration all relevant factors, exempt a member unconditionally or on specified terms from any or all of the provisions of Schedule E which it deems appropriate. Unless waived by the party requesting an exemption, a hearing shall be held upon a request before the Corporate Financing Committee, or a Subcommittee thereof designated for that purpose.

Section 17—Violation of Schedule E

A violation of the provisions of this Schedule shall constitute conduct inconsistent with high standards of commercial honor and just and equitable principles of trade and a violation of Article III, Section 1 of the Corporation's Rules of Fair Practice and possibly other sections, especially Sections 2 and 18, as the circumstances of the case may dictate.

*All references to subsections of Section 2 are to the amended subsection designations.

*New language is underlined; deleted language is in brackets.

*In the opinion of the National Association of Securities Dealers, Inc., and the Securities and Exchange Commission, the full responsibilities and liabilities of an underwriter under the Securities Act of 1933 attached to a "qualified independent underwriter" performing the functions called for by the provisions of Section 3 hereof.