Proposed Amendments to NASD Rule 2720 on Conflicts of Interest in Public Offerings

May 12, 2009

The SEC has issued Release No. 34-59880 soliciting comments on proposed amendments to NASD Rule 2720 that streamline the application of the Rule’s requirements to public offerings of securities in which a participating broker-dealer has a “conflict of interest.” Some of the more significant proposed amendments would:

  • exempt from the filing requirements and the qualified independent underwriter (“QIU”) requirements of NASD Rule 2720 public offerings (1) in which the FINRA member primarily responsible for managing the offering (or each co-lead, if applicable) does not have a conflict of interest, is not an affiliate of a member that has a conflict of interest and can meet the disciplinary history requirements for a QIU, (2) of investment-grade rated securities, and (3) of securities that have a bona fide public market;
  • change the definition of “conflict of interest” so that the Rule would cover public offerings in which at least five percent of the offering proceeds are directed to a participating member or its affiliates (in contrast to the current ten percent threshold set forth in Rule 5110(h) (formerly NASD Rule 2710(h), which applies on an aggregate basis to all participating members, and which would now become part of Rule 2720);
  • modify the Rule’s disclosure requirements so that information relating to conflicts of interest is more prominently disclosed in offering documents;
  • amend the Rule’s provisions regarding the use of a QIU to focus on the QIU’s due diligence responsibilities and eliminate the requirement that the QIU render a pricing opinion;
  • amend the QIU qualification requirements to focus on the experience of the firm rather than its board of directors, prohibit a member that would receive more than five percent of the proceeds of an offering from acting as a QIU, and lengthen from five to ten years the amount of time that a person involved in due diligence in a supervisory capacity must have a clean disciplinary history; and
  • eliminate provisions in the Rule that do not apply to public offerings and instead address an issuer’s corporate governance responsibilities.

The comment period is 21 days from the date the SEC release is published in the Federal Register. Before becoming effective, any amendments to NASD Rule 2720 finally proposed by the FINRA must be approved by the SEC. A copy of SEC Release No. 34-59880 is available at http://www.sec.gov/rules/sro/finra/2009/34-59880.pdf. 

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