Subject: File No. SR-NASD-2004-022
From: Marianne McKeon
Affiliation: attorney, Dewey Ballantine LLP

February 14, 2005

NEW YORK, NEW YORK 10019-6092
TEL 212 259-8000 FAX 212 259-6333

February 14, 2005
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549-0609
Re: File No. SR-NASD-2004-22 Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to the Corporate Financing Rule and Shelf Offerings of Securities

Dear Mr. Katz:
We appreciate the opportunity to submit this comment letter on the NASDs above referenced proposed rule change regulating the filing and review of public offerings registered with the SEC pursuant to Rule 415 Shelf Offerings published for comment by the SEC on December 7, 2004.
We support the initiative behind the proposal to streamline the NASDs procedures for the filing and review of Shelf Offerings. Hhowever we believe that the Rule as currently drafted the Proposed Rule would make this process more cumbersome at a time when the SEC is looking to further simplify the review process for Shelf Offerings and would extend the application of the Conduct Rules to transactions not within their scope.
I. Proposed Market Transaction Exemption:
NASD Conduct Rules 2710, 2720 and 2810, commonly referred to as the Corporate Financing Rules the CF Rules, apply to arrangements between sellers and NASD members involving a distribution of securities to the public. NASD Conduct Rule 2440 and IM-2440 regulate compensation to members in ordinary trading and market transactions. These provisions reflect the distinction made throughout both the NASD and SECs rules between appropriate regulation of distributions of securities constituting public offerings and non-public distributions and secondary market transactions. This distinction has provided effective regulation of both types of transactions. We believe the Market Transaction Exemption in proposed Rule 2710b10B MTE, and the change to the definition of participation in a public offering to include any shelf takedown that does not satisfy the requirement of the MTE, would blur this distinction and expand the concept of participating in a public offering to transactions that were not intended to be regulated as public offerings under the CF Rules e.g. sales through a member by a selling shareholder for its own account or a sale by an issuer under circumstances that would constitute a transaction exempt as a non-public offering under Section 42 of the Securities Act of 1933 the 33 Act. Such transactions do not present the issues and regulatory concerns addressed by the CF Rules regarding underwriting terms and arrangements in connection with distributions of securities to the public and should not be regulated as public offerings simply because the security involved is registered under the 33 Act or because there is an agreement between the seller and the NASD member regarding the transaction.
We believe the proposed MTE and the revisions to the definition of participating in a public offering would inappropriately extend the application of the CF Rules to transaction beyond their scope and would create uncertainty and confusion regarding the appropriate regulation of market-making and ordinary trading activity under the Conduct Rules. Consequently we believe the MTE provision should not be adopted.
II. Shelf Filing and Review Procedures:
The procedures for the filing and review of shelf registrations Shelf Procedures that had been followed by the NASD for decades and the procedures in proposed amendments to Rule 2710 each would ensure compliance with the CF Rules for Shelf Offerings subject to those rules. However, we believe that the Shelf Procedures are more efficient and compatible with the operation of Rule 415 while the Proposed Rule creates unnecessary obstacles in achieving that goal.
A. Shelf Filing and Review Procedures Prior to Proposed Amendments Shelf Procedures
NASD Conduct Rule 2710b4A provides that unless filed by the issuer, a public offering subject to the filing requirements of Rule 2710 should be filed by the managing underwriter or another member that is participating in the offering.
A registration statement filed with the SEC pursuant to Rule 415 a Shelf or Shelf Registration that is subject to filing pursuant to Rule 2710 or Rule 2720 may be filed either by the issuer at the time it is filed with the SEC even though no specific offering is contemplated, or by either the issuer or the underwriter prior to a proposed public offering. In each instance all the information required under Rules 2710 and, if applicable, Rules 2720 and 2810, and any additional information requested by the NASD to grant clearance for offerings off the Shelf, would be provided in this filing.
For issuer filings where proposed underwriters are named in the S-3, forms of underwriting agreements may be filed if no underwriters are designated the underwriting agreement would be filed at the time of the proposed offering. This has not been an obstacle to clearing an issuer-filed shelf because the information and representations provided to get the filing cleared, including disclosure in the base prospectus regarding the 8 maximum underwriting compensation and the other Rule 415 representations incorporated into Cobradesk, confirm that any offering made off the Shelf would comply with all the applicable provisions of the CF Rule. These representations are required because the NASD recognizes that for most shelf offerings the underwriting agreement would be filed with the prospectus supplement after an offering has priced.
The no objections letter NOL applied to all takedowns off the Shelf, provided there has been no material change to the information or representations made in the filing. Any material change to the information previously filed would have to be provided to the NASD prior to pricing a takedown and the Department would have to confirm its no-objections prior to pricing. In the absence of any material change to the filed information, the filing of the prospectus supplement serves as notice that the underwriters had participated in an offering in conformity with the terms of NOL issued for the Shelf.
As contemplated under SEC Rule 415, these procedures meant that Shelf offerings could be made without the possible delay additional regulatory review or processing at the time of a takedown may cause while ensuring compliance with the Conduct Rules.
B. Filing Procedures Under the Proposed Rule
As discussed above, when a Shelf is filed, the Department requires the information and documents necessary to determine that the underwriting terms and arrangements for any takedown off the Shelf would be fair and reasonable in accordance with the Conduct Rules. Under the Shelf Procedures, the NOL for the Shelf would indicate that only offerings made within the parameters of the NOL could proceed without any further review by the Department. In the absence of any material change, the filing of the final offering documents would serve as notice that a takedown in accordance with the terms of the NOL had been made.
Under the Proposed Rule, each member participating in a takedown would be required to have an NOL that is addressed to the member or that covers the member before they could commence selling securities in a takedown. We believe this does not serve any regulatory purpose that is not already satisfied by the Shelf Procedures described above and would result in unnecessary delays for Shelf Offerings that comply with the CF Rules.
For a Shelf that has already been filed with the NASD and issued an NOL, a member would be required to make a Subsequent Member Filing before its initial participation in a takedown off the shelf. The member would have to confirm that the information previously submitted for the shelf has not changed or disclose any material changes to that information and provide the Department the specifics of the proposed offering e.g. the type and amount of securities being issued etc.. Once the Department has issued an NOL to the member that member and any other members covered by that NOL would be granted Life of Shelf Clearance LOSC and, as under the Shelf Procedures, barring any material change to the information on file, could participate in future takedowns without any pre-sale filing or review by the Department.
The Departments basis for granting clearance to all Shelf Offerings under the Shelf Procedures and for future Shelf Offerings to a member making a Subsequent Member Filing is the confirmation by the member that the information and representations previously provided in the filing are accurate as to that member and any future offering it will participate in, not the details regarding the amount and type of security being offered in the current takedown. In view of this it appears the purpose of the Subsequent Member Filing is to notify the Department prior to sales that a member which has not previously participated in a takedown off an issuers shelf is going to do so now. If the NASDs purpose in requiring the Subsequent Member Filing is getting a direct representation from the member that the information that had been previously provided in the filing is accurate as to that member and the transactions it will participate in, it could be accomplished simply by including a representation to that effect in Cobradesk which could be made at the time of the filing of the final offering documents.
We believe the Shelf Procedures, including notifying the Department of a members participation in a takedown with the post-sale filing of the prospectus supplement, ensure that the underwriting terms and arrangements for public Shelf Offerings subject to the CF Rules are conducted in accordance with the CF Rules and are compatible with the SECs goal of allowing issuers maximum flexibility in issuing securities off a shelf.
We urge the NASD to return to the Shelf Procedures described above and not to adopt the pre-sale Subsequent Member filings and multiple NOL requirements in the Proposed Rule which we believe will only serve to obstruct the offering process without serving any regulatory purpose.
III. Seasoned Issuer Exemption:
NASD Conduct Rule 2710b7C, commonly referred to as the Shelf Exemption, exempts from filing, offerings of securities registered on Form S-3 and F-3 pursuant to the standards in place for those forms prior to October 21, 1992 and offered pursuant to Rule 415. The pre-October 21, 1992 standards referred to in Rule 2710b7C are the 36 month reporting and 150,000,000 public float requirements required for registrants on Form S-3 and the 300,000,000 public float requirement for F-3 registrants. The proposed Seasoned Issuer exemption proposed Rule 2710b10C sets forth the pre-October 21, 1992 standards in the text of the Rule and limits the exemption to companies that meet these criteria. This would be a major change to Rule 2710 that would result in negating the Shelf Exemption for many offerings. Currently an offering off an S-3 Shelf by a majority-owned subsidiary of non-convertible securities fully guaranteed by a parent that meets pre-October 21, 1992 standards would qualify for the Shelf Exemption. Many issuers eligible for registration on Form S-3 pursuant to the pre-October 21, 1992 standards issue debt through financing subsidiaries and utilize other financing structures eligible for registration on Form S-3 and routinely rely on the Shelf Exemption for these offerings. This would no longer be possible under the Seasoned Issuer exemption.
Although we do think it is helpful to have the pre-October 21, 1992 standards specifically set forth in the text of the Rule we believe it would be preferable and appropriate to simply amend the current Shelf Exemption to include them.
IV. Definitions
Underwriter and Related Persons
The NASD proposes to amend the definition of underwriter and related person in 2710b6 to include any person receiving an item of value that would be deemed underwriting compensation. This definition is circular and would render the term underwriter or related person so ambiguous as to be meaningless. We strongly urge the Department not to adopt this change.
Rule 2710c3 provides that the Department will deem all items of value received or to be received by an underwriter or related persons in connection with or related to the distribution of the public offering to be underwriting compensation. Thus the term underwriting compensation is defined with reference to 2710c3, as items of value received or to be received by an underwriter or related persons in connection with the distribution of a public offering i.e. in the 180 day period immediately preceding the required NASD filing date through the SEC effective date the Registration Period. To properly analyze underwriting compensation the logical progression would be to first determine whether or not a person is an underwriter or related person second, determine whether or not any items of value were received by them during the Registration Period and third, determine whether or not any of those items of value would be deemed underwriting compensation and if so whether or not any exception under Rule 2710d would be available. Amending the definition of underwriter and related person to include any person receiving an item of value that would be deemed underwriting compensation would make it impossible to determine who the NASD deems to be within the definition. We believe this is an inappropriate result that could lead to many persons who provide services to an issuer in a public offering but who have no relationship with the underwriters being deemed underwriters and related persons. We also believe the proposed amendment to the definition of underwriter and related persons is contradictory to the NASDs stated goal in adopting the amendments to the CF Rules effective in March 2004 to provide clear guidelines to members and their counsel as to what constitutes underwriting compensation under the CF Rules.
Investment Grade Securities
The current language in Rule 27107A and Rule 2720b7 referring to securities rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories is comparable to the definition of investment grade securities in item I.B.2 of the General Instructions to SEC Form S-3. The Proposed Rule would substitute this language with the term investment-grade rated. We believe this language is less precise than the current language and should not be substituted for it. If the proposed language is adopted, it should also be separately defined as it is in Form S-3.
We thank you for the opportunity to comment on this Rule proposal and hope you find our comments helpful. If you would like to discuss any of the matters discussed in this letter please contact the undersigned at 212-259-6101 or e-mail at


Marianne McKeon