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December 13, 2002

U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Attention: Jonathan G. Katz, Secretary

Re: SEC Release No. 34-46942 (December 4, 2002); File No. SR-NASD-99-60

Ladies and Gentlemen:

We are writing to comment on the above-captioned release (the "Release"), in which the Commission seeks public comment on a proposed new Rule 2790 of NASD, Inc. relating to restrictions on the purchase and sale of initial public offerings of equity securities. As the Commission noted in the Release, we previously commented on a number of issues with respect to this rule filing. We now comment on the Commission's procedures in publishing the rule filing for public comment.

As the Commission noted in the Release, we and the Managed Funds Association previously criticized the NASD's proposed Rule 2790 and suggested that the most recently filed revision (Amendment No. 4) be published for comment. We made substantive comments in our letter because the Commission staff was unsure whether Amendment No. 4, which was filed by NASD, Inc. with the Commission in June 2002, would be published for comment. We appreciate the Commission's decision now to seek public comment.

The reason we recommended that publication, however, was that certain provisions of the proposed rule are poorly conceived and difficult to understand and Amendment No. 4 makes a number of arbitrary and inappropriate changes to the prior Amendments Nos. 2 and 3, as we noted in our prior comment letter, a copy of which is attached. In seeking public comment, we think the Commission at a minimum should have made reference to the points made in our letter and that of the Managed Funds Association to alert potential commenters to the concerns we raised.

Notwithstanding the significant improvements Amendments No. 2 and 3 made to the treatment of portfolio managers in the version of Rule 2790 originally filed, NASD has now largely reverted to the former, seriously flawed approach in the original proposal. In view of NASD's change in course, commenters on the Release should be given a much fuller explanation of the reasons NASD would make that change and the implications of the change for investors.

We also note the Release does not discuss substantive issues that in fact NASD discussed in the transmittal letter June 27, 2002 accompanying the filing of Amendment No. 4 on Form 19b-4. One example issue that in Mr. Goldsholle's letter, he noted that Rule 2790 does not have specific provisions concerning the use of separate accounts to "carve out" the interests of restricted from unrestricted beneficial owners in an investment fund, but he stated that NASD would allow such practices. That should certainly have been discussed in the Release if not in fact incorporated into the language of the rule itself. Without such a discussion, the Release fails to inform the public about this significant aspect of the proposed rule's intended application.

We note that the courts have held that regulatory agencies should identify and respond publicly to all comments made in rule filings that involve, as the proposed Rule 2790 does, the allocation of important economic franchises and privileges. Cf. Home Box Office, Inc. v. FCC, 567 F.2d 9 (1977). The failure to even summarize the objections we made to the current proposal does not comport with Home Box Office. As the United States Court of Appeals for the District of Columbia has held, it is particularly important that the administrative process be one that is transparent, not opaque, and that fairly seeks comment on important issues:

The purpose of the comment period is to allow interested members of the public to communicate information, concerns, and criticisms to the agency during the rule making process. If the notice of proposed rule making fails to provide an accurate picture of the reasoning that has led the agency to the proposed rule, interested parties will not be able to comment meaningfully upon the agency's proposals . . . . In order to allow for useful criticism, it is especially important for the agency to identify and make available technical studies and data that it has employed in reaching the decisions to propose particular rules. To allow an agency to play hunt the peanut with technical information, hiding or disguising the information that it employs, is to condone a practice in which the agency treats what should be a genuine interchange as mere bureaucratic sport.1

In addition, we respectfully submit that for the Commission to publish this Release on December 10, 2002, five months after NASD's submission of Amendment No. 4 and undoing years of regulatory progress in reforming the original Rule 2790 proposal, and then to afford commenters only a minimum, 21-day comment period expiring New Year's Eve, is not consistent with sound administrative procedure and is not in keeping with the importance of this proposed rule change to investors. The Congress made clear, in the legislative history of the Securities Acts Amendments of 1975, that the Commission must follow the same administrative law standards of policy justification in passing on proposed rule changes of self-regulatory organizations that apply to its own rulemaking.2 The Release does not at all comport with that standard.

As we noted in our comment letter of September 24, 2002, this proposed rule has a number of pernicious aspects, not the least of which is that it flies in the face of investors' wishes that collective investment vehicle managers establish and maintain a substantial investment alongside the investors' capital. The proposed restriction on the portfolio manager's participation is not consistent with investors' legitimate expectations that the manager will stand beside them, in many cases with most of its net worth, in the fund. If the manager reinvests the moneys it earns from a performance-based fee into the account, its interest in the account likely will grow more rapidly than other investors and will quickly exceed 10%. In our experience, the other investors in a collective investment vehicle would much prefer that the manager increase its stake in the vehicle through reinvestment of its earnings rather than to bail out in the manner the proposed rule would virtually require.

We respectfully suggest that the Commission should keep investors' interests paramount and should not approve NASD rule changes that are so inconsistent with the protection of investors. To that end, we believe the Commission should issue a further release extending the comment period and discussing the substantive comments we made in response to Amendment No. 4 in our September 24 letter. . We suggest, moreover, that the Commission should not approve the flawed approach concerning portfolio managers represented by Amendment No. 4 but should require NASD to restore the approach reflected in the prior Amendment Nos. 2 and 3.

We appreciate the opportunity to make our views known to the Commission and the staff and we hope that our letter is helpful. If members of the Commission or of the staff believe we may be of further assistance in these matters, please let us know.

Respectfully submitted,
Roger D. Blanc


cc(w/att):  The Hon. Harvey L. Pitt
The Hon. Cynthia A. Glassman
The Hon. Harvey J. Goldschmid
The Hon. Paul S. Atkins
The Hon. Roel C. Campos
Annette L. Nazareth, Esq., Director,
    Division of Market Regulation
Robert L. D. Colby, Esq., Deputy Director,
    Division of Market Regulation
Larry E. Bergmann, Esq., Assistant Director,
    Division of Market Regulation
Florence E. Harmon, Esq., Senior Special Counsel,
    Division of Market Regulation
Michael J. Gaw, Esq., Division of Market Regulation
Giovanni P. Prezioso, Esq., General Counsel
T. Grant Callery, Esq., General Counsel,
    NASD, Inc.
Gary L. Goldsholle, Esq., Assistant General Counsel,
    NASD, Inc.


1 Connecticut Light and Power Co. v. NRC, 673 F.2d 525, 530-31 (D.C. Cir. 1982).
2 See Securities Acts Amendments of 1975, Report of the Senate Comm. on Banking, Housing and Urban Affairs to Accompany S.249, S. Rep. No. 94-75, 94th Cong., 1st Sess. 29-30 (1975):
In order to facilitate expeditious Commission review and evaluation of [proposed rule changes] and to assure informed public comment on them, Section 19(b)(1) would require all self-regulatory organizations to file with the SEC in connection with any proposed rule change a "concise general statement of the basis and purpose" of the proposed rule change. It is the Committee's intention in adopting this standard to hold the self-regulatory organizations to the same standards of policy justification that the Administrative Procedure Act imposes on the SEC.
. . . [T]he Committee believes interested persons should have a meaningful opportunity to obtain accurate information about proposed changes in self-regulatory rules and to comment on the need or justification for these changes. Section 19(b)(1) would require the SEC to give notice and provide an opportunity for interested persons to participate in the process of reviewing a proposed change in a self-regulatory organization's rules. In addition, this section would require that all comment and all correspondence between the SEC and the self-regulatory agency concerning the proposal be available for public inspection. . . .
. . . The Committee believes the Commission has a responsibility to see that self-regulatory rules are fully responsive to regulatory needs. By explicitly providing that the Commission's oversight authority encompasses major self-regulatory policies, the bill would make this responsibility clear and substantially decrease the possibility of slippage between regulatory need and self-regulatory performance [emphasis added]. . . .