September 18, 2006

NASD Proposes Amendments to Conflict of Interest Rule

Last week, the NASD proposed amendments to NASD Rule 2720 that would significantly amend the application of the rule to public offerings in which a participating broker/dealer has a conflict of interest. The more significant proposals are:

– exempt from the filing requirements and the qualified independent underwriter (QIU) requirements of Rule 2720 public offerings with a book-running lead manager or dealer/manager that does not have a conflict of interest and that can meet the disciplinary history requirements for a QIU and public offerings of investment-grade rated debt and securities that have a bona fide public market

– change the definition of “conflict of interest” so that the Rule covers public offerings in which at least five percent of the offering proceeds are directed to a participating member or its affiliates and eliminates ownership of subordinated debt as a basis for a conflict of interest

– modify the Rule’s disclosure requirements so that more information relating to conflicts of interest is 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

– eliminate provisions in the Rule that do not apply to public offerings and instead address an issuer’s corporate governance responsibilities

– eliminate a provision that applies certain disclosure requirements to intrastate offerings

Comments are due by October 30th…