Non-Registered Securities Targeted By Amex, NASD

The American Stock Exchange and NASD compete to trade emerging growth companies that don't qualify for an NYSE listing. Now they're preparing to go head-to-head in a new electronic market -- debt and equity issues not registered with the SEC.

While there are minor differences between the two proposals -- NASD's plan will include private placements of domestic firms in addition to non-registered foreign securities -- the concept is the same. Both want to develop screen-based systems to give U.S. institutions easier access to the Euromarket.

Under both proposals, brokers would be able to trade for their own accounts and for institutions, though not for individual investors. If approved by the SEC, the two systems would begin operating next year.

NASD isn't ready to disclose how traders will access its new market, says John Wall, executive vice president. The plan will require new software, but probably not new hardware, says Bob Riess, vice president, systems planning.

Observers speculate the Amex will use its joint venture with Instinet Corp., a unit of Reuters Holdings PLC, to set up its electronic trading system.

Quadrex Securities approached the Amex more than a year ago about creating an offshore electronic market for non-registered securities. The idea was said to be the brainchild of John Liftin, who headed Quadrex's New York office and recently left to become general counsel at Kidder Peabody & Co., Inc.

Earlier this month, Quadrex withdrew from the project, but the Amex plans to pursue it. Although the Amex trades on an exchange floor, the venture was going to more closely resemble NASDAQ.

NASD decided to develop its private placements market at the urging of several brokerage firms that believe NASDAQ to be well-suited for non-registered securities.

At first, NASD's market would be no more than an electronic billboard to alert customers to foreign offerings available on a private placement basis. As the system evolves, it would allow investors qualified by the SEC to increase or reduce their holdings in non-registered securities. In its final form, it would be a NASDAQ look-alike, says James Davin, chairman of NASD's international committee.

There are no plans to develop a "black box" market where private placements could be completed by pushing a button, Davin says. Broker/dealers would use the phone to do deals after viewing data on a screen, just like they do for most transactions in the OTC market.

Davin concedes that a vendor like Autex or Bridge could set up a similar billboard, but doubts whether they'd be willing to work out the clearing and settlement details.

Both NASD and the Amex are working with the International Securities Clearing Corp. to develop a book-entry system that would eliminate the need for U.S. institutions to take physical possession of foreign securities.

The Amex plan calls for foreign securities to be priced in U.S. dollars, but this won't be the case for NASD's market. "Currency movement adds another dimension to investing in foreign securities that institutions don't want to miss out on," Davin says. However, the Amex doesn't want to ignore those U.S. institutions required by law to invest in dollar-denominated securities.

Before the Amex and NASD can begin operating their systems, the SEC must modify its Rule 144 governing the sale of non-registered securities. The Commission's Division of Corporation Finance is drafting a rule making it easier for institutions to purchase foreign issues.

Under existing regulations, this is tough. To buy stock issued in a recent French privatization, the College Retirement Equities Fund had to acquire the shares in a private placement. The securities can't be resold in the U.S. and must be disposed of on the Paris Bourse.

If either proposal becomes a reality, there could be ramifications in the Euromarket.

Members of the Association of International Bond Dealers, the Zurich-based trade group for Eurobond dealers, have resisted efforts to disseminate prices via screens because of fears that spreads -- and profits -- would narrow. The dealers aren't convinced the decline in margins would be offset by rising volume.

At an international investing conference held last week by the Securities Industry Association, Ian Kerr, executive director at Kidder, Peabody International Ltd., predicted the AIBD wouldn't adopt screen-based trading until the 1990s. At the same time, he lamented the current lack of liquidity in the Eurobond market.

Either the Amex or NASD could very well establish the first electronic marketplace for Eurobonds and Euroequities. However, Davin stresses that NASD's private placements market is not intended to challenge the AIBD, whose members would manage the offerings listed on the system.

"We're not trying to steal a march on the AIBD," says Davin, who's a managing director at First Boston Corp. "We're just trying to give hundreds of U.S. institutions easier access to the Euromarket."