Small Firms Poke at NASD Offering Plan

Smaller brokerage firms are worried they're being shut out of the NASD's public offering.
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Large securities issuers and market participants would become owners of half the

Nasdaq

exchange under a proposal the

National Association of Securities Dealers

is scheduled to consider Thursday.

But the plan, which would give NASD member firms a total of 20% interest in the new ownership structure for the exchange, already is drawing fire from smaller broker-dealers who complain they'll be overshadowed by big Wall Street firms.

They're particularly critical of the fact that the initial sale, involving as much as 49% of the exchange, would take place without a vote of the NASD's current member firms.

But Alan Davidson, a member of the 33-person NASD board of governors, and one of the most vociferous critics of the spinoff plan and many NASD initiatives, doesn't hesitate to air his objections.

"There's very little support for this, if there's any support," says Davidson, who maintains he's representing the view of his

Zeus Securities

and the

Independent Broker Dealer Association

. "I'm concerned over the way the deal is being proposed. I don't really see any benefit to the public or the members."

Davidson said the biggest concern of small NASD members is the lack of a voice in the spinoff plan. "The members are owners of NASD," he says. "I think there's a moral obligation to submit it to the membership."

The much-anticipated spinoff would convert Nasdaq into a for-profit concern in two stages beginning early next year, according to Davidson.

The NASD board is scheduled to take up the proposal when it meets in New York Thursday and could decide whether and how to go forward with the spinoff.

A NASD spokesman confirmed the board will discuss the issue in its meeting, but declined to elaborate.

The NASD currently owns and operates the Nasdaq exchange as a not-for-profit enterprise, along with

NASD Regulation

, the organization's enforcement and oversight arm. The NASD itself is owned by its more than 5,500 members.

The NASD board in July approved the concept of spinning off the Nasdaq exchange, a move that comes as its neighbor, the

New York Stock Exchange

, is also considering becoming a for-profit concern.

In recent weeks, NASD officials have been peddling the specific sale proposal to the association's members in small meetings around the country, Davidson said.

Under that plan, 75% of the exchange would be sold in two private placements beginning early next year, he said.

The plan would allocate about 21% of the offering to Nasdaq-listed companies, including

Sun Microsystems

(SUNW) - Get Report

,

Microsoft

(MSFT) - Get Report

,

Dell

(DELL) - Get Report

,

Cisco

(CSCO) - Get Report

and

Intel

(INTC) - Get Report

, according to Davidson.

He said this would include nine firms, but another person familiar with the proposal said the number of issuers included in that allocation would be closer to 100.

The deal would allocate 43% of the overall ownership offering to major market participants, including broker-dealers, 8% to institutional investors and 28% to NASD members.

Each NASD member would receive an allocation of 1,000 warrant shares in the first tranche and 4,000 warrants in the second, to take place later in 2000, Davidson said.

The move to spin off, or "demutualize" Nasdaq comes as the exchange and the NYSE are facing an increasing threat of competition from electronic communications networks, or ECNs.

The largest obstacle to a publicly owned Nasdaq -- as well as the NASD -- is the regulatory authority it will retain.

Davidson said one concern about the spinoff is that once Nasdaq is separated from NASD, there's no guarantee the exchange would continue to use NASD Regulation for its regulatory functions. "Nasdaq is the biggest customer of NASD Regulation," he says. "Without Nasdaq, the members are left with the regulatory costs."