[Federal Register Volume 60, Number 249 (Thursday, December 28, 1995)]
[Notices]
[Pages 67146-67152]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31356]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36611; File No. SR-NASD-95-53]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. Requiring
Members Who Participate in the Transfer of Limited Partnership
Securities To Use Standard Transfer Forms
December 20, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December
15, 1994,\1\ the National Association of
[[Page 67147]]
Securities Dealers, Inc. (``NASD'' or ``Association'') filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the NASD. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
\1\ The proposed rule change was initially filed on November 8,
1995, but was subsequently amended on December 11, 1995, and again
on December 15, 1995, in order to clarify that the proposed rule
change does not apply to limited partnership securities that are
traded on the Nasdaq Stock Market or a registered national
securities exchange.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is herewith filing a proposed rule change to amend Section
1 and add new Section 73 and Exhibit A to the NASD's Uniform Practice
Code. Below is the text of the proposed rule change to Sections 1 and
73 of the Code. Proposed new language is italicized.
Uniform Practice Code
Scope of Uniform Practice Code
Sec. 1.
(a) All over-the-counter secondary market transactions in
securities between members shall be subject to the provisions of
this Code except:
(i)-(iv) (No change).
(v) transactions in Direct Participation Program securities as
defined in Article III, Section 34 of the Association's Rules of
Fair Practice, except as otherwise provided in this Code.
* * * * *
Limited Partnership Securities
Sec. 73.
Each member who participates in the transfer of limited
partnership securities, as defined in Article III, Section 34 of the
Association's Rules of Fair Practice, shall use standard transfer
forms in the same form as set forth in Exhibit A of this section.
This section shall not apply to limited partnership securities which
are traded on The Nasdaq Stock Market or a registered national
securities exchange.
* * * * *
Proposed Exhibit A to Section 73 of the Uniform Practice Code
contains the standard transfer forms, including a ``Transferor's
(Seller's) Application For Transfer,'' a ``Transferee's (Buyer's)
Application For Transfer,'' a ``Registration Confirmation Form,'' and a
``Distribution Allocation Agreement.'' Briefly, the Transferor and
Transferee forms are each two pages in length and contain all of the
essential information necessary to perform a valid transfer; the
Registration Confirmation Form confirms to the buyer/transferee that
the transfer has been completed; the Distribution Allocation Agreement
contains certain affirmations on which the transferor/seller and
transferee/buyer agree, and would act as a contract between them
setting forth their agreement regarding all upaid distributions.\2\
\2\ The contents of the proposed forms are not reproduced here.
Copies of proposed Exhibit A are available from the NASD by calling
(202) 728-6960, and are available for inspection and copying in the
Commission's Public Reference Room.
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II. Self-Regulatory Organization's Statement of the Purpose of and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The NASD has prepared summaries, set forth in Sections
(A), (B), and (C) below, of the most significant aspects of such
statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The Uniform Practice Code (``Code'') governs the delivery and
settlement of all over-the-counter secondary market transactions in
securities between members, with certain exceptions. The Code provides
and exception, among others, for transactions in Direct Participation
Program securities (``DPP securities'') as defined in Article III,
Section 34 of the NASD's Rules of Fair Practice, including limited
partnership securities also defined in Article III, Section 34. The
NASD is proposing to modify and add a new section to the Code to
require members to use standardized limited partnership transfer forms
when transferring a limited partnership security.
Historically, limited partnership securities were not structured to
be freely transferable in secondary market transactions. Trading
markets now exist, however, for many limited partnership securities in
addition to the large publicly-traded partnerships which are traded on
The Nasdaq Stock Market and the national securities exchanges. Quick
and accurate processing of the transfer of limited partnership
securities has, therefore, become more critical.
The terms and requirements relating to the assignment and transfer
of limited partnership interests are contained in and controlled by the
partnership agreement,\3\ almost all of which state that assignment or
transfer of limited partnership interests requires the consent and
approval of the general partner(s). As a result, when transferring
limited partnership interests, NASD members are currently confronted
with transfer requirements unique to each partnership which may vary
widely on the type and amount of documents necessary for the valid
transfer of a partnership interest. Some parternship agreements require
information so extensive that the transfer documents sometimes reach 30
to 40 pages in length. Thus, the transfer of the partnership interest
may take up to six months, in some cases, to become finalized.
\3\ The Revised Uniform Limited Partnership Act and the Delaware
Revised Uniform Limited Partnership Act expressly provide for the
ability to recognize transfers and admit new partners under whatever
rules the general partners design.
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Partnership terms for record dates and distribution or dividend
payment dates are equally varied. Transfer delays and non-standardized
payment provisions have caused or contributed to delays or mistakes in
the allocation of cash distributions between buyers and sellers. A
seller of a limited partnership interest, as a recordholder of the
securities, often receives distributions that rightly should have
accrued to the buyer and subsequently disposes of such distributions
without knowledge of the claims of purchasers. Particularly problematic
are special distributions other than cash distributions (such as
proceeds from capital transactions, capital distributions, sale or
refinancing proceeds, liquidating distributions, distributions with
respect to terminating transactions) which, under many partnership
agreements, are paid to the owner of record of the partnership unit in
the prior quarter. Thus, under current transfer standards and
practices, buyers and sellers of limited partnership securities in the
secondary market are unable to protect their rights to such
distributions. This leads to disputes over distributions that often
must be settled by broker/dealers at their own expense or through
arbitration or litigation.\4\
\4\ The NASD believes these problems are exacerbated by the fact
that general partners relying on no-action letters issued by the
Division of Market Regulation do not believe they are required under
SEC Rule 10b-17 to publicly disclose the payment of regular or
special distributions.
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The NASD recognizes that the transfer of limited partnership
interests is controlled by the terms of the partnership agreement under
various state limited partnership statutes. However, the NASD also
recognizes that, in most cases, prior to the recognition by the general
partner of the actual transfer of the partnership property interest
from one holder (transferor/seller) to another (transferee/purchaser),
a security interest in the property is created whenever the
[[Page 67148]]
purchaser gives, and seller accepts, economic consideration to secure
the purchaser's right to have the partnership interests transferred.
The security interest creates the right for the purchaser to have the
partnership interest transferred in advance of the date specified in
the partnership agreement and entitles the purchaser to legal certainty
that his/her ownership rights can be recognized and protected until the
transfer of the partnership interest is completed.
In order to provide a uniform way for member firms engaged in the
transfer of limited partnership interests to receive and recognize
information on the valid transfer of the security interest separate and
apart from the partnership interest, and to record such information of
valid transfer on their books and records, the NASD is proposing to
amend Section 1(a)(v) to allow the Code to apply to over-the-counter
secondary market transfers of direct participation programs to the
extent provided in individual provisions of the Code and to add new
Section 73 of the Code to require members to use standardized transfer
forms, as set forth in proposed Exhibit A to Section 73, when
transferring limited partnership securities. The proposed forms will
standardize the format for gathering transfer information by registered
representatives, reduce the amount of information necessary to perform
a valid transfer, and eliminate delays and inefficiencies in the
transfer and settlement process. Proposed new Section 73 will not apply
to limited partnership securities which are traded on The Nasdaq Stock
Market or a registered national securities exchange.
The proposed standardized transfer forms include ``Transferor's
(Seller's) Application For Transfer,'' ``Transferee's (Buyer's)
Application For Transfer,'' ``Registration Confirmation Form,'' and
``Distribution Allocation Agreement,'' as set forth in proposed Exhibit
A to Section 73. The Transferor and Transferee forms are each two pages
in length and contain all of the essential information necessary to
perform a valid transfer, including customer identification,
partnership identification, tax identification, quantity transferred,
broker/dealer and registered representative involved and signature
execution. The Registration Confirmation Form confirms to the buyer/
transferee that the transfer has been completed and contains
information regarding, among other things, the partnership's NASD
symbol, CUSIP number, tax identification number, number of units
transferred and the effective/admission date.
The Distribution Allocation Agreement would be completed at the
time the transfer documents are completed and sent to the general
partner of the limited partnership security being transferred. The
agreement contains certain affirmations on which the transferor and
transferee agree and would act as a contract between the buyer and
seller setting forth their agreement regarding all unpaid
distributions. The agreement specifies when the unitholder of record is
entitled to cash distributions and capital distributions, and who is
responsible for correcting a distribution made to the wrong party. The
agreement requires, among other things, the party who incorrectly
receives a distribution to promptly endorse and deliver to the correct
party the distribution checks or otherwise pay to the other party the
amount of such distribution.
Although only NASD members would be required to use the
standardized forms under the proposed amendments, the NASD is confident
that general partners and transfer agents engaged in the transfer of
limited partnership securities will use and honor the proposed forms so
that uniform transfer practices and procedures could be established on
an industry-wide basis.\5\
\5\ In fact, the NASD has worked closely with transfer agents
who specialize in the transfer of partnership securities, and the
Investment Program Association, a trade organization for the
partnership industry, to reach an informal consensus on the general
applicability of forms throughout the industry.
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The NASD believes that standardized forms will significantly reduce
the time and effort required by member firms to process limited
partnership transfers from approximately 180 days to less than 30 days.
In particular, the use of the Distribution Allocation Agreement will
provide certainty as to the buyer/transferee and seller/transferor
regarding distributions not yet announced or received by memorializing
the agreement among the buyer and seller as to the method for handling
distributions. The Distribution Allocation Agreement will also prevent
member broker-dealers representing such buyers and sellers from
effecting and settling trades without knowledge of the buyers' and
sellers' rights to any distribution.
The NASD is requesting an effective date for NASD members of 60
days after the date on which SEC approval of the proposed rule is
announced in an NASD Notice to Members, which announcement shall be
made no later than 45 days after Commission approval.
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act,\6\ which require that
the Association adopt and amend its rules to promote just and equitable
principles of trade, and generally provide for the protection of
customers and the public interest in that the proposed rule change
standardizes the process and the means by which limited partnership
securities are transferred on the secondary markets, thereby
significantly eliminating the delays and inefficiencies in the transfer
process, substantially improving the accuracy of dividend and capital
distributions and minimizing litigation in that regard, and
facilitating the transfer of limited partnership securities.
\6\ 15 U.S.C. Sec. 78 o-3.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
The NASD does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
The proposed rule change was published for comment in Notice to
Members 94-75 (September 1994) (``NTM 94-75''). Fourteen comment
letters from thirteen commenters were received in response thereto.\7\
Nine commenters supported the proposed rule change, two commenters were
opposed and two commenters neither supported nor opposed the proposed
rule change.
\7\ Copies of the Comment letters received by the NASD in
response to NTM 94-75 are available for inspection and copying at
the NASD or at the Commission's Public Reference Room.
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General Comments
One commenter suggested that the forms be typeset. Two commenters
stated that the forms are too technical, complicated and cumbersome for
the average investor and that the forms should be streamlined. One of
the commenters stated that investors would not have the necessary
information to complete the forms without help from their registered
representative.
The NASD understands the concerns expressed by these commenters but
emphasizes that the forms were never intended to be completed by
investors. The forms are intended to be used by general partners,
transfer agents and financial intermediaries.
[[Page 67149]]
Two commenters stated that the proposed forms have no ability to
include certain transferor and transferee representations required by
the issuer's prospectus or partnership agreement in conjunction with
transfer documents. One of these commenters suggested that general
partners and sponsors might be more willing to adopt the proposed forms
if they incorporate certain additional provisions, acknowledgements and
representations commonly found in existing transfer documents (e.g.,
illiquidity, lack of a public market, availability of public
information, distribution and tax allocations, etc.). Another commenter
suggested that general partners should be allowed to use their own
forms. Similarly, one commenter recommended that the forms serve as
model guides subject to reasonable modifications by a general partner
or sponsor.
Three commenters objected to the requirement that use of the
proposed forms be mandatory for members. One commenter requested that
the proposed modification to the Uniform Practice Code requiring
members to use the forms not be made. Another commenter recommended
that the proposal be clarified to require members only to accept the
proposed documentation and not that they be required to use it. One
commenter stated that the NASD must have a strategy for compelling
issuers to adopt the new forms and procedures or else use by members is
meaningless. The same commenter also stated that only issuers know the
exact number of units a seller owns and the exact registration
information, and that these same issuers are often unresponsive, slow
and inaccurate in verifying this information. The commenter added that
any policy set with regard to dividend distributions can only be
accomplished if issuers agree to adopt and accept the proposed new
procedures and that the proposed Registration Conformation Form would
not help members if issuers and transfer agents do not promptly notify
all parties of the receipt and approval of a transfer. The commenter
concludes that unless the proposed forms are adopted by issuers, use of
the forms should not be mandatory for members.
One commenter, while supporting the initiative, stated that the
standardization should not be limited to transfer forms, but also
should include signature verification, authorization and supporting
documentation to insure uniformity and efficiency in the DPP transfer
process. The commenter stated that attempting to establish uniformity
without developing procedural guidelines in these areas would do little
to reduce inefficiencies and delays.
Despite the concerns expressed, the NASD believes the proposed
forms will become the standard forms used by the industry. Since 1990,
the NASD's Direct Participation Program Committee and the special Ad
Hoc Committee on Uniform Settlement and Transfer Procedures for Direct
Participation Program Securities have gathered and assessed information
from the major market participants that act as principal or agent for
customers in the fragmented limited partnership secondary market and
consulted with the major limited partnership issuers in order to
develop limited partnership transfer forms that have universal
applicability. Both the staff and the members of the NASD's Direct
Participation Program Committee, some of whom represent major limited
partnership sponsors, are committed, through supporting a number of
initiatives undertaken by the NASD in addition to the standardized
transfer forms, to developing a broad, accessible framework through
which the transfer and distribution process for limited partnership
securities becomes streamlined and efficient for issuers, transfer
agents and NASD members.\8\
\8\ These initiatives include: (1) the development of a Direct
Participation Program Symbol Directory; (2) the submission of a
petition to the SEC to subject limited partnerships to the dividend
and distribution reporting requirements of SEC Rule 10b-17; and, (3)
the submission of a petition to the SEC requesting modification of
SEC Rule 17Ad-4(a) to require the application of Rules 17Ad-2
(Turnaround, Processing, and Forwarding of Items), 17Ad-3
(Limitations on Expansion), and 17Ad-6(a) (1) through (7) and (11)
(Recordkeeping) to the transfer of interests in publicly traded
limited partnerships by transfer agents and to modify Rule 17Ad-10
to establish a limited buy-in provision for publicly traded
partnership interests.
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While it is true that the NASD cannot compel non-member limited
partnership issuers to use the proposed forms, many of these issuers
have had significant input into the development of the proposed forms
and generally agree that the forms are workable. Limited partnership
issuers also understand that, once the proposed forms are approved by
the SEC, member firms, transfer agents and other limited partnership
secondary market intermediaries will begin using the forms as part of
their standard transfer process. Therefore, the NASD is confident that
issuers will generally not be adverse to using the proposed forms and
that, in fact, it will be in their best interest to do so.
The NASD believes that the proposed forms contain all the essential
information to effect a valid transfer of the security interest in a
timely fashion. To allow the forms to be used as mere models or guides
would defeat the fundamental aim of standardizing the limited
partnership transfer process. Nonetheless, nothing precludes a
particular general partner, member or transfer agent from requesting
additional information in order to complete certain books, records or
documentation requirements of the partnership agreement. However, the
failure to obtain such additional information should not prevent a
valid transfer of the security interest from taking effect where the
transfer forms are complete and contain all of the required information
for a valid transfer.
Specific Comments
Transferor/Transferee Forms
One commenter suggested that the terms ``Buyers'' and ``Seller'' be
deleted from the proposed applications for transfer forms since
transfers are not limited to buy/sell transactions.
The ``Reasons For Transfer'' section in the transferor's form
contains fields for ``reregistration,'' ``sale,'' ``death,'' ``gift''
and ``other.'' Thus, the forms do recognize that a transfer can be
effected in ways other than a purchase and sale.
Partnership ID Information
Three commenters suggested modifications to the Partnership ID
Information section of the proposed forms. Once commenter stated that
the tax Shelter Identification Number is a unique number to each
partnership and, therefore, problematic in its application, that not
all partnerships have a tax number and that it is not clear whether
transfer agents track such a number for identification purposes. The
other commenter suggested that the additional partnership identifiers,
such as the CUSIP #, the NASD Symbol, the Partnership Tax ID and the
Tax Shelter ID, are not particularly helpful to the average investor
and should be replaced with information to be completed by the
secondary market intermediary completing the form. Finally, one
commenter stated that the symbols in the NASD symbol directory were
confusing and should be changed suggesting a different format for the
symbols.
The proposed forms were designed to accommodate not any particular
DPP secondary market participant but the transfer processing in
general. Thus, some information required by the forms may be
unnecessary for certain transfers. Regarding confusion to the average
investor, the NASD wishes to emphasize again that the proposed forms
were never intended to be completed by investors; the forms are
[[Page 67150]]
intended to be used by general partners, transfer agents and financial
intermediaries. The NASD does not view the symbols in the proposed
symbol directory as confusing or difficult to use.
Quantity
One commenter suggested that the quantity section of the proposed
forms include either the original investment amount or the original
cost per unit. The commenter claims that some general partners use a
``dollar for dollar'' investment amount rather than a unit amount,
which creates confusion when different secondary markets randomly
assigned unit values to these partnerships. The commenter also stated
that investors are more likely to know how much money they initially
invested rather than how many units they purchased. The commenter
concluded that this additional information would eliminate confusion
and would ensure that all involved parties are ``speaking the same
language.''
The NASD believes that since most partnership documents offer an
initial unit value of measurement to the investor and continue to use
such a measurement for books and records and tax allocation purposes, a
unit value is the best measure of quantity transferred.
Required Representations and Acknowledgments
One commenter suggested that both the proposed transferor and
transferee forms contain certain representations and acknowledgments
that (1) specify an ``effective date'' for the right to receive
distributions of cash and allocations or profits and losses, (2)
recognize certain restrictions in the partnership agreement and state-
imposed suitability requirements, and (3) recognize the general partner
as the designated person to maintain the list required under Section
6112 of the Internal Revenue Code. The same commenter stated that in
order to clarify the enforcement and interpretation of the parties'
agreement for the transfer of the interests, both the transferor's and
transferee's forms should state that the application for transfer is
irrevocable and specify the governing law.
In response to the comments above, the NASD has added a field to
the Registration Confirmation Form for ``Effective/Admission Date.''
The NASD does not believe that the inclusion in the proposed forms of
the additional suggested representations and acknowledgements is
necessary in order to effect a valid transfer.
Sale Price
Two commenters suggested including in the proposed applications for
transfer a space to insert the sale price or other consideration paid
for the interests being transferred (Comments 7,10). One Commenter
explained that, with this information, general partners or sponsors
could maintain data on current sales transactions for prospective
buyers or sellers to obtain current market prices of interests or for
others to use in valuing interests held by estates.
NASD research indicates that knowledge or recordation of the sales
price is not necessary for a general partner to effect the transfer of
a limited partnership interest. In any case, the NASD is actively
working to permit certain public limited partnerships to be listed or
quoted on the NASD's OTC Bulletin Board. Transactional data, including
price, would be available for a nominal fee for general partners who
would be interested in such information.
Fees
Three commenters commented on the instructions in the proposed
transfer forms requiring the transferor and transferee form to be
submitted together with the required fees. One commenter requested
authority for the issuer to implement its own fee structure. Another
commenter stated that advance notice of fee changes to members by
issuers should be mandatory. Another commenter stated that transfer
fees ought to be standardized.
The NASD believes that, notwithstanding the proposed
standardization of transfer forms, the amount of resources expended in
the transfer process by secondary market intermediaries in what is
still a fragmented and somewhat disorganized marketplace may vary
significantly from one entity to another. It is therefore inappropriate
to impose a standard fee structure as part of the proposed forms.
Signature Execution
Two commenters suggested changes regarding signature execution. One
commenter also recommend that the application for transfer forms should
include a signature block and date line for the general partner or
sponsor to execute or acknowledge, either by manual signature of an
officer or partner or by a generic signature stamp to alleviate
confusion and possible disagreements as to whether applications for
transfer have been accepted. The other commenter suggested, when
applicable, adding an explanation that the custodian's signature is
required, noting that most partnerships require the custodian's and the
client's signatures. The commenter stated that there are numerous
limited partnership units held in custodial accounts (e.g., IRA,
pension plans etc.) and investors are often confused as to whose
signature is required on these forms. The commenter also suggested that
Instruction #7 on the proposed forms state that satisfactory evidence
of the custodian's authority be represented.
In response to the comments above, the NASD has changed the forms
to incorporate the use of the medallion stamp, and believes that this
proposed change will help to alleviate concerns about signature
verification.
Transferor Form
Application to Transfer: New Language
One commenter suggested that the first full paragraph of the
transferor form be modified as shown (new language is underlined).
``The transferor hereby makes application to transfer and assign,
subject to the general partner's rights, to the transferee all rights,
title and interest in and to the profits, losses, and distributions of
the partnership, as set forth in the partnership below and for the
transferee to succeed to such interest as a Substitute Limited partner,
successor in interest or assignee.''
Under the assumption that the intent of the above commenter's
suggested changes was to make the forms more consistent, the NASD has,
in response, changed the first full paragraph of the proposed
transferee's form by deleting the words ``and assign'' and ``title'' to
correct the form and to make the language more consistent with the
proposed transferor's form.
Quantity
Two of the fourteen commenters suggested modifications to the
quantity section of the proposed form. One commenter suggested that the
number of units to be held after transfer be labeled on the
transferor's form as ``must be completed'' rather than ``optional.''
Another commenter believes that requesting information on the number of
units to be held after transfer may result in delays when attempting to
verify this information.
The NASD has included the field for number of units to be held
after transfer as an optional field for informational purposes only.
Verification of the information should not result in delays, since the
information is optional.
[[Page 67151]]
Transferee Form
Required Representations and Acknowledgements
One commenter suggested adding certain acknowledgements and
representations regarding liquidity and tax status to the proposed
transferee form. The commenter suggested adding to the proposed
transferee form: (1) the acknowledgement that there may not be a public
market in the future through which the transferee can liquidate his/her
investment in the partnership, (2) the representation that the taxpayer
identification number is correct and that the transferee is not subject
to backup withholding, and (3) if a resident is a non-alien, the
representation that IRS form 4224 is correct.
The NASD does not believe that the inclusion in the proposed forms
of the additional suggested representations and acknowledgements is
necessary in order to effect a valid transfer.
Partnership Information
One commenter suggested modification to the Partnership Tax I.D.
number on the Transferee's Form. The commenter indicated that for those
Direct Participation Programs that have obtained from the Internal
Revenue Service tax shelter registration numbers, the transferee's
application should also contain the tax shelter registration
notification required by the Internal Revenue Service regulations.
However, the commenter stated that in order to limit the length of the
form, such notification could be included as part of the Registration
Confirmation Form.
The IRS tax notification requirements was intended, in part, to
provide some federal oversight, through tax law, for partnerships that
were intentionally constructed to have little or no economic value and
generate excessive tax losses. The NASD believes that the universe of
public partnerships traded in the secondary markets with which it is
concerned contains, for the most part, partnerships which were designed
to return some real economic value to the investor and which do not
generally make use of the IRS notification requirement.
Registration Type
One commenter suggested adding the categories ``Money Purchase
Pension Plan'' and ``Profit Sharing Plan'' to the ``Tax Deferred''
section under ``Registration Type.'' In response to the comments above,
the NASD has added the categories ``Money Purchase Pension Plan'' and
``Profit Sharing Plan'' to the ``Tax Deferred'' section under
``Registration Type.''
Secondary Address Information
Two commenters suggested modifications to the Secondary Address
Information Section on the Transferee's Form. One commenter stated that
distribution payment instructions are very important to partnership
processing and sending distributions to the wrong address is costly
both in processing time and bank fees. The same commenter stated that
the form does not make it clear where distribution payment is to be
made, and suggested that a statement could be added such as: ``If the
secondary address field is not filled in, then payment will be made to
the legal address,'' as well as an additional field to solicit the
custodian account number so that distribution payments can be
accurately audited. The second commenter suggested adding a space for
the buyer to include distribution instructions, with a note to the
effect that if no instructions are given, all distributions will be
paid to the registered transferee. The commenter stated that adding
such space and instructions will enable the buyer to direct
distributions to a brokerage account or mutual fund account.
The NASD agrees that the correct payment of distributions is an
important part of the transfer process. In response to the comments
above, the NASD has added space to the proposed Registration
Conformation Form entitled ``Distribution Address (if different than
address of record),'' and, in addition, has developed a Distribution
Allocation Agreement to allow transferor and transferee to agree to
specify how and to whom distributions will be paid.
Suitability
One commenter, a registered transfer agent, suggested revising the
Transferee's (Buyer's) Form to include suitability standards. The
commenter stated that many partnerships are required to limit transfers
to buyers who satisfy the suitability standards established at the time
of each partnership's initial offering. The commenter suggested the
following suitability information be added to the form:
Please indicate your annual net income, and your current net worth
(exclusive of home, automobiles, and home furnishings).
------------------------------------------------------------------------
Income Net worth
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$35,000-$44,999.................... $35,000-$44,999
$45,000-$59,999.................... $45,000-$59,999
$60,000 or above................... $60,000-$74,999
$75,000-$149,999
$150,000-$174,999
$175,000-$249,999
$250,000 or above.
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In researching this issue, the NASD found that only California
required a suitability determination when a partnership security was
sold or transferred in a secondary market transaction. The forms
contain the necessary disclosure requiring the prior written consent of
the Commissioner of Corporations of the State of California.
Registration Confirmation Form
Four commenters suggested modifications to the Registration
Confirmation Form. One commenter stated that an apparent unintentional
consequence of the proposed confirmation form is to notify the client
that he/she has actually been admitted into the partnership when in
fact completion of the closing documents can take a considerable amount
of time. The commenter favors a two-step process that first confirms
receipt of the documents in a timely fashion and then later confirms
the actual acceptance of the client into the partnership.
Another commenter stated that the language in the first paragraph,
``You have been, or will be admitted as a Limited Partner in the
Partnership indicated below'' was confusing and suggested more simple
wording that would state, ``Your transfer request has been processed.
The effective date or admission date as a limited partner in the
partnership is indicated below.'' The same commenter also believes that
a field should be added to the form requesting a date processed.
Another commenter stated that the confirmation form was similar to
forms already in use and it was not likely that a standardized
confirmation form would replace certificates. The commenter suggested
that, since investors are not satisfied with a confirmation and want a
certificate, issuers should be required to issue only non-negotiable
certificates so that investors would not be required to pay for lost
certificates.
Another commenter recommended four modifications to the form.
First, the seller's name should be added to the form to eliminate any
confusion regarding the parties involved in the transaction. Second,
the form should contain space to add the name of the individual at the
general partner processing the paperwork, so that an NASD member would
have a contact person should any questions come up concerning the
transaction. Third, information should be provided on the form
indicating when the first
[[Page 67152]]
distribution would take place, including any information available with
regard to the amount of that distribution and the date it would be
paid. Finally, a specified time period in which a general partner or
transfer agent must respond to a transfer request should be indicated
on the form.
In response to the comments above, the NASD added changes to the
Registration Confirmation Form. The first sentence of the first full
paragraph on the form was changed to state, ``Your transfer request has
been processed. The effective date or admission date as a limited
partner in the partnership is indicated below.'' In addition, the
portion of the form which asks for the date of admission to the
partnership has been changed to state ``Effective/Admission Date.''
Finally, space was provided at the bottom of the form to indicate an
address for distributions if different than the address of record.
Distribution Affirmation Form
Four commenters responded to the request for comment in NTM 94-75
on whether a dividend distribution affirmation/agreement should be used
in conjunction with the proposed transfer forms or should be optional.
One commenter requested that the affirmation requirement be optional.
Another commenter believes that the affirmation that a seller gives up
all distributions not yet declared or paid can only work if issuers
will uniformly adopt such practices. The same commenter added that the
agreement by a member with a seller to such a contractual term,
followed by the issuer not honoring such term, creates a legal conflict
and a contractual term which becomes pragmatically unenforceable. The
commenter concluded that the affirmation should only be included if the
issuer will uniformly agree to it.
One commenter stated that while it is important to include
distribution allocation language to the proposed documentation, it
would also be important to include language with respect to tax
allocations to facilitate investors understanding as to whether they
will or will not be allocated gains or losses for tax purposes.
Another commenter stated that distribution procedures were so
important that they should be standardized in the industry and a
statement should be included on the form for the seller to affirm that
it agrees to give up any undeclared or unpaid distributions.
In response to the comments above, the NASD has developed a
proposed distribution allocation agreement that would be executed by
the parties at the time the transfer documents are completed and sent
to the general partner of the limited partnership security being
transferred. The agreement contains certain affirmations on which the
transferor and transferee agree and would act as a contract between the
buyer and seller setting forth their agreement regarding all unpaid
distributions. The agreement specifies when the transferee becomes the
unitholder of record, when a unitholder of a record is entitled to cash
distributions and capital distributions, and who is responsible for
correcting a distribution made to the wrong party. The agreement
requires, among other things, the party who incorrectly receives a
distribution to promptly endorse and deliver to the correct party the
distribution checks or otherwise pay to the other party the amount of
such distribution. Thus, the distribution allocation agreement, which
incorporates this information, would evidence the parties' agreement as
to the treatment of distributions and make it clear that they have
agreed to all material terms of the transaction.
As mentioned above, while it is true that the NASD cannot compel
non-member DPP issuers to use the proposed forms, major DPP issuers,
working in conjunction with the NASD's Direct Participation Program
Committee and the special Ad Hoc Committee on Uniform settlement and
Transfer Procedures for Direct Participation Program Securities, have
had an opportunity for input into the development of the agreement. The
NASD believes that issuers will uniformly use the proposed agreement in
conjunction with the proposed transfer forms.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. by order approve such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to file number SR-NASD-95-53 and
should be submitted by January 18, 1996.
For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\9\
\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-31356 Filed 12-27-95; 8:45 am]
BILLING CODE 8010-01-M
