[Federal Register Volume 61, Number 81 (Thursday, April 25, 1996)]
[Notices]
[Pages 18452-18454]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10244]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37131; File No. SR-NASD-96-08]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to the Quotation of Direct Participation Programs in the OTC Bulletin
Board Service
April 19, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on March 12, 1996, the
National Association of Securities Dealers Inc. (``NASD'' or
``Association'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
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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 permit the
quotation of Direct Participation Programs (``DPPs'') in the OTC
Bulletin Board Service (``OTCBB'' or ``OTC Bulletin Board'') and to
require the reporting of transactions in DPPs through the Automated
Confirmation Service (``ACT''). The text of the proposed rule change is
available at the NASD and at the Commission.\2\
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\2\ Pursuant to a new rule numbering system for the NSDA Manual
anticipated to be effective no later than May 1, 1996, the rules
that are the subject of this proposed rule change will become Rules
6530, 6540, and 6550 (regarding the OTC Bulletin Board Rules); Rule
6100 (regarding the Automated Confirmation Transaction Service); and
new Rule 6900 series (regarding transaction reporting for DPPs). See
Securities Exchange Act Release No. 36698 (Jan. 11, 1996), 61 FR
1419 (approving new NASD rule numbering system).
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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
1. Purpose
The purpose of the proposed rule change is to increase transparency
and provide for more efficient price discovery in the secondary market
for limited partnerships, also known as DPPs, by permitting these
securities to be quoted in the OTC Bulletin Board and requiring
transactions in DPPs to be reported through ACT.
a. Background
In 1990, at the direction of the NASD's Direct Participation
Programs Committee (``Committee''), the staff undertook a study of the
nature and functioning of the secondary market for limited partnership
securities. Data gathered and interviews conducted during the study
revealed that approximately $90 billion was invested in public direct
participation programs. The programs were organized to invest in a
variety of industries including, but not limited to, real estate, oil
and gas, cable television, commodities, and equipment leasing. Although
these securities were not intended to be liquid and tradeable, the NASD
estimated at that time that approximately two dozen participants act as
principal or agent for customers in a fragmented secondary market that
in the aggregate transfers ownership of an estimated $250 to $300
million worth of limited partnership securities annually. The NASD
noted that the majority of transactions that occur in the market are
necessitated by triggering events that force the sale of the
partnership unit upon the limited partner. Such events include estate
sales by trustees due to the death of a limited partner, liquidation of
IRA accounts, divorce, and unexpected or extraordinary expenses such as
major medical or post-secondary education. Thus, the inefficiencies of
the fragmented market tend to disproportionately impact investors who
need liquidity, rather than investors who are merely seeking liquidity.
In response to the developing secondary market, the NASD has
directed its regulatory focus to ensuring that NASD members active in
the market comply with NASD rules, federal securities laws and state
laws relating to advertising and sales literature, suitability and
recommendations to customers, solicitation and tender offers,
prospectus disclosure, transactions with non-members, net capital, and
escrow.
[[Page 18453]]
A particular focus has been directed toward rules and policies relating
to markups/markdowns and best execution of customer orders that require
members to use reasonable diligence to obtain the most favorable price
possible under prevailing market conditions. The NASD published its
findings on the secondary market in Notice to Members 91-69.
Since the time of that study, the Committee has expressed the view
that the NASD's primary concern should continue to focus on ensuring
that the secondary market in partnership securities is regulated
efficiently and operates in a manner that protects public investors. In
furtherance of these goals, the Committee determined that the quotation
of DPPs in the OTC Bulletin Board would enhance investor protection and
greatly assist the NASD in carrying out its regulatory
responsibilities. The OTC Bulletin Board is an electronic quotation
medium operated by the Nasdaq Stock Market, Inc. that allows eligible
members to enter, update, and retrieve quote information and unpriced
indications of interest for non-Nasdaq securities.
b. Tax Status of DPPs
The NASD has long been aware that facilitation of a more
centralized means for the quotation of DPPs could cause these
securities to be deemed ``publicly traded partnerships'' under the
Internal Revenue Code, as that term is defined therein. This would lead
to the unintended result of DPPs being treated as corporations for
federal tax purposes.
Recently issued IRS regulations, however, have clarified the
circumstances under which interests in partnerships may be quoted
without impacting their tax status.\3\ The proposed rule change
reflects the requirement contained in these new regulations, and thus
is intended to ensure that the quotation of DPPs in the OTC Bulletin
Board would not, by itself, have negative tax status consequences for
the issuers of these securities. For example, because the OTC Bulletin
board will not disseminate firm buy or sell quotations with respect to
partnership interests under the proposed rule change, it would not fall
within the definition of an ``interdealer quotation system'' under the
new IRS regulations, as that term is defined therein. As a result, such
interests in DPPs are not publicly traded for purposes of the IRS Code,
provided that the some of the percentage interests in partnership
capital or profits transferred during the taxable year of the
partnership (subject to certain exclusions) does not exceed two percent
(or five percent for grandfathered existing partnerships) of the total
interests in capital or profits. It is expected that the monitoring of
these two and five percent thresholds will not be the responsibility of
the NASD, but will be that of the general partners, who, under most
partnership agreements, must approve each transfer of units in the
partnership. The NASD, however, will make transaction reporting
information available to general partners for a nominal fee to assist
them with such compliance.
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\3\ Section 1.7704-1 has been added to the Income Tax
Regulations, (26 CFR Part 1), relating to Section 7704(b) of the
Internal Revenue Code, which defines the term ``publicly traded
partnership.'' 60 FR 62026 (Dec. 4, 1995).
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c. Quotation of DPPs in the OTC Bulletin Board
Generally, the treatment of DPPs quoted in the OTC Bulletin Board
will be similar to that of foreign securities and ADRs currently; i.e.,
no firm prices will be displayed. NASD members will be permitted to
insert only non-firm prices or unpriced indications of interest (``bid
wanted'' or ``offer wanted'' and ``name only'' entries). These non-firm
prices or indications of interest will provide the basis for a
negotiation that will take place in order to complete a transaction in
a DPP security. The OTCBB display screen will reflect the inside
market, last sale, previous close, volume, and distribution
information, if available.
In addition, only NASD members will be permitted to apply to place
unpriced entries or indicative quotes on the OTC Bulletin Board. The
requirements of Securities Exchange Act Rule 15c2-11 will apply, and
thus firms generally will be required to submit Form 211 prior to
initiating a quotation of a DPP in the OTC Bulletin Board, unless an
exemption applies.\4\ There will be no provision for any automatic
execution for DPPs in the OTCBB.
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\4\ 17 CFR 240.15c2-11 (governing the initiation or resumption
of quotations by a broker-dealer for over-the-counter securities in
a non-Nasdaq interdealer quotation medium).
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d. Reporting Transactions in DPPs
Subject to certain exclusions under the reporting requirements, all
secondary market transactions in DPPs will be required to be reported
to the NASD, without regard to whether the DPP was the subject of a
quotation in the OTCBB. Transactions will be reported through ACT for
reporting purposes only.\5\ Thus, ACT will not be used to facilitate
clearance and settlement of these securities notwithstanding the
possibility that a particular DPP eligible for inclusion in the OTCBB
also may be eligible for clearing with a clearing agency, e.g. NSCC,
nor will the OTCBB provide assistance to parties in completing the
transfer documents and other forms necessary to clear and settle a
transaction in a DPP security.\6\
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\5\ It is understood that members who effect transactions in
DPPs predominantly act in the capacity of agent. For reporting
purposes, it is expected that the concepts of agency and principal
have the same meaning as those terms are commonly used or
understood, unless otherwise noted in Rule 6900.
\6\ Certain technical corrections have been made to the
definition of the term ``ACT eligible security'' to clarify that
transactions in Nasdaq SmallCap and certain other OTC securities
must be reported through ACT, and to delete an outdated reference to
ACT implementation.
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Firms will report on T+1, designating the transaction ``as of'' the
previous day and include the time of execution. Member firms that have
the operational capability to report transactions within 90 seconds of
execution, however, may do so. A symbol directory will be prepared to
facilitate transaction reporting in DPPs.
The NASD recognizes that some member firms who participate in this
market may not be Nasdaq Workstation subscribers and thus may not have
the facility to report transactions through ACT. Members without direct
access to ACT will have the option of reporting through the ACT Service
Desk if the member averages a limited number of transactions in
DPPs.\7\ Alternatively, such members may consider obtaining a computer-
to-computer interface (``CTCI'') or a Nasdaq Workstation. Members may
contact Subscriber Services for further information.
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\7\ As set forth in Rule 6920, a member may use the ACT Service
Desk if it averages five or fewer trades per day during the previous
calendar quarter. For this purpose, any calculation of the average
number of trades per day shall include transactions in any security,
and not just DPPs.
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2. Statutory Basis
The NASD believes the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act \8\ in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, and, in general, to protect
investors and the public interest. Subparagraph (b)(11) of that section
authorizes the NASD to adopt rules governing the form and content of
quotations for securities traded over-the-counter for the purposes of
producing fair and informative quotations, preventing misleading
quotations, and promoting orderly procedures for
[[Page 18454]]
collecting and disseminating quotations. The proposed rule change would
centralize a fragmented market and provide greater transparency, while
maintaining certainty with respect to the tax status of these
securities. It will provide more efficient price discovery in the
secondary market for limited partnerships, and is expected to aid NASD
members in complying with their obligations for best execution when
effecting transactions.
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\8\ 15 U.S.C. 78o-3(b)(6).
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In addition, the NASD relies on Section 11A(a)(1) of the Act \9\ in
that the proposed rule change is consistent with the Congressional
findings and policy goals, as set forth therein, respecting operational
enhancements to the securities markets. Basically, Congress found that
new data processing and communications techniques should be applied to
improve the efficiency of market operations, broaden the distribution
of market information, and foster competition among market
participants.
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\9\ 15 U.S.C. 78k-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD believes the proposed rule change will impose no burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The NASD has neither solicited nor received written comments.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the 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 the 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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Also, copies of such filing will be available
for inspection and copying at the principal office of the NASD. All
submisssions should refer to File No. SR-NASD-96-08 and should be
submitted by May 16, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 C.F.R. 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-10244 Filed 4-24-96; 8:45 am]
BILLING CODE 8010-01-M
