[Federal Register Volume 60, Number 109 (Wednesday, June 7, 1995)]
[Notices]
[Pages 30133-30134]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13897]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35788; File No. SR-NASD-95-21]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
Freely Tradeable Direct Participation Program Securities
May 31, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on May
23, 1995, the National Association of 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.\1\ The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
\1\The proposal was originally filed with the Commission on May
10, 1995. The NASD subsequently submitted Amendment No. 1 to the
filing which amends Subsections (b)(3)(C) (i) and (ii) to Article
III, Section 34 of the Rules of Fair Practice, by replacing the
phrase ``the NASDAQ System'' in Subsections (i) and (ii) and the
word ``NASDAQ'' in Subsection (ii) with the word ``Nasdaq.'' Letter
from Suzanne E. Rothwell, Associate General Counsel, NASD, to Mark
P. Barracca, Branch Chief, Over-the-Counter Regulation, Division of
Market Regulation, SEC, dated May 22, 1995.
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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 Article III,
Section 34 of the Rules of Fair Practice. Below is the text of the
proposed rule change. Proposed new language is italicized; proposed
deletions are in brackets.
Direct Participation Programs
Sec. 34.
* * * * *
Suitability
(3)(A) A member or person associated with a member shall not
underwrite or participate in a public offering of a direct
participation program unless standards of suitability have been
established by the program for participants therein and such standards
are fully disclosed in the prospectus and are consistent with the
provisions of subparagraph (B) of this section.
(B) In recommending to a participant the purchase, sale or exchange
of an interest in a direct participation program, a member or person
associated with a member shall:
(i) have reasonable grounds to believe, on the basis of information
obtained from the participant concerning his investment objectives,
other investments, financial situation and needs, and any other
information known by the member or associated person, that:
a. the participant is or will be in a financial position
appropriate to enable him to realize to a significant extent the
benefits described in the prospectus, including the tax benefits where
they are a significant aspect of the program;
b. the participant has a fair market net worth sufficient to
sustain the risks inherent in the program, including loss of investment
and lack of liquidity; and
c. the program is otherwise suitable for the participant; and
(ii) maintain in the files of the member documents disclosing the
basis upon which the determination of suitability was reached as to
each participant.
(C)[D] Notwithstanding the provisions of subparagraphs (A) and (B)
hereof, no member shall execute any transaction in a direct
participation program in a discretionary account without prior written
approval of the transaction by the customer.
(D)[C] Subparagraphs 3(A) and 3(B), and, only in situations where
the member is not affiliated with the direct participation program,
Subparagraph 3(C), shall not apply to:
(i) a secondary public offering of or a secondary market
transaction in a unit, depositary receipt, or other interest in a
direct participation program for which quotations are displayed on
Nasdaq or which is listed on a registered national securities exchange,
or
(ii) an initial public offering of a unit, depositary receipt or
other interest in a direct participation program for which an
application for inclusion on Nasdaq or listing on a registered national
securities exchange has been approved by Nasdaq or such exchange and
the applicant makes a good-faith representation that it believes such
inclusion on Nasdaq or listing on an exchange will occur within a
reasonable period of time following the formation of the program.
* * * * *
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
Article III, Section 34 of the Rules of Fair Practice regulates
participation by members and persons associated with a member in direct
participation programs and limited partnership rollup transactions
(``DPP rule''). The DPP rule generally prohibits a member or a person
associated with a member from participating in a public distribution of
a direct participation program or a limited partnership rollup
transaction unless the distribution or transaction conforms to certain
suitability and disclosure requirements and standards of fairness and
reasonableness.
Since the adoption of the DPP rule in 1982,\2\ an increasing number
of direct participation programs, such as master limited partnerships,
have issued partnership units, depositary receipts for such units, or
assignee units of limited partnership units that are freely tradeable
in a manner generally analogous to common stock and are quoted on
Nasdaq and listed on registered national stock exchanges. A direct
participation program security is considered freely-tradeable under
Section 34 if it is either (1) a secondary public offering of or a
secondary market transaction in a direct participation program security
for which quotations are displayed on Nasdaq or which is listed on a
registered national securities exchange, or (2) a primary offering of a
direct participation program for which [[Page 30134]] an application
for inclusion on Nasdaq or listing on a registered national securities
exchange has been approved.
\2\The DPP rule was initially approved by the Commission as
Appendix F to Article III, Section 34 on September 16, 1982
(Securities Exchange Act Release No. 19054); 47 FR 42226 (September
24, 1982).
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In order to address the increased transparency and liquidity
associated with the nature of the secondary markets for freely
tradeable direct participation program securities, the NASD amended the
DPP rule to, among other things, exempt freely tradeable direct
participation program securities from the suitability requirements of
Subsections 34(b)(3) (A) and (B) of the DPP rule.\3\ At the time, the
NASD determined that since the disclosure requirements in the DPP rule
were primarily designed for direct participation program securities
that lacked liquidity and marketability, no purpose was served by
applying the same criteria to freely tradeable direct participation
program securities.
\3\See, Securities Exchange Act Release No. 23619 (September 15,
1986); 51 FR 33968 (September 24, 1986).
Freely tradeable direct participation program securities, however,
continue to be subject to the discretionary account prohibitions of
Article III, Section 34. Currently, Subsection 34(b)(3)(D) of the DPP
rule states, in part, that ``* * * no member shall execute any
transaction in a direct participation program in a discretionary
account without prior written approval of the transaction by the
customer.'' The provision applies to transactions in all direct
participation program securities, whether freely tradeable or not. The
NASD considers discretionary transactions in direct participation
program securities which are illiquid and for which no ready market
exists to be an improper use of discretionary power. Recently, the NASD
considered whether Monthly Income Preferred Securities (``MIPS''), a
new financial instrument which is a freely tradeable direct
participation program security, ought to be subject to the
discretionary account restrictions in Article III, Section 34.\4\ In
its consideration, the NASD determined that the concerns which attach
to the use of discretionary authority for illiquid, unmarketable direct
participation program securities are not present with freely tradeable
direct participation program securities. Therefore, the NASD is
proposing reversing the order of current Subsections (b)(3)(C) and (D)
to Section 34 and to add a reference to Subparagraph 3(C) in new
Subparagraph 3(D) to exclude freely-tradeable direct participation
program securities from the prohibition on transactions in
discretionary accounts without written approval. The exclusion for
freely tradeable direct participation program securities in newly
designated Subparagraph (3)(D) also restricts the availability of the
exclusion to members that are not affiliated with the direct
participation program. Where such an affiliation is present, the NASD
believes that substantial conflict of interest and regulatory concerns
continue to exist and the exclusion should not be made available.
\4\MIPS are preferred securities issued by a parent company's
subsidiary, which is structured as a limited partnership or limited
liability company. The subsidiary issues MIPS to investors and
invests the proceeds in convertible subordinated debentures of the
parent. Interest on the debentures of the parent are paid to the
subsidiary, which in turn pays the equivalent rate of interest to
MIPS holders in the form of dividends. MIPS are eligible to be
listed on a national securities exchange or The Nasdaq Stock Market
and have flow-through tax consequences for investors, which means
that they are considered direct participation programs and,
therefore, subject to Section 34.
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The NASD believes that recognizing the use of discretionary
authority for transactions in freely tradeable direct participation
program securities is consistent with 1986 amendments to Section 34
exempting freely tradeable participation program securities from the
suitability and disclosure requirements of Section 34. Such suitability
and disclosure requirements, which are necessary where direct
participation program securities lack liquidity and marketability, were
found to be unnecessary where a ready, liquid market exists.
Nothwithstanding the relief provided by the proposed rule from the
prohibition in Article III, Section 34 against discretionary
transactions in freely tradeable direct participation program
securities, such transactions would, however, remain subject to the
general discretionary account requirements contained in Article III,
Section 15 of the Rules of Fair Practice.
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act,\5\ which require that
the rules of the Association be designed to prevent fraudulent and
manipulative acts and promote just and equitable principles of trade,
in that the proposed rule change relieves members of their obligation
to comply with prohibitions against discretionary transactions in
direct participation program securities in situations which do not
present the regulatory concerns that the prohibitions were intended to
address, and provides for regulatory consistency in the treatment of
discretionary transactions in freely tradeable securities.
\5\15 U.S.C. 78o-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
Written comments were neither solicited nor received.
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
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 No. SR-NASD-95-21 and should
be submitted by June 28, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-13897 Filed 6-6-95; 8:45 am]
BILLING CODE 8010-01-M
