[Federal Register Volume 59, Number 198 (Friday, October 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25478]


[[Page Unknown]]

[Federal Register: October 14, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34803; File No. SR-NASD-93-03]

 

Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to Receipt 
of Differential Compensation in Connection With Limited Partnership 
Rollup Transactions Under Article III, Section 34 of the Rules of Fair 
Practice

October 7, 1994.
    On August 26, 1994,\1\ The National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') a proposed rule 
change pursuant to Section 19(b)(1)\2\ of the Securities Exchange Act 
of 1934 (``Act''), and Rule 19b-4 thereunder.\3\
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    \1\The proposal was amended nine times subsequent to its initial 
filing on February 3, 1993. Amendment No. 1, filed on April 14, 
1993, superseded the original rule filing. Amendment No. 2, filed on 
May 7, 1993, amended the rule language and the NASD's Statement of 
Purpose in response to comments of the Commission staff. Amendment 
Nos. 3 and 4, filed on May 13 and 14, 1993, made technical changes 
to the rule. Notice of the proposed rule change (Securities Exchange 
Act Release No. 32312, May 17, 1993) was then published in the 
Federal Register (58 FR 29655, May 21, 1993). Amendment No. 5, filed 
on August 26, 1993, made technical changes to the rule text and 
responded to the comment letters that the Commission received in 
response to the publication of the release in the Federal Register. 
Amendment No. 6, filed on October 21, 1993, made changes to the rule 
text to address issues of state law addressed in comment letters. 
Amendment No. 7, filed on April 14, 1994, amended the rule language 
to partially conform the rule to the Limited Partnership Rollup 
Reform Act of 1993 (``Rollup Reform Act''), enacted on December 17, 
1993, and proposed to narrow the scope of transactions in which 
members were forbidden to receive differential compensation. 
Amendment No. 8, filed on July 27, 1994, amended the rule language 
to conform the rule to the Rollup Reform Act in all relevant parts 
and reordered the text of the proposed rule change in accordance 
with Section 34 of the Rules of Fair Practice. Amendment No. 9, 
filed on August 26, 1994, was a minor technical amendment, the text 
of which may be examined in the Commission's Public Reference Room. 
See Letter from Suzanne E. Rothwell, Associate General Counsel, 
NASD, to Mark P. Barracca, Branch Chief, Over-the-Counter 
Regulation, SEC (August 26, 1994).
    \2\15 U.S.C. 72s(b)(1) (1988).
    \3\17 CFR 19b-4 (1993).
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    The proposed rule change amends Article III, Section 34(b)(6) to 
narrow the scope of transactions in which members are forbidden to 
receive differential compensation (``Differential Compensation 
Amendment''). The Differential Compensation Amendment amends Subsection 
(b)(6) to limit the scope of the prohibition upon receipt of 
differential compensation to transactions constituting ``limited 
partnership rollup transactions'' instead of transactions constituting 
``rollup of direct participation programs'' (``DPP Rollups'').
    Notice of the Differential Compensation Amendment, together with 
the substance of the proposal, was provided by the issuance of a 
Commission release (Securities Exchange Act Release No. 34533, Aug. 15, 
1994) and by publication in the Federal Register (59 FR 43147, Aug. 22, 
1994).\4\ No comment letters were received in response to the 
Commission release. This order approves the Differential Compensation 
Amendment.
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    \4\The proposed rule change amended Article III, Section 34 of 
the Rules of Fair Practice to include rules which prevent NASD 
members or persons associated with an NASD member from participating 
in any ``limited partnership rollup transaction'' (as defined in the 
proposed rule change) unless the transaction includes certain 
specified provisions designed to protect the rights of limited 
partners and Schedule D of the By-Laws (``Schedule D'') to prohibit 
the authorization for quotation on the Nasdaq National Market 
(``Nasdaq/NM'') of any security which results from a covered 
partnership rollup transaction unless the transaction was conducted 
in accordance with certain specified procedures designed to protect 
the rights of dissenting limited partners. The release approved 
these amendments.
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    Congress began to focus on investor protection, fairness and 
disclosure issues related to rollup transactions in 1990. One of the 
early abuses on which Congress focussed was payment of compensation to 
soliciting broker-dealers only when an investor voted in favor of a 
rollup transaction. Since 1991, the rules of the NASD have forbidden 
members from accepting compensation based upon the result of a DPP 
Rollup solicitation.\5\ However, Congressional testimony indicated 
concern that general partners would skirt the NASD's prohibition by 
using non-members to solicit proxies or tenders.\6\
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    \5\See Securities Exchange Act Release No. 29582 (Aug. 19, 
1991), 56 FR 42095 (Aug. 26, 1991) (approving SR-NASD-91-24). 
Section 34(a)(2) defines ``direct participation program'' as ``a 
program which provides for flow-through tax consequences regardless 
of the structure of the legal entity or vehicle for distribution. . 
. .'' (emphasis added). By contrast, new Subsection (b)(2)(B)(vi) 
defines ``limited partnership'' as a DPP organized as a limited 
partnership (emphasis added).
    \6\S. Rep. No. 121, 103d Cong., 1st Sess. (1993) at 7-8 
(``Senate Report'').
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    The Rollup Reform Act was enacted on December 17, 1993, as part of 
the Government Securities Act Amendments of 1993. The Rollup Reform Act 
prohibits, among other things, the compensation of a person soliciting 
proxies, consents or authorizations in connection with a limited 
partnership rollup transaction on the basis of whether or not the 
solicited proxy, consent or authorization either approves or 
disapproves the proposed transaction, or is contingent on approval, 
disapproval or completion of the transaction.\7\ The Rollup Reform 
Act's prohibition applies to a smaller universe of transactions than 
does current Subsection 34(b)(6) because Subsection (b)(6) applies to 
``direct participation programs'' rather than ``limited partnerships'' 
and does not include all of the exclusions that are available from the 
``limited partnership rollup transaction'' definition contained in the 
Rollup Reform Act.
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    \7\15 U.S.C. 78n(h)(1)(C).
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    The legislative history of the Rollup Reform Act indicates that 
Congress intended to ensure that NASD members and non-members 
soliciting proxies, consents or authorizations in connection with a 
limited partnership rollup transaction were prohibited from receiving 
compensation on the basis of whether the solicited proxy, consent or 
authorization either approves or disapproves the proposed transaction, 
or is contingent on approval, disapproval or completion of the 
transaction.\8\ The Commission recently proposed Rules 14a-15 
(pertaining to proxy solicitations) and 14e-7 (pertaining to tender 
offers) under the Act to implement the Rollup Reform Act's prohibition 
of the receipt of differential compensation by any solicitor, 
regardless of NASD membership.\9\
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    \8\Senate Report, supra n. 7., at 12: NASD rules implemented in 
1991 prohibit NASD members from accepting compensation based upon 
the outcome of a transaction. This section closes a potential gap in 
coverage by applying this prohibition to nonmember proxy solicitors 
as well.
    \9\See Securities Act Release No. 7090 (Sept. 1, 1994), 59 FR 
46365 (Sept. 8, 1994).
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    It is clear that Congress did not intend to legislate a situation 
in which NASD members were precluded from receiving differential 
compensation in connection with a particular transaction while non-
members were permitted to receive differential compensation in the 
context of the same transaction. Therefore, the NASD is amended 
Subsections (b)(6) (A) and (B) by replacing the special rollup 
definition in those Subsections with the definition of ``limited 
partnership rollup transaction'' and by substituting the term ``limited 
partnership rollup transaction'' wherever the term ``rollup of a direct 
participation program'' currently appears. The NASD notes that the 
result of this amendment would be to limit the scope of these 
Subsections as they would no longer be applicable to almost every DPP 
rollup, but only to those transactions in which non-member solicitors 
also would be prohibited from receiving differential compensation.
    The Commission finds that the Differential Compensation Amendment 
is consistent with the provisions of Section 15A(b)(6)\10\ of the Act, 
which require, in pertinent part, that the rules of a registered 
securities association be designed to prevent fraudulent and 
manipulative acts, promote just and equitable principles of trade, and 
protect investors and the public interest. In addition, the Commission 
finds that the Differential Compensation Amendment is consistent with 
the provisions of Section 15A(b)(12)\11\ of the Act, which, effective 
December 17, 1994, will require the rules of a registered securities 
association to include rules to prevent members of the association from 
participating in any limited partnership rollup transaction that does 
not provide procedures to protect certain specified rights of limited 
partners. The proposed rule change will ensure that members and non-
members face identical prohibitions with respect to the receipt of 
differential compensation while continuing to prohibit members from 
receiving differential compensation in those categories of transactions 
identified by Congress as harming investors, undermining investor 
confidence and threatening capital formation.\12\
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    \10\15 U.S.C. 78o-3(b)(6).
    \11\15 U.S.C. 78o-3(b)(12).
    \12\Senate Report, supra n. 7, at 9.
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    It Is Therefore Ordered, pursuant to Section 19(b)(2)\13\ of the 
Exchange Act, that the proposed rule change, SR-NASD-93-3 be, and 
hereby is approved.

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    \13\15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25478 Filed 10-13-94; 8:45 am]
BILLING CODE 8010-01-M