[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             
------------------------------------------------------------------------
$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.            
------------------------------------------------------------------------

    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