[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