[Federal Register Volume 62, Number 10 (Wednesday, January 15, 1997)]
[Notices]
[Pages 2204-2210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-896]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38132; File No. SR-NASD-96-08]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval to Proposed Rule Change and 
Notice of Filing of, and Order Granting Accelerated Approval to, 
Amendment No. 1 to the Proposed Rule Change Relating to Quotation and 
Reporting Requirements of Direct Participation Programs

January 7, 1997.

I. Introduction

    On March 12, 1996, the National Association of Securities Dealers, 
Inc. (``NASD'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to permit the quotation of Direct 
Participation Programs (``DPPs'') on the OTC Bulletin Board Service 
(``OTCBB'' or ``OTC Bulletin Board'') and require all transactions in 
DPPs to be reported through the Automated Confirmation Transaction 
Service (``ACT'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on April 25, 1996.\3\ The Commission received seven comment 
letters concerning this proposal.\4\ The NASD initially responded to 
these comments in a letter dated October 16, 1996.\5\ On November 26, 
the NASD submitted Amendment No. 1 to the proposed rule change.\6\ 
After careful consideration of all of the comments, the Commission has 
decided to approve the proposal, including Amendment No. 1 on an 
accelerated basis.
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    \3\ Securities Exchange Act Release No. 37131 (Apr. 19, 1996), 
61 FR 18452.
    \4\ See letter from James Frith, Jr., President, Chicago 
Partnership Board, Inc. (``CPB''), to Jonathan G. Katz, Secretary, 
SEC, dated May 14, 1996 (``CPB Letter No. 1''); letter from James F. 
Fotenos, Attorney, Fotenos & Suttle, P.C., to Jonathan G. Katz, 
Secretary, SEC, dated May 22, 1996 (``Fotenos & Suttle Letter''); 
letter from James Frith, Jr., President, CPB, to Jonathan G. Katz, 
Secretary, SEC, dated June 10, 1996 (``CPB Letter No. 2) 
(concentrating primarily on the Qualified Matching Service Safe 
Harbor); letter from James Frith, Jr., President, CPB, to Jonathan 
G. Katz, Secretary, SEC, also dated June 10, 1996 (``CPB Letter No. 
3) (focusing on the NASD's standardized Distribution Allocation 
Agreement form); letter from George E. Hamilton, President, NAPEX, 
to Jonathan G. Katz, Secretary, SEC, dated June 10, 1996 (``NAPEX 
Letter''); letter from Gregory S. Paul, President, American 
Partnership Services (``APS''), to Jonathan G. Katz, Secretary, SEC, 
dated June 10, 1996 (``APS Letter''); letter from Laura J. Lacey, 
President, Nationwide Partnership Marketplace Inc. (``NPM''), to 
Jonathan G. Katz, Secretary, SEC, dated June 26, 1996 (``NPM 
Letter'').
    \5\ See letter from Joan Conley, Corporate Secretary, NASD, to 
Katherine A. England, Assistant Director, Division of Market 
Regulation, SEC, dated October 16, 1996 (``NASD Response'').
    \6\ See letter from Joan Conley, Corporate Secretary, NASD, to 
Katherine A. England, Assistant Director, Division of Market 
Regulation, SEC, dated November 26, 1996 (``Amendment No. 1''). 
Amendment No. 1 explained when a DPP trade needs to be reported, 
made technical corrections to the proposal so that it now conforms 
with the NASD Manual's new format, clarified the implementation 
schedule for these new rules, and extended the time period for 
Commission action.
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II. Background

    In response to findings by the NASD's Direct Participation Programs 
Committee (``DPP Committee'' or ``Committee'') and recently issued 
Internal Revenue Service (``IRS'') regulations, the NASD submitted a 
proposed rule change to permit the quotation of DPPs \7\ on the OTCBB 
by NASD members and, subject to a few exceptions, require that all 
transactions in DPPs be reported through ACT.
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    \7\ The NASD defines a DPP as a program that provides for flow-
through tax consequences regardless of the structure of the legal 
entity or vehicle for distribution including, but not limited to, 
oil and gas programs, real estate programs, agriculture programs, 
condominium securities, Subchapter S corporate offerings and all 
other programs similar in nature, regardless of the industry 
represented by the program, or any combination thereof. Excluded 
from the definition are real estate investment trusts, tax qualified 
pension and profit sharing plans pursuant to Sections 401 and 403(a) 
of the Internal Revenue Code and individual retirement plans under 
Section 408 of that code, tax sheltered annuities pursuant to 
Section 403(b) of the Internal Revenue Code, and any company 
including separate accounts, registered pursuant to the Investment 
Company Act of 1940. Proposed NASD Rule 6910(a); NASD Rule 
2810(a)(4).
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A. NASD Study of DPPs

    The NASD has contemplated the implementation of a system that 
facilitates the dissemination of information concerning DPPs for quite 
some time. In fact, the NASD began examining this issue as early as 
1980 when it solicited its members' opinions on this topic in the form 
of a voluntary questionnaire mailed to all of its members.\8\ The 
positive reaction to the questionnaire prompted the NASD to design the 
``Electronic Bulletin Board'' system, draft the necessary rules, and 
solicit comments from its members regarding these rules and ``the 
overall concept of such a system.'' \9\ The NASD received eighteen 
comment letters, most of which supported the concept.\10\ After 
considering these comments, the NASD filed a proposed rule change with 
the Commission on January 20, 1983.\11\ After notice of this proposed 
rule change was published by the Commission, additional comment letters 
were received.\12\ Subsequently, the NASD decided to further analyze 
the issues raised in the comment letters and withdrew the proposal on 
August 21, 1985.\13\
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    \8\ Dennis C. Hensley, A Study of the NASD ``Electronic Bulletin 
Board'' for Limited Partnerships in American Bar Association, 
Section of Corporation, Banking and Business Law, Committee on 
Partnerships and Unincorporated Business Organizations, Publicly 
Traded Limited Partnerships IV-25 (Aug. 2, 1983). Nearly 20% of the 
NASD membership responded. Id. of those members, 68% favored the 
development of such a system. Id. Among those members who dealt in 
DPPs, the percentage of those in favor of the idea rose to be over 
80%. Id.
    \9\ NASD Notice to Members 82-13.
    \10\ Although most of the concerns raised by the commenters were 
specific to that proposal, some of the comments focused on issues 
that are pertinent to the current rule proposal (e.g., potential tax 
law implications, appropriate level of general partner involvement, 
and costs). See File No. SR-NASD-83-1 (comment letters attached as 
Exhibit 2 to the Form 19b-4).
    \11\ File No. SR-NASD-83-1.
    \12\ Securities Exchange Act Release No. 19675A (May, 9, 1983), 
48 FR 21693 (publishing notice of File No. SR-NASD-83-1).
    \13\ Letter from Frank J. Wilson, then-Executive Vice President, 
Legal and Compliance, NASD, to Stuart J. Kaswell, then-Branch Chief, 
Over-the-Counter Regulation, SEC, dated August 20, 1985.
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    The NASD revisited this issue in 1990. At the direction of the DPP 
Committee, NASD staff undertook a study of the nature and operation of 
the secondary market for limited partnership securities.\14\ This study 
indicated that approximately $90 billion was invested in public DPPs in 
the 1970s and 1980s by more than ten million investors. The programs 
were organized to invest in a variety of

[[Page 2205]]

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 study 
found that a secondary market in DPP securities nevertheless had 
developed.\15\
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    \14\ See NASD Notice to Members 91-69 (``NTM-91-69'') 
(publishing the Committee's findings and noting that the primary 
concern of the study was to determine how the market currently 
operates, whether it functions efficiently, and whether NASD members 
are in compliance with the applicable securities laws and rules).
    \15\ The NASD estimated at the time that approximately two dozen 
participants acted as principal or agent for customers in a 
fragmented secondary market that, in the aggregate, transferred 
ownership of an estimated $250 to $300 million worth of limited 
partnership securities annually. Id.
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    In addition, the Committee found that some market participants were 
miscalculating markups, markdowns, spreads, and expenses in the DPP 
market; were making little effort to determine an investor's 
suitability to purchase DPP securities; had no knowledge as to the 
applicability of transaction reporting requirements; and were violating 
NASD rules concerning predatory pricing practices, best execution, and 
due diligence on behalf of customers.\16\ The Committee also found that 
some members were not complying with the requirement to file sales 
literature with the NASD and were improperly doing business with 
nonmember broker-dealers. In addition, some members were not properly 
disclosing expenses being charged in connection with the purchase or 
sale of a DPP, conflicts of interest the broker-dealer may have with a 
customer, and the basis on which the member was recommending the price 
at which the securities were being bought or sold.
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    \16\ See also William Power, Market for Limited Partnerships Is 
Rife with ``Predatory Pricing,'' NASD Finds, Wall St. J., Nov. 18, 
1991, at C1 (discussing the DPP Committee's findings).
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B. Tax Status of DPPs

    In formulating a response to the Committee's findings, the NASD was 
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 (``IRC'' or 
``Code'').\17\ This would lead to the unintended result of DPPs being 
treated as corporations for federal tax purposes.\18\ To assist 
partnerships wishing to avoid this result, the IRS issued regulations 
in December 1995 that clarified the circumstances under which interests 
in partnerships may be quoted without negatively affecting their tax 
status.\19\
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    \17\ 15 U.S.C. 1-9602.
    \18\ I.R.C. Section 7704(a) providing that a publicly traded 
partnership is treated as a corporation for federal tax purposes 
unless the partnership meets the 90% qualifying income test of 
Section 7704(c) or qualifies as an ``existing partnership'' as 
defined in Treas. Reg. Sec. 1.7704-2).
    \19\ See 60 FR 62026 (Dec. 4, 1995) (adopting Treas. Reg. 
Sec. 1.7704-1 and discussing the definition of a publicly traded 
partnership under Section 7704(b) of the Code).
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    For tax purposes, a publicly traded partnership is defined as a 
partnership whose interests are traded on an established securities 
market, a secondary securities market, or the substantial equivalent of 
a secondary market.\20\ An established securities market includes: 
national securities exchanges registered pursuant to Section 6 of the 
Act; national securities exchanges exempt from registration because of 
the limited volume of transactions conducted thereon; foreign 
securities exchanges; and interdealer quotation systems that regularly 
disseminate firm quotations by identified brokers or dealers by 
electronic means or otherwise.\21\ A secondary market or the 
substantial equivalent thereof is an entity or arrangement that, based 
on all of the facts and circumstances, readily permits partners to buy, 
sell, or exchange their partnership interests in a manner that is 
economically comparable to trading on an established securities 
market.\22\
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    \20\ I.R.C. Section 7704(b); Treas. Reg. Sec. 1.7704-1(a)(1).
    \21\ Treas. Reg. Sec. 1.7704-1(b).
    \22\  Id. Section 1.7704-(c)(1). For example, a partnership 
interest is readily tradable if it is regularly quoted by persons 
such as brokers or dealers who are making a market in the 
partnership interests; the holder of the partnership interest has a 
readily available and ongoing opportunity to sell or exchange the 
partnership interest through a public means of obtaining or 
providing information of offers to buy, sell, or exchange the 
partnership interest; or prospective buyers and sellers otherwise 
have the opportunity to buy, sell, or exchange the partnership 
interest in a time frame and with the requisite regularity and 
continuity described above. Id. Section 1.7704-1(c)(2).
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    The broad reach of this expansive definition is tempered by five 
nonexclusive safe harbor provisions.\23\ These safe harbors include 
transfers not involving trading (private transfers); \24\ redemption or 
repurchase agreements meeting certain requirements; \25\ transfers 
through a qualified matching service (``QMS''); \26\ certain private 
placement transactions; \27\ and a 2% de minimus rule.\28\ Transfers 
that qualify for one of the safe harbors are disregarded when 
determining whether interests in a partnership are readily tradable on 
a secondary market or substantial equivalent thereof.
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    \23\ Id. Section 1.7704-1(c)(3).
    \24\ Id. Section 17704-1(e) (listing transfers not involving 
trading). Among the types of transfers included on this list are 
transfers at death, including transfers from an estate or 
testamentary trust; transfers between members of a family; and 
transfers involving distributions from a qualified retirement plan 
or an individual retirement account.
    \25\ Id. Section 1.7704-1(f) (listing the necessary 
qualifications for a redemption or repurchase agreement).
    \26\ Id. Section 1.7704-1(g) (detailing the requirements that a 
QMS must abide by).
    \27\ Id. Section 1.7704-1(h) (exempting partnership interests 
issued pursuant to certain private placement transactions).
    \28\ Id. Section 1.7704-1(j). Under this safe harbor provision, 
there is no actual trading in a partnership's interests if the sum 
of the percentage interests in partnership capital or profits 
transferred during the taxable year of the partnership does not 
exceed 2% of the total interests in partnership capital or profits. 
Private transfers, transfers pursuant to redemption and repurchase 
agreements meeting the specified requirements, and transfers 
pursuant to a QMS are disregarded for purposes of applying the 2% 
rule.
    For partnerships that were actively engaged in an activity 
before December 4, 1995, this rule applies for taxable years 
beginning after December 31, 2005. Until then, these partnerships 
may continue to rely on Notice 88-75, 1988-2 C.B. 386, including its 
2%-5% safe harbor. This transitional relief expires, however, if the 
partnership adds a substantial new line of business within the 
meaning of Treas. Reg. Sec. 1.7704-2. Id. Sec. 1.7704-1(1)(2).
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III. Description of the Proposal

    The NASD believes the majority of DPP resale transactions are 
necessitated by 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 
procedures or a post-secondary education. From this, the NASD concludes 
that the inefficiencies of the fragmented secondary market for DPPs 
tend to disproportionately affect investors who need liquidity, rather 
than investors who are merely seeking liquidity.
    According to the NASD, the proposed changes to its rules concerning 
ACT and the OTCBB address this concern and the concerns raised in the 
DPP Committee's report. Moreover, the NASD believes the changes reflect 
the requirements contained in the IRS regulations so that the quotation 
of DPPs on the OTC Bulletin Board would not, by itself, have negative 
tax status consequences for the issuers or the holders of these 
securities.

A. Quotes on the OTC Bulletin Board

    Generally, the treatment of DPPs quoted on the OTC Bulletin Board 
will be similar to that of foreign securities and ADRs currently--no 
firm prices will be displayed. NASD members will be permitted to insert 
only nonfirm prices or unpriced indications of interest (``bid wanted'' 
or ``offer wanted'' and ``name only'' entries). These nonfirm prices or 
indications of interest will provide the

[[Page 2206]]

basis for the negotiations 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, if available, 
distribution information.
    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 Rule 15c2-11 will apply and, thus, firms generally will 
be required to submit Form 211 prior to initiating a quotation of a DPP 
on the OTC Bulletin Board, unless an exemption applies.\29\ Finally, 
there is no provision for any automatic executions of DPPs on the 
OTCBB.
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    \29\ See 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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B. ACT Trade Reporting

    Subject to certain limited exceptions,\30\ 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 on the 
OTCBB.\31\ Firms will report the transaction on ``T+1,'' \32\ designate 
it ``as of'' the previous day, and include the time of execution. 
Member firms that have the operational capability to report 
transactions within ninety seconds of execution, however, may do so. 
The NASD has prepared a symbol directory to facilitate transaction 
reporting in DPPs.
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    \30\ The proposed reporting requirements do not apply to (1) 
transactions made in reliance on Section 4(2) of the Securities Act 
of 1933, (2) transactions where the buyer and seller have agreed to 
trade at a price substantially unrelated to the current market for 
the DPP (e.g. gifts), or (3) transactions executed on a registered 
national securities exchange or through Nasdaq. See proposed NASD 
Rule 6920(g).
    \31\ Certain minor changes 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 as well.
    \32\ The date of the trade plus one.
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    The transactions will be reported through ACT for reporting 
purposes only.\33\ Thus, ACT will not be used to facilitate clearance 
and settlement of these securities notwithstanding the possibility that 
a particular DPP eligible for inclusion on the OTCBB also may be 
eligible for clearing with a clearing agency. Moreover, the OTCBB will 
not assist parties in completing the transfer documents and other forms 
necessary to clear and settle a transaction in a DPP security.
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    \33\ The NASD's understanding is that members who effect 
transactions in DPPs predominately act in the capacity of agent. For 
reporting purposes, the concepts of agency and principal have the 
same meaning as those terms are commonly used or understood, unless 
otherwise noted in proposed NASD Rule 6900.
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    The NASD recognizes that some member firms who participate in this 
market may not have the capability to report transactions through ACT. 
Members without direct access to ACT may report such transactions 
through the ACT Service Desk if the member averaged a limited number of 
transactions per day during the previous calendar quarter.\34\ 
Alternatively, such members may consider obtaining a computer-to-
computer interface (``CTCI'') or a Nasdaq Workstation.
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    \34\ As proposed, NASD Rule 6920 provides that a member may use 
the ACT Service Desk if it averaged five fewer trades per day during 
the previous calendar quarter. In calculating the average number of 
trades per day, transactions in any security must be included, not 
just transactions in DPPs.
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IV. Summary of Comments

    The Commission received seven comment letters concerning this 
proposal. Although the commenters discussed a number of different 
topics, their comments generally addressed one of two categories: tax 
issues and clearing issues. The NASD responded to these comments in 
letters dated October 16, 1996 and November 26, 1996.

A. Tax Issues

1. IRS Private Letter Ruling
    Several commenters noted that the NASD did not obtain a ruling from 
the IRS assuring the NASD that the proposal would not run afoul of 
Section 7704 of the IRC and the regulations promulgated thereunder.\35\ 
The commenters stated that this is particularly important in light of 
the fact that the NASD sought such a ruling from the IRS on a prior 
occasion concerning a similar five percent safe harbor as set forth in 
IRS Notice 88-75, 1988-2 C.B. 386. Without such a ruling, they claimed 
that the liquidity and efficiency of the market would be reduced.\36\ 
Therefore, the commenters maintained that, due to the importance of the 
proposal to the secondary market, its approval should be conditioned 
upon the NASD obtaining a favorable ruling from the IRS.
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    \35\ See Fotenos & Suttle Letter, supra note 4; CPB Letter No. 
2, supra note 4; APS Letter, supra note 4.
    \36\ See CPB Letter No. 2, supra note 4 (asserting that an IRS 
ruling is required to allow QMSs to participate in the OTCBB without 
affecting their status as a QMS); APS Letter, supra note 4 (claiming 
that certain general partners will use the absence of such a ruling 
as an excuse to restrict the trading of their DPPs).
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    In response, the NASD asserted that the IRS regulations were clear 
and unambiguous in that the inclusion of quotations on the OTCBB would 
not constitute an established securities market, a secondary securities 
market, or the substantial equivalent thereof and, therefore, a ruling 
from the IRS was not necessary to approve the proposal. Nevertheless, 
the NASD obtained a private letter ruling from the IRS to gain absolute 
certainty regarding the impact of this proposal on the tax status of 
DPPs. Specifically, the IRS ruled that: (1) the OTCBB is not an 
established securities market for purposes of Section 7704(b) of the 
IRC and Section 1.7704-1(b) of the Income Tax Regulations; (2) a 
partnership whose interests are displayed on the OTCBB will not be 
considered to be publicly traded solely by reason of being displayed on 
the OTCBB because the OTCBB undertakes to display partnership interests 
in compliance with Example 2 of Treasury Regulation 1.7704-1(j)(2); (3) 
such partnerships may rely on this ruling provided it is not revoked 
and the OTCBB continues to operate in a manner consistent with the 
facts represented; (4) calculations relating to qualification for any 
applicable safe harbor in Treasury Regulation 1.7704-1 or in IRS Notice 
88-75 remain the responsibility of the partnerships whose interests are 
traded and are not the responsibility of the NASD, The Nasdaq Stock 
Market Inc., NASD Regulation, Inc., or the OTCCBB; and (5) 
notwithstanding that the OTCBB does not meet the requirements to be a 
QMS under Treasury Regulation 1.7704-1(g), matching services eligible 
for participation in the OTCBB may utilize the OTCBB to display nonfirm 
prices and unpriced indications of interest without disqualifying 
themselves as a QMS, provided that they otherwise meet all of the 
requirements for a QMS under Treasury Regulation 1.7704-1(g).\37\ 
Compliance with the requirements for a QMS will be the sole 
responsibility of the matching service, not the NASD, The Nasdaq Stock 
Market, Inc., NASD Regulation, Inc., or the OTCBB.
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    \37\ See letter from William P. O'Shea, Chief, Branch 3, Office 
of the Assistant Chief Counsel, IRS, to Richard G. Ketchum, 
Executive Vice President and Chief Operating Officer, NASD, dated 
October 7, 1996 and attached as Exhibit 3 to the NASD Response 
(``IRS Ruling'').
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2. Procedural Safeguards
    One commenter requested that the NASD provide additional 
information concerning the procedures the NASD would employ to 
reasonably assure general partners that the DPP securities of the 
partnerships they manage would not afoul of the safe harbors in 
Treasury

[[Page 2207]]

Regulation 1.7704-01.\38\ The NASD addressed this comment by noting 
that virtually all partnership agreements require that general partners 
first approve all transfers of partnership interests and grant the 
general partner the authority to reject transfers that may jeopardize 
the tax status of the partnership. The NASD explained that the proposal 
would not affect the fiduciary responsibility currently born by general 
partners of ensuring the tax status of their DPPs. Thus, the monitoring 
of the safe harbor threshold levels would continue to be the 
responsibility of the general partners.\39\
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    \38\ See Fotenos & Suttle Letter, supra note 4.
    \39\ See Amendment No. 1 supra note 6; IRS Ruling, supra note 
37. To assist the general partners with such compliance, the NASD 
will make transaction reporting information available for a nominal 
fee.
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3. Qualified Matching Services
    One comment letter discussed the potential impact the proposal 
might have on the QMS safe harbor.\40\ The commenter alleged that a 
shadow of uncertainty would be cast on the status of QMSs that also 
wished to publish quotes on the OTCBB because the OTCBB was not a QMS. 
The commenter claimed that such dual participation would jeopardize the 
QMS status of those members. In order to protect their QMS safe harbor 
status, the commenter predicted that QMSs would not publish quotes on 
the OTCBB and thereby lead to further fragmentation of the DPP market. 
In addition, the commenter asserted that this uncertainty would 
disadvantage those firms that made the investment in becoming qualified 
as a QMS because some general partners will simply suspend all trading 
at the 2% level, regardless of who is involved in the trades. To avoid 
these problems, the commenter suggested that the NASD modify the rules 
of the OTCBB to accommodate different turnover levels and obtain a 
private letter ruling from the IRS that specified that publishing 
nonfirm quotes on the OTC Bulletin Board would not disqualify a system 
as a QMS.
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    \40\ See CPB Letter No. 2, supra note 4.
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    The NASD responded by noting that the proposal would have no effect 
whatsoever on the application of the QMS safe harbor because a QMS 
could maintain its status by simply complying with that safe harbor's 
requirements while utilizing the OTCBB.\41\ Moreover, the NASD asserted 
that QMSs may actually enjoy some advantages over non-QMS participants 
utilizing the OTCBB because QMSs could continue to utilize the OCTBB 
until the 10% QMS safe harbor level was reached, while other OCTBB 
participants will be effectively capped by the IRS regulations at the 
2% de minimis level.
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    \41\ See Amendment No. 1 supra note 6. See also IRS Ruling supra 
note 37.
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B. Clearing Issues

1. Timing of Trade Reports
    The commenters requested further guidance concerning the timing of 
DPP trade reporting.\42\ The commenters explained that transfers in the 
DPP secondary market differ significantly from transfers in other 
secondary securities markets in that these contracts are subject to a 
number of unique contingencies.\43\ These contingencies often cause 
significant delays in the transfer process. As a result, many 
``trades'' fail. Therefore, the commenters requested that the NASD 
reconsider when a trade takes place for ACT reporting purposes.
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    \42\ See Fotenos & Suttle Letter, supra note 4; NAPEX Letter, 
supra note 4.
    \43\ For example, transfers in the DPP secondary market are 
subject to the approval of the general partner(s), which often 
impose informational requirements. In addition, the prior consent of 
a state regulator may be required under certain circumstances. See 
Dudley Muth et al., Transferring Limited Partnership Interests, Real 
Est. Sec. J. Winter 1981, at 51 (detailing the transfer process of a 
DPP).
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    The NASD explained that an obligation to report a transaction in a 
DPP security is triggered on the day following the ``date of 
execution.'' \44\ Once an agreement to trade has been reached, the NASD 
expects the appropriate member to report the transaction. The NASD 
believes delaying the transaction report until a later date when the 
transfer actually occurs could mislead market participants and 
regulators who need to access the current value of a DPP.
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    \44\ See Amendment No. 1, supra note 6. Proposed NASD Rule 
6910(e) defines the ``date of execution'' as ``the date when the 
parties to a transaction in a DPP have agreed to all of the 
essential terms of the transaction, including the price and number 
of units to be traded.''
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    In addition, the NASD does not believe it is necessary for the 
reporting member to submit a correction or fail to notice if a transfer 
does not take place after a transaction is reported. The NASD 
maintained that the subsequent events that may impair the process of 
transferring a DPP do not negate the circumstances surrounding the 
events that initially gave rise to the intent to trade the security.
2. OTC Bulletin Board Symbols
    The commenters questioned the ability of the NASD's current six 
digit symbol format to sufficiently service all of the DPPs in 
existence, inquired whether it would be necessary to report a DPP 
transaction through ACT if a NASD symbol did not exist, and requestd 
that the NASD provide a symbol directory at least sixty days prior to 
the final implementation of this proposal so that NASD members would 
have ample time to input this information into their computer 
systems.\45\
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    \45\ See CPB Letter No. 1, supra note 4; NAPEX Letter, supra 
note 4.
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    In response to these comments, the NASD assured the Commission that 
it will announce the effective date of the proposed rule change in a 
Notice to Members no later than forty-five days following commission 
approval of the proposed rule change and, in no event, will that 
effective date be sooner than forty-five days after Commission approval 
of the proposal.\46\
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    \46\ See Amendment No. 1, supra note 6. The NASD also indicated 
that the effective date will be no later than 90 days following the 
publication of that Notice to Members. should this schedule need to 
be revised, the NASD stated that it will immediately notify the 
Commission.
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3. Associated Costs
    One commenter asserted that the proposal would increase its costs 
and reduce its allowable compensation.\47\ The commenter attributed the 
increase in costs to the proposal's reporting requirement, the need for 
additional equipment, and reduced spreads.
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    \47\ See NAPEX Letter, supra note 4.
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4. Standardized Transfer Forms
    Several commenters contended that the NASD's standardized transfer 
forms, including the standardized distribution allocation agreement, 
contain flaws that render them useless.\48\ The commenters maintained 
that distribution terms are extremely material to the quoted price and, 
therefore, quotations on the OTC Bulletin Board should not be allowed 
until this matter is resolved.
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    \48\ See CPB Letter No. 3, supra note 4; NAPEX Letter, supra 
note 4; APS Letter, supra note 4. For example, one commenter 
asserted that it is often necessary to prepare two sets of transfer 
documents to effect transactions because many general partners 
refuse to honor the NASD's forms. NAPEX Letter, supra note 4.
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    In response, the NASD emphasized the importance of the standardized 
forms, but also acknowledged the difficulty of bringing total 
uniformity to every transfer in this market.\49\ As a result, the NASD 
has filed a proposed amendment to NASD Rule 11580 that would permit 
members to modify the forms after receiving authorization from NASD 
Regulation staff.\50\
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    \49\ NASD Response, supra note 5.
    \50\ See Securities Exchange Act Release No. 38042 (Dec. 11, 
1996), 61 FR 66339 (publishing notice of File No. SR-NASD-96-42). 
Currently, NASD Rule 11580 does not allow NASD members to modify the 
NASD's standardized forms concerning limited partnership interests.

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[[Page 2208]]

V. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirement of the Act and the rules and regulations 
thereunder applicable to a national securities association. 
Specifically, the Commission believes the proposed rule change is 
consistent with Section 15A(b)(6) \51\ because it is designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts, to perfect the mechanism of a free and open 
market, and, in general, to protect investors and the public interest. 
In making this finding, the Commission notes that the proposal should 
promote more efficient regulation of the DPP market, as well as enhance 
transparency, liquidity, and competition in that market.\52\ The 
Commission also believes the proposed rule change is consistent with 
Section 15A(b)(2) \53\ because it improves the NASD's ability to 
regulate the DPP market by increasing its surveillance 
capabilities.\54\
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    \51\ 15 U.S.C. 78O-3(b)(6).
    \52\ 15 U.S.C. 78c(f) (as added by the ``National Securities 
Markets Improvement Act of 1996'').
    \53\ 15 U.S.C. 78O-3(b)(2).
    \54\ The Commission notes that the proposal also promotes many 
of the same policy considerations Congress found appropriate for the 
development of the National Market System. For example, the proposal 
should improve the efficiency of DPP market operations, broaden the 
distribution of market information, enhance the NASD's market 
oversight capabilities, and foster competition among market 
participants through the use of new data processing and 
communications techniques. See 15 U.S.C. 78k-1(a)(1).
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    During the 1980s, over $150 billion of public limited partnership 
interests were sold to approximately eleven million U.S. investors, 
most of whom were retail investors with an average investment of ten 
thousand dollars.\55\ Investors usually purchased these securities with 
the understanding that they were long-term, illiquid investments to be 
held until the holding period expired and the partnership was 
liquidated.\56\ The holding period of many of these securities, 
however, had to be extended beyond the originally anticipated five to 
ten year holding period due to weakness in the underlying value of many 
partnership assets. This extended holding period has contributed to the 
development of a viable secondary market for DPP securities.\57\ Given 
the size and nature of this market, it is important that it operate 
efficiently and fairly. In this regard, the proposal represents a 
positive, evolutionary change in the DDP market.\58\ It increases 
transparency without adversely affecting the tax status of the quoted 
securities or inhibiting the clearance and settlement process.
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    \55\ Senate Comm. on Banking, Housing, and Urban Affairs, 
Limited Partnership Rollup Reform Act of 1993, S. Rep. No. 121. 103d 
Cong., 1st Sess., 4 (1993). See also Deborah A. DeMott, Rollups of 
Limited Partnerships: Questions of Regulation and Fairness, 70 Wash. 
U. L.Q. 617 (1992) in Limited Partnerships: Hearings on H.R. 617 
Before the Subcomm. on Telecommunications and Finance of the House 
Committee on Energy and Commerce, 103d Cong., 1st Sess., 114-15 
(1993) (classifying the limited partnership interests sold by 
broker-dealers as an overwhelmingly ``retail'' product because 8 
million of the 11 million purchasers of these securities were 
individual investors).
    \56\ House Comm. on Energy and Commerce, Limited Partnership 
Rollup Reform Act of 1993, H.R. Rep. No. 21, 103 Cong., 1st Sess., 7 
(1993); Securities Exchange Act Release No. 29883 (Oct. 30, 1991), 
56 FR 57237 (adopting rules intended to enhance the quality of 
information provided to investors in connection with transactions 
involving rollups of limited partnerships). See also C. David Chase, 
Mugged on Wall Street 195 (1987) (espousing the author's personal 
opinion that it is easier to divorce one's spouse than to separate 
from a partnership).
    \57\ The longer the holding period, the more likely an event 
requiring a limited partner to sell his interest will occur (e.g., 
death, liquidation of an IRA account, divorce, or an extraordinary 
expense such as a major medical procedure or post-secondary 
education). See also NASD Response, supra note 5 (asserting that, in 
the aggregate, this market transfers an estimated $250 to $300 
million worth of DPP securities annually).
    \58\ One commenter suggested that the Commission delay its 
consideration of the proposed rule change until it had rendered a 
decision regarding two pending NASD petitions for rulemaking. See 
NPM Letter, supra note 4 (discussing the NASD's pending rulemaking 
petitions concerning the applicability of Rules 10b-17, 17Ad-2, 
17Ad-3, 17Ad-4, and 17Ad-6 to the DPP market). The NASD withdrew its 
request concerning the modification of SEC transfer agent rules 
under Section 17A of the Act on December 23, 1996. See letter from 
Suzanne E. Rothwell, Associate General Counsel, NASD Regulation, 
Inc., to Jonathan G. Katz, Secretary, SEC, dated December 20, 1996 
(File No. 4-387) Although the pending rulemaking petition addresses 
important issues, the Commission believes the issues presented in 
the proposed rule change may be addressed independently of those 
matters.
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A. Benefits of the Proposal

    By increasing transparency, the proposed rule change should enhance 
investor protection and increase the actual and perceived fairness of 
the DPP market. The proposal should benefit investors by improving 
their ability to secure better prices in DPP transactions and by making 
it easier for them to monitor the quality of executions they receive 
from their intermediaries. Moreover, the increased transparency should 
assist regulators by expanding their market oversight capabilities and 
their ability to monitor member handling of DPP transactions and 
markups. Finally, the increased transparency should assist NASD members 
to fulfill their regulatory responsibilities and help prevent 
overreaching by certain members of other, previously less informed 
members.
    In addition, the proposal should promote liquidity in the DPP 
market by encouraging greater investor participation.\59\ For example, 
a more transparent market can reduce trading costs by decreasing 
spreads and, as noted previously, facilitate the investors' ability to 
monitor the quality of executions they receive. This should foster 
investor confidence in the DPP market and, as a result, investors 
should be more willing to participate.\60\ This increased participation 
should elevate the level of liquidity in the DPP market.\61\
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    \59\ See Securities Exchange Act Release No. 37619A, 61 FR 48289 
n.58, n.122 (Sept. 12, 1996) (adopting the ``Order Execution 
Obligation Rules'' and noting that past Commission enhancements to 
transparency have resulted in improved liquidity). One commenter 
claimed that the proposal will harm liquidity because it will reduce 
spreads which, in turn, will decrease members' compensation and, 
ultimately, cause market participants to reevaluate the services 
that they wish to provide. NAPEX Letter, supra note 4. The 
Commission recently addressed a similar concern in connection with 
its adoption of the Order Execution Obligation Rules. By mandating 
the display of customer limit orders under most circumstances, the 
Commission recognized that increased transparency may reduce market 
maker profits through the narrowing of spreads and, as a result, may 
force less efficient competitors to stop making markets in some of 
the securities that they then quoted. Nevertheless, the Commission 
did not believe the Order Execution Obligation Rules would have a 
significant negative impact on the market because customers are the 
ultimate source of liquidity for the markets. Order Execution 
Obligation Rules, supra note 59, at n.118. See also ``Why Protect 
Investors?'' Remarks by SEC Chairman Arthur Levitt Before the 
Commonwealth Club, San Francisco, California (May 17, 1996) 
available on SEC World Wide Web site at ``www.sec.gov/news/
spchindx.htm#chair'' (noting that a market can exist without 
brokers, but it cannot exist without investors). Similarly, the 
Commission believes the proposal's benefits of increased investor 
protection, elevated liquidity, and improved efficiency outweigh its 
associated costs, including the potential loss of liquidity provided 
by market makers.
    \60\ One commenter expressed concern that approval of the 
proposal will cause the volume of DPP transactions to explode and 
unduly exacerbate certain clearance and settlement issues that 
currently exist in this market. See NPM Letter, supra note 4. So 
also Muth et al., supra note 43 (detailing the complicated clearance 
and settlement process). The Commission disagrees. Although more 
investors, traders, and dealers may be willing to participate in a 
fairer, more transparent, more competitive DPP market, any potential 
increase in the volume of transactions that may occur in this market 
is limited by the applicable IRC provisions and the rules and 
regulations promulgated thereunder. Furthermore, this inhibition on 
volume should prevent these long-term investments from being 
converted into short-term speculative securities and minimize any 
potential effect on the primary market for DPPs.
    \61\ SEC, Division of Market Regulation, Market 2000: An 
Examination of Current Equity Market Developments IV-3 (Jan. 1994) 
(``Market 2000 Study''); Securities Exchange Act Release No. 37273 
(June 4, 1996), 61 FR 29438 (noting that the depth and liquidity of 
any particular security is dependent on numerous variables, 
including the degree of customer buying and selling interest in the 
security and the quality and capitalization of the issuer).

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[[Page 2209]]

    The proposal also fosters market efficiency by helping unite the 
extremely fragmented DPP market. The current structure of this market 
requires the DPP securities be traded ``in the dark'' (i.e., with 
little or not transparency for those trades). This prevents investors 
from assessing the overall supply and demand for a particular DPP 
security and, consequently, hampers their ability to determine that 
security's optimal price. Furthermore, this opaque trading makes price 
competition difficult and inefficient.\62\
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    \62\ American Bar Association, Committee on Partnerships and 
Unincorporated Business Organizations, Publicly Traded Limited 
Partnership, 39 Bus. Law. 717-18 (1984) (explaining that secondary 
sales of limited partnership often result in a ``haphazard search'' 
to find a buyer for the unit).
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    The proposal addresses both of these inefficiencies. First, by 
requiring that all transactions in DPP securities be reported through 
ACT \63\ and permitting quotes and market information to be 
disseminated via the OTC Bulletin Board, the proposal provides 
investors with valuable information that enhances their ability to 
accurately determine the current value of a DPP, discern the direction 
of recent trading activity, and determine whether significant trading 
is occurring between, or outside of, the displayed nonfirm quotes. 
Second, the proposed rule change fosters price competition in this 
market \64\ because pricing information will be more readily 
available.\65\
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    \63\ See supra note 30 (listing the limited exemptions from the 
reporting requirement).
    \64\ One commenter asserted that utilizing nonfirm quotes and 
unpriced indications of interest will encourage market participants 
to place unrealistic bids to attract sellers. See NAPEX Letter, 
supra note 4. This assertion, however, overlooks at least three 
policing mechanisms inherent in a competitive market.
    First, the existence of other quotes limit the ability of a 
market participant to place an unrealistic quote to attract interest 
and then move away form this quote once negotiations begin. Assume, 
for example A, B, and C each place a bid on the OTCBB for a 
particular DPP at $1050, $1025, and $1000 respectively. Naturally, a 
prospective seller would begin negotiating with the most favorable 
bidder, in this case A. If A attempts to reduce its bid lower than 
$1025, A risks losing the transaction because A does not know B's 
intentions--B may be willing to pay $1025.
    Second, members are under a duty to provide their customers with 
best execution as to price. NTM-91-69 points out that this requires 
a member to obtain quotations from at least three dealers to 
determine the best interdealer market price for a non-Nasdaq 
security. For example, if W, X, Y, and Z each place a bid on the 
OTCBB for a particular DPP at $1050, $1025, $1000, and $975 
respectively, the seller's broker would contact, at a minimum, W, X, 
and Y. If W, X, and Y are only willing to trade at prices below Z's 
bid, the broker should contact Z as well.
    Third, the Commission notes that NASD Rule 3310 prohibits 
members from publishing any quotation for any security without 
having reasonable cause to believe that such quotation is a bona 
fide quotation and is not published for any deceptive or 
manipulative purpose.
    \65\ This information will be accessible from almost 6,000 
Nasdaq Workstations and an additional 290,000 market data vendor 
terminals. NASD Repsonse, supra note 5.
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    In sum, the increased transparency should reduce the effects of 
fragmentation and encourage competition.\66\ Thus, the Commission 
believes that proposal's benefits of increased transparency for the DPP 
market outweigh its potential costs.\67\
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    \66\ Market 2000 Study, supra note 61, at IV-1.
    \67\ One commenter claimed that the reporting requirement would 
increase members' costs by requiring them to procure additional 
equipment. See NAPEX Letter, supra note 4. The Commission does not 
believe the proposal will have a significant impact on the NASD's 
membership as a whole because this justifiable cost will be limited 
to a relatively small group of members. Cf. NTM-91-69, supra note 14 
(finding that the DPP market was consisted primarily of two dozen 
participants acting as principal or agent); CPB Letter No. 2, supra 
note 4 (claiming to have effectuated one-third of all transactions 
reported to independent sources since 1992); NASD Response, supra 
note 5 (noting that the NASD interviewed all identifiable 
participants in the secondary market for DPPs). Moreover, the 
Commission notes that members that average five or fewer trades per 
day for the previous calendar quarter will not need to acquire any 
additional equipment because they may utilize the ACT Service Desk 
to report their trades. Proposed NASD Rule 6920. Thus, of this 
already limited group, only active members who do not already 
possess the necessary equipment will be affected. See also supra 
note 59 and accompanying text (discussing the costs associated with 
increased transparency).
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B. Tax Issues

    Although most of the commenters' concerns \68\ are explicitly 
addressed in Treasury Regulation 1.7704-1,\69\ the NASD obtained a 
private letter ruling that, among other things, specifically addresses 
each of their tax concerns.\70\ In that ruling, the IRS explained that 
(1) the OTCBB is not an established securities market, a secondary 
securities market, or the substantial equivalent thereof and (2) the 
calculations relating to qualification for any applicable safe harbor 
in Treasury Regulation 1.7704-1 or IRS Notice 88-75 are the sole 
responsibility of the partnerships whose interests are traded.\71\ 
Thus, there is no need for the NASD to make any additional 
modifications to the OTCBB.\72\
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    \68\ As noted above, the commenters raised several concerns 
regarding the potential tax implications they believed the proposed 
rule change could have. Specifically, the commenters requested that: 
(1) the NASD obtain a private letter ruling from the IRS stating 
that the inclusion of a DPP on the OTCBB would not, by itself, 
transform that DPP into a publicly traded partnership; (2) the NASD 
detail what procedural protections were going to exist to ensure 
that the IRS safe harbor provisions were not exceeded; and (3) the 
NASD consider the potential impact the proposal could have on QMSs.
    \69\ See Treas. Reg. Sec. 1.7704-1(j)(2) (setting forth in 
Example 2 a hypothetical situation that is virtually identical to 
the NASD's proposed rule change).
    \70\ IRS Ruling, supra note 37.
    \71\ IRS Ruling, supra note 37.
    \72\ Nevertheless, the NASD has indicated that it will assist 
general partners by making transaction data available to them for a 
nominal fee. The Commission notes, however, that the NASD's rules 
currently do not contain the formula by which such charges will be 
calculated. Therefore, the NASD must submit a proposed rule change 
to the Commission pursuant to Section 19 of the Act before charging 
such a fee. Moreover, given that this fee will be imposed on non-
NASD members, it must be submitted for full notice and comment 
because it does not qualify for immediate effectiveness pursuant to 
Section 19(b)(3)(A) of the Act. See 15 U.S.C. 78s(b); Securities 
Exchange Act Release No. 35123 (Dec. 20, 1994), 59 FR 66692 
(amending Rule 19b-4 and stating that, as a matter of general 
policy, a proposed rule change that establishes or changes a fee 
applicable to nonmembers must be filed under Section 19(b)(2) of the 
Act for full notice and comment).
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    The IRS also clarified that a QMS may utilize the OTCBB without 
jeopardizing its status as a QMS, as long as the QMS continues to 
comply with all of the applicable safe harbor provisions.\73\ Hence, a 
member that has made the capital investment to become a QMS may enjoy 
an advantage over those members that are not a QMS because the IRS 
regulations permit QMSs to facilitate transactions until the 10% QMS 
safe harbor threshold is met, while members relying on the de minimis 
safe harbor are capped at 2%.\74\ This advantage should promote 
competition and increase the market's liquidity by encouraging other 
NASD members to become QMSs.
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    \73\ IRS Ruling, supra note 37.
    \74\ Certain transactions, such as those not involving trading, 
are not subject to a strict, predetermined cap. See supra notes 23 
to 28 and accompanying text (providing a general explanation of the 
IRS safe harbor provisions).
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C. Clearing Issues

1. Trade Reporting
    Notwithstanding the unique contingencies that exist in a DPP 
transaction, the Commission believes it is appropriate for the NASD to 
require its members to report transactions in DPP securities as soon as 
an agreement to trade has been reached. By reporting transactions by 
T+1, the member will be reporting the current trading interest in a 
particular DPP. If the reporting requirement were postponed until the 
date the transfer actually takes place, investors would be receiving 
information that was several weeks, or possibly months, old. The 
usefulness of such information to parties attempting to ascertain the 
current value of a DPP

[[Page 2210]]

is minimal when compared to information reported by T+1. Moreover, 
reporting a trade when the agreement occurs, rather than waiting until 
the transfer actually takes place, is consistent with current industry 
practice for other securities.
    The Commission also does not believe it is necessary for members to 
submit a notice at a later date if a trade fails due to the unique 
post-trade contingencies that exist in the DPP market.\75\ Ultimately, 
the price of a security is determined by two factors: the amount of 
money a buyer is willing to spend to acquire a certain amount of a 
particular security and the amount of money a seller is willing to 
accept to sell the same amount of that security. It is this information 
that investors value the most. The fact that a transaction fails at a 
later date because a general partner refuses to acknowledge the trade 
does not disparage the quality of the previously reported information 
concerning current market interest.\76\
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    \75\ Of course, members must correct inaccurate trade reports. 
For example, a member must correct a trade reported at $680 if, in 
fact, the trade price was $860.
    \76\ The Commission assumes that the parties are bargaining in 
good faith when they reach an agreement that is subsequently 
reported through ACT. Cf. NASD Rule 3310 (prohibiting members from 
publishing the notice of a purchase or sale of any security without 
having reasonable cause to believe that such transaction was a bona 
fide purchase or sale).
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2. Implementation
    The Commission believes the NASD's implementation plan adequately 
addresses the commenters' concerns. The NASD intends to announce the 
effective date of the proposed rule change in a Notice to Members 
within forty-five days following the date of this order. This effective 
date will be no later than 90 days following the publication of that 
Notice to Members but, in no event, will the effective date be sooner 
than forty-five days after the date of this order.\77\ This 
implementation schedule should provide the NASD's members with ample 
time to procure any necessary equipment and enter any essential data 
into their computer systems.
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    \77\ Amendment No. 1, supra note 6.
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    To facilitate transaction reporting, the NASD has compiled a 
comprehensive list of symbols that will be utilized by members when 
reporting a transaction through ACT.\78\ If a symbol does not exist for 
a particular DPP, a member simply calls the ACT Service Desk before 
reporting the transaction, and a symbol will be assigned.\79\
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    \78\ This list will automatically be incorporated into the 
Nasdaq Workstation's on-line symbols directory when the proposed 
rule change becomes effective. If members would like a copy of this 
list prior to the proposal's implementation, however, they simply 
have to contact the Nasdaq Market Operations staff in Trumbull, 
Connecticut, and an electronic or paper copy will be provided.
    \79\ The Commission believes the current six digit format is 
sufficient to service the DPP market. Contra NAPEX Letter, supra 
note 4. After polling the major market participants, the NASD 
represented that it anticipates approximately 2,000 DPP securities 
to be quoted on the OTCBB. Telephone conversation between Andrew S. 
Margolin, Senior Attorney, The Nasdaq Stock Market, Inc., and 
Anthony P. Pecora, Attorney, Division of Market Regulation, SEC 
(Jan. 3, 1996). Notwithstanding that the NASD intends to utilize the 
prefixes of ``xx,'' ``yy,'' and ``zz'' to indicate DPP securities, 
the remaining four digits still provide ample capacity because a 
surplus of approximately 86,000 symbols will exist to accommodate 
unanticipated or new DPP securities. In addition, the Commission 
does not believe the expense associated with mandating an entirely 
new, expanded symbol format to ensure the symbols assigned clearly 
indicate the issuer of a particular DPP outweighs the potential 
benefits such a convenience would confer upon NASD members.
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D. Amendment No. 1

    The Commission finds good cause for approving Amendment No. 1 prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register. Amendment No. 1 simply updates the proposal's 
internal citations to conform with the new rule numbering system that 
was implemented by the NASD after it filed SR-NASD-96-08 with the 
Commission. Therefore, the Commission believes that granting 
accelerated approval to Amendment No. 1 is appropriate and consistent 
with Section 15A and Section 19(b)(2) of the Act.\80\
---------------------------------------------------------------------------

    \80\ 15 U.S.C. 70o-3, 78s(b)(2).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1 to the proposed rule change. 
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 rules 
change that are filed with the Commission, and all written 
communications relating to Amendment No. 1 between the Commission and 
any persons, 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 in the Commission's Public Reference Room. 
Copies of such filing will also be available at the principal office of 
the NASD. All submissions should refer to File No. SR-NASD-96-08 and 
should be submitted by February 5, 1997.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\81\ that the proposed rule change (SR-NASD-96-08) is approved, 
including Amendment No. 1 on an accelerated basis.

    \81\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\82\
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    \82\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-896 Filed 1-14-97; 8:45 am]
BILLING CODE 8010-01-M