[Federal Register Volume 65, Number 81 (Wednesday, April 26, 2000)]
[Notices]
[Pages 24523-24528]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-10257]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42698; File No. SR-NASD-00-13]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to the Valuation of Illiquid Direct Participation Program and Real 
Estate Investment Trust Securities on Customer Account Statements

April 18, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 28, 2000, the National Association of Securities Dealers, Inc. 
``NASD'' or ``Association''), through its wholly-owned subsidiary, NASD 
Regulation, Inc. (``NASD Regulation''), filed with the Securities and 
Exchange Commission (``Commission'' or ``SEC'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the NASD Regulation. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation proposes to amend NASD Conduct Rules 2340, 
``Customer Account Statements,'' 2710, ``Corporate Financing Rule--
Underwriting Terms and Arrangements,'' and 2810, ``Direct Participation 
Programs.'' \3\ The text of the proposed rule change appears below. 
Proposed new language is in italics; proposed deletions are in 
brackets.
---------------------------------------------------------------------------

    \3\ As discussed more fully below, the current proposal replaces 
File No. SR-NASD-97-12 (``1997 Proposal''). The 1997 Proposal was 
published for comment in the Federal Register on April 3, 1997. NASD 
Regulation subsequently withdrew the 1997 Proposal. See Letter from 
Suzanne E. Rothwell, Chief Counsel, Corporate Financing, NASD 
Regulation, to Katherine A. England, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated March 27, 2000 
(``March 27 Letter'').
---------------------------------------------------------------------------

Rule 2340  Customer Account Statements

(a) General
    Each general securities member shall, with a frequency of not less 
than once every calendar quarter, send a statement of account 
(``account statement'') containing a description of any securities 
positions, money balances, or account activity to each customer whose 
account had a security position, money balance or account activity 
during the period since the last such statement was sent to the 
customer.
(b) DPP/REIT Securities

(1)(A) Voluntary Estimate Value

    A general securities member may provide a per share estimated value 
for a direct participation program (``DPP'') or real restate investment 
trust (``REIT'') security on an account statement, provided the member 
meets the conditions of paragraphs (b)(2) and (3) below.

(B) Mandatory Estimated Value

    If the annual report of a DPP or REIT includes a per share 
estimated value for a DPP or REIT security that is held in the 
customer's account or included on the customer's account statement, a 
general securities member must include an estimated value from the 
annual report, an independent valuation service, or any other source, 
in the first account statement issued by the member thereafter, 
provided that the member meets the conditions of paragraphs (b)(2) and 
(3) below.
    (2) A member may only provide a per share estimated value for a DPP 
or REIT security on an account statement if:
    (A) after considering any relevant information about the market and 
the particular investment in its possession, the member has no reason 
to believe that the estimated value is inaccurate; and
    (B) the estimated value has been developed from data that is as of 
a date no more than 18 months prior to the date that the statement is 
issued.
    (3) If an account statement provides an estimated value for a DPP 
or REIT security, if must include:
    (A) a brief description of the estimated value, its source, and the 
method by which it was developed; and
    (B) disclosure that DPP or REIT securities are generally illiquid, 
and that the estimated value may not be realized when the investor 
seeks to liquidate the security.
    (4) If an account statement does not provide an estimated value for 
a DPPor REIT security, it must include disclosure that:
    (A) DPP or REIT securities are generally illiquid;
    (B) the value of the security will be different than its purchase 
price; and
    (C) if applicable, that accurate valuation information is not 
available.
(c)[(b)] Definitions
    For purposes of this Rule, the following terms will have the stated 
meanings:
    (1) [the term] ``account activity'' [shall] includes, but is not 
[be] limited to, purchases, sales, interest credits or debits, charges 
or credits, divided payments, transfer activity, securities receipt or 
delivers, and/or journal entries relating to securities or funds in the 
possession or control of the member.
    (2) [(c) For purposes of this Rule,] [the term] a ``general 
securities member'' [shall] refers to any member which conducts a 
general securities business and is required to calculate its net 
capital pursuant to the provisions of SEC Rule 15c3-1(a), except for 
paragraph (a)(2) and (a)(3). Notwithstanding the foregoing definition, 
a member which does not carry customer accounts and does not hold 
customer funds and securities is exempt from the provisions of this 
section.
    (3) ``direct participation program'' or ``direct participation 
program security'' refers to the publicly issued equity securities of a 
direct participation program as defined in Rule 2810 (including limited 
liability companies), but does not include securities on deposit in a 
registered securities depository and settled regular way, securities 
listed on a national securities exchange or The Nasdaq Stock Market, or 
any program registered as a commodity pool with the Commodity Futures 
Trading Commission.
    (4) ``real estate investment trust'' or ``real estate investment 
trust security'' refers to the publicly issued equity securities of a 
real estate investment trust as defined in Section 856 of the Internal 
Revenue Code, but does not include securities on deposit in a 
registered securities depository and settled regular way or securities 
listed on a national securities exchange or The Nasdaq Stock Market.
    (5) ``annual report'' means the most recent annual report of the 
DPP or REIT distributed to investors pursuant Section 13(a) of the Act.
(d) Exemptions
    Pursuant to the Rule 9600 Series, the Association may exempt any 
member

[[Page 24524]]

from the provisions of this Rule for good cause shown.

2710. Corporate Financing Rule--Underwriting Terms and Arrangements

* * * * *

(c) Underwriting Compensation and Arrangements

* * * * *

(6) Unreasonable Terms and Arrangements

* * * * *
    (B) Without limiting the foregoing, the following terms and 
arrangements, when proposed in connection with the distribution of a 
public offering of securities, shall be unfair and unreasonable:
* * * * *
    (xv) \4\ for a member or person associated with a member to 
participate in a public offering of real estate investment trust 
securities, as defined in Rule 2340(c)(4), unless the trustee will 
disclose in each annual report distributed to investors pursuant 
Section 13(a) of the Act a per share estimated value of the trust 
securities, the method by which it was developed, and the date of the 
data used to develop the estimated value.
---------------------------------------------------------------------------

    \4\ The NASD has filed with the SEC a proposed rule change (File 
No. SR-NASD-00-04), that would amend paragraph (c)(6)(B). The 
Commission has not taken action regarding File No. SR-NASD-00-04. If 
the Commission approves File No. SR-NASD-00-04, proposed paragraph 
(c)(B)(xv) would be renumbered (xiv).
---------------------------------------------------------------------------

* * * * *

Rule 2810. Direct Participation Programs

* * * * *

(b) Requirements

* * * * *

(5) Valuation for Customer Account Statements

    No member may participate in a public offering of direct 
participation program securities unless:
    (A) the general partner or sponsor of the program will disclose in 
each annual report distributed to investors pursuant Section 13(a) of 
the Act a per share estimated value of the direct participation program 
securities, the method by which it was developed, and the date of the 
data used to develop the estimated value.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD Regulation 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. NASD Regulation has prepared summaries, set 
forth in sections A, B, and C below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organizations Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

(a) Purpose

1. Background

Customer Account Statement Policy

    NASD Rule 2340 requires members who conduct a general securities 
business to send account statements to customers on at least a 
quarterly basis. \5\ The statements must include a description of any 
securities position, money balances or account activity since the prior 
account statement was sent. \6\ A member that does not carry customer 
accounts and does not hold customer funds and securities is exempt from 
the provisions of NASD Rule 2340.
---------------------------------------------------------------------------

    \5\ ``General securities member'' is defined in the rule to mend 
any member that conducts a general securities business and is 
required to calculate its net capital pursuant to the provisions of 
SEC Rule 15c3-1(a), except for paragraphs (a)(2) and (a)(3).
    \6\ ``Account activity.'' as defined in the rule, includes, but 
is not limited to, purchases, sales, interest credits or debits, 
charges or credits, dividend payments, transfer activity, securities 
receipts or deliveries, and/or journal entries relating to 
securities of funds in the possession or control of the member.
---------------------------------------------------------------------------

Request for Regulatory Action

    By letter dated March 9, 1994, the Subcommittee or 
Telecommunications and Finance of the U.S. House of Representatives 
(``House Subcommittee''), expressed to the NASD its concern regarding 
the sufficiency of information provided on customer account statements 
regarding the current value of illiquid partnership securities.\7\ The 
House Subcommittee recommended that investors in illiquid partnerships 
receive better information on the current value of their investments.
---------------------------------------------------------------------------

    \7\ See Letter from Edward J. Markey, Chairman, and Jack Fields, 
Ranking Republican Member, Subcommittee on Telecommunications and 
Finance, U.S. House of Representatives, dated March 9, 1994. The 
House Subcommittee also expressed concerns to the SEC, the National 
Association of State Securities Administrators, and the Investment 
Program Association.
---------------------------------------------------------------------------

    By letter dated June 14, 1994, the SEC's Division of Market 
Regulation (``Division'') requested information from the NASD on where 
it would be appropriate for self-regulatory organizations to require 
that members make certain disclosures regarding illiquid partnerships 
on customer account statements.\8\ The Division suggested that, at a 
minimum, a member should disclose that: (1) There is no liquid market 
for most limited partnership interests; (2) the value of partnership, 
if any reported on the account statement may not reflect a value at 
which customers can liquidate their positions; and (3) the source of 
any reported value, a short description of the methodology used to 
determine the value, and the date the value was last determined.
---------------------------------------------------------------------------

    \8\ See  Letter from Brandon Becker, Director, Division, 
Commission, to Richard G. Ketchum, Executive Vice President and 
Chief Operating Officer, NASD, dated June 14, 1994.
---------------------------------------------------------------------------

    In Notice to Members 94-96 (December 1994), the NASD requested 
comments concerning a proposed rule establishing requirements for 
illiquid direct participation program \9\ (``DPP'') securities listed 
on customer account statement. As described more fully below, the NASD 
received comments from 36 commenters regarding the proposal. In 
response to the commenters, NASD Regulation revised the proposal 
published for comment in Notice to Members 94-96 and filed the revised 
rule with the Commission in the 1977 proposal.\10\
---------------------------------------------------------------------------

    \9\ NASD Rule 2810(a)(4) defines ``direct participation 
program'' as a ``program that provides for flow-through tax 
consequences regardless of the structure of the legal entity or 
vehicle for distribution * * *;'' This definition covers most 
limited partnerships and specifically excludes real estate 
investment trust.
    \10\ See note 3, supra.
---------------------------------------------------------------------------

    The 1997 Proposal required general securities members to include 
estimated values for illiquid DPP and real estate investment trust 
(``REIT'') securities on customer account statements under certain 
circumstances.\11\ Among other things, the 1997 Proposal required a 
general securities member that provided individual valuations for 
illiquid DPP or REIT securities on its retirement account statements to 
provide the same valuation to other customers owning such securities. 
The Commission published the 1997 Proposal for comment in the Federal 
Register on April 3, 1997 \12\ and received nine comment letters 
regarding the proposal.
---------------------------------------------------------------------------

    \11\ REIT securities were covered by the proposal to ensure 
similar treatment of the two products under NASD rules.
    \12\ See 1997 Notice, supra note 3.
---------------------------------------------------------------------------

    NASD Regulation states that, as a result of further discussions 
with industry members, concerns arose regarding potential conflicts 
between the requirements of the 1997 Proposal

[[Page 24525]]

and the obligations of a member acting as a retirement account 
fiduciary under the Employee Retirement Income Securities Act 
(``ERISA'') and Internal Revenue Service (``IRS'') regulations. 
Therefore, NASD Regulation withdrew the 1997 Proposal \13\ and has 
replaced it with the current proposal, which amends NASD Rules 2340, 
2710, and 2810.
---------------------------------------------------------------------------

    \13\ See March 27 Letter, supra note 3.
---------------------------------------------------------------------------

2. Description of the Current Proposal

A. Proposed Amendments to NASD Rule 2340
    Scope: NASD Regulation proposes to apply the new requirements in 
NASD Rule 2340 to DPP securities and REIT securities sold in a public 
offering. The definitions of ``DPP'' and ``REIT'' proposed in NASD Rule 
2340(c)(3) and (4) would exclude securities listed on a national 
securities exchange or the Nasdaq Stock Market, as well as securities 
that are in a depository and settle regular way. NASD Regulation 
believes that the excluded securities are more likely to trade 
regulatory and, accordingly, that investors will have ready access to 
current market value information. The proposed definition of ``DPP'' in 
NASD Rule 2340(c)(3) also would exclude any program registered as a 
commodity pool because those programs generally offer investors a 
security that is redeemable by the issuer at the customer's option at 
regular intervals and at ascertainable values.
    Voluntary Estimated Value: Proposed NASD Rule 2340(b)(1) states 
that a general securities member may provide a per share estimated 
value for a DPP or REIT security on an account statement, provided that 
the member complies with the requirements in paragraphs (b)(2) and (3) 
that are intended to ensure that the estimated value is reliable and 
that certain disclosures accompany the estimated value. Specifically, 
as discussed more fully below, NASD Rule 2340(b)(2) allows a member to 
provide estimated DPP or REIT valuations if the member has no reason to 
believe that the estimated value is inaccurate and the estimated value 
has been developed from data that is as of a date no more than 18 
months prior to the date that the statement is issued. NASD Rule 
2340(b)(3) requires an account statement that provides an estimated DPP 
or REIT valuation to include (1) a brief description of the estimated 
value, its source, and the method by which it was developed; and (2) 
disclosure that DPP or REIT securities are generally illiquid and that 
the estimated value may not be realized when the investor seeks to 
liquidate the security.
    Mandatory Estimated Value: Proposed NASD Rule 2340(b)(1)(B) would 
require a general securities member to include a per share estimated 
value for any DPP or REIT security on an account statement if the 
annual report of the DPP or REIT provides a per share estimated value 
for the security. Although the inclusion of the estimated value in the 
issuer's annual report would trigger the member's obligation, the 
estimated value included on the account statement could be obtained 
from the annual report or from an independent valuation service or 
another source, e.g., an estimated value generated by the member. The 
estimated value must be included in the first customer account 
statement issued after the annual report is available. Proposed NASD 
Rule 2340(c)(5) defines the term ``annual report'' as the most recent 
annual report of a DPP or REIT distributed to investors pursuant to 
Section 13(a) of the Act.\14\ A general securities member that provides 
a per share estimated value pursuant to NASD Rule 2340(b)(1)(B) also 
must comply with the requirements of NASD Rules 2340(b)(2) and (b)(3).
---------------------------------------------------------------------------

    \14\ See discussion below of proposed related amendments to NASD 
Rules 2710 and 2810 that would prohibit members from participating 
in a public offering of a DPP or REIT unless the general partner, 
sponsor, or trustee agreed to include an estimated value for the 
securities in each annual report.
---------------------------------------------------------------------------

    Reliability of Estimated Values: NASD Rule 2340(b)(2) imposes 
various conditions designed to ensure that any voluntary or mandatory 
per share estimated value provided on a customer account statement is 
reliable, current, and not misleading. Proposed NASD Rule 2340(b)(2) 
states that a member may only provide a per share estimated value on an 
account statement if the member, after considering all relevant 
information about the market and the particular investment in its 
possession, has no reason to believe that the estimated value is 
inaccurate. Thus, the proposal would prohibit a member from including a 
per share estimated value on the account statement if the member 
reasonably believed that the estimated value was inaccurate at the time 
it was developed or was no longer accurate as a result of changing 
circumstances.
    In addition, proposed NASD Rule 2340(b)(2) requires that the 
estimated value be developed from data that is of a date no more than 
18 months prior to the date that the statement is issued. NASD 
Regulation believes that the 18-month standard provides sufficient time 
for the member and for an independent valuation source to develop an 
estimated value for DPP/REIT securities based on the audited financial 
statements contained in the Form 10-K of the DPP or REIT. For example, 
an estimated value based on December 31, 1999, financial statements may 
be used from January 1, 2000, through June 30, 2001, thereby allowing 
time between April and June 2001 for a new estimated value to be 
developed based on the December 31, 2000, financial statements.
    Disclosures Required When An Estimated Value Is Provided: Under 
proposed NASD Rule 2340(b)(3), a customer account statement that 
includes an estimated value for a DPP or REIT security must include a 
brief description of the estimated value, its source, and the method by 
which it was developed. In addition, the account statement must 
disclose that DPP or REIT securities are generally illiquid and that 
the estimated value disclosed may not be realized when the customer 
seeks to liquidate the security.
    Disclosures Required When An Estimated Value Is Not Provided: 
Proposed NASD Rule 2340(b)(4) requires that an account statement that 
does not provide a valuation for DPP or REIT securities disclose that 
the securities are generally illiquid, the value of the security will 
be different from its purchase price, and, if applicable, the accurate 
valuation information is not available.
B. Proposed Amendments to NASD Rules 2710 and 2810
    NASD Regulation states that the proposed rule change also will 
ensure that DPP sponsors and REIT trustees provide estimated per share 
values in their annual reports. In this regard, NASD Regulation 
proposes to amend NASD Rules 2710 and 2810 to prohibit members from 
participating in a public offering of a DPP or REIT unless the general 
partner, sponsor, or trustee agrees to include in each annual report a 
per share estimated value, a description of the method by which the 
estimated value was developed, and the date of the data use to develop 
the estimated value.

3. Implementation of Proposed Rule Change

    To provide members and their service organizations with sufficient 
time to modify their computer systems to comply with the proposed rule 
change, NASD Regulation is requesting that the proposed rule change 
become effective six months after SEC approval. During that time, NASD 
Regulation will issue a Notice to Members announcing SEC

[[Page 24526]]

approval of the proposed rule change and the anticipated effective 
date.
(b) Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act, 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 significantly improves disclosure to public customers on 
their account statements of information concerning the value of 
illiquid DPP or REIT securities, while providing safeguards for both 
member firms and public customers against the publication of inaccurate 
values for such securities.

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation 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

Notice to Members 94-96 (December 1994)
    In Notice to Members 94-96 (December 1994), the NASD published for 
comment a proposed rule change establishing requirements for illiquid 
DPP securities listed on customer account statements. The NASD received 
39 comments regarding the proposal from 36 commenters. Thirty of the 36 
commenters generally favored the NASD's effort to provide regulatory 
guidance regarding the disclosure of partnership valuations on customer 
account statements, although every letter contained suggested 
revisions. Six commenters were opposed to the adoption of the proposed 
rule change. The proposal published for comment in Notice to Members 
94-96 required that customer account statements:
    1. Segregate DPP securities from other securities on the account 
statement;
    2. For illiquid DPP securities listed without a price, disclose 
that accurate pricing information was not available because the value 
of the security was not determinable until the liquidation of the 
partnership and no secondary market existed;
    3. If DPP securities were listed with a price:
    a. Not aggregate the value of the DPP securities with the value of 
any other securities on the statement or include their value in the 
customer account net worth calculation;
    b. Disclose the methodology used for obtaining the valuation; and
    c. Disclose that DPP securities are generally illiquid securities 
and the price listed may not be realizable if the customer seeks to 
liquidate the security.
    Scope and Definitions: NASD Regulation agreed with the views of 
commenters on the rule proposed in Notice to members 94-96 that the 
regulatory concerns surrounding the value of DPP securities should only 
extend to unlisted DPPs because an investment in Nasdaq or exchange-
listed securities provides investors with some measure of liquidity and 
recent market values. Accordingly, the current proposal adopts 
definitions of DPP and REIT securities that exclude securities listed 
on a national securities exchange or The Nasdaq Stock Market, as well 
as securities that are in a depository and settle regular way. NASD 
Regulation also determined to except from the definition of DPP 
securities any program registered as a commodity pool because those 
programs offer investors a security that is redeemable by the issuer at 
the customer's option at regular intervals and at ascertainable values.
    Prices vs. Estimated Values: In response to the commenters, NASD 
Regulation amended the current proposal to eliminate the word ``price'' 
and insert the phrase ``estimated value'' throughout the proposed rule. 
Commenters stated that a ``price'' carried on a customer account 
statement gives the appearance to the investor that the security can be 
liquidated for an amount that is roughly equivalent to the price set 
forth on the customer account statement.
    Requirement to Place Estimated Values on Customer Account 
Statements: Commenters generally agreed with the proposed mandatory 
requirement for disclosure of values for DPP securities. However, 
commenters differed as to the value to be disclosed, with the greatest 
amount of comment focused on valuation methodologies (whether net asset 
value or securitized value) and their source (i.e., whether generated 
by the member or obtained from the general partners or third-party 
independent evaluators).
    NASD Regulation agrees with the sentiment expressed in a majority 
of the comment letters and with the views of correspondence received 
from the House Subcommittee that investors in non-publicly traded 
partnerships and trusts should know how their investment is performing. 
However, NASD Regulation believes that there are practical problems to 
requiring that all members provide disclosure of the estimated values 
of all DPP and REIT securities held by their customers.
    Therefore, the current proposal will require a general securities 
member to include a per share estimated value for illiquid DPP or REIT 
securities on customer account statements when the DPP or REIT includes 
a per share estimated value in the program's or trust's annual report. 
In addition, the current proposal will prohibit a member from 
participating in a public offering a DPP or REIT unless the general 
partner, sponsor, or trustee agrees to include a per share estimated 
value for the program or trust securities in the annual report.
    Appropriate Source for Estimated Values: Commenters on the proposal 
published in Notice to Members 94-96 expressed concern that the 
proposal did not provide guidance on the different sources of an 
estimated value considered appropriate by the Association. The current 
proposal permits the per share estimated value that is included on a 
customer account statement to be from the program or trust's annual 
report, from an independent valuation service, or another source. The 
latter category is intended to permit the use of an estimated value 
generated by the member.
    Prohibition on Using Stale Data: Many commenters on the proposal 
published for comment in Notice to Member 94-96 stated that an 
estimated value, accurate upon its first use on a customer account 
statement, may become stale or inaccurate due to lengthy time of 
subsequent events, such as the sale of a major asset of the 
partnership. NASD Regulation agrees that an estimated value based on 
stale information eventually becomes sufficiently misleading to 
investors to constitute a fraud. Therefore, the current proposal 
precludes members from disclosing an estimated value if the financial 
statements and other underlying data used to determine that value are 
of a date more than 18 months prior to the date the account statement 
is issued. In addition, the current proposal requires that a member 
have no reason to believe that the estimated value is inaccurate.
    Segregation of DPP/REIT Securities: Several commenters on the 
proposal published for comment in Notice to Members 94-96 objected to 
the requirement that DPP and REIT securities be segregated from other 
securities into a separate location on the customer account statement. 
The

[[Page 24527]]

current proposal does not include this requirement.
    Required Disclosure for Unpriced Securities: The proposal published 
for comment in Notice to members 94-96 would have required a customer 
account statement that included no price for DPP securities to indicate 
that accurate pricing information is not available because the value of 
the DPP security is not determinable until the liquidation of the 
partnership and no active secondary market exists. In response to 
comments, the current proposal requires disclosure that DPP and/or REIT 
securities are generally illiquid securities; that the value of the 
security may be different than its purchase price; and, if applicable, 
that accurate valuation information is not available.
The 1997 Proposal
    The NASD filed the 1997 Proposal with the SEC on February 21, 1997. 
The Commission published the 1997 Proposal for comment in the Federal 
Register on April 3, 1997,\15\ and received nine comment letters. NASD 
Regulation notes that, in general, the commenters supported the 
proposal but believed that it did not go far enough. The 1997 Proposal 
required that a general securities member:
---------------------------------------------------------------------------

    \15\ See 1997 Notice, supra note 2.
---------------------------------------------------------------------------

    1. Provide an estimated value for illiquid DPP and REIT securities 
on all customer account statements if the member:
    a. Provided such values to its retirement account customers (except 
when the retirement account statement only included an aggregate 
valuation for all of the assets in the account); or
    b. Participated in the public offering of the DPP or REIT and could 
obtain such a value from a periodic report filed with the SEC or from 
an independent source; and
    2. If the member provided a valuation, obtain estimated values form 
a periodic filing with the SEC, an independent source, or develop its 
own value that is based on data that was of a date more than 18 months 
before the date the statement was issued;
    3. Segregate illiquid DPP and REIT securities from other securities 
on the account statement;
    4. Not aggregate the value of DPP/REIT securities with the value of 
other securities in the total account value unless the statement 
included the disclosure on the illiquidity of the securities;
    5. Include a brief description in the account statement of the type 
of estimated value, its source, and how a customer could obtain a 
detailed explanation of the valuation methodology, and disclose that 
DPP/REIT securities are generally illiquid and that the value disclosed 
may not be realizable upon sale by the customer;
    6. If illiquid DPP and REIT securities were listed on the account 
statement without a value, disclose in the account statement that DPP/
REIT securities are illiquid, that the value of the security may be 
different than its purchase price, and that accurate pricing 
information was not available; and
    7. Not include the original issue price of a DPP or REIT security 
as the estimated value on an account statement.
    Objection to the Exception for Retirement Accounts: Five of the 
commenters urged the Association to make it mandatory for members to 
provide an estimated value on the account statement for the publicly 
sold DPP/REIT securities in their customers' accounts. In particular, 
several commenters objected to an exception that would have permitted 
members to provide an aggregate valuation for the assets in a 
retirement account.\16\
---------------------------------------------------------------------------

    \16\ The Division asked NASD Regulation to amend its proposal to 
require members acting in a fiduciary capacity to list on customer 
account statements the individual valuations for illiquid DPPs and 
REITs that they would be required to obtain for IRS purposes. See 
Letter from Robert L.D. Colby, Deputy Director, to Charles L. 
Bennett, Director, Corporate Finance, NASD Regulation, dated October 
6, 1997.
---------------------------------------------------------------------------

    NASD Regulation has concluded that the mandatory disclosure of 
estimated values for DPP and REIT securities in retirement accounts 
would impose a burdensome requirement on broker-dealers that would not, 
according to NASD Regulation, also be applicable to non-member 
fiduciaries that are responsible for the majority of the accounts in 
which such illiquid DPP/REIT securities reside. Moreover, NASD 
Regulation believes that basing the mandatory disclosure of estimated 
values for illiquid DPP/REIT securities on the treatment of such 
securities in a retirement account inappropriately intrudes the rules 
of the NASD into the regulation of retirement accounts by the 
Department of Labor and the IRS.\17\
---------------------------------------------------------------------------

    \17\ NASD Regulation believes that the need for greater and more 
frequent disclosure of individual values for retirement account 
assets, as urged by the commenters, is more appropriately addressed 
by the IRS and the Department of Labor.
---------------------------------------------------------------------------

    Therefore, the current proposal eliminate the requirement that 
members include estimated values for illiquid DPP and REIT securities 
in retirement accounts. Instead, the current proposal would require 
that a general securities member provide an estimated value for an 
illiquid DPP or REIT in the first account statement issued after a per 
share estimated value is provided in the program's or trust's annual 
report. According to NASD Regulation, the member's issuance of an 
annual retirement account statement in accordance with ERISA and IRS 
regulations will not be affected by this NASD account statement 
requirement, although members may need to advise customers of the 
reason for the different information provided in the two account 
statements.
    Description of Type of Estimated Value: Commenters also suggested 
that the provision requiring a description of the type of estimated 
value be amended to only permit members to report a fair market value 
that incorporates a control and marketability discount, as required to 
be reported on IRS Forms 1099-R and 5498. A general partner's valuation 
is typically a net asset value and does not include a discount for 
illiquidity or lack of control. Therefore, NASD Regulation believes 
that the change requested by these commenters would limit members to an 
estimated value provided by an independent valuation firm because such 
organizations normally incorporate this type of discount in developing 
a valuation. NASD Regulation believes that members should be able to 
provide different types of per share estimated values, as long as the 
member makes appropriate disclosures.
    Definition of DPP: In response to the request of a commenter. 
Regulation has revised the definition of DPP security in the current 
proposal to clarify that limited liability companies are covered by the 
proposed rule.

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 Exchange 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, including whether the proposed rule 
change is consistent with the Act. Persons mailing written submissions

[[Page 24528]]

should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 
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 relation to the proposed 
rule change 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. 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 NASD 
Regulation. All submission should refer to File No. SR-NASD-00-13 and 
should be submitted by May 17, 2000.

    For the Commission , by the Division of Market Regulation, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 27 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-10257 Filed 4-25-00; 8:45 am]
BILLING CODE 8010-01-M