[Federal Register Volume 69, Number 146 (Friday, July 30, 2004)]
[Notices]
[Pages 45870-45872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17398]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50065; File No. SR-NASD-2004-108]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to the Treatment of Commodity Pool 
Trail Commissions

July 22, 2004.
    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 July 13, 2004, the National Association of Securities Dealers, Inc. 
(``NASD''), filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by NASD. NASD has 
designated the proposed rule change as constituting a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule of NASD under 
Section 19(b)(3)(A)(i) of the Act \3\ and Rule 19b-4(f)(1) 
thereunder,\4\ which renders the proposal effective upon receipt of 
this filing by the Commission. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is filing a Notice to Members 04-50, discussing the treatment 
of commodity pool trail commissions under NASD Rule 2810 (Direct 
Participation Programs) (``Rule 2810'').

[[Page 45871]]

    No changes to the text of NASD rules are required by this proposed 
rule change.

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 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 has prepared summaries, set forth in Sections (A), 
(B), and (C) below, of the most significant aspects of such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASD's Direct Participation Programs Rule governs public offerings 
of direct participation programs (DPPs), including establishing limits 
on the level of underwriting compensation. Historically, in reviewing 
the level of underwriting compensation in commodity pool DPPs, NASD 
staff has excluded certain trail commissions. In particular, NASD staff 
excluded trail commissions paid to an associated person of a member if: 
(1) The member was registered with the Commodity Futures Trading 
Commission as a Futures Commission Merchant; (2) the associated person 
receiving the trail commissions had passed the National Commodity 
Futures Examination (Series 3) or the Futures Managed Funds Examination 
(Series 31); and (3) the associated person receiving the trail 
commissions provided ongoing investor relations services to the 
investors. Notice to Members 04-50 serves to advise members that 
effective immediately, NASD staff will consider all trail commissions 
paid in connection with commodity pool DPPs in calculating whether the 
level of underwriting compensation meets the requirements of Rule 2810.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\5\ which requires, among 
other things, that NASD's rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASD believes that the proposed rule change is in the 
public interest and will benefit investors in commodity pool DPPs by 
limiting the compensation that can be paid to members for selling 
commodity pool DPPs, and servicing the accounts that hold such 
investments, to the same amounts that apply to all other DPP 
investments.
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    \5\ 15 U.S.C. 78o-3(b)(6).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    The proposed rule change was published for comment in NASD Notice 
to Members 04-07 (February 2004) (the ``Notice''). Twenty-six comment 
letters addressing the issue of commodity pool DPP trail commissions 
were received in response to the Notice. Of the twenty-six comment 
letters received, two were in favor of the proposed rule change, 
twenty-three were opposed, and one expressed no opinion. Most of the 
commenters that opposed the proposed rule change noted generally the 
differences between commodity pools and other DPPs, and the services 
generally provided to persons investing in commodity pool DPPs. Many 
commenters also cited the benefits to investors of diversification by 
investing in commodities in general and in commodity pool DPPs in 
particular, but warned that if the level of underwriting compensation 
was capped, then they may no longer be in a position to recommend 
commodity pool DPPs to investors. However, six of the commenters that 
opposed the proposed rule change acknowledged that establishing 
compensation limits for selling commodity pool DPPs may be appropriate, 
but urged limits higher than those currently in place for other DPPs.
    As discussed in Notice to Members 04-50, based upon NASD staff's 
review and analysis, including review of the comments received, NASD 
staff does not believe the reasons underlying the exclusion of certain 
trail commissions of commodity pool DPPs continue to apply today. NASD 
staff has seen no evidence that today's commodity pool DPP investors 
receive a significantly higher level of service than investors in other 
DPPs, including real estate, oil and gas, and equipment leasing 
partnerships. Moreover, commenters failed to adequately explain the 
differences in service provided by persons who have passed the Series 3 
or Series 31 (and thus met the exclusion) and those who have not (and 
thus remained subject to the compensation limits of the DPP Rule). 
Finally, NASD staff believes that notwithstanding a limit on the level 
of underwriting compensation, firms and registered representatives will 
continue to offer and recommend commodity pool DPPs where there are 
benefits to investors in terms of diversification and where such 
products meet investors' financial status and investment objectives.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    NASD has designated the proposed rule change as constituting a 
stated policy, practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule of NASD under 
Section 19(b)(3)(A)(i) of the Act \6\ and Rule 19b-4(f)(1) 
thereunder,\7\ which renders the proposal effective upon receipt of 
this filing by the Commission.
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    \6\ 15 U.S.C. 78s(b)(3)(A)(i).
    \7\ 17 CFR 240.19b-4(f)(1).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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. Comments may be submitted by any of 
the following methods:
    Electronic Comments:
     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-108 on the subject line.
    Paper Comments:
     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2004-108. This 
file number should be included on the

[[Page 45872]]

subject line if e-mail is used. To help us process and review comments 
more efficiently, comments should be sent in hardcopy or by e-mail but 
not by both methods. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of NASD. 
All submissions should refer to the file number SR-NASD-2004-108 and 
should be submitted by August 20, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-17398 Filed 7-29-04; 8:45 am]
BILLING CODE 8010-01-P