Notice To Members 84-28

Amendments to Appendix F Concerning Sales Incentives for Direct Participation Programs

Published Date:

TO: All NASD Members and Other Interested Persons

Attn: Direct Participation Programs Department

The provisions of Appendix F to Article III, Section 34 of the Association's Rules of Fair Practice ("Appendix F") relating to the use of sales incentive arrangements in public offerings of direct participation programs have been amended.

The amendments were distributed to the membership for their comment and were subsequently approved by the Association's Board of Governors. The amendments were published in the Federal Register and subsequently approved by the Securities and Exchange Commission on April 11, 1984.

Background

The provisions of Sections 5(e) and 5(f) of Appendix F provide for an equitable evaluation of sales incentives under the underwriting compensation guidelines. They also require disclosure to the public investor of the use of sales incentive programs. Finally, they are designed to permit members participating in public offerings of programs utilizing such arrangements to appropriately supervise their salesmen and maintain required books and records.

The Association's Direct Participation Programs Committee proposed amendments to Appendix F to address concerns regarding the use of sales incentive arrangements in public offerings of direct participation programs. Arrangements for sales incentives have often been organized by direct participation program sponsors and have been offered directly to sales forces. Such arrangements may circumvent the member which is responsible for supervision of its salesmen and for maintenance of books and records. In addition, use of sales incentive arrangements may, in the absence of appropriate supervision of the sales force, undermine the affirmative suitability determination called for under Appendix F.

Explanation of Amendments

Section 5(f) of Appendix F has been amended to require that all sales incentives be paid to a member and that such incentives be paid only in the form of cash. Cash payment of sales incentives will require the sales incentive to flow through the books and records of the member. This provision is intended to place control over the disposition of the incentives with the member. The member could, therefore, distribute incentives to salesmen or retain them.

The remaining amendments to Sections 5(e) and 5(f) of Appendix F are technical and conforming in nature.

The text of amended Sections 5(e) and 5(f) of Appendix F is attached. Any questions regarding this Notice should be directed to Harry E. Tutwiler of the Corporate Financing Department at (202) 728-8258.

Sincerely,

Frank J. Wilson
Executive Vice President
Legal and Compliance

The Association is requesting comments on the proposed amendments prior to final Board consideration. All comments received during this comment period will be reviewed by the Direct Participation Programs Committee and changes to the amendments will be recommended as deemed appropriate. The Board of Governors will then consider the amendments again. If the Board approves the amendments, they must be filed with, and approved by, the Securities and Exchange Commission before they become effective.

All written comments should be addressed to the following:

S. William Broka, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006

All comments must be received by April 25, 1983. All comments received will be made available for public inspection.

Any questions regarding this notice should be directed to Dennis C. Hensley or Harry E. Tutwiler of the Corporate Financing Department at (202) 728-8258.

Sincerely,

Frank J. Wilson
Executive Vice President
Legal and Compliance

Attachment

DRAFT AMENDMENT TO APPENDIX F

Amend Subsections 5(e) and (f) as follows: *

(e) No sponsor, affiliate of a sponsor (other than a member dealing with persons associated with that member), or program shall provide any sales incentive item, including, but not limited to, travel bonuses, prizes, and awards, directly to a person associated with a member unless:
(1) the aggregate value of all such items to be received by each associated person during any year does not exceed $50;
(2) the value of all such items to be made available in connection with an offering is included as compensation to be received in connection with the offering for purposes of paragraph (b)(l) of this section; and
(3) the proposed payment or transfer of all such items to be made available in connection with an offering is are disclosed in the prospectus or similar offering document.
(f) No sponsor, affiliate of a sponsor, or program shall provide compensation to a member in the form of sales incentives or bonuses items including, but not limited to, travel bonuses, prizes, and awards unless all of the following conditions are satisfied:
(1) all sales incentives and bonuses are paid directly to the member in cash and the distribution, if any, of incentives or bonuses to associated persons is controlled solely by the member;
(1) a fair market dollar value of the incentive items has been established;
(2) the value of all such items incentives or bonuses to be made available in connection with an offering is included as compensation to be received in connection with the offering for purposes of subsection (b) of this section;
(3) arrangements relating to the proposed payment or transfer of all such items incentives or bonuses, including the formula or formulae used to determine

AMENDMENTS TO APPENDIX F

Sections 5(e) and 5(f) of Appendix F to Article III, Section 34 of the Rules of Fair Practice have been amended as follows:*

••••

(e) No sponsor, affiliate of a sponsor (other than a member dealing with persons associated with that member), or program shall provide any sales incentive item, including, bat net limited to, travel bonuses, prizes, and awards directly to a person associated with a member unless:
(1) the aggregate value of all such items to be received by each associated person during any year does not exceed $50.00;
(2) the value of all such items to be made available in connection with an offering is included as compensation to be received in connection with the offering for purposes of paragraph subsection (b) (l) of this section; and
(3) the proposed payment or transfer of all such items to be made available in connection with an offering is are disclosed in the prospectus or similar offering document.
(f) No sponsor, affiliate of a sponsor, or program shall provide compensation to a member in the form of sales incentives or bonuses items including but not limited travel bonuses, prizes, and awards unless all of the following conditions are satisfied;
(1) all sales incentives and bonuses are paid directly to the member in cash and the distribution, if any, of incentives or bonuses to associated persons is controlled by the member;
(1) a fair market dollar value of the incentive items has been established,
(2) the value of all such items incentives or bonuses to be made available in connection with an offering is included as compensation to be received in connection with the offering for purposes of subsection (b) of this section;
(3) arrangements relating to the proposed payment or transfer of all such items incentives or bonuses are disclosed in the prospectus or similar offering document; and
(4) the manner of receiving all such items and their subsequent disposition whether the associated persons or otherwise, is entered solely by the member in a manner which enables the member to properly supervise its associated persons and
(4)
(5) the value of all incentives and bonuses is reflected on the books and records of the recipient member as compensation received in connection with the offering.

* New language is underlined; deleted language is stricken.

* New language is underlined; deleted language is stricken. All other sections of Appendix F remain unchanged. The full text of Appendix F may be found in NASD Manual (CCH) para. 2192.