Questionnaire Concerning an Information Service for Direct Participation Program Securities

TO: NASD Members Participating in Sales of Direct Participation Program Securities

The National Association of Securities Dealers, Inc. is circulating the attached questionnaire to members which participate in sales of direct participation programs in order to ascertain the level of interest in a communications service that would disseminate information about DPPs to members and sponsors. This information service would provide the membership and sponsors of DPP programs with indications of interest from persons who would like to buy or sell securities of previously capitalized DPPs.

In November 1979, the Association's Direct Participation Programs and Real Estate Committees recommended a study of possible means for developing an information service which would convey indications of interest in DPP securities to the membership and sponsors. In 1980, an initial survey of Association members was conducted to determine the level of interest in such a service. This initial survey drew a response from over 638 members and of those responding which were distributing DPP securities, 87.7 percent favored establishing some sort of service.

Subsequent to the initial survey, the Direct Participation Programs and Real Estate Committees refined the concepts and proposed to establish such an information service and presented the concept along with the necessary rule changes to Schedule D to Article XVI of the Association's By-Laws to the Association's Board of Governors. The Board approved the establishment of an information service and authorized Notice to Members 82-13 (March 9, 1982) requesting comments from the membership and other interested persons on the proposed overall concept as well as the necessary rule changes to implement such a service.

The information service or "electronic bulletin board" proposed by the Association in Notice to Members 82-13 was intended to provide the membership with a means of communicating indications of interests in DPP securities with any resulting transaction occurring outside the system. The Association proposed that the service be available for qualified securities of programs that are reporting companies under the Securities Exchange Act of 1934 which have a capitalization of 10,000 or more units and which are held by not less than 300 persons. In addition, the NASD proposed that members would be considered eligible to enter information into the service if the member is a general securities or direct participation programs-only broker-dealer which maintains a minimum net capital of at least $25,000. The service would list the name and phone number of any member who indicated an interest in buying or selling units of a qualified program.

The Association received a total of 18 comments to Notice to Members 82-13, including comment letters from the American Bar Association, Securities Industry Association and a number of NASD member firms. Of the respondents who offered general comments on the overall concept, half considered the proposal highly attractive, both from the point of view of investor clients and from the point of view of member firms. In addition, half of the respondents offered more specific comments with respect to individual aspects of the proposed rule changes.

Based on these generally favorable responses, the Board approved the filing with the Securities and Exchange Commission of the amendments necessary to implement the service. Subsequently, the SEC published the proposed rule in the Federal Register on two separate occasions in April and May 1983. Twenty-five responses were received by the SEC mostly from NASD member-affiliates of sponsors, all but one of which expressed opposition to the development of such an information service.

As a result of the marked differences between the results of the initial survey completed in 1980, the comments received in connection with the Notice to Members in 1982 and the comments received by the SEC in connection with the Federal Register releases of 1983, the Direct Participation Programs and Real Estate Committees and the Association's Board of Governors determined to re-examine the interest of the membership and sponsors of DPP programs in the establishment of an information service.

The Association has, therefore, determined to distribute this questionnaire to members which sell program securities to determine the level of interest in a service which would disseminate information on DPP programs to the NASD membership and sponsors and which members may utilize when clients request aid in liquidating their holdings of securities in direct participation programs. Conversely, if a member's client expressed an interest in purchasing securities of a program which has already concluded its capitalization period, the service would enable the member to locate a person who is willing to sell the securities they are presently holding.

We are asking members which have participated in the sale of DPP securities to complete this questionnaire and return it to the Association. Respondents are not asked to identify their firm. However, we would appreciate your cooperation in ensuring that the person completing the questionnaire is familiar with the DPP operations of the firm. Please return your completed questionnaire by April 30, 1985, to the Association at the following address:

National Association of Securities Dealers, Inc.
Corporate Financing Department
1735 K Street, N.W.
Washington, D.C. 20006

Questions concerning the enclosed questionnaire may be directed to Suzanne E. Rothwell, Assistant Director, Corporate Financing Department, at telephone number (202) 728-8258.

Sincerely,

Gordon S. Macklin
President

Attachment

Member Survey

Questionnaire On An Information Service for Direct Participation Program Securities

In order to more fully assess the need for and interest in an information service developed specifically for direct participation program securities, the National Association of Securities Dealers, Inc. is directly soliciting the comments of the membership which participate in the sale of program securities. If your firm conducts any business in direct participation program securities please complete the following questionnaire and return it to the Association in the enclosed postage-paid envelope by April 30, 1985.

A. Information about the member: The Association is interested in gathering information about the general characteristics of the members responding to this questionnaire.

1. How many years has your firm been involved in the distribution of DPPs?*

2. Is your firm:

3. If your firm is affiliated with a sponsor of DPPs, does your firm act as: (check only one category)

4. How many DPPs have you closed during the past two years?

B. Information concerning the transfer of DPP securities.

1. Has your firm received requests to buy or sell currently outstanding DPP securities?I

2. Do these requests come from holders of DPP securities of:

3. Were such requests received from: (check all applicable categories)

4. How many requests for the purchase or sale of currently outstanding DPP securities have you received in the last 2 years?

5. On average, how long has a person held their DPP securities before trying to sell them?

6. What method(s) do you use to match requests for the purchase or sale of a program security?

7. What methodology do you usually use to establish a sale price for an outstanding DPP security? (check only one category)

8. Do you believe that the methods indicated in Questions 6 and 7 are adequate for buyers and sellers of DPP securities?

C. Information about your opinions on the desirability and feasibility of an information service for DPPs.

1. Would you be in favor of an information service that provided indications of interest on the purchase of DPP securities?

2. Would you be in favor of an information service that provided indications of interest on the sale of DPP securities?

3. Would you be in favor of an information service that would allow indications of interest on DPP securities only after obtaining prior approval of the general partner?

4. Do you believe that an information service would facilitate transfers of DPP securities?

5. Under the Internal Revenue Code, a partnership will terminate by law if fifty percent or more of its equity interests are transferred in any twelve-month period. Do you believe that the implementation of an information service would cause an increase in transfers of DPP securities?

If your answer was "yes," do you believe that the transfers would increase enough to terminate a partnership?

6. Under Internal Revenue Code regulations, a partnership is considered an association taxable as a corporation if it possesses a majority of four corporate characteristics. The corporate characteristics are (1) perpetual life; (2) centralized management; (3) limited liability of management; and (4) free transferability of securities. Most programs are structured so that their only corporate characteristic is centralized management.

Do you believe that a partnership may be taxed as a corporation if it has centralized management and its securities are considered freely transferable?

7. It is generally recognized that the valuation of the securities in a program may be affected if the program has not had sufficient time to invest the contributed capital and begin producing cash flow from operation. Would a required period of seasoning prior to transfer of program interests help alleviate this problem?

If seasoning is appropriate, how long should the seasoning period be after the program closes?

D. Information about the characteristics you would like to see incorporated in an information service for DPPs.

1. What medium would be best suited to providing information on DPPs?

2. What categories of information should an information service permit to be included in an indication of interest on DPP securities?

3. What eligibility criteria should a DPP security have to meet in order for a broker-dealer to insert an indication of interest in an information service?

4. Do you believe that a broker-dealer which seeks to insert an indication of interest on a DPP security in an information service should be required to maintain net capital above the minimum of $5,000?

What minimum net capital do you suggest? $____________________

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The National Association of Securities Dealers, Inc. appreciates your cooperation in completing this questionnaire. Please return the questionnaire in the enclosed, postage-paid envelope by April 30, 1985, to:

National Association of Securities Dealers, Inc. Corporate Financing Department 1735 K Street, N.W. Washington, D.C. 20006

* * * * *

* Article III, Section 34 defines the term "direct participation program" to include a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution. Excluded from the definition are real estate investment trusts, tax-qualified pension and profit sharing plans, individual retirement plans, and tax-sheltered annuities.