Proposed Amendment to Schedule C to the NASD By-Laws to Amend the Definition of a Direct Participation Program; Last Date for Comments: April 3, 1989
|
SUGGESTED ROUTING* |
|
Senior Management |
*These are suggested departments only. Others may be appropriate for your firm.
REQUEST FOR COMMENTS
EXECUTIVE SUMMARY
The NASD invites comments on a proposed amendment to Schedule C to the By-Laws that would exclude from the definition of a direct participation program freely tradable limited partnership securities that are or will be quoted on the NASDAQ System or listed on a registered national securities exchange. Persons who are direct participation program limited representatives or limited principals would not be qualified to engage in transactions in freely tradable limited partnership securities that are or will be quoted on the NASDAQ System or listed on an exchange, as such transactions would require registration as either a general securities principal/representative or as a corporate securities representative. The text of the proposed amendment follows this notice.
BACKGROUND
The NASD has become concerned about the scope of the present definition of direct participation program (DPP) in Part II, Section 2(d)(ii) of Schedule C to the By-Laws with respect to the types of securities in which Direct Participation Programs - Limited Principals and Limited Representatives are qualified to transact business. These categories of registration originally were established for those member firms and their associated persons who participated in the distribution of securities, usually interests in limited partnerships, that provide for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution. One of the distinguishing characteristics of the DPP vehicle had been its illiquidity relative to other investments and, for this reason, the DPP limited representatives and principal qualifications examinations have not included questions on the distribution of liquid securities, secondary trading in the securities markets, and related market regulation.
In recent years, freely tradable limited partnerships, such as master limited partnerships, have emerged as a significant portion of the DPP segment of the securities industry. Technically, freely tradable partnership securities are encompassed by the current definition of a direct participation program in Section 2(d)(ii) to Part II of Schedule C. The NASD believes that in cases where limited partnership securities are or will be quoted in the NASDAQ System or listed on a registered national securities exchange, that the freely tradable feature of the limited partnership interests requires a substantial body of additional knowledge, including the operation of secondary securities markets, customer account and margin requirements, and trading-related regulation, which is not covered by the current DPP qualifications examinations. Therefore, the NASD believes that such freely tradable partnership interests should not be included in the definition of the direct participation program in Schedule C, as such securities more closely resemble other equity products that are publicly traded in the secondary securities markets.
In reviewing this issue, the Qualifications Committee and the DPP/Real Estate Committee also considered and rejected a proposal to expand the subject matter of the DPP qualification examinations to include the material, identified above, relevant to the freely tradable feature of limited partnership securities in the secondary market.
EXPLANATION OF PROPOSED AMENDMENT*
The NASD proposes to amend the definition of direct participation program in Part II, Section (2)(d)(ii) of Schedule C to the By-Laws to exclude secondary market transactions in any direct participation program security for which quotations are displayed on the NASDAQ System or which is listed on a registered national securities exchange. The amendment would also exclude the initial distribution of any direct participation program that will be quoted on the NASDAQ System or will be listed on a registered national securities exchange within a reasonable period following the formation of the program. The "reasonable period" determination will be made at the time the program is filed with the NASD pursuant to the Interpretation of the Board of Governors with respect to the Review of Corporate Financing under Article III, Section 1 of the Rules of Fair Practice.
The proposed amendment is contained in the registration category for direct participation programs principal. It is incorporated by reference in Part III, Section (2)(c) of Schedule C to the By-Laws, the registration rule for direct participation programs representative. Accordingly, persons who effect transactions in direct participation program securities that are or will be quoted on the NASDAQ System or listed on an exchange are required under the proposed amendment to register as either a general securities principal/ representative or as a corporate securities representative.
The NASD encourages all members and interested parties to comment on the proposed amendment to Schedule C to the By-Laws. Comments should be directed to:
Mr. Lynn Nellius, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, NW
Washington, DC 20006-1506.
Comments must be received no later than April 3, 1989. Comments received by this date will be considered by the Qualifications Committee and the Board of Governors. Any changes to Schedule C to the By-Laws must be filed with, and approved by, the SEC before becoming effective.
Questions concerning this notice can be directed to Frank J. McAuliffe, Vice President, NASD Qualifications, at (301) 590-6694, or Jacqueline T. Whelan, NASD Office of General Counsel, at (202) 728-8291.
PROPOSED AMENDMENT TO PART II, SECTION (2)(d)(ii) SCHEDULE C TO THE BY-LAWS
(Note: New language is underlined.)
II
REGISTRATION OF PRINCIPALS
(Note: This definition is incorporated by reference in Part III, Section (2)(c) of Schedule C to the By-Laws, the registration rule for Limited Representative - Direct Participation Programs.)
*The amendment proposed herein does not affect the definition of direct participation program in Article III, Section 34(d)(2) of the By-Laws. Therefore, Appendix F to Article III, Section 34 remains applicable to freely tradable limited partnerships.