SEC Approves Adoption Of NASD Limited Partnership Rollup Transaction Rules;

Effective Date: November 1, 1994

Executive Summary

On August 15, 1994, the Securities and Exchange Commission (SEC or Commission) approved amendments, in part, to Article III, Section 34 (Section 34), of the NASD Rules of Fair Practice prohibiting NASD members or associated persons from participating in "limited partnership rollup transactions" (rollup or rollup transactions) unless the transaction includes certain specified provisions designed to protect the rights of limited partners, and amendments to Schedule D to the By-Laws (Schedule D) prohibiting the authorization for quotation on the Nasdaq National Market^® of any security that results from a "limited partnership rollup transaction" unless the transaction was conducted in accordance with certain specified procedures designed to protect the rights of limited partners (together, rollup rules). Simultaneously, the Commission solicited public comment on proposed amendments to Section 34 which would apply the new definition of "limited partnership roilup transaction" to Subsections (A) and (B) of Article III, Section 34(b)(6) that regulate the receipt of differential compensation for the solicitation of sales or tenders in a rollup transaction.¹ The amendments approved by the SEC take effect November 1, 1994. The full text of the amendments follows this Notice.

Background

During the 1980s, more than $150 billion of public limited partnership interests were sold to U.S. investors, most of whom were small investors with an average investment of about $10,000. Limited partners, unlike general partners, received many of the tax benefits of business ownership without the resultant responsibility and liability. Partnerships "passed through" tax benefits to the limited partners who were not involved in the day-to-day management of the limited partnership and usually could not lose more than their capital contributions. Some partnerships financed limited partner contributions through recourse or non-recourse loans, thereby generating an additional layer of tax writeoffs for the investor.

Limited partnership interests, however, were typically illiquid, due to the nature of the investment and the lack of an active trading market for such interests. Federal tax reform in 1986 eliminated most tax benefits for limited partner investors by, among other things, lowering the marginal tax rate to 28 percent, eliminating preferential treatment for capital gains, limiting the offsetting use of losses generated from passive activity to passive income only, lengthening depreciation schedules, extending the at-risk rules to include real estate investments, and altering the method for calculating depreciation. Subsequently, economic developments contributed to the deterioration of partnership performance. Some general partners responded by restructuring the limited partnerships or "rolling" them up into new entities.

Use Of Rollups

A limited partnership rollup either reorganizes an existing limited partnership or combines multiple limited partnerships into a new entity to take advantage of larger asset pools and economies of scale. However, many rollups resulted in newly traded securities that immediately traded at a discount to its net asset value, as the cash flow from the stronger partnerships supported losses from weaker partnerships. Also, many investors in rollups found that the terms of the original partnership agreement had changed significantly as to voting rights, term of existence of the entity, management compensation, or investment objectives. Rollups were solicited in many cases with the help of proxy solicitation firms that were paid to solicit only "yes" votes for approval of the rollup.

Federal Legislation

The Limited Partnership Reform Act of 1993, (Rollup Reform Act), enacted in December 17, 1993, as part of the Government Securities Act Amendments of 1993, is the legislative response to rollup transactions. Section 3(a) of the Rollup Reform Act amended Section 15A(b) of the Securities Exchange Act of 1934 (Exchange Act) to require that NASD rules prohibit members from participating in any limited partnership rollup transaction that does not provide procedures to protect the rights of limited partners. Section 3(c) of the Rollup Reform Act also amended Section 15A(b) of the Exchange Act to require that the rules of the Nasdaq National Market prohibit the authorization for quotation of any security resulting from a rollup transaction unless the transaction provides certain rights for limited partners. The NASD believes these new rollup rules comply with this Congressional mandate.

Amendments

DEFINITIONS

Subsection 34(b)(2)(B) and Part I, Schedule D have been amended to add as new definitions the following terms:

• Cash Available for Distribution: cash flow of a limited partnership less amounts set aside for restoration or creation of reserves.
  
  
• Cash Flow: cash provided from limited partnership operations, including lease payments on net leases from builders and sellers, without deduction for depreciation, but after deducting cash funds used to pay all other expenses, debt payments, capital improvements and replacements.
  
  
• Dissenting Limited Partner: a per son who, on the date rollup solicitation material is mailed to investors, holds a beneficial interest in a limited partnership that is the subject of the limited partnership rollup transaction and who voted against the transaction and complies with procedures established by the NASD to assert dissenters' rights, except that for purposes of an exchange or tender offer, a person must file an objection in writing with the party responsible for tabulating the votes or tenders during the period in which the offer is outstanding. Consequently, a per son who abstains from voting cannot qualify as a dissenting limited partner, and a person who purchases a limited partner interest after the date on which soliciting material is mailed will be prevented from asserting dissenters' rights.
  
  
• Limited Partner or Investor in a Limited Partnership: the purchaser of an interest in a direct participation program that is a limited partnership, and who is not involved in the day-to-day management of the limited partnership and bears limited liability. The term "direct participation program" is defined in Section 34 as a program that provides for flow-through tax consequences regardless of the structure of the legal entity.
  
  
• Limited Partnership: an unincorporated association that is a direct participation program organized as a limited partnership, whose partners are one or more general partners and one or more limited partners, that conforms to the provisions of the Revised Uniform Limited

Partnership Act or the applicable state statute that regulates the organization of such partnership.

• Limited Partnership Rollup Transaction: a transaction involving the combination or reorganization of one or more limited partnerships, either directly or indirectly, in which: 1) some or all of the investors in any of the limited partnerships will receive new securities reported under a transaction reporting plan (i.e., Nasdaq National Market, the New York Stock Exchange, and the American Stock Exchange); 2) any of the investors' limited partnership securities are not, as of the date of the filing, reported under a transaction reporting plan; 3) investors in any of the limited partnerships are subject to a significant adverse change as to voting rights, the term of existence of the entity, management compensation, or investment objectives; and 4) any such investors are not provided an option to receive or retain a security under substantially the same terms and conditions as the original issue.²

The first and second requirements are intended to include those limited partnership rollup transactions where the limited partners are not able to dispose of their interests in an active trading market before the rollup transaction and then, as a result of a rollup, receive new listed securities. The third and fourth requirements are intended to exclude limited partnership rollup transactions that are not subject to significant adverse change or have the option to retain a similar security. As for the fourth requirement, the standards for determining whether the security to be received by all investors are substantially the same as the standards that are included in the requirements applicable to the rights of dissenting limited partners in Subsection 34(b)(6)(C)(i)b and Subsection 3(a)(2)(ii) to Part III, Schedule D.

The inclusion of the terms "directly or indirectly" in the preamble to the definition are intended to include multiple-step transactions in the definition of limited partnership rollup transactions. The definition also covers indirect rollup transactions, such as those in which a single non-traded partnership first undergoes a simple reorganization and then, in a subsequent transaction or series of transactions, the successor entity is either reorganized or merged with other business entities and, as a consequence of this reorganization or merger, there is a publicly traded security with a significant adverse change in voting rights, the term of existence of the entity, management compensation, or investment objectives. Thus, the definition covers not only transactions in which new securities are received directly by limited partners in single or multiple partnership rollups, but also transactions in which securities are received indirectly through a step transaction, such as umbrella partnership real estate investment trusts, discussed below.

• Exclusions from the Definition of "Limited Partnership Rollup Transaction": The definition of "limited partnership rollup transaction" also incorporates six exclusions that conform to the Rollup Reform Act. The first is for transactions involving partnerships with an operating policy or practice of retaining cash available for distribution and reinvesting proceeds from the sale, financing, or refinancing of assets in accordance with such criteria as the Commission determines appropriate. This exception is similar to the exclusion recognized by the SEC in adopting a definition of "finite-life" in Item 901 (b) of Regulation S-K.³ Such reinvesting partnerships closely resemble ordinary operating businesses and have not been subject to the criticism associated with limited partnership rollup transactions. Investors in such partnerships, like investors in other operating businesses, have no expectation that the partnership will distribute its cash from operations or sell its assets and distribute the proceeds to investors. Moreover, rollups of reinvesting partnerships do not involve many of the fundamental changes associated with finite-life partnerships, such as changes in management compensation and investor voting rights.

The second exclusion is for transactions involving only limited partnerships wherein the interests of the limited partners are repurchased, recalled, or exchanged in accordance with the terms of the pre-existing partnership agreement for securities in an operating company specifically identified at the time of the formation of the original limited partnership. Such partnerships with a pre-existing agreement include, for example, limited partnerships established solely for the purpose of conducting research and development that were always intended to be merged with a parent or other affiliate and are generally not available to the retail public. These are rollup transactions to which the investor agreed at the time of the investor's original investment decision and are not the types of transactions where abuses have been reported.

The third exclusion is for transactions involving securities to be issued or exchanged that are not required to be and are not registered under the Securities Act of 1933 (1933 Act). This provision excludes public issuances of securities, therefore, under Sections 3(a)(9) and (10) of the 1933 Act as well as Section 1145 of the Bankruptcy Code.⁴

The fourth exclusion is for transactions involving only issuers that are not required to register or report under Section 12 of the Exchange Act, both before and after the transaction.

The fifth exclusion is for transactions involving a proposal by an independent, non-affiliated third party to succeed to a general partner or sponsor interest only if the transaction is approved by not less than 66-2/3 percent of the outstanding units of each of the participating partnerships and the existing general partners receive only compensation expressly provided for in the pre-existing partnership agreements of the partnerships being rolled up. This last provision is intended to prohibit payments to the general partners to secure their approval of the transaction. The fifth exclusion is intended to exclude transactions resembling either a "hostile" or "white knight" acquisition by a third-party without extraordinary financial remuneration to the current general partner., In such situations, the limited partners have a bona fide choice of retaining current management or tendering or exchanging their shares in a limited partner rollup transaction that changes the management of the current general partners.

The sixth exclusion is for transactions, except as the Commission may by rule deem to fall within the definition of "limited partnership rollup transaction," in which the securities offered to investors are securities of another entity that are listed on the Nasdaq National Market, the New York Stock Exchange or the American Stock Exchange, if: 1) such other entity was formed, and such class of securities was regularly reported and traded, not less than 12 months before the date on which soliciting material is mailed to investors; and 2) the securities of that entity issued to investors in the transaction do not exceed 20 percent of the total outstanding securities of the entity, exclusive of any securities of such class held by or for the account of the entity or a subsidiary of the entity.

• Management Fee: fee paid to a sponsor, general partner(s), their affiliates, or other persons for management and administration of a direct participation program. The definition uses the term "direct participation program" rather than "limited partnership" because the term "management fee" is used in provisions in Section 34 that are applicable generally to direct participation programs offerings. The definition in Schedule D uses the term "limited partnership."
  
  
• Solicitation Expenses: direct marketing expenses, incurred by a member in a rollup transaction, such as telephone calls, broker/dealer fact sheets, legal and other fees related to the solicitation, and direct solicitation compensation to members. Since the expenses must be incurred by or for a member, the definition does not cover solicitation expenses incurred by general partners or proxy solicitation firms that are not NASD members. These expenses are included, however, in transaction costs.
  
  
• Transaction Costs: costs incurred in a limited partnership rollup transaction, including printing and mailing the proxy, prospectus and other documents; legal fees not related to the solicitation of votes or tenders; financial advisory fees; investment banking fees; appraisal fees; accounting fees; independent committee expenses; travel expenses; and all other fees related to the preparatory work of the transaction, but not costs that would have been otherwise incurred by the subject limited partnerships in the ordinary course of business or solicitation expenses. As set forth in the definitions, the total costs related to a limited partnership rollup transaction are comprised of solicitation expenses and transaction costs.

Substantive Requirements

The NASD has adopted new Subsection 34(b)(6)(C) to prohibit a member or person association with a member from participating in a limited partnership rollup transaction in any capacity if the transaction is unfair and unreasonable.⁵ Subsection 34(b)(6)(C) contains two basic subdivisions. The first subdivision, Subsection 34(b)(6)(C)(i), defines a series of circumstances and conditions that create a presumption that a limited partnership rollup transaction is not unfair or unreasonable; the second subdivision, Subsection 34(b)(6)(C)(ii), defines a series of circumstances and conditions under which limited partnership rollup transactions are presumed to be unfair or unreasonable. For an applicable limited partnership rollup transaction to comply with Section 34, the transaction must both include one of the provisions set forth in Subsection 34(b)(6)(C)(i) and not violate any of the provisions of Subsection

The NASD has also adopted amendments to Part III, Schedule D that establish listing standards for Nasdaq National Market securities resulting from a limited partnership rollup transaction in new Section 3 thereof.⁶ With minor contextual exceptions, the rule language is the same as that adopted in Section 34(b)(6)(C). To simplify the following discussion of the substantive requirements of the rollup rules, section designations reference the provisions in new Section 34(b)(6)(C).

Limited Partnership Rollup Transactions Presumed Not To Be Unfair Or Unreasonable

New Subsection (b)(6)(C)(i) defines a series of circumstances under which limited partnership rollup transactions are presumed not to be unfair and unreasonable. It is presumed not to be unfair or unreasonable if dissenting limited partners are offered one of the following:

• Compensation Based on Appraisal—New paragraph a. of Subsection (b)(6)(C)(i) provides that dissenting limited partners may receive compensation based on the appraisal of an independent appraiser, unaffiliated with the sponsor or general partner of the program, who values the assets as if sold in an orderly manner in a reasonable period of time, plus or minus other balance sheet items, and less the cost of sale or refinancing. The appraisal should accurately reflect the current value of the assets and be done in a manner consistent with appropriate industry practice.

The methodology for valuing partnership assets should be that methodology that is appropriate for a particular industry, so that partnerships in real estate, oil and gas, and equipment leasing, for example, may use different valuation models. The professionals in each industry should use whatever appraisal methods are appropriate to that industry. The requirement that the appraisal be performed "in a manner consistent with industry practice" implies that the appraiser must meet certain logical qualifications for the performance of the appraisal. Such qualifications would include consideration of the experience and financial stability of the appraiser, as well as whether the appraiser meets the standards of a qualifying organization.

Forms of compensation based on appraisal include cash, secured or unsecured debt instruments, and freely-tradeable securities. All debt instruments must provide for a trustee and an indenture, and provide for prepayment with 80 percent of the net proceeds of any sale or refinancing of the assets of the entity. All debt instruments must provide the holders with a market rate of interest equal to at least 120 percent of the applicable federal rate as determined by the Internal Revenue Service, have a term no greater than eight years, and allow for the use of unsecured debt instruments only when the entity issuing the debt has a limitation on total leverage of 70 percent of the appraised value of its assets. Freely tradeable securities utilized as compensation must be previously listed on a national securities exchange or previously traded on The Nasdaq Stock Market^SM prior to the transaction. Nasdaq securities used as compensation include all securities traded in The Nasdaq SmallCap Market™ and the Nasdaq National Market, thus permitting freely tradeable securities of any Nasdaq company to be utilized as compensation to dissenting limited partners.

The number of freely tradeable securities offered in return for partnership interests would be determined in relation to the average last-sale price of the securities in the 20-day period following the date of the meeting at which the vote on the rollup occurs. If the issuer of the freely tradable securities and the sponsor or general partner are affiliated, and the securities issued as compensation are new securities, such securities must not represent more than 20 percent of the issued and outstanding securities of that class after the issuance. A definition solely for purposes of this provision provides that a sponsor or general partner is deemed affiliated with the issuer if the sponsor or general partner receives any material compensation from the issuer or its affiliates in conjunction with the rollup transaction or the purchase of the general partner's interest. The 20 percent limitation on the amount of securities offered as compensation by an affiliate helps to establish a threshold below which significant dilution is be presumed to have not occurred.

• Receipt of a Security With Substantially the Same Terms and Conditions—New paragraph b. of Subsection 34(b)(6)(C)(i) provides that dissenting limited partners may receive or retain a security with substantially the same terms and conditions as the original issue because there is no material adverse change as to the business plan or the investment, distribution, and liquidation policies of the partnership and the dissenting limited partners receive or retain substantially the same rights, preferences, and priorities they had in their original security. Where reliance on this provision is proposed, the NASD Corporate Financing Department will review the terms of a new security to determine if it has substantially the same terms and conditions as the original issue.
  
  
• Comparable Rights—New paragraph c. of Subsection 34(b)(6)(C)(i) provides for other comparable rights so that sponsors and general partners have the flexibility to propose other protections for limited partners. The comparable rights options include, but are not limited to, the right to supermajority approval of the transaction and the right to review of the transaction by an independent committee.
  
  
• Comparable Rights – Supermajority Approval—New paragraph c.l. of Subsection 34(b)(6)(C)(i) provides that approval of the limited partnership rollup transaction by 75 percent of the outstanding units of each of the individual participating partnerships provides dissenting limited partners with the presumption that the rollup is fair. The criticism of many limited partner ship rollups is that a simple majority of limited partners voting for the rollup can deprive other limited partners of the business and financial opportunities they bargained for when they originally invested. New paragraph c.l. provides that this assumption is no longer reasonable where 75 percent of the partnership interests (supermajority) take affirmative action to approve the transaction, since such an overwhelming approval of the transaction provides an indication of its fairness and beneficial nature. Even though new paragraph c.l. allows a particular limited partnership transaction to be consummated even though individual partnerships did not approve the transaction, any limited partnership that fails to reach the 75 percent threshold is excluded from the transaction.
  
  
• Comparable Rights – Review by Independent Committee—New paragraph c.2. to Subsection 34(b)(6) (C)(i) provides for a right of review by an independent committee not affiliated with the general partner(s) or sponsors. The independent committee has certain rights and obligations. The independent committee's rights are that it: 1) shall have access to the books and records of the partnerships; 2) shall have the authority to negotiate the proposed transaction with the general partner or sponsor for the limited partners, but not the authority to approve the transaction for the limited partners; 3) shall have the ability to retain independent counsel and financial advisers to represent all limited partners at the limited partnerships' expense and may be compensated and reimbursed by the limited partnerships subject to the rollup transaction; and 4) shall be entitled to indemnification to the maximum extent permitted by law from the limited partnerships subject to the rollup transaction against claims, causes of action, or lawsuits related to any action or decision made in furtherance of their responsibilities; provided, however, that the general partner may also agree to indemnify the independent committee.
  
  


The independent committee's obligations are that it: 1) shall be approved by a majority of the outstanding securities of each of the participating partnerships; 2) shall prepare a report to the limited partners subject to the limited partnership rollup transaction that presents its findings and recommendations, including any minority views; 3) shall deliberate for a period no longer than 60 days unless unanimously extended by the members of the independent committee or if approved by the NASD.
• Comparable Rights – Other Comparable Rights—New paragraph c.3. to Subsection 34(b)(6)(C)(i) provides for other comparable rights for dissenting limited partners that are not limited to supermajority approval or the establishment of an independent committee, but include any other comparable rights proposed by general partners or sponsors, provided that the general partners or sponsors demonstrate to the satisfaction of the NASD or, if the NASD determines appropriate, to the satisfaction of an independent committee, that the rights proposed are comparable.

Limited Partnership Rollup Transactions Presumed To Be Unfair And Unreasonable

New Subsection 34(b)(6)(C)(ii) defines a series of circumstances under which limited partnership rollup transactions, regardless of compliance with Subsection 34(b)(6)(C)(i), are presumed to be unfair or unreasonable⁷ if: 1) certain actions taken by the general partner result in the unfair conversion and valuation of general partner interests in a limited partnership rollup transaction; 2) a limited partnership rollup transaction fails to protect the voting rights of the limited partners; 3) the transaction costs of a rejected limited partnership rollup transaction are unfairly apportioned or allocated; or 4) the payment of fees to general partners in limited partnership rollup transactions are unfair, unreasonable, or inappropriate.

• Actions Taken By the General Partner—New paragraph a. of Subsection 34(b)(6)(C)(ii) provides that it is presumptively unfair and unreasonable for general partners, when determining their interest in the new entity resulting from a limited partnership rollup transaction, to: 1) convert an equity interest for which consideration has not been paid into a voting interest in the new entity if the equity interest was not otherwise provided for in the limited partnership agreement and disclosed to limited partners; 2) fail to follow the valuation methods, if any, in the partnership agreements when valuing their partnership interests; or 3) utilize a projected value of their equity interest rather than the appraised current value of their equity interest when determining then-interest in the new entity.
  
  
• Voting Rights—New paragraph b. of Subsection 34(b)(6)(C)(ii) contains four provisions for the protection of investors with respect to voting rights. New subparagraph b.l. provides that it is presumptively unfair if the voting rights in the entity resulting from the limited partnership rollup transaction do not follow the original voting rights of the limited partnerships participating in the transaction. However, the NASD recognizes that certain material changes to voting rights may be necessary to conform disparate rights that may exist among participating partnerships. Material changes may be effected only if the NASD determines that such changes are not unfair or if an independent committee approves such changes.

New subparagraph b.2. provides that it is presumptively unfair if a majority of the interests in an entity resulting from a limited partnership rollup transaction is prevented from voting to take certain actions unless the sponsor, general partner(s), board of directors or trustee concur, such as voting to: amend the limited partnership agreement, articles of incorporation, by-laws or indenture; dissolve the entity; remove and elect new management; and approve or disapprove the sale of substantially all the assets of the entity, unless such voting actions would be inconsistent with state law.

New subparagraph b.3. provides that it is presumptively unfair as to voting rights if the sponsor or general partner proposing a limited partnership rollup transaction is not required to provide a document that clearly delineates instructions and procedures of voting against or dissenting from a proposed transaction.

New subparagraph b.4. provides that it is presumptively unfair if the general partner or sponsor fails to utilize an independent third party to receive and tabulate all votes and dissents or fails to require the third party to make the tabulation available to the general partner and any limited partner upon request at any time during and after voting occurs.

• Transaction Costs—New paragraph c. of Subsection 34(b)(6)(C)(ii) provides that it is presumptively unfair if transaction costs of a rejected limited partnership rollup transaction are not apportioned between the general and limited partners in accordance with the final vote as follows: 1) in the case of a limited partnership rollup transaction that is not approved, the general partner/sponsor bears transaction costs in proportion to the total number of abstentions and votes to reject the transaction, and the limited partners bear transaction costs in proportion to the number of votes to approve the transaction; or 2) in the case of a rollup transaction that is approved, but where some individual partnerships do not approve and are not included in the approved transaction, the general partner is not required to pay costs for the limited partnerships who have voted not to approve the transaction.
  
  
• Fees of the General Partners—New paragraph d. of Subsection 34(b)(6)(C)(ii) protects limited partners against the assessment of fees by a general partner that are unfair, unreasonable, or inappropriate. New sub paragraph d.1. provides that it is presumptively unfair for general partners to receive or convert unearned management fees discounted to a present value while also proposing to receive new asset-based fees. A similar presumption of unfairness applies if property management fees and other fees are inappropriate, unreasonable, or more than, or not competitive with, what would be paid to third parties for performing similar services under new subparagraph d.2. New subparagraph d.3. provides that substantial and adverse changes in fees are presumed unreasonable if not submitted to and approved by an independent committee.

Applicability Of Rollup Rules To UPREITs

During the period when the NASD rule proposal to adopt the rollup rules was under consideration by the SEC, questions were raised concerning the applicability of the proposed rules to umbrella partnership real estate investment trust (UPREIT) transactions.⁸ As a result of an understanding reached between the staffs of the NASD and the SEC, the NASD Corporate Financing Department intends to work closely with the SEC Division of Corporation Finance to review all direct, indirect, and multi-step limited partnership rollup transactions in their entirety, including UPREITS, for an initial determination of whether a transaction constitutes a "limited partnership rollup transaction."

Implementation

The new rules take effect November 1, 1994, for: 1) any rollup transaction that has not been declared effective by the SEC, regardless of whether the NASD Corporate Financing Department has previously issued an opinion of "no objections" to the proposed underwriting terms and arrangements; and 2) any application for inclusion of a security in the Nasdaq National Market that has not been designated for inclusion.

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Questions regarding this Notice as to the general applicability of the rollup rules may be directed to Richard J. Fortwanger, Associate Director, Corporate Financing Department at (301) 208-2700. Questions concerning applications to the Nasdaq National Market may be directed to Tim Pupo, Issuer Services, at (202) 728-8115.

¹ Securities Exchange Act Release No. 34533 (August 15, 1994); 59 F.R. 43147 (August 22, 1994).

² The SEC has published for comment whether the current definition of "rollup or rollup of a direct participation program" should continue to apply to Subsections 34(b)(6)(A) and 34(b)(6)(B) which regulate the receipt of differential compensation in the solicitation of votes and tenders in a rollup. These provisions were adopted in 1991. See Notice to Members 91-56 (September 1991). The SEC has approved the new definition of "limited partnership rollup transaction" to apply to new Subsection 34(b)(6)(C). The SEC's comment period expired on September 12, 1994. The text of the rollup rules attached to this Notice show Subsections (A) and (B) as if the proposed amendments published for comment were adopted.

³ See, Securities Act Rel. No. 6922 (October 30, 1991); 56 FR 217 (November 8, 1991).

⁴ This provision also excludes securities issued pursuant to Sections 3(a)(l 1), 3(b), 4(2) and 4(6) of the 1933 Act.

⁵ The term of "participation" is defined in Article III, Section 44(a)(5) to include acting in "any advisory or consulting capacity to the issuer related to the offering" and would include any member acting as a financial adviser.

⁶ Current Section 3 is redesignated as Section 4 and is amended to reference the limited partnership rollup criteria. Current Section 4 is redesignated Section 5.

⁷ Where a limited partnership rollup transaction is determined by NASD staff to include one of the arrangements considered to be unfair or unreasonable, the burden of proof is borne by the member to rebut the presumption by demonstrating that the arrangement is not unfair or unreasonable or that the arrangement does not come within one of the enumerated unfair and unreasonable arrangement provisions.

⁸ See, discussion of the applicability of the rollup rules to UPREITS accompanying footnotes 32 and 50 in Securities Exchange Act Release No. 34533 (August 15, 1994); 59 F.R. 43147 (August 22, 1994).

Text Of Amendments To Article III, Section 34 Of The Rules Of Fair Practice And Schedule D Of The By-Laws

(Note: New language is underlined; deletions are in brackets.)

Direct Participation Programs Sec. 34.

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Schedule D

PART I

Definitions

For purposes of Schedule D, unless the context requires otherwise:

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PART III

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Designation Of Nasdaq National Market System Securities

Sec. 1. – Sec. 2. No change.

Sec. 3. Limited Partnership Rollup Designation Criteria

In addition to meeting the quantitative criteria for Nasdaq/NMS inclusion, an issuer that is formed as a result of a limited partnership rollup transaction, as defined in Part I, Section (13) hereof, must meet the criteria set forth below in order to be designated.

Sec. [3.] 4. Registration Standards

In addition to meeting the quantitative criteria and the limited partnership rollup criteria, if applicable, for NASDAQ/NMS inclusion, the issue must also be:

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Sec. [4.] 5. Quantitative Maintenance Criteria

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Sec. [5.] 6. Non-Quantitative

Designation Criteria for Issuers Excepting Limited Partnerships

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Sec. [6.] 7. Non-Quantitative Designation Criteria for Issuers That Are Limited Partnerships¹

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* Transaction reporting plans under Section 11A were declared effective prior to January 1, 1991, for the Nasdaq National Market, the New York Stock Exchange, and the American Stock Exchange.

¹ The NASD has pending at the SEC rule filing SR-NASD-91-58 that proposes to adopt corporate governance rules for limited partnerships. This proposed rule change was published for comment in Securities Exchange ActRel. No. 30811 (June 15, 1992); 57 F.R. 28542 (June 25, 1992). The rule language of this proposed rule change is set forth herein as if adopted.