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86-76 South African Sanctions Act
TO: All NASD Members and Other Interested Persons
The Congress has recently enacted legislation providing sanctions against certain transactions with South Africa or South African entities. This notice provides information relating to certain provisions of that Act which may relate to the business of NASD members.
On October 2, 1986, Congress enacted the Comprehensive Anti-Apartheid Act of 1986 (Sanctions Act) (Public Law No. 99-440), containing prohibitions against certain transactions in securities issued by South African entities. Important prohibitions in the Sanctions Act become effective on November 16, 1986, and may directly affect NASD members' trading activity, especially trading in American Depositary Receipts (ADRs). Members and associated persons should consult with their counsel to assure that their trading activity is in compliance with the Sanctions Act.
There are a number of potential ramifications of the Act to the broker-dealer community. One of primary importance to NASD members relates to continued market making and retail activity in ADRs representing shares of South African entities. The pertinent provision in this regard is §310(a) of the Act which provides "no national of the United States may, directly or through another person, make any new investment in South Africa." This provision becomes effective on November 16. The term "new investment" is defined at §3(4) of the Act as meaning "a commitment or contribution of funds or other assets" and "a loan or other extension of credit," but does not include:
the ownership or control of ... a debt or equity security issued by the government of South Africa or a South African entity before [October 2, 1986] or the transfer or acquisition of such ... debt or equity security, if any such transfer or acquisition does not result in a payment, contribution of funds or assets, or credit to a South African entity, a controlled South African entity, or the government of South Africa.
In the context of ADR trading, this language presents the possibility of violation of the Act, which carries civil and/or criminal sanctions, through the purchase of depositary receipts which are backed by securities issued by a South African entity after October 2, 1986, and through transactions benefitting South African entities. Presently, application of the prohibitions of the Act to a situation where securities issued after October 2 become part of the pool of securities underlying an ADR is unclear. There is the possibility that the inclusion of post-October 2 securities in the pool would "taint" the entire pool and therefore make it a prohibited investment. The Treasury Department has rulemaking authority and is currently working on rule proposals for this and other sections of the Act. The NASD, various banks that issue ADRs and certain broker-dealers doing an ADR business have been in contact with the Treasury Department to focus the Department's attention on this and other issues. To date, there have been no regulatory proposals or statements that indicate how, or whether, this problem will be dealt with in the proposed regulations.
The purpose of this notice is to inform NASD members of this situation and of the fact that regulations will be prepared by the Treasury Department. Should members or their counsel desire to make their views as to the implementation of these or other provisions of the Sanctions Act known to the Treasury Department, the regulations are being developed by the Office of Foreign Asset Control, Treasury Department, 1331 G Street, N.W., Suite 500, Washington, D.C. 20220.
Once a determination is made by the Treasury as to the method in which it will proceed, members will be provided with such information as becomes available. As of November 16, however, any member or associated person handling transactions in ADRs should take steps, including consultation with counsel, to assure that the transactions in the securities in question are in compliance with the Sanctions Act.
Any questions regarding this notice may be addressed T. Grant Callery, NASD Office of the General Counsel, at (202) 728-8285.
Executive Vice President and General Counsel