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91-56 SEC Approval of Amendments to Appendix F Concerning Member Participation in Partnership RoIIups
The Securities and Exchange Commission (SEC or "Commission") has approved amendments to Appendix F under Article III, Section 34 of the NASD Rules of Fair Practice regarding members' compensation arrangements in connection with the solicitation of investor votes in partnership rollup transactions. The amendments are effective immediately. The text of the amendments follows this notice.
In December 1990, the NASD requested comments on the receipt of differential compensation contingent on investor votes in connection with members' solicitation of votes or tenders in partnership rollups. Differential compensation plans provide for NASD members soliciting limited partners in a rollup to receive compensation only when an investor votes "yes" on the proposed transaction. The NASD was concerned that arrangements providing payment only for "yes" votes may raise a conflict of interest or the appearance of a conflict of interest. In light of serious regulatory and legislative concerns that have been raised about rollup transactions, the NASD questioned the appropriateness of compensation arrangements that provide members with an incentive to recommend only approval of the transaction, particularly when it is unclear that a "yes" vote is in the best interest of investors.
Commenters were strongly in favor of an amendment prohibiting differential compensation and indicated that compensation arrangements should provide an incentive for general partners to propose fair transactions. Therefore, the NASD's proposal was amended to prohibit member participation in rollups unless the general partner or sponsor has agreed to pay the costs of the solicitation, including the preparatory work related thereto, if the transaction is not approved. The commenters also indicated that solicitation compensation paid to members should not be contingent on approval of the transaction. In addition, the NASD decided to limit the amount of solicitation compensation that may be received by members to 2 percent of the exchange value of the newly issued securities resulting from the rollup.
The NASD believes that amendments to Appendix F requiring payment for any vote, regardless of whether the transaction is approved, will eliminate any conflict of interest, or the appearance of any conflict of interest, that may be present when NASD members soliciting limited partners in a rollup receive compensation only when the investor votes "yes" to the transaction. The intended result of the NASD's action is that the general partner or sponsor, if faced with the responsibility of paying the costs of an unsuccessful solicitation, will have a strong incentive to structure and propose rollup transactions that are fair to limited partners. Meanwhile, NASD members will have equal incentive to advise their customers to vote "yes" or "no" as is appropriate.
EXPLANATION OF AMENDMENTS
The amendments to Appendix F prohibit NASD members from receiving compensation for soliciting votes or tenders from participants in connection with a rollup of a direct participation program unless such compensation (1) is payable and equal in amount regardless of whether limited partners vote affirmatively or negatively on the proposed rollup, (2) in the aggregate does not exceed 2 percent of the exchange value of the newly created securities, and (3) is paid regardless of whether the limited partners accept or reject the proposed rollup.
The amendments also prohibit members or persons associated with members from participating in the solicitation of votes or tenders in connection with a rollup unless the general partner or sponsor proposing the rollup agrees to pay all solicitation expenses related to the transaction, including all preparatory work related thereto, in the event the rollup is not approved. Solicitation expenses include direct marketing expenses such as telephone calls, broker/dealer fact sheets, legal and other fees related to the solicitation, as well as direct solicitation compensation to members. Solicitation expenses do not include other expenses normally paid by the registrant such as counsel fees, accounting fees, printing costs, and financial advisory fees related to the rollup transaction.
The amendments define "rollup" or "rollup of a direct participation program" as a transaction involving an acquisition, merger, or consolidation of at least one direct participation program, not currently listed on a national securities exchange or The Nasdaq Stock Market,SM into another direct participation program, public corporation, or public trust. The definition of rollup in the amendments differs from the definition employed in proposed rollup legislation being considered by Congress. The NASD will consider conforming the definition of rollup to the legislative definition in the event it becomes law.
EFFECTIVENESS OF AMENDMENTS
The amendments were approved by the SEC August 19, 1991.* Members must comply with the amendments immediately. Questions concerning this notice may be directed to Richard J. Fort-wengler, Associate Director, or Carl R. Sperapani, Assistant Director, Corporate Financing Department at(202) 728-8258.
TEXT OF AMENDMENTS TO APPENDIX F UNDER ARTICLE III, SECTION 34 OF THE NASD RULES OF FAIR PRACTICE
(Note: New language is underlined.)
No member or person associated with a member shall participate in a public offering of a direct participation program or a rollup of a direct participation program except in accordance with this Appendix.
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PARTICIPATION IN ROLLUPS
* See SEC Release No. 34-29582; 56 F.R. 42095, August 26, 1991