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91-51 Request for Comments on Proposed Changes to Schedule C to the NASD By-Laws Regarding the Sale of Partnership Debt by Direct Participation Programs Representatives and Principals; Last Date for Comments: September 25, 1991

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Senior Management
Legal & Compliance
Registration
*These are suggested departments only. Others may be appropriate for your firm.

EXECUTIVE SUMMARY

The NASD requests comments on proposed amendments to Schedule C to the NASD By-Laws that would permit Direct Participation Programs Representatives and Principals to sell partnership debt. The text of the amendments follows this notice.

DISCUSSION

Since the implementation of the direct participation programs registration categories in the early 1980s, the NASD has consistently interpreted the relevant provisions of Schedule C to apply only to the sale of equity interests in direct participation programs as this term is defined in Part II, Section 2(e)(ii) of Schedule C to the By-Laws. In recent years, however, partnership syndicators have begun to issue debt securities of direct participation programs, usually promissory notes, for sale to "qualified plans" as that term is defined under the Employee Retirement Income Security Act (ERISA) regulations.

The principal reason for issuing the security as a debt instrument is to avoid the receipt of unrelated business taxable income (UBTI) as part of the distribution to debtholders. The NASD believes that these debt instruments are equivalent to equity interests in a partnership and would be offered as equity if not for the adverse tax consequences that would occur.

The NASD is proposing amendments to Schedule C that would permit the sale of partnership debt by direct participation registrants. The NASD believes this to be a reasonable response to the evolution noted above in the syndication business that does not compromise the limited scope of the direct participation registration categories. Since this change would replace past interpretations of the direct participation programs registration provisions, the NASD requests comment from members and other interested parties before the amendments are presented to the NASD Board of Governors for adoption.

Questions may be directed to Carole Hartzog in the Qualifications Department at (301) 590-6696 or Craig Landauer in the Office of General Counsel at (202) 728-8291.

Written comments should be forwarded to Stephen Hickman, Office of the Secretary, National Association of Securities Dealers, Inc., 1735 K Street, NW, Washington, DC 20006-1506. Comments should be received by September 25, 1991.

TEXT OF PROPOSED SCHEDULE C CHANGES

(Note: New language is underlined.)

Part II, Section (2)(e)(i)a Of Schedule C to the NASD By-Laws

REGISTRATION OF PRINCIPALS

(2) Categories of Principal Registration
(e) Limited Principal Direct Participation Programs
(i) Each person associated with a member who is included within the definition of principal in Part II, Section (1) hereof may register with the Corporation as a Limited Principal — direct participation programs if:
a. his activities in the investment banking and securities business are limited solely to the equity interests in or the debt of direct participation programs as defined in Part II, Section (2)(e)(ii) hereof;

Part III, Section (2)(c)(i)a Of Schedule C to the NASD By-Laws

REGISTRATION OF REPRESENTATIVES

(2) Categories of Representative Registration
(c) Limited Representative Direct Participation Programs
(i) Each person associated with a member who is included within the definition of a representative in Part III, Section (1) hereof may register with the Corporation as a Limited Representative — direct participation programs if:
a. his activities in the investment banking or securities business are limited to the solicitation, purchase and/or sale of equity interests in or the debt of direct participation programs as defined in Part II, Section (2)(e)(i) hereof;

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