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94-75 NASD Requests Comment On Standardized Forms Proposed For DPP Securities;
Comment Period Expires October 17, 1994
The NASD® requests comment on a proposal to require the use of Standard Transferor and Transferee Applications for Transfer of Direct Participation Programs (DPP) Securities, Standard Registration Confirmation Form, and modification to the Uniform Practice Code requiring members to accept the use of the forms when transferring a DPP security.
In October 1990, the DPP Committee initiated a study of the nature and function of the secondary market for public partnership securities. Data gathered by the DPP Committee indicated that approximately $90 billion was invested in public DPPs in the 1970s and 1980s. These funds represent the investments of more than 10 million people. The programs were organized to invest in a variety of industries including, but not limited to, real estate, oil and gas, cable television, commodities, and equipment leasing. Although these securities were not generally intended to be liquid and tradeable, a developing secondary market in partnership securities nevertheless exists. The DPP Committee estimated that approximately two dozen participants (both NASD members and non-members) act as principal or agent for customers in a fragmented secondary market that transfers ownership of an estimated $250 to $300 million in public partnership securities annually.
In its report and subsequent Notice to Members (NTM 91-69), the DPP Committee stated that one of the major problems in the secondary market for DPP securities is the inefficient transfer of limited partnership interests between investors and on the books and records of members and partnerships. Transfer problems also have led to delays or mistakes in the allocation of cash distributions between buyers and sellers. There appear to be two primary reasons for these difficulties: (1) general partners and broker/dealers use different forms and procedures, charge varying fees, and effect transfers at undisclosed times; and (2) in many cases, a general partner is disinterested in assisting or facilitating these transfers in a security that was intended to be held for the life of the program (especially when the transfer may take place at a deep discount from the original offering price or may jeopardize the tax treatment of the partnership).
In November 1991, the NASD Board of Governors established the Ad Hoc Committee on Uniform Settlement and Transfer Procedures for Direct Participation Program Securities to study, among other issues, the settlement and transfer procedures of DPP securities. In an effort to eliminate delays and inefficiencies in the settlement and transfer procedure for DPP securities, the Committee and working groups established by the Committee designed standard transfer forms for the transferor and the transferee, as well as the confirmation form to be used by members, general partners, or transfer agents. The goal of the Committee was to develop a standard one-page form that would replace twenty- and thirty-page transfer documents. The purpose of this Notice is to request comment on the forms and on modification to the Uniform Practice Code requiring that members accept the use of the forms when transferring a DPP security.
Transferor's (Seller's) Application For Transfer
The Transferor's (Seller's) Application for Transfer indicates that the form is to be sent to the general partner or transfer agent together with the Transferee's Form and the required fees (see Instruction number 1 on page 2 of the form) and that it contains an optional transaction reference number for use by the financial services firms to identify and track the transfer as indicated in Instruction number 2. This number should be the same reference number used on the transferee's form.
The first full paragraph on the form indicates also that the transfer of ownership will take place subject to the general partner's approval, and space has been provided on the form for the full name of the partnership. At least one identification item needs to be completed in order to properly identify the unit sold or transferred. Instruction number 3 advises the parties that the NASD symbol needed to complete this form may be obtained from the NASD Symbol Directory, a new publication to be issued in conjunction with this endeavor. The quantity section of the form specifically states the number of units (not dollar values) to be transferred and the number of units the transferor (seller) will continue to hold after the transfer is completed. This information will not only ensure that the proper number of units are transferred, but that all books and records of the general partner, transfer agent, and broker/dealers are kept current.
The registration information section of the form requests the exact name of the registered owner as well as custodial information, including the custodian account number and address of record. This section of the form will provide information as to how the partnership interests are currently registered, as well as a Social Security or tax ID number and the custodian/trustees tax ID number (see Instructions 4 and 5). In addition, this portion of the form contains the necessary disclosure advising California residents of the restrictions on the sale or transfer of their interest without the prior written consent of the Commissioner of Corporations of the state of California.
The broker/dealer information section, which is optional, does not need to be completed by an individual investor involved in a transaction directly with the partnership.
Next, the top of page 2 of the form requires that the transferor certify possession of valid title and all requisite power to assign the interest and to state specifically the reason for the transfer.
Finally, the form requires the exact signature of the registered holder, and the name, address, and capacity of the signer if the signature is by a trustee, executor, administrator, guardian, attorney in fact, agent or officer of the corporation, or someone acting in a fiduciary or representative capacity. This will ensure, as stated in Instruction number 7, that persons acting as a representative or in another fiduciary capacity present satisfactory evidence of their authority to so act. In addition, space has been provided for a signature guarantee by a Medallion stamp.
In addition, the Committee is aware that several major general partners require limited partners, when they sell, to give up any rights that they have under the limited partnership agreement to dividends that have not yet been declared or paid. They accomplish this through a written affirmation that is part of their "transferor" forms. The affirmation is specific in that the seller agrees to give up rights to distributions that they are entitled to under the partnership agreement. Comment is requested on whether such an affirmation would be useful in this form or whether it should be optional.
Transferee's (Buyer's) Application For Transfer
The Transferee's (Buyer's) Application for Transfer is similar to the transferor's form. The form is to be sent to the general partner or transfer agent with the transferor's form and provides space for the optional reference number. Instruction number 2 to the form describes the purpose of the transaction reference number. The first full paragraph of the form indicates that the transferee makes application to transfer and assign, subject to the general partner's rights, all rights and interests to the partnership units as a Substitute Limited Partner/Assignee and agrees to accept all terms and conditions of the partnership agreement and related documents. This is intended to ensure that the general partner reserves the right to deny the transfer. The full name of the partnership is required on this form.
The partnership information section of this form is identical to the transferor's form and requests at least one identification item for the units being acquired. As required on the transferor's form, this form requests the number of units to be acquired but also requests that the transferees indicate if they already own units in the partnership.
The transferee also must indicate the tax status of the requested registration and alert the buyer that additional documentation may be required.
The next section of the form requires information regarding the buyer and how the partnership interests are to be registered. Instruction numbers 3, 4, and 5 refer to this section of the form and indicate that if this is to be a custodial account, the address of record should be that of a custodian/trustee, and that if the purchaser is an individual, only a Social Security number is required.
A secondary address may be provided by the buyer, which may be used to direct distributions to an address other than the address provided in the registration information section. If this is a custodial account, the investor's mailing address is necessary. This section also contains the necessary disclosure advising California residents of the restrictions on the sale or transfer of the interest without the prior written consent of the Commissioner of Corporations of the state of California.
The Certification section of the form requires the transferee to certify the accuracy of the information contained in the form. An additional undertaking by the transferee grants the general partner the power of attorney under the laws of the applicable state. Space has been provided for the transferee's signature and a co-transferee's signature if necessary, and for a signature guarantee by a Medallion stamp. The instructions for these sections indicate that the signatures must correspond with the name of the transferee as it appears in the registration section. Persons signing as representatives or in fiduciary capacities must indicate this capacity when signing and, unless waived by the partnership or its agent in its sole discretion, must present satisfactory evidence of then-authority to so act.
Registration Confirmation Form
The Registration Confirmation Form was developed as an acknowledgement by a general partner or an agent that a registrant has been admitted as a limited partner in the partnership as a result of a purchase, transfer, or account transfer. The first section is standard while the second section contains specific information regarding the admission, the name of the partnership, the number of units held by the limited partner, the effective date of admission, the exact registration, and information about the limited partner and his or her financial services firm. Space for a secondary address was added to the form to provide for a custodian/ trustee account. As stated, the form is non-negotiable, and should be kept with the new limited partner's permanent records. The form will replace the variety of instruments used throughout the industry and will help eliminate the need for partnership certificates.
Request For Comments
The NASD asks members and other interested parties to comment on the proposed standard forms.
Comments should be addressed to:
Joan C. Conley
Office of the Secretary
National Association of Securities
1735 K St., N.W.
Washington, D.C. 20006-1506
Comments must be received no later than October 17, 1994. Comments received by this date will be considered by the Board. Prior to becoming mandatory for use by NASD members, the forms must be approved by the Board and the membership and then filed with the Securities and Exchange Commission for approval.
Questions concerning this Notice should be directed to Charles L. Bennett, Director, or Carl R. Sperapani, Assistant Director, Corporate Financing Department, at (301) 208-2700, or Dorothy L. Kennedy, Assistant Director, Nasdaq Market Operations, at (203) 385-6243.