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92-20 Sale of Direct Participation Program Debt Instruments by Limited Principals and Representatives; SEC Approval of Amendments to Parts II and III of Schedule C To the NASD's By-Laws

SUGGESTED ROUTING:*

Senior Management
Corporate Finance
Registration
Syndicate
*These are suggested departments only. Others may be appropriate for your firm.

EXECUTIVE SUMMARY

On March 4, 1992, the Securities and Exchange Commission (SEC) approved amendments to Parts II and III of Schedule C to the NASD's By-Laws permitting Direct Participation Program (DPP) Limited Principals and Representatives to sell DPP debt instruments. The text of the amendments, which took effect March 4, 1992, follows the discussion below.

BACKGROUND AND DESCRIPTION OF AMENDMENTS

The SEC has approved amendments to Parts II and III of Schedule C to the NASD's By-Laws to permit persons registered as Limited DPP Principals and DPP Representatives to offer and sell direct participation program debt instruments. This amendment results from the NASD's determination that DPP syndicators are offering debt securities of DPPs to pension plans and other institutional accounts that are considered "qualified plans" under the Employee Retirement Income Security Act (ERISA). The NASD found that syndicators are offering such debt instruments in order to avoid having distributions classified as "unrelated business taxable income" under Internal Revenue Service regulations.

Schedule C to the By-Laws allows a person to qualify to sell all types of securities by passing the Series 7 examination (General Securities Examination) or to qualify to sell a specific category of security by passing a more limited examination such as the Series 22 (DPP Examination). The current provisions of Schedule C, however, do not permit a DPP-registered person to sell debt securities. Nevertheless, an initial sale of a DPP debt security does not require general market knowledge or knowledge of the debt securities market because the DPP debt security is typically sold to retirement plans that intend to hold the security to maturity.

The NASD believes that there is no discernible difference between the knowledge required for the initial sale of debt and equity instruments issued by a DPP. Both instruments require that a DPP salesman be familiar with the structure of a DPP and with the DPP's tax consequences. Accordingly, the NASD believes that DPP principals and representatives should be permitted to offer and sell debt instruments of a DPP. Moreover, while the amendments permit DPP-registered persons to sell debt securities in a distribution, the amendments will not permit them to buy or sell DPP debt securities in the secondary market.

Questions regarding this rule filing may be directed to Carole Hartzog, Qualifications Department, at (301) 590-6696 or Elliott R. Curzon, General Counsel's Office, at (202) 728-8451.

SCHEDULE C TO THE NASD BY-LAWS

II

REGISTRATION OF PRINCIPALS

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

* * * * *

(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 [D]direct [P]participation [P]programs as defined in Part II, Section (2)(e)(ii) hereof; and

* * * * *

III 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 and securities business are limited solely to the solicitation, purchase and/or sale of equity interests in or debt of direct participation programs as defined in Part II, Section (2)(e)(ii) hereof[,]; and

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