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95-64 SEC Approves Amendments To Article III, Section 34 Of The NASD Rules Of Fair Practice And Part I Of Schedule D To The NASD By-Laws Relating To Limited Partnership Rollup Transactions

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Executive Summary

On July 3, 1995, the Securities and Exchange Commission (SEC) approved amendments to Article III, Section 34 of the NASD Rules of Fair Practice and Part I of Schedule D to the NASD By-Laws to exclude investment companies and business development companies from the definition of "limited partnership rollup transaction."1 The rule change became effective on July 3, 1995.

Background And Description

Federal legislation regulating limited partnership rollups (Rollup Reform Act) was signed into law on December 17, 1993, and contained a mandate for the NASD to adopt its own rollup rule. The NASD's rule regulating rollups (Rollup Rule) was approved by the SEC on August 15, 19942 and amended Article III, Section 34 of the NASD Rules of Fair Practice to prohibit NASD members and associated persons from participating in a limited partnership rollup transaction unless the transaction includes specified provisions to protect the rights of limited partners.

The Rollup Rule further amended Part III of Schedule D to the By-Laws to prohibit the authorization for quotation on the Nasdaq National Market® of any security resulting from a limited partnership rollup transaction unless the transaction is conducted in accordance with certain specified procedures designed to protect the rights of dissenting limited partners. The NASD Rollup Rule was designed to conform to the federal rollup legislation.

Subsequent to approving the NASD Rollup Rule, the SEC adopted new Rule 3b-11 to exclude from the definition of limited partnership rollup transaction, among other things, transactions involving entities registered under the Investment Company Act of 1940 (the Act) or any Business Development Company as defined in Section 2(a)(48) of the Act.3 In its adopting release, the SEC stated that it was adopting the new rule to define related terms used in the federal rollup definition "...for purposes of, among other things, the SRO rules." Subsequently, the SEC requested that the NASD amend the Rollup Rule to conform the NASD's definition of limited partnership rollup transaction to the definition adopted by the SEC.

The amendments add an exclusion for investment companies and business development companies to the definition of limited partnership rollup transaction in new paragraph 7 to Subsection (b)(2)(B)(vii)d to Article III, Section 34 of the Rules of Fair Practice and new paragraph (vii) to Subsection 14(D) to Part I of Schedule D. Thus, the amendments exclude investment companies and business development companies from the purview of the Rollup Rule. Investment companies and business development companies are already subject to extensive regulation under the Act and have not been perceived as entities connected with the types of abusive limited partnership rollup transactions for which the investor protection provisions of the rollup rules were sought.

Questions regarding this Notice may be directed to Robert J. Smith, Attorney, Office of General Counsel, at (202) 728-8176.


1 See, Securities Exchange Act Rel. No. 35934 (July 3, 1995); 60 FR 35977 (July 12, 1995).

2 See, Securities Exchange Act Rel. No. 34533 (August 15, 1994); 59 FR 43147 (August 22, 1994).

3 See, Securities Act Release No. 33-7113; Exchange Act Release No. 34-35036 (December 2, 1994); 59 FR 63676 (December 8, 1994).


Text Of Proposed Amendments To Article III, Section 34 Of The NASD Rules Of Fair Practice And Part I Of Schedule D To The NASD By-Laws

(Note: New text is underlined.) Direct Participation Programs Sec. 34.

(a) No change.
(b)

Application

(1) No member or person associated with a member shall participate in a public offering of a direct participation program or a limited partnership rollup transaction except in accordance with this subsection.

Definitions

(2)
(A) No change.
(B) The following terms shall have the stated meaning when used in this subsection:
(i) through (vi) No change.
(vii) Limited Partnership RollupTransaction—a transaction involving the combination or reorganization of one or more limited partnerships, directly or indirectly, in which:
a through c No change.
d. any of such investors are not provided an option to receive or retain a security under substantially the same terms and conditions as the original issue.

Notwithstanding the foregoing definition, a "limited partnership rollup transaction" does not include:

1 through 6 No change.
7. a transaction involving only entities registered under the Investment Company Act of 1940 or any Business Development Company as defined in Section 2(a)(48) of that Act.

Schedule D, Part 1 Definitions

For purposes of Schedule D, unless the context otherwise requires:

(1) through (13) No change.
(14) "Limited Partnership Rollup Transaction" means a transaction involving the combination or reorganization of one or more limited partnerships, directly or indirectly, in which:
(A) through (C) No change.
(D) any of such investors are not provided an option to receive or retain a security under substantially the same terms and conditions as the original issue.

Notwithstanding the foregoing definition, a "limited partnership rollup transaction" does not include:

(i) through (vi) No change.
(vii) a transaction involving only entities registered under the Investment Company Act of 1940 or any Business Development Company as defined in Section 2(a)(48) of that Act.

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