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FINRA Manual
Corporate Organization Notices
1995
95-104 Expanded Sign-In Procedures At The PROCTOR Centers, Effective February 1, 1996; And PROCTOR Adds Remote Delivery Sites
95-103 SEC Approves A Policy That Delegates Authority To The NASD Staff And The NASD Fixed Income Committee To Review Member Requests For Exemptions From MSRB Rule G-37(b)
95-101 Mail Vote—NASD Solicits Member Vote On Amendments To The NASD By-Laws To Reconfigure The NASD Board And Establish A National Nominating Committee;
95-88 Treasury Delays Effective Date Of Wire Transfer Recordkeeping Requirements Until April 1, 1996; Proposes Clarifying Amendments
95-85 Clarification Of NASD Notice to Members 95-16 And NYSE Information Memorandum 95-16: Content And Enforcement Of Provisions In Customer Agreements And Predispute Arbitration Clauses
95-83 SEC Approves Rules Permitting Arbitration Participants To Seek Injunctive Relief From Arbitrators
95-81 SEC Approves Rules For Reporting Customer Complaint Information; Special NASD Notices to Members
95-80 NASD Further Explains Members Obligations And Responsibilities Regarding Mutual Funds Sales Practices
95-76 SEC Permits NASD To Discipline Members And Associated Persons Who Fail To Honor Arbitration Or Mediation Settlement Agreements
95-73 NASD Requests Comment On Member Obligations To File Certain Exchange Offers That Result In Public Distributions;
95-69 Treasury Amends Bank Secrecy Act; Requires Additional Recordkeeping Requirements For Wire Transfers
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
95-63 SEC Approves Amendments To Article III, Section 34 Of The NASD Rules Of Fair Practice Relating To Freely Tradeable Direct Participation Program Securities
95-61 Mail Vote—NASD Solicits Member Vote On Amendments To The By-Laws To Include Statutory Disqualification Provisions Adopted By Congress;
95-56 NASD Files With The SEC Proposals Related To Non-Cash Incentive Programs, Disclosure Of Cash Compensation, And Direct Payments To Associated Persons
95-54 SEC Approves Amendments To Article III, Section 21 Of The NASD Rules Of Fair Practice Relating To Cold-Calling Requirements
95-50 Availability Of New Qualification Examination For Registered Options Limited Representative (Series 42)
95-47 SEC Approves NASD Proposal To Raise Position Limits For Certain Equity Securities Not Subject To Standardized Options Trading
95-45 SEC Approves Amendments To NASD Interpretation Of Forwarding Of Proxy And Other Materials Under Article III, Section 1 Of The Rules Of Fair Practice
95-44 Request For Comments On Proposed Amendments To The Exception To The Qualified Independent Underwriter Requirement In Schedule E To The NASD By-Laws;
95-37 SEC Approves NASD Proposal Amending The Foreign-Associate Provisions Of Schedule C To The NASD By-Laws
95-36 SEC Approves T+3-Related Amendments To The NASD Uniform Practice Code And Rules Of Fair Practice
95-33 Mail Vote—NASD Solicits Member Vote On Measures To Discipline Members And Registered Persons For Failing To Honor Arbitration And Mediation Settlement Agreements; Last Voting Date: June 15, 1995
95-29 Treasury Approves Amendments To Capital Requirements Under The Government Securities Act Of 1986
95-28 Treasury Provides Government Securities Broker/Dealers With Exemptive Relief In Calculating Haircuts For Options On Certain Mortgage-Backed Securities
95-24 SEC Approves Recordkeeping And Reporting Requirements For Trading Systems Operated By Broker/Dealers
95-22 SEC Approves Amendments To Article III, Section 44 Of The NASD Rules Of Fair Practice About Filing Requirements For Modified Guaranteed Annuity And Life Insurance Contracts
95-21 Request For Comments On Proposed Suitability Obligations To Institutional Customers Interpretation;
95-20 NASD Solicits Member Comment On Proposals For Comprehensive Improvements To The Regulation And Operation Of The Nasdaq Stock Market;
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95-63 SEC Approves Amendments To Article III, Section 34 Of The NASD Rules Of Fair Practice Relating To Freely Tradeable Direct Participation Program Securities
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Executive Summary
On July 11, 1995, the Securities and Exchange Commission (SEC) approved amendments to Article III, Section 34 of the NASD Rules of Fair Practice to exclude initial placements and secondary market transactions in direct participation program (DPP) securities that are listed or for which an application has been submitted to The Nasdaq Stock MarketSM (Nasdaq®) or a registered national securities exchange from the prohibition on transactions in discretionary accounts without written approval.1 The rule change became effective on July 11, 1995. The exclusion is not available to a member that is an affiliate of the DPP.
Background
Article III, Section 34 of the Rules of Fair Practice regulates participation by members and persons associated with a member in DPP and limited partnership rollup transactions (rollup) and generally prohibits a member or a person associated with a member from participating in a public distribution of a DPP or a rollup unless the distribution or transaction conforms to certain suitability and disclosure requirements and standards of fairness and reasonableness (DPP rule). The DPP rule required that all DPP securities are subject to the discretionary account prohibitions in subsection (b)(3)(D) of the DPP rule, which state, in part, that ". . . no member shall execute any transaction in a direct participation program in a discretionary account without prior written approval of the transaction by the customer." The NASD considers discretionary transactions in DPP securities that are illiquid and for which no ready market exists to be an improper use of discretionary power.
Since the adoption of the DPP rule in 1982,2 an increasing number of DPPs, such as master limited partnerships, have issued partnership units, depositary receipts for such units, or assignee units of limited partnership units that are freely tradeable in a manner analogous to common stock and are quoted on Nasdaq or listed on registered national stock exchanges.
Recently, the NASD considered whether DPP securities listed on Nasdaq or a registered national stock exchange ought to be subject to the discretionary account restrictions in the DPP rule. The NASD determined that the concerns that attach to the use of discretionary authority for illiquid, unmarketable DPP securities are not present with freely tradeable DPP securities.
Description Of Amendments
The NASD has adopted amendments that reverse the order of current Subsections (b)(3)(C) and (D) to Section 34 of the DPP rule and add a reference to Subparagraph 3(C) in new Subparagraph 3(D) to exclude from the prohibition on transactions in discretionary accounts without written approval:
- secondary public offerings of, or secondary market transactions in, a DPP security for which quotations are displayed on Nasdaq or which is listed on a registered national securities exchange, and
- primary offerings of a DPP for which an application for inclusion on Nasdaq or listing on a registered national securities exchange has been approved. The exclusion for such freely tradeable DPP securities in newly designated Subparagraph (3)(D) is available only to members that are not an affiliate of the DPP, as the concept of "affiliate" is defined in Section (2)(a)(1) of Schedule E to the NASD By-Laws. Where such an affiliation is present, the NASD believes that substantial conflicts of interest and regulatory concerns continue to exist and the exclusion should not be made available.
Recognizing the use of discretionary authority for transactions in such freely tradeable DPP securities is consistent with the current provisions in the DPP rule, which exempt freely tradeable DPP securities from the suitability and disclosure requirements of the DPP rule. Such suitability and disclosure requirements, which are necessary where DPP securities lack liquidity and marketability, are unnecessary where a ready, liquid market exists.
Discretionary transactions in freely tradeable DPP securities remain subject to the general discretionary account requirements contained in Article III, Section 15 of the Rules of Fair Practice.
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. 35954 (July 11,1995); 60 FR 36845 (July 18, 1995).
2 The DPP rule was initially approved by the Securities and Exchange Commission as Appendix F to Article III, Section 34 on September 16, 1982 (Securities Exchange Release No. 19054).
Text Of Amendments To Article III, Section 34 Of The Rules Of Fair Practice
(Note: New text is underlined; deletions are bracketed.)
Direct Participation Programs
Sec. 34.
Suitability
