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84-53 Request for Comments on Proposed Amendment to Appendix F Concerning Suitability Requirements for Freely Tradeable Partnership Units
TO: All NASD Members and Other Interested Persons
Attention: Direct Participation Programs Department
COMMENTS MUST BE RECEIVED BY NOVEMBER 8, 1984
The Association's Board of Governors has approved for membership comment a proposed amendment to Appendix F to Article III, Section 34 of the Rules of Fair Practice. Appendix F contains rules and regulations relating to public offerings of direct participation programs. The proposed amendment would liberalize the special suitability criteria contained in Section 3(b) of Appendix F by exempting from its provisions direct participation programs which are quoted on NASDAQ or listed on an exchange. The text of the proposed amendment is attached to this Notice.
All comments received during the comment period will be reviewed by the Association's Direct Participation Programs Committee and the Board of Governors. If the Board of Governors approves the proposal or an amended version resulting from comments received, it must be filed with the Securities and Exchange Commission for approval.
Background and Explanation of Proposed Amendment
It has become increasingly common for direct participation programs to issue freely tradeable units or to place units of limited partnership interest in a depositary and issue depositary receipts for such units. Such units and depositary receipts are freely tradeable in a manner generally analogous to common stock and evidence entitlement to a portion of a program's income, gains, losses, deductions, credits and distributions.
Section 3(b) of Appendix F requires members in "recommending the purchase, sale or exchange of an interest in a direct participation program" to obtain certain enumerated information, make an affirmative finding of suitability, and retain a record of the basis for that finding in its files. These requirements were specifically included in light of the general absence of liquidity in the market for limited partnerships as well as to assure that the unique tax status and investment characteristics of these programs be considered in secondary market transactions as well as initial distributions. With the emergence of active trading markets for certain programs, however, questions have arisen as to the applicability of these requirements to transactions in NASDAQ quoted or exchange-listed programs.
The Committee and the Board reviewed the purposes of the special suitability requirements and concluded that freely tradeable program units present liquidity, tax and investment considerations which are different from those for other partnership securities. It was also concluded that where an active trading market exists, potentially adverse consequences to an investor resulting from such unique considerations can be remedied by quickly liquidating the investor's holdings. Ordinarily, investors may be forced to bear those consequences in the absence of an active secondary market.
With the above distinction in mind, the Committee and the Board concluded that it would be appropriate to amend Appendix F to exempt transactions in direct participation programs which are quoted on NASDAQ or listed on an exchange from the special suitability requirements contained in Section 3(b). Such transactions would, however, remain subject to the general suitability requirements contained in Article III, Section 2 of the Rules of Fair Practice.
It is important to note that the proposed amendment would relate only to freely tradeable partnership units or depositary receipts quoted on NASDAQ or listed on a registered securities exchange. Members will still be expected to assure compliance with the suitability requirements of Section 3(b) of Appendix F in all initial public offerings of and secondary market transactions in other direct participation programs. In addition, the provisions of Section 3(a), which requires the establishment and disclosure of investor suitability standards in the prospectus, remain applicable to all public offerings of direct participation programs.
All written comments should be addressed to the following:
James M. Cangiano, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006
All comments must be received by November 8, 1984. All comments received will be made available for public inspection.
Any questions regarding this notice should be directed to Suzanne E. Rothwell of the Corporate Financing Department at (202) 728-8258.
Frank J. Wilson
Executive Vice President'
Legal and Compliance Department
Proposed Amendment to Appendix F to Article III, Section 34 of the Rules of Fair Practice *
In recommending to a participant the purchase, sale or exchange of an interest in a direct participation program, a member or person associated with a member shall:
* New language is underlined.