Federal Register / Vol. 65, No. 81 / Wednesday, April 26, 2000 / Notices 24523

10See 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3As discussed more fully below, the current

proposal replaces File No. SR–NASD–97–12 (‘‘1997

Proposal’’). The 1997 Proposal was published for

comment in the Federal Register on April 3, 1997.

NASD Regulation subsequently withdrew the 1997

Proposal. See Letter from Suzanne E. Rothwell,

Chief Counsel, Corporate Financing, NASD

Regulation, to Katherine A. England, Assistant

Director, Division of Market Regulation

(‘‘Division’’), Commission, dated March 27, 2000

(‘‘March 27 Letter’’).

refer to File No. SR–CHX–00–09 and should

be submitted by May 17, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.10

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–10368 Filed 4–25–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42698; File No. SR–NASD–

00–13]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc. Relating to the Valuation

of Illiquid Direct Participation Program

and Real Estate Investment Trust

Securities on Customer Account

Statements

April 18, 2000.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on March 28,

2000, the National Association of

Securities Dealers, Inc. ‘‘NASD’’ or

‘‘Association’’), through its whollyowned subsidiary, NASD Regulation,

Inc. (‘‘NASD Regulation’’), filed with the

Securities and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) the proposed

rule change as described in Items I, II,

and III below, which Items have been

prepared by the NASD Regulation. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

NASD Regulation proposes to amend

NASD Conduct Rules 2340, ‘‘Customer

Account Statements,’’ 2710, ‘‘Corporate

Financing Rule—Underwriting Terms

and Arrangements,’’ and 2810, ‘‘Direct

Participation Programs.’’ 3 The text of

the proposed rule change appears

below. Proposed new language is in

italics; proposed deletions are in

brackets.

Rule 2340 Customer Account

Statements

(a) General

Each general securities member shall,

with a frequency of not less than once

every calendar quarter, send a statement

of account (‘‘account statement’’)

containing a description of any

securities positions, money balances, or

account activity to each customer whose

account had a security position, money

balance or account activity during the

period since the last such statement was

sent to the customer.

(b) DPP/REIT Securities

(1)(A) Voluntary Estimate Value

A general securities member may

provide a per share estimated value for

a direct participation program (‘‘DPP’’)

or real restate investment trust (‘‘REIT’’)

security on an account statement,

provided the member meets the

conditions of paragraphs (b)(2) and (3)

below.

(B) Mandatory Estimated Value

If the annual report of a DPP or REIT

includes a per share estimated value for

a DPP or REIT security that is held in

the customer’s account or included on

the customer’s account statement, a

general securities member must include

an estimated value from the annual

report, an independent valuation

service, or any other source, in the first

account statement issued by the

member thereafter, provided that the

member meets the conditions of

paragraphs (b)(2) and (3) below.

(2) A member may only provide a per

share estimated value for a DPP or REIT

security on an account statement if:

(A) after considering any relevant

information about the market and the

particular investment in its possession,

the member has no reason to believe

that the estimated value is inaccurate;

and

(B) the estimated value has been

developed from data that is as of a date

no more than 18 months prior to the

date that the statement is issued.

(3) If an account statement provides

an estimated value for a DPP or REIT

security, if must include:

(A) a brief description of the

estimated value, its source, and the

method by which it was developed; and

(B) disclosure that DPP or REIT

securities are generally illiquid, and that

the estimated value may not be realized

when the investor seeks to liquidate the

security.

(4) If an account statement does not

provide an estimated value for a DPPor

REIT security, it must include disclosure

that:

(A) DPP or REIT securities are

generally illiquid;

(B) the value of the security will be

different than its purchase price; and

(C) if applicable, that accurate

valuation information is not available.

(c)[(b)] Definitions

For purposes of this Rule, the

following terms will have the stated

meanings:

(1) [the term] ‘‘account activity’’

[shall] includes, but is not [be] limited

to, purchases, sales, interest credits or

debits, charges or credits, divided

payments, transfer activity, securities

receipt or delivers, and/or journal

entries relating to securities or funds in

the possession or control of the member.

(2) [(c) For purposes of this Rule,] [the

term] a ‘‘general securities member’’

[shall] refers to any member which

conducts a general securities business

and is required to calculate its net

capital pursuant to the provisions of

SEC Rule 15c3–1(a), except for

paragraph (a)(2) and (a)(3).

Notwithstanding the foregoing

definition, a member which does not

carry customer accounts and does not

hold customer funds and securities is

exempt from the provisions of this

section.

(3) ‘‘direct participation program’’ or

‘‘direct participation program security’’

refers to the publicly issued equity

securities of a direct participation

program as defined in Rule 2810

(including limited liability companies),

but does not include securities on

deposit in a registered securities

depository and settled regular way,

securities listed on a national securities

exchange or The Nasdaq Stock Market,

or any program registered as a

commodity pool with the Commodity

Futures Trading Commission.

(4) ‘‘real estate investment trust’’ or

‘‘real estate investment trust security’’

refers to the publicly issued equity

securities of a real estate investment

trust as defined in Section 856 of the

Internal Revenue Code, but does not

include securities on deposit in a

registered securities depository and

settled regular way or securities listed

on a national securities exchange or The

Nasdaq Stock Market.

(5) ‘‘annual report’’ means the most

recent annual report of the DPP or REIT

distributed to investors pursuant

Section 13(a) of the Act.

(d) Exemptions

Pursuant to the Rule 9600 Series, the

Association may exempt any member

24524 Federal Register / Vol. 65, No. 81 / Wednesday, April 26, 2000 / Notices

4The NASD has filed with the SEC a proposed

rule change (File No. SR–NASD–00–04), that would

amend paragraph (c)(6)(B). The Commission has not

taken action regarding File No. SR–NASD–00–04. If

the Commission approves File No. SR–NASD–00–

04, proposed paragraph (c)(B)(xv) would be

renumbered (xiv).

5 ‘‘General securities member’’ is defined in the

rule to mend any member that conducts a general

securities business and is required to calculate its

net capital pursuant to the provisions of SEC Rule

15c3–1(a), except for paragraphs (a)(2) and (a)(3).

6 ‘‘Account activity.’’ as defined in the rule,

includes, but is not limited to, purchases, sales,

interest credits or debits, charges or credits,

dividend payments, transfer activity, securities

receipts or deliveries, and/or journal entries relating

to securities of funds in the possession or control

of the member.

7See Letter from Edward J. Markey, Chairman,

and Jack Fields, Ranking Republican Member,

Subcommittee on Telecommunications and

Finance, U.S. House of Representatives, dated

March 9, 1994. The House Subcommittee also

expressed concerns to the SEC, the National

Association of State Securities Administrators, and

the Investment Program Association.

8See Letter from Brandon Becker, Director,

Division, Commission, to Richard G. Ketchum,

Executive Vice President and Chief Operating

Officer, NASD, dated June 14, 1994.

9NASD Rule 2810(a)(4) defines ‘‘direct

participation program’’ as a ‘‘program that provides

for flow-through tax consequences regardless of the

structure of the legal entity or vehicle for

distribution * * *;’’ This definition covers most

limited partnerships and specifically excludes real

estate investment trust.

10See note 3, supra.

11REIT securities were covered by the proposal

to ensure similar treatment of the two products

under NASD rules.

12See 1997 Notice, supra note 3.

from the provisions of this Rule for good

cause shown.

2710. Corporate Financing Rule—

Underwriting Terms and Arrangements

* * * * *

(c) Underwriting Compensation and

Arrangements

* * * * *

(6) Unreasonable Terms and

Arrangements

* * * * *

(B) Without limiting the foregoing, the

following terms and arrangements,

when proposed in connection with the

distribution of a public offering of

securities, shall be unfair and

unreasonable:

* * * * *

(xv) 4 for a member or person

associated with a member to participate

in a public offering of real estate

investment trust securities, as defined in

Rule 2340(c)(4), unless the trustee will

disclose in each annual report

distributed to investors pursuant

Section 13(a) of the Act a per share

estimated value of the trust securities,

the method by which it was developed,

and the date of the data used to develop

the estimated value.

* * * * *

Rule 2810. Direct Participation

Programs

* * * * *

(b) Requirements

* * * * *

(5) Valuation for Customer Account

Statements

No member may participate in a

public offering of direct participation

program securities unless:

(A) the general partner or sponsor of

the program will disclose in each

annual report distributed to investors

pursuant Section 13(a) of the Act a per

share estimated value of the direct

participation program securities, the

method by which it was developed, and

the date of the data used to develop the

estimated value.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

NASD Regulation included statements

concerning the purpose of and basis for

the proposed rule change and discussed

any comments it received on the

proposed rule change. The text of these

statements may be examined at the

places specified in Item IV below.

NASD Regulation has prepared

summaries, set forth in sections A, B,

and C below, of the most significant

aspects of such statements.

A. Self-Regulatory Organizations

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

(a) Purpose

1. Background

Customer Account Statement Policy

NASD Rule 2340 requires members

who conduct a general securities

business to send account statements to

customers on at least a quarterly basis. 5

The statements must include a

description of any securities position,

money balances or account activity

since the prior account statement was

sent. 6 A member that does not carry

customer accounts and does not hold

customer funds and securities is exempt

from the provisions of NASD Rule 2340.

Request for Regulatory Action

By letter dated March 9, 1994, the

Subcommittee or Telecommunications

and Finance of the U.S. House of

Representatives (‘‘House

Subcommittee’’), expressed to the NASD

its concern regarding the sufficiency of

information provided on customer

account statements regarding the

current value of illiquid partnership

securities.7 The House Subcommittee

recommended that investors in illiquid

partnerships receive better information

on the current value of their

investments.

By letter dated June 14, 1994, the

SEC’s Division of Market Regulation

(‘‘Division’’) requested information from

the NASD on where it would be

appropriate for self-regulatory

organizations to require that members

make certain disclosures regarding

illiquid partnerships on customer

account statements.8 The Division

suggested that, at a minimum, a member

should disclose that: (1) There is no

liquid market for most limited

partnership interests; (2) the value of

partnership, if any reported on the

account statement may not reflect a

value at which customers can liquidate

their positions; and (3) the source of any

reported value, a short description of

the methodology used to determine the

value, and the date the value was last

determined.

In Notice to Members 94–96

(December 1994), the NASD requested

comments concerning a proposed rule

establishing requirements for illiquid

direct participation program 9 (‘‘DPP’’)

securities listed on customer account

statement. As described more fully

below, the NASD received comments

from 36 commenters regarding the

proposal. In response to the

commenters, NASD Regulation revised

the proposal published for comment in

Notice to Members 94–96 and filed the

revised rule with the Commission in the

1977 proposal.10

The 1997 Proposal required general

securities members to include estimated

values for illiquid DPP and real estate

investment trust (‘‘REIT’’) securities on

customer account statements under

certain circumstances.11 Among other

things, the 1997 Proposal required a

general securities member that provided

individual valuations for illiquid DPP or

REIT securities on its retirement

account statements to provide the same

valuation to other customers owning

such securities. The Commission

published the 1997 Proposal for

comment in the Federal Register on

April 3, 1997 12 and received nine

comment letters regarding the proposal.

NASD Regulation states that, as a

result of further discussions with

industry members, concerns arose

regarding potential conflicts between

the requirements of the 1997 Proposal

Federal Register / Vol. 65, No. 81 / Wednesday, April 26, 2000 / Notices 24525

13See March 27 Letter, supra note 3.

14See discussion below of proposed related

amendments to NASD Rules 2710 and 2810 that

would prohibit members from participating in a

public offering of a DPP or REIT unless the general

partner, sponsor, or trustee agreed to include an

estimated value for the securities in each annual

report.

and the obligations of a member acting

as a retirement account fiduciary under

the Employee Retirement Income

Securities Act (‘‘ERISA’’) and Internal

Revenue Service (‘‘IRS’’) regulations.

Therefore, NASD Regulation withdrew

the 1997 Proposal 13 and has replaced it

with the current proposal, which

amends NASD Rules 2340, 2710, and

2810.

2. Description of the Current Proposal

A. Proposed Amendments to NASD

Rule 2340

Scope: NASD Regulation proposes to

apply the new requirements in NASD

Rule 2340 to DPP securities and REIT

securities sold in a public offering. The

definitions of ‘‘DPP’’ and ‘‘REIT’’

proposed in NASD Rule 2340(c)(3) and

(4) would exclude securities listed on a

national securities exchange or the

Nasdaq Stock Market, as well as

securities that are in a depository and

settle regular way. NASD Regulation

believes that the excluded securities are

more likely to trade regulatory and,

accordingly, that investors will have

ready access to current market value

information. The proposed definition of

‘‘DPP’’ in NASD Rule 2340(c)(3) also

would exclude any program registered

as a commodity pool because those

programs generally offer investors a

security that is redeemable by the issuer

at the customer’s option at regular

intervals and at ascertainable values.

Voluntary Estimated Value: Proposed

NASD Rule 2340(b)(1) states that a

general securities member may provide

a per share estimated value for a DPP or

REIT security on an account statement,

provided that the member complies

with the requirements in paragraphs

(b)(2) and (3) that are intended to ensure

that the estimated value is reliable and

that certain disclosures accompany the

estimated value. Specifically, as

discussed more fully below, NASD Rule

2340(b)(2) allows a member to provide

estimated DPP or REIT valuations if the

member has no reason to believe that

the estimated value is inaccurate and

the estimated value has been developed

from data that is as of a date no more

than 18 months prior to the date that the

statement is issued. NASD Rule

2340(b)(3) requires an account statement

that provides an estimated DPP or REIT

valuation to include (1) a brief

description of the estimated value, its

source, and the method by which it was

developed; and (2) disclosure that DPP

or REIT securities are generally illiquid

and that the estimated value may not be

realized when the investor seeks to

liquidate the security.

Mandatory Estimated Value:

Proposed NASD Rule 2340(b)(1)(B)

would require a general securities

member to include a per share estimated

value for any DPP or REIT security on

an account statement if the annual

report of the DPP or REIT provides a per

share estimated value for the security.

Although the inclusion of the estimated

value in the issuer’s annual report

would trigger the member’s obligation,

the estimated value included on the

account statement could be obtained

from the annual report or from an

independent valuation service or

another source, e.g., an estimated value

generated by the member. The estimated

value must be included in the first

customer account statement issued after

the annual report is available. Proposed

NASD Rule 2340(c)(5) defines the term

‘‘annual report’’ as the most recent

annual report of a DPP or REIT

distributed to investors pursuant to

Section 13(a) of the Act.14 A general

securities member that provides a per

share estimated value pursuant to NASD

Rule 2340(b)(1)(B) also must comply

with the requirements of NASD Rules

2340(b)(2) and (b)(3).

Reliability of Estimated Values: NASD

Rule 2340(b)(2) imposes various

conditions designed to ensure that any

voluntary or mandatory per share

estimated value provided on a customer

account statement is reliable, current,

and not misleading. Proposed NASD

Rule 2340(b)(2) states that a member

may only provide a per share estimated

value on an account statement if the

member, after considering all relevant

information about the market and the

particular investment in its possession,

has no reason to believe that the

estimated value is inaccurate. Thus, the

proposal would prohibit a member from

including a per share estimated value on

the account statement if the member

reasonably believed that the estimated

value was inaccurate at the time it was

developed or was no longer accurate as

a result of changing circumstances.

In addition, proposed NASD Rule

2340(b)(2) requires that the estimated

value be developed from data that is of

a date no more than 18 months prior to

the date that the statement is issued.

NASD Regulation believes that the 18-

month standard provides sufficient time

for the member and for an independent

valuation source to develop an

estimated value for DPP/REIT securities

based on the audited financial

statements contained in the Form 10–K

of the DPP or REIT. For example, an

estimated value based on December 31,

1999, financial statements may be used

from January 1, 2000, through June 30,

2001, thereby allowing time between

April and June 2001 for a new estimated

value to be developed based on the

December 31, 2000, financial

statements.

Disclosures Required When An

Estimated Value Is Provided: Under

proposed NASD Rule 2340(b)(3), a

customer account statement that

includes an estimated value for a DPP

or REIT security must include a brief

description of the estimated value, its

source, and the method by which it was

developed. In addition, the account

statement must disclose that DPP or

REIT securities are generally illiquid

and that the estimated value disclosed

may not be realized when the customer

seeks to liquidate the security.

Disclosures Required When An

Estimated Value Is Not Provided:

Proposed NASD Rule 2340(b)(4)

requires that an account statement that

does not provide a valuation for DPP or

REIT securities disclose that the

securities are generally illiquid, the

value of the security will be different

from its purchase price, and, if

applicable, the accurate valuation

information is not available.

B. Proposed Amendments to NASD

Rules 2710 and 2810

NASD Regulation states that the

proposed rule change also will ensure

that DPP sponsors and REIT trustees

provide estimated per share values in

their annual reports. In this regard,

NASD Regulation proposes to amend

NASD Rules 2710 and 2810 to prohibit

members from participating in a public

offering of a DPP or REIT unless the

general partner, sponsor, or trustee

agrees to include in each annual report

a per share estimated value, a

description of the method by which the

estimated value was developed, and the

date of the data use to develop the

estimated value.

3. Implementation of Proposed Rule

Change

To provide members and their service

organizations with sufficient time to

modify their computer systems to

comply with the proposed rule change,

NASD Regulation is requesting that the

proposed rule change become effective

six months after SEC approval. During

that time, NASD Regulation will issue a

Notice to Members announcing SEC

24526 Federal Register / Vol. 65, No. 81 / Wednesday, April 26, 2000 / Notices

approval of the proposed rule change

and the anticipated effective date.

(b) Statutory Basis

NASD Regulation believes that the

proposed rule change is consistent with

the provisions of Section 15A(b)(6) of

the Act, which require that the

Association adopt and amend its rules

to promote just and equitable principles

of trade and generally provide for the

protection of customers and the public

interest, in that the proposed rule

change significantly improves

disclosure to public customers on their

account statements of information

concerning the value of illiquid DPP or

REIT securities, while providing

safeguards for both member firms and

public customers against the publication

of inaccurate values for such securities.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

NASD Regulation does not believe

that the proposed rule change will result

in any burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act, as amended.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

Notice to Members 94–96 (December

1994)

In Notice to Members 94–96

(December 1994), the NASD published

for comment a proposed rule change

establishing requirements for illiquid

DPP securities listed on customer

account statements. The NASD received

39 comments regarding the proposal

from 36 commenters. Thirty of the 36

commenters generally favored the

NASD’s effort to provide regulatory

guidance regarding the disclosure of

partnership valuations on customer

account statements, although every

letter contained suggested revisions. Six

commenters were opposed to the

adoption of the proposed rule change.

The proposal published for comment in

Notice to Members 94–96 required that

customer account statements:

1. Segregate DPP securities from other

securities on the account statement;

2. For illiquid DPP securities listed

without a price, disclose that accurate

pricing information was not available

because the value of the security was

not determinable until the liquidation of

the partnership and no secondary

market existed;

3. If DPP securities were listed with

a price:

a. Not aggregate the value of the DPP

securities with the value of any other

securities on the statement or include

their value in the customer account net

worth calculation;

b. Disclose the methodology used for

obtaining the valuation; and

c. Disclose that DPP securities are

generally illiquid securities and the

price listed may not be realizable if the

customer seeks to liquidate the security.

Scope and Definitions: NASD

Regulation agreed with the views of

commenters on the rule proposed in

Notice to members 94–96 that the

regulatory concerns surrounding the

value of DPP securities should only

extend to unlisted DPPs because an

investment in Nasdaq or exchange-listed

securities provides investors with some

measure of liquidity and recent market

values. Accordingly, the current

proposal adopts definitions of DPP and

REIT securities that exclude securities

listed on a national securities exchange

or The Nasdaq Stock Market, as well as

securities that are in a depository and

settle regular way. NASD Regulation

also determined to except from the

definition of DPP securities any program

registered as a commodity pool because

those programs offer investors a security

that is redeemable by the issuer at the

customer’s option at regular intervals

and at ascertainable values.

Prices vs. Estimated Values: In

response to the commenters, NASD

Regulation amended the current

proposal to eliminate the word ‘‘price’’

and insert the phrase ‘‘estimated value’’

throughout the proposed rule.

Commenters stated that a ‘‘price’’

carried on a customer account statement

gives the appearance to the investor that

the security can be liquidated for an

amount that is roughly equivalent to the

price set forth on the customer account

statement.

Requirement to Place Estimated

Values on Customer Account

Statements: Commenters generally

agreed with the proposed mandatory

requirement for disclosure of values for

DPP securities. However, commenters

differed as to the value to be disclosed,

with the greatest amount of comment

focused on valuation methodologies

(whether net asset value or securitized

value) and their source (i.e., whether

generated by the member or obtained

from the general partners or third-party

independent evaluators).

NASD Regulation agrees with the

sentiment expressed in a majority of the

comment letters and with the views of

correspondence received from the

House Subcommittee that investors in

non-publicly traded partnerships and

trusts should know how their

investment is performing. However,

NASD Regulation believes that there are

practical problems to requiring that all

members provide disclosure of the

estimated values of all DPP and REIT

securities held by their customers.

Therefore, the current proposal will

require a general securities member to

include a per share estimated value for

illiquid DPP or REIT securities on

customer account statements when the

DPP or REIT includes a per share

estimated value in the program’s or

trust’s annual report. In addition, the

current proposal will prohibit a member

from participating in a public offering a

DPP or REIT unless the general partner,

sponsor, or trustee agrees to include a

per share estimated value for the

program or trust securities in the annual

report.

Appropriate Source for Estimated

Values: Commenters on the proposal

published in Notice to Members 94–96

expressed concern that the proposal did

not provide guidance on the different

sources of an estimated value

considered appropriate by the

Association. The current proposal

permits the per share estimated value

that is included on a customer account

statement to be from the program or

trust’s annual report, from an

independent valuation service, or

another source. The latter category is

intended to permit the use of an

estimated value generated by the

member.

Prohibition on Using Stale Data:

Many commenters on the proposal

published for comment in Notice to

Member 94–96 stated that an estimated

value, accurate upon its first use on a

customer account statement, may

become stale or inaccurate due to

lengthy time of subsequent events, such

as the sale of a major asset of the

partnership. NASD Regulation agrees

that an estimated value based on stale

information eventually becomes

sufficiently misleading to investors to

constitute a fraud. Therefore, the current

proposal precludes members from

disclosing an estimated value if the

financial statements and other

underlying data used to determine that

value are of a date more than 18 months

prior to the date the account statement

is issued. In addition, the current

proposal requires that a member have

no reason to believe that the estimated

value is inaccurate.

Segregation of DPP/REIT Securities:

Several commenters on the proposal

published for comment in Notice to

Members 94–96 objected to the

requirement that DPP and REIT

securities be segregated from other

securities into a separate location on the

customer account statement. The

Federal Register / Vol. 65, No. 81 / Wednesday, April 26, 2000 / Notices 24527

15See 1997 Notice, supra note 2.

16The Division asked NASD Regulation to amend

its proposal to require members acting in a

fiduciary capacity to list on customer account

statements the individual valuations for illiquid

DPPs and REITs that they would be required to

obtain for IRS purposes. See Letter from Robert L.D.

Colby, Deputy Director, to Charles L. Bennett,

Director, Corporate Finance, NASD Regulation,

dated October 6, 1997.

17NASD Regulation believes that the need for

greater and more frequent disclosure of individual

values for retirement account assets, as urged by the

commenters, is more appropriately addressed by

the IRS and the Department of Labor.

current proposal does not include this

requirement.

Required Disclosure for Unpriced

Securities: The proposal published for

comment in Notice to members 94–96

would have required a customer

account statement that included no

price for DPP securities to indicate that

accurate pricing information is not

available because the value of the DPP

security is not determinable until the

liquidation of the partnership and no

active secondary market exists. In

response to comments, the current

proposal requires disclosure that DPP

and/or REIT securities are generally

illiquid securities; that the value of the

security may be different than its

purchase price; and, if applicable, that

accurate valuation information is not

available.

The 1997 Proposal

The NASD filed the 1997 Proposal

with the SEC on February 21, 1997. The

Commission published the 1997

Proposal for comment in the Federal

Register on April 3, 1997,15 and

received nine comment letters. NASD

Regulation notes that, in general, the

commenters supported the proposal but

believed that it did not go far enough.

The 1997 Proposal required that a

general securities member:

1. Provide an estimated value for

illiquid DPP and REIT securities on all

customer account statements if the

member:

a. Provided such values to its

retirement account customers (except

when the retirement account statement

only included an aggregate valuation for

all of the assets in the account); or

b. Participated in the public offering

of the DPP or REIT and could obtain

such a value from a periodic report filed

with the SEC or from an independent

source; and

2. If the member provided a valuation,

obtain estimated values form a periodic

filing with the SEC, an independent

source, or develop its own value that is

based on data that was of a date more

than 18 months before the date the

statement was issued;

3. Segregate illiquid DPP and REIT

securities from other securities on the

account statement;

4. Not aggregate the value of DPP/

REIT securities with the value of other

securities in the total account value

unless the statement included the

disclosure on the illiquidity of the

securities;

5. Include a brief description in the

account statement of the type of

estimated value, its source, and how a

customer could obtain a detailed

explanation of the valuation

methodology, and disclose that DPP/

REIT securities are generally illiquid

and that the value disclosed may not be

realizable upon sale by the customer;

6. If illiquid DPP and REIT securities

were listed on the account statement

without a value, disclose in the account

statement that DPP/REIT securities are

illiquid, that the value of the security

may be different than its purchase price,

and that accurate pricing information

was not available; and

7. Not include the original issue price

of a DPP or REIT security as the

estimated value on an account

statement.

Objection to the Exception for

Retirement Accounts: Five of the

commenters urged the Association to

make it mandatory for members to

provide an estimated value on the

account statement for the publicly sold

DPP/REIT securities in their customers’

accounts. In particular, several

commenters objected to an exception

that would have permitted members to

provide an aggregate valuation for the

assets in a retirement account.16

NASD Regulation has concluded that

the mandatory disclosure of estimated

values for DPP and REIT securities in

retirement accounts would impose a

burdensome requirement on brokerdealers that would not, according to

NASD Regulation, also be applicable to

non-member fiduciaries that are

responsible for the majority of the

accounts in which such illiquid DPP/

REIT securities reside. Moreover, NASD

Regulation believes that basing the

mandatory disclosure of estimated

values for illiquid DPP/REIT securities

on the treatment of such securities in a

retirement account inappropriately

intrudes the rules of the NASD into the

regulation of retirement accounts by the

Department of Labor and the IRS.17

Therefore, the current proposal

eliminate the requirement that members

include estimated values for illiquid

DPP and REIT securities in retirement

accounts. Instead, the current proposal

would require that a general securities

member provide an estimated value for

an illiquid DPP or REIT in the first

account statement issued after a per

share estimated value is provided in the

program’s or trust’s annual report.

According to NASD Regulation, the

member’s issuance of an annual

retirement account statement in

accordance with ERISA and IRS

regulations will not be affected by this

NASD account statement requirement,

although members may need to advise

customers of the reason for the different

information provided in the two

account statements.

Description of Type of Estimated

Value: Commenters also suggested that

the provision requiring a description of

the type of estimated value be amended

to only permit members to report a fair

market value that incorporates a control

and marketability discount, as required

to be reported on IRS Forms 1099–R and

5498. A general partner’s valuation is

typically a net asset value and does not

include a discount for illiquidity or lack

of control. Therefore, NASD Regulation

believes that the change requested by

these commenters would limit members

to an estimated value provided by an

independent valuation firm because

such organizations normally incorporate

this type of discount in developing a

valuation. NASD Regulation believes

that members should be able to provide

different types of per share estimated

values, as long as the member makes

appropriate disclosures.

Definition of DPP: In response to the

request of a commenter. Regulation has

revised the definition of DPP security in

the current proposal to clarify that

limited liability companies are covered

by the proposed rule.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding, or

(ii) as to which the Exchange consents,

the Commission will:

(A) By order approve the proposed

rule change, or

(B) Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons mailing written submissions

24528 Federal Register / Vol. 65, No. 81 / Wednesday, April 26, 2000 / Notices

18 27 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See April 12, 2000 letter from Nandita Yagnik,

Exchange, to Rebekah Liu, Special Counsel,

Division of Market Regulation, SEC (‘‘Amendment

No. 1’’). In Amendment No. 1, the Exchange

requested that the proposed rule change be filed

under Section 19(b)(3)(A) of the Act and Rule 19b–

4(f)(6) thereunder. 15 U.S.C. 78s(b)(3)(A) and 17

CFR 240.19b–4(f)(6). The Exchange also requested

that the Commission waive the 5-day notice of its

intent to file the proposal by treating the original

proposed rule change as the prefiling notice

required under Rule 19b–4(f)(6); and requested that

the Commission waive the 30-day period before the

proposal becomes effective to permit the proposed

rule change to become immediately effective.

4 15 U.S.C. 78s(b)(3)(A).

5 17 CFR 240.19b–4(f)(6).

6See Securities Exchange Act Release No. 41210

(March 24, 1999), 64 FR 15857 (April 1, 1999) (SR–

Phlx–96–14).

7 15 U.S.C. 78f(b)(5).

8 15 U.S.C. 78s(b)(3)(A).

9 17 CFR 240.19b–4(f)(6).

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW,

Washington, DC 20549–0609. Copies of

the submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relation to the

proposed rule change between the

Commission and any persons, other

than those that may be withheld from

the public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of NASD Regulation.

All submission should refer to File No.

SR–NASD–00–13 and should be

submitted by May 17, 2000.

For the Commission , by the Division of

Market Regulation, pursuant to delegated

authority.18

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–10257 Filed 4–25–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42702, File No. SR–Phlx–

00–19]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Philadelphia Stock Exchange, Inc.

Changing the Name of the VWAP

System to ‘‘eVWAP’’

April 19, 2000.

Pursuant to section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on March 3,

2000, the Philadelphia Stock Exchange,

Inc. (‘‘PHLX’’ or ‘‘Exchange’’), filed a

proposed rule change with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’). The

proposed rule change is described in

Items I, II, and III below, which Items

have been prepared by Exchange. On

April 12, 2000, the Exchange filed

Amendment No. 1 to the proposed rule

change.3 The Exchange filed the

proposed rule change, as amended,

pursuant to section 19(b)(3)A) of the

Act,4 and Rule 19b–4(f)(6) thereunder,5

which renders the proposed rule change

effective upon filing with the

Commission. The Commission is

publishing this notice to solicit

comments on the proposed rule change,

as amended, from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange proposes to amend

Phlx Rule 237 so that the name of an

electronic trading system, and the name

of the calculation component of this

system, currently referred to as

‘‘Universal Trading System,’’ ‘‘UTS,’’

‘‘Volume Weighted Average Price

Trading System,’’ ‘‘VTS,’’ ‘‘Volume

Weighted Average Price’’ and

‘‘VWAPTM,’’ would be changed to

‘‘eVWAPTM.’’ eVWAP would denote

both the name of the system and the

name of the calculation component,

depending upon the context in which

the term is used.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

Exchange included statements

concerning the purpose of and basis for

the proposed rule change and discussed

any comments it received on the

proposed rule change. The text of these

statements may be examined at the

places specified in Item IV below. The

Exchange has prepared summaries, set

forth in sections A, B, and C below, of

the most significant aspects of such

statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The Exchange proposes to change the

name of this electronic trading system

and the terminology for its pricing

calculation to ‘‘eVWAP.’’ The system,

which was developed by Universal

Trading Technologies Corporation

(‘‘UTTC’’), is operated as a facility of the

Exchange under Section 3(a)(2) of the

Act. The Commission approved the

Exchange’s operation of the system on

March 24, 1999.6

UTTC has informed the Exchange that

the proposed name and reference

changes will be consistent with and

facilitate the registration of a certain

trademark by UTTC in ‘‘eVWAP’’. The

‘‘e’’ will promote UTTC’s branding

strategy regarding the system and more

clearly reflect the electronic character of

the system and its calculation

component. The proposed rule change

does not change the substance or

operation of the system or the

calculations.

2. Statutory Basis

The Exchange believes that the

proposed rule change is consistent with

Section 6(b)(5) of the Act 7 in that it is

designed to prevent fraudulent and

manipulative acts and practices, to

promote just and equitable principles of

trade, to remove impediments to and

perfect the mechanism of a free and

open market and a national market

system, and, in general, to protect

investors and the public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change, as amended,

will result in any burden on

competition that is not necessary or

appropriate in furtherance of the

purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

The Exchange has neither solicited

nor received written comments on the

proposed rule change, as amended.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The foregoing rule change has become

effective upon filing pursuant to section

19(b)(3)(A)(iii) of the Act 8 and Rule

19b–4(f)(6) 9 thereunder because the

proposed rule change does not (i)

significantly affect the protection of

investors or the public interest; (ii)

impose any significant burden on

competition; and (iii) become operative

for 30 days from the date on which the

proposed rule change was filed, or such

shorter time as the Commission may