Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices 71169

26See January 1997 Order, supra note 7.

27 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See letter from Suzanne E. Rothwell, Chief

Counsel, Corporate Financing, NASD Regulation, to

Katherine A. England, Assistant Director, Division

of Market Regulation (‘‘Division’’), Commission,

dated September 21, 2000 (‘‘Amendment No. 1’’). In

Amendment No. 1, NASD Regulation proposed to

delete NASD Rule 2340(b)(A) and add new

paragraph (b)(4) to NASD Rule 2340. NASD Rule

2340(b)(4) states that, notwithstanding the

requirement in NASD Rule 2340(b)(1)(B), a member

may refrain from including a per share estimated

value for a DPP or REIT security on an account

statement if the member can demonstrate the value

was inaccurate as of the date of the valuation or is

no longer accurate as a result of a material change

in the operations or assets of the program or trust. 4See letter from Suzanne E. Rothwell, Chief

Counsel, Corporate Financing, NASD Regulation, to

Katherine A. England, Assistant Director, Division,

Commission, dated October 27, 2000 (‘‘Amendment

No. 2’’). Amendment No. 2 revised NASD Rule

2340(b)(4) to indicate that a member must refrain

from including a per share estimated value for a

DPP or REIT security on an account statement if the

member can demonstrate the value was inaccurate

as of the date of the valuation or is no longer

accurate as a result of a material change in the

operations or assets of the program. NASD

Regulation noted that the revised provision does

not relieve a member of its obligation to provide an

alternative per share estimated value when the

member’s obligation is triggered by NASD Rule

2340(b)(1)(B). 5See Securities Exchange Act Release No. 42698

(April 18, 2000), 64 FR 24523.

6See letter from Anne Rabbitt, Assistant Vice

President, Director of Investor Services,

Resourcephoenix.com, to the Honorable Arthur

Levitt, Chairman, Commission, dated October 10,

2000 (‘‘Resourcephoenix.com Letter’’); letter from

Larry E. Goff, National Sales Manager, CNL

Investment Company, to the Honorable Arthur

Levitt, Chairman, Commission, dated October 3,

2000 (‘‘CNL Letter’’); letter from Christopher L.

Davis, President, Investment Program Association

(‘‘IPA’’), to Secretary, Commission, dated June 30,

2000 (‘‘IPA letter’’); letter from Anne Julie Ravane,

Vice President and Senior Counsel, Private Client

Counsel, Office of General Counsel, Merrill Lynch

(‘‘Merrill Lynch’’), to Secretary, Commission, dated

June 2, 2000 (‘‘Merrill Lynch I’’); and letter from

Anne Julie Ravane, Vice President and Senior

Counsel, Private client Counsel, Office of General

Counsel, Merrill Lynch, to Secretary, Commission,

dated June 5, 2000 (‘‘Merrill Lynch I’’). Merrill

Lynch withdrew Merrill Lynch I and replaced it

with Merrill Lynch II. See Merrill Lynch II.

Commission expects the Exchange to

continue to work towards establishing a

linkage with the Nasdaq systems as

requested in the January 1997 Order.26

In connection with this effort, the

Commission has requested an update on

the information provided in the

December 21, 1999 report using the

Exchange’s surveillance system. The

Commission requests that the Exchange

supplement the available trading data so

that it can consider issues concerning

the pilot program, including the

circumstances involving orders that are

not automatically executed through

MAX, whether orders are given the

NBBO shown at the time the order is

received or the NBBO posted at the time

the order is executed, and what

explanations are available for price

disimprovement. The Commission is

extending the pilot program for one year

so that the Exchange may continue to

compile this data for the Commission’s

review.

The Commission also requests that

the Exchange continue its effort to

rewrite Article XX, Rule 37 and Article

XX, Rule 43 of the Exchange’s rules so

these rules clearly explain the difference

between how listed (or dually traded)

securities and over-the-counter (or

Nasdaq/NM) securities are routed and

executed by the Exchange, and submit

the new proposed language to the

Commission for review and approval.

Additionally, the Commission requests

that the Exchange include in its rules an

explanation of how the provisions of the

Exchange’s Best Rule interact with the

Exchange’s Rules governing automatic

execution of orders.

The Commission does not want to

interrupt the current operations of the

Exchange while the above-described

issues are being addressed. Therefore,

the Commission finds that it is

appropriate to accelerate the operative

date of the proposed rule change.

At any time within 60 days of the

filing of the proposed rule change, the

Commission may summarily abrogate

such rule change if it appears to the

Commission that such action is

necessary or appropriate in the public

interest, for the protection of investors,

or otherwise in furtherance of the Act.

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 making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

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 relating to the

proposed rule change between the

Commission and any person, 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 in Washington, DC Copies of the

filing will also be available for

inspection and copying at the principal

office of the Exchange. All submissions

should refer to File No. SR–CHX–00–36

and should be submitted by December

20, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.27

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–30384 Filed 11–28–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43601; File No. SR–NASD–

00–13]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval to Amendment

Nos. 1 and 2 to the 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

November 21, 2000.

Introduction

On March 28, 2000, the National

Association of Securities Dealers, Inc.

(‘‘NASD or Association’’), through its

wholly-owned subsidiary, NASD

Regulation, Inc. (‘‘NASD Regulation’’),

submitted to the Securities and

Exchange Commission (‘‘Commission’’

or ‘‘SEC’’), pursuant to Section 19(b)(1)

of the Securities Exchange Act of 1934

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

proposal to amend its rules to require

general securities members to provide

valuations and disclosures relating to

direct participation program (‘‘DPP’’)

and real estate investment trust

(‘‘REIT’’) securities on customer account

statements under certain circumstances.

NASD Regulation amended its proposal

on September 25, 2000,3 and on October

30, 2000.4

The Proposal was published for

comment in the Federal Register on

April 26, 2000.5 Five comment letters

were received regarding the proposal.6

This order approves the proposed rule

change, as amended. In addition, the

Commission is publishing notice to

solicit comments and is simultaneously

approving, on an accelerated basis,

Amendment Nos. 1 and 2.

II. Background and Description of the

Proposal

A. Background

NASD Rule 2340, ‘‘Customer Account

Statements,’’ requires general securities

71170 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices

7A general securities member is any member that

conducts a general securities business and is

required to calculate its net capital pursuant to the

provisions Rule 15c3–1(a) under the Act, except for

paragraphs (a)(2) and (a)(3). See NASD Rule

2340(c).

8See Letter from Edward J. Markey, Chairman,

and Jack Fields, Ranking Republican Member,

Subcommittee on Telecommunications and

Finance, U.S. House of Representatives, to Joseph

R. Hardiman, President and Chief Executive Officer,

NASD, dated March 9, 1994 (‘‘1994 Letter’’).

9See 1994 Letter, supra note 10.

10See Letter from Brandon Becker, Director,

Division, Commission, to Richard G. Ketchum,

Executive Vice President and Chief Operating

Officer, NASD, dated June 14, 1994 (‘‘Limited

Partnership Letter’’).

11See Limited Partnership Letter, supra note 10.

12See File No. SR–NASD–97–12.

13See Securities Exchange Act Release No. 38451

(March 27, 1997), 62 FR 15945.

14See Letter from Suzanne E. Rothwell, Chief

Counsel, Corporate Financing, NASD Regulation, to

Katherine A. England, Assistant Director, Division,

Commission, dated March 27, 2000.

15Under the proposal, a DPP or DPP security

refers to the publicly issued equity security of a

DPP as defined in NASD Rule 2810 (including

limited liability companies), but does not include

securities on deposit in a registered security

depository and settled regular way, securities listed

on a national securities exchange or The Nasdaq

Stock Market (‘‘Nasdaq’’), or a program registered as

a commodity pool with the Commodity Futures

Trading Commission. The proposal defines a REIT

or REIT security to include the publicly issued

equity securities of a REIT as defined in Section 856

of the Internal Revenue Code, but not REIT equity

securities on deposit in a registered securities

depository and settled regular way or REIT equity

securities listed on a national securities exchange

or Nasdaq. See NASD Rules 2340(c)(3) and (c)(4).

16NASD Rule 2340(c)(5) defines annual report to

mean the most recent annual report of the DPP or

REIT distributed to investors pursuant to Section

13(a) of the Act.

members to send account statements to

customers on at least a quarterly basis.7

The statements must include a

description of any securities position,

money balances or account activity

since the prior account statement was

sent. An NASD member that does not

carry customer accounts and does not

hold customer funds and securities is

exempt from the provisions of NASD

Rule 2340.

In March 1994, the Subcommittee on

Telecommunications and Finance of the

U.S. House of Representatives (‘‘House

Subcommittee’’), expressed concern to

the NASD regarding the sufficiency of

information provided on customer

account statements with respect to the

current value of illiquid partnership

securities.8 The House Subcommittee

noted that investors in non-traded

partnerships should be able to know

how their investments are performing

and expressed a belief that their might

be shortcomings in current valuation

reporting to that group of investors.9

In June 1994, the Division requested

information from the NASD concerning

whether it would be appropriate for selfregulatory organizations to require that

members make certain disclosures

regarding illiquid partnerships on

customer account statements.10 The

Division suggested that, at a minimum,

a member should disclose: (1) That

there is no liquid market for most

limited partnership interests; (2) that the

value of a 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.11

B. The 1997 Proposal

In response to the concerns raised by

the House Subcommittee and the

Division, NASD Regulation filed a

proposed rule change relating to DPPs

and REITs with the Commission in

February 1997 (‘‘1997 Proposal’’).12

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 those securities. The

Commission published the 1997

Proposal for comment in the Federal

Register on April 3, 1997,13 and

received nine comment letters regarding

the proposal.

According to NASD Regulation,

concerns arose regarding potential

conflicts between the requirements of

the 1997 Proposal and the obligations of

a member acting as a retirement account

fiduciary under Employee Retirement

Income Securities Act and Internal

Revenue Service regulations. Therefore,

NASD Regulation withdrew the 1997

Proposal and replaced it with the

current proposal.14

C. NASD–00–13

In the current proposal, NASD

Regulation proposes to amend its rules

to require general securities members to

list valuations for DPP and REIT

securities on customer account

statements under certain

circumstances.15

1. Definitions

The proposal will apply to DPP and

REIT securities sold in a public offering.

The definitions of DPP and REIT in

NASD Rule 2340 will exclude securities

listed on a national securities exchange

or Nasdaq, 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 regularly and, accordingly, that

investors will have ready access to

current market value information. The

definition of DPP in NASD Rule 2340

also will 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.

2. Voluntary Estimated Value

NASD Rule 2340(b)(1)(A) allows a

general securities member to provide a

per share estimated value for a DPP or

REIT on an account statement if the

member satisfies the conditions of

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

3. Mandatory Estimated Value

NASD Rule 2340(b)(1)(B) requires a

general securities member to include in

a customer’s account statement an

estimated value of a DPP or REIT from

an annual report,16 an independent

valuation service, or any other source if:

(1) The annual report of a DPP or REIT

held in a customer’s account or

included on the customer’s account

statement includes a per share estimated

value; and (2) the conditions of NASD

Rules 2340(b)(2) and (b)(3) are satisfied.

NASD Regulation notes that although

the inclusion of the estimated value in

the issuer’s annual report triggers the

member’s obligation to provide a

valuation on the customer’s account

statement, the estimated value included

on the account statement could be

obtained from the annual report, 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.

4. Reliability of Estimated Values

NASD Rule 2340(b)(2) requires that an

estimated value be developed from data

that is as 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

and 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 could 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.

Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices 71171

17See Amendment Nos. 1 and 2, supra notes 3

and 4.

18See Merrill Lunch II, supra note 6. Proposed

NASD Rule 2340 (b)(2)(A) permitted a member to

provide a per share estimated value for a DPP or

REIT on a customer account statement if ‘‘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 valuation is inaccurate.’’

19See Amendment No. 1 supra note 3.

20See Amendment No. 2 supra note 4.

21See Amendment No. 2 supra note 4.

22Telephone conversation among Suzanne

Rothwell, Chief Counsel, Corporate Financing,

NASD Regulation, and Katherine A. England,

Assistant Director, Division, Commission, and

Yvonne Fraticelli, Special Counsel Division,

Commission on November 20, 2000 (‘‘November 20

Conversation’’).

23See note 6, supra.

24See IPA Letter, CNL Letter, and

Resourcephoenix.com Letter, supra note 6.

25See Merrill Lynch II, supra note 6.

NASD Rule 2340(b)(4), as proposed in

Amendment No. 1 and revised in

Amendment No. 2, prohibits a member

from including a per share estimated

value for a DPP or REIT security on an

account statement if the member can

demonstrate that the value was

inaccurate as of the date of the valuation

or is no longer accurate as a result of a

material change in the operations or

assets of the program or trust.17

5. Required Disclosures

NASD Rule 2340(b)(3) requries an

account statement that provides an

estimated value for a DPP or REIT

security 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.

NASD Rule 2340(b)(5) requires an

account statement that does not provide

an estimated value for a DPP or REIT

security to include disclosure that: (1)

DPP or REIT securities are generally

illiquid; (2) the value of the security will

be different from its purchase price; and

(3) if applicable, that accurate valuation

information is not available.

6. NASD Rule 2710 and 2810

NASD Regulation believes that the

amendments to NASD Rule 2710,

‘‘Corporate Financing Rule—

Underwriting Terms and

Arrangements,’’ and NASD Rule 2810,

‘‘Direct Participation Programs,’’ will

help to ensure that DPP general partners

or sponsors and REIT trustees provide

estimated per share values in their

annual reports. NASD Rule 2710(c)(6),

as amended, states that, when proposed

in connection with the distribution of a

public offering of securities, it shall be

unfair and unreasonable for a member

or associated person to participate in a

public offering of REIT securities unless

the trustee will disclose in each annual

report distributed to investors pursuant

to 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.

New NASD rule 2810(b)(5) prohibits a

member from participating in a public

offering of DPP securities unless the

general partner or sponsor of the

program will disclose in each annual

report distributed to investors pursuant

to Section 13(a) of the Act a per share

estimated value of the DPP securities,

the method by which it was developed,

and the date of the data used to develop

the estimated value.

D. Amendment Nos. 1 and 2

As discussed more fully below, one

commenter, Merrill Lynch, expressed

concern that NASD Rule 2340(b)(2)(A)

would have required members to make

an affirmative determination about the

reliability of estimated values provided

through an annual report of a DPP or

REIT, by an independent valuation

service, or through any other source.18

NASD Regulation responded to

concerns raised by Merrill Lynch, and

the issues raised by the other

commenters, in Amendment No. 1.

Among other things, Amendment No. 1

deletes NASD Rule 2340(b)(2)(A) and

adopts NASD Rule 2340(b)(4), which

stated that, notwithstanding the

requirement in NASD Rule

2340(b)(1)(B), a member may refrain

from including a per share estimated

value for a DPP or REIT security on an

account statement if the member can

demonstrate that the value was

inaccurate as of the date of the valuation

or is no longer accurate as a result of a

material change in the operations or

assets of the program or trust. NASD

Regulation also noted that NASD Rule

2340(b)(2)(A) was not intended to

impose an obligation on members to

guarantee the accuracy of an estimated

value obtained from a third-party

source.19

In Amendment No. 2, NASD

Regulation revised NASD Rule

2340(b)(4) to prohibit a member from

including an estimated per share value

for a DPP or REIT security on an

account statement if the member can

demonstrate that the value was

inaccurate as of the date of the valuation

or is no longer accurate as a result of a

material change in the operations or

assets of the program or trust. According

to NASD Regulation, the amended rule

language is intended to clarify that a

member is obligated to refrain from

using an estimated per share value on

customer account statements if the

member can demonstrate that the

estimated value is inaccurate.20 NASD

Regulation noted that the provision does

not relieve a member of its obligation to

provide an alternative per share

estimated value when the member’s

obligation is triggered by NASD Rule

2340(b)(1)(B).21

E. Implementation of the 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,

the NASD has requested that the

proposed rule change become effective

three months after notifying its members

of Commission approval of the

proposal.22 Following the Commission’s

approval of the proposal, the NASD will

issue a Notice to Members announcing

Commission approval of the proposed

rule change and the anticipated effective

date of the proposal.

III. Comments Received

The Commission received five

comment letters from four commenters

regarding the proposal.23 Three

commenters supported the proposal but

recommended that NASD Regulation

revise the proposal to require members

to provide valuation information if a

general partner makes an 8–K or 10–Q

filing subsequent to the release of an

annual report.24 Another commenter,

Merrill Lunch, expressed concern that

proposed NASD Rule 2340(b)(2)(A)

would have required a member to make

an affirmative determination regarding

the reliability of each estimated value

provided to a member through an

annual report of the DPP or REIT, by an

independent valuation service, or by

any other source.25

Specifically, Merrill Lynch asserted

that NASD Rule 2340(b)(2)(A) would

impose an unfair obligation on a

member to consider the accuracy of an

estimated valuation, even if the member

had obtained the estimated value from

the DPP or REIT’s annual report or from

an independent valuation service that

the member had retained to provide a

valuation. Merrill Lynch recommended

that NASD Regulation amend NASD

Rule 2340(b)(2)(A) to include a

provision from the 1997 Proposal that

would prohibit a member from

including on an account statement ‘‘an

estimated value that the member

believes is inaccurate as of the date of

71172 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices

26See Merrill Lynch II, supra note 6.

27See Merrill Lynch II, supra note 6.

28See IPA Letter, supra note 6.

29See IPA Letter, supra note 6.

30See CNL Letter Resourcephoenix.com Letter,

supra note 6.

31 In reviewing this proposal, the Commission has

considered its impact on efficiency, competition,

and capital formation. 15 U.S.C. 78o–3(b)(8).

32 15 U.S.C. 78o–3(b)(6).

the valuation or is no longer accurate as

a result of a material change in the

operations or assets of the program or

trust.’’ 26 Merrill Lynch believed that the

revised language would prohibit a

member from providing an estimated

valuation that the member believes is

inaccurate without imposing an

affirmative duty on the member to

determine that it has no reason to

believe that the estimated value is

inaccurate.27

The IPA supported the proposal but

expressed concern that some firms

might omit valuation information from

customer account statements by arguing

that an action of an investment program

since the date of an annual report, such

as a purchase or sale, made the

valuation information in the annual

report inaccurate.28 To prevent the

omission of valuation information under

those circumstances, the IPA

recommended that the NASD amend the

proposal to require members to include

on customer account statements any

estimated value published by the

general partner in an 8–K or 10–Q filing

made subsequent to the release of the

annual report.29 CNL and

Resourcephoenix.com supported the

IPA’s position.30

IV. Discussion

The Commission finds that the

proposed rule change is consistent with

the Act and the rules and regulations

thereunder applicable to a national

securities association.31 In particular,

the Commission finds that the proposed

rule change is consistent with the

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

Act which provides, among other

things, that the rules of a national

securities association must be 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.32

A. Definitions

The Commission finds that the

proposed definitions of DPP and REIT

in NASD Rule 2340(c) will facilitate

compliance with the proposal by clearly

identifying the DPP and REIT securities

that are subject to the proposal. As

noted above, the proposal will apply to

DPP and REIT securities sold in a public

offering and will exclude: (1) DPP and

REIT securities listed on a national

securities exchange or Nasdaq; (2) DPP

and REIT securities that are in a

depository and settle regular way; and

(3) any DPP program registered as a

commodity pool. According to NASD

Regulation, DPP and REIT securities

listed on a national securities exchange

or Nasdaq and DPP and REIT securities

that are in a depository and settle

regular way are more likely to trade

regularly and investors should have

ready access to current market value

information concerning those securities.

Similarly, NASD Regulation noted that

a DPP program registered as a

commodity pool generally offers

investors a security that is redeemable

by the issuer at the customer’s option at

ascertainable values.

The Commission believes that the

proposed definitions of DPP and REIT

are consistent with the concerns raised

in the 1994 Letter regarding the

adequacy of ongoing valuation

disclosures for non-publicly traded

partnership securities. Because the 1994

Letter expressed concern with regard to

the availability of valuation information

for non-publicly traded partnership

securities, the Commission believes that

it is reasonable for NASD Regulation to

exclude from the proposal those DPPs

and REITs for which current valuation

information is available.

The Commission believes that the

proposal to define an ‘‘annual report’’ as

the most recent annual report of the DPP

or REIT distributed to investors

pursuant to Section 13(a) of the Act is

reasonable and will help to clarify the

application of the rule.

B. Voluntary Estimated Value

NASD Rule 2340(b)(1)(A) allows a

general securities member to provide a

per share estimated value for a DPP or

REIT on an account statement if the

member satisfies the conditions of

NASD Rules 2340(b)(2) and (b)(3). The

Commission believes that NASD Rule

2340(b)(1)(A) will protect investors and

public interest by ensuring that DPP and

REIT valuations provided voluntarily in

customer account statements are subject

to the same requirements and

disclosures as the mandatory DPP and

REIT valuations required under NASD

Rule 2340(b)(1)(B). The Commission

believes that it is reasonable to provide

identical treatment for DPP and REIT

valuations provided voluntarily in

customer account statements and for

DPP and REIT valuations provided in

customer account statements to comply

with the requirements of NASD rule

2340(b)(1)(B).

C. Mandatory Estimated Value

NASD Rule 2340(b)(1)(B) requires a

general securities member to include in

a customer account statement an

estimated value of a DPP or REIT from

an annual report, an independent

valuation service, or any other source if:

(1) The annual report of a DPP or REIT

held in a customer’s account or

included on the customer’s account

statement includes a per share estimated

value; and (2) the conditions of NASD

Rules 2340(b)(2) and 2340(b)(3) are

satisfied. The Commission believes that

NASD Rule 2340(b)(1)(B) will protect

investors and the public interest by

requiring members to provide DPP and

REIT valuation information on customer

account statements under the

circumstances specified in NASD Rule

2340(b)(1)(B). By providing investors

with valuation information for their DPP

or REIT investments, the Commission

believes that NASD Rule 2340(b)(1)(B)

will help to address the concerns raised

in the 1994 Letter regarding the

availability of valuation information for

non-traded partnerships.

D. Reliability of Estimated Values

NASD Rule 2340(b)(2) allows a

member to include a per share estimated

value for a DPP or REIT on an account

statement only if 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.

The Commission believes that NASD

Rule 2340(b)(2) will help to ensure the

reliability of estimated valuations

provided on customer account

statements by requiring the valuations

to be based on relatively recent data. In

addition, as NASD Regulation noted in

its proposal, the 18-month period

should provide a member or an

independent valuation source with

sufficient time to develop a new

valuation based on the audited financial

statements provided in a DPP or REIT’s

most recent Form 10–K.

In Amendment No. 1 NASD

Regulation addressed Merrill Lynch’s

concern that proposed NASD Rule

2340(b)(2)(A) would have imposed on

broker-dealers an obligation to consider

the accuracy of an estimated valuation

obtained from an annual report of a DPP

or REIT or from an independent

valuation service retained by the

member to provide a valuation.

Specifically, Amendment No. 1 deleted

proposed NASD Rule 2340(b)(2)(A) and

adopted NASD Rule 2340(b)(4), which,

as revised in Amendment No. 2,

Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices 71173

33See Amendment Nos. 1 and 2, supra notes 3

and 4.

34See IPA Letter, supra note 6. See also CNL

Letter and Resourcephoenix.com Letter, supra note

6.

35See IPA Letter, supra note 6.

36See Amendment No. 1, supra note 3. Similarly,

NASD Regulation noted in Amendment No. 2 that

NASD Rule 2340(b)(4) does not relieve a member

of its obligation to provide an alternative per share

estimated value when NASD Rule 2340(b)(1)(B)

triggers the member’s obligation.

37See Amendment No. 1, supra note 3.

38However, a member is not obligated to confirm

the accuracy of an estimated valuation provided in

a DPP or REIT’s annual report. Conversation

between Suzanne Rothwell, Chief Counsel,

Corporate Financing, NASD Regulation, and

Yvonne Fraticelli, Special Counsel, Division,

Commission, on November 9, 2000.

39See Amendment No. 1, supra note 3.

40See note 10, supra. 41See NASD Rule 2810.

prohibits a member from including a per

share estimated value for a DPP or REIT

security on an account statement if the

member can demonstrate that the value

was inaccurate as of the date of the

valuation or is no longer accurate as a

result of a material change in the

operations or assets of the program or

trust.33

In Amendment No. 1 NASD

Regulation also responded to the

concerns of the IPA and other

commenters, who believed that a

broker-dealer might omit an estimated

valuation from an account statement by

asserting that a change in an investment

program since the date of an annual

report made the valuation information

in the annual report inaccurate.34 To

address this concern, the IPA

recommended that NASD Regulation

require broker-dealers to include on

customer account statements any

estimated value published by the

general partner or trustee in an 8–K or

10–Q filing subsequent to the release of

the annual report.35

In response, NASD Regulation stated

that it did not believe that members

would be able to rely inappropriately on

NASD Rule 2340(b)(4) to omit estimated

valuations from customer account

statements. In this regard, NASD

Regulation noted that once the

publication of an estimated value in a

DPP or REIT’s annual report triggers a

broker-dealer’s obligation to provide a

valuation on a customer account

statement, the member must include on

the customer account statement either

the value published in the annual

report, a value obtained from another

third-party source, or a value developed

by the member.36 Thus, NASD

Regulation concluded that a member

would be required to develop a

valuation to include on a customer

account statement if the member

determined that the values available

from the annual report and third-party

sources were inaccurate.37

The Commission believes that NASD

Rule 2340(b)(4) will protect investors

and the public interest by helping to

ensure the reliability of valuation

information provided on customer

account statements. Specifically, by

prohibiting a broker-dealer from

including a per share estimated value

for a DPP or REIT if the broker-dealer

can demonstrate that the value was

inaccurate as of the date of the valuation

or is no longer accurate, NASD Rule

2340(b)(4) will help to prevent the

dissemination of inaccurate valuation

information.38 In addition, the

Commission notes that once an

estimated valuation in a DPP or REIT’s

annual report triggers a member’s

obligation under NASD Rule

2340(b)(1)(B) to provide a valuation on

customer account statements, the

member must provide an alternative

valuation obtained from a third-party

source or developed by the member if

the member demonstrates that the

valuation provided in the annual report

is inaccurate. If the member determines

that values available from the annual

report and from third-party sources are

inaccurate, then the member would be

required to develop a valuation to

include on customer account

statements.39 Accordingly, the

Commission believes that members will

not be able to use NASD Rule 2340(b)(4)

to avoid providing valuation

information when a valuation is

required under NASD Rule

2340(b)(1)(B).

E. Required Disclosures

NASD Rule 2340(b)(3) requires an

account statement that provides an

estimated value for a DPP or REIT 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. The Commission notes that the

disclosures required by NASD Rule

2340(b)(3) are consistent with the

disclosures discussed in the Division’s

Limited Partnership Letter.40 The

Commission believes that a description

of the estimated value provided on an

account statement, its source, and the

method by which it was developed will

provide investors with useful

information regarding the estimated

valuation and may help them to assess

the accuracy of the estimated valuation.

In addition, the Commission believes

that the 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 will provide investors with an

important reminder concerning the

market for DPP and REIT securities and

the potential for realizing the estimated

value of their DPP or REIT upon

liquidation of the security.41

NASD Rule 2340(b)(5) requires an

account statement that does not provide

an estimated value for a DPP or REIT

security an account statement that does

not provide an estimated value for a

DPP or REIT security to include

disclosure that: (1) DPP or REIT

securities are generally illiquid; (2) the

value of the security will be different

from its purchase price; and (3) if

applicable, that accurate valuation

information is not available. The

Commission believes that the disclosure

required in NASD Rule 2340(b)(5) will

provide investors with important

information concerning the market for

DPP and REIT securities, the difference

between the purchase price and the

current value of their security, and the

availability of valuation information.

F. NASD rules 2710 and 2810

NASD Regulation proposes to amend

NASD rule 2710(c)96) to provide that,

when proposed in connection with the

distribution of a public offering of

securities, it shall be unfair and

unreasonable for a member or associated

person to participate in a public offering

of REIT securities unless the trustee will

disclose in each annual report

distributed to investors pursuant to

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.

NASD Regulation proposes to amend

NASD Rule 2810(b) to prohibit a

member from participating in a public

offering of DPP securities unless the

general partner or sponsor of the

program will disclose in each annual

report distributed to investors pursuant

to Section 13(a) of the Act a per share

estimated value of the DPP securities,

the method by which it was developed,

and the date of the data used to develop

the estimated value.

The Commission believes that the

amendments to NASD Rules 2710 and

2810 will encourage general partners

and sponsors of DPPs and REIT trustees

to provide estimated per share values in

their annual reports, thereby helping to

address the concerns raised in the 1994

Letter regarding ongoing disclosures of

the values of non-traded partnership

71174 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices

42See November 20 Conversation, supra note 22.

43 15 U.S.C. 78s(b)(2).

44 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 42201

(Dec. 3, 1999), 64 FR 69305.

4The NASD previously submitted Amendment

No. 1 to reflect the Association’s receipt of written

comments from the Regional Municipal Operations

Association. After consultation with the

Commission staff, the NASD withdrew Amendment

No. 1 and has incorporated RMOA’s comments and

the NASD’s response in Amendment No. 2. As

explained in the original proposal, the NASD

represents that it will file a separate proposal to

establish appropriate fees and charges for TRACE

prior to implementation.

5The NASD represents that it will rename

TRACE. When a new name is selected, the NASD

will amend the TRACE Rules prior to

implementation of the service to reflect that name

change.

securities. The Commission finds that

the proposed amendments to NASD

Rules 2710 and 2810 will protect

investors and the public interest by

helping to ensure that investors in DPPs

and REITs that are sold in a public

offering receive ongoing valuation

information concerning their

investments.

G. Implementation of the Proposed Rule

Change

The NASD has requested that the

proposed rule change become effective

three months after the NASD notifies its

members of Commission approval of the

proposal.42 The Commission believes

that the proposed period for

implementing the proposal will provide

NASD members and service

organizations with time to modify their

computer systems to comply with the

proposal, thereby helping to ensure that

NASD members are adequately prepared

to implement the proposed changes.

H. Accelerated Approval of Amendment

Nos. 1 and 2

The Commission finds good cause for

approving Amendment Nos. 1 and 2

prior to the thirtieth day after the date

of publication of notice of filing thereof

in the Federal Register. Amendment

No. 1 clarifies that an NASD member is

not obligated to guarantee the accuracy

of an estimated value obtained from a

third-party source. Amendment No. 2

strengthens the proposal by prohibiting

a member from using an estimated

valuation on a customer account

statement if the member can

demonstrate that the value was

inaccurate as of the date of the valuation

or is no longer accurate. Accordingly,

the Commission finds that it is

consistent with Sections 15A(b)(5) and

19(b) of the Act to approve Amendment

Nos. 1 and 2 on an accelerated basis.

V. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendments

Nos. 1 and 2, including whether

Amendment Nos. 1 and 2 are consistent

with the Act. Persons making written

submissions should file six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street, N.W., 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 relating to the

proposed rule change between the

Commission and any person, 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 the NASD. All

submissions should refer to File No.

SR–NASD–00–13 and should be

submitted by December 20, 2000.

VI. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,43 that the

proposed rule change (File No. SR–

NASD–00–13), as amended, is

approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.44

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–30374 Filed 11–28–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43616; File No. SR–NASD–

99–65]

Self-Regulatory Organizations; Notice

of Filing of Amendment Nos. 2 and 3

to Proposed Rule Change by the

National Association of Securities

Dealers, Inc. Relating to the Creation of

a Corporate Bond Trade Reporting and

Transaction Dissemination Facility and

the Elimination of Nasdaq’s Fixed

Income Pricing System

November 24, 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 November

17, 2000 and November 22, 2000, the

National Association of Securities

Dealers, Inc. (‘‘NASD’’ or ‘‘Association’’)

filed with the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

Amendment Nos. 2 and 3 to the

proposed rule change as described in

Items I, II, and III below, which Items

have been prepared by the NASD. The

proposed rule change was published for

comment in the Federal Register on

December 10, 1999.3 The Commission is

publishing this notice to solicit

comments on Amendment Nos. 2 and 3

to the proposed rule change from

interested persons.4

Amendment No. 2 reflects certain

changes proposed by the commenters in

response to the proposed rule change, as

originally noticed, or changes suggested

by the NASD staff after additional

review. Amendment No. 3 sets forth the

statutory basis of the proposed rule

change. For convenience, the proposed

NASD Rules in Amendment No. 2 are

referred to as the TRACE Rules, in

reference to the proposed facility, which

is currently referred to as the Trade

Reporting and Comparison Entry

Service (TRACE).5

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD proposes the following

amendments to the rule text (as

originally proposed) in response to

comment letters or suggestions by the

NASD staff after additional review.

Proposed additions are italicized;

proposed deletions are in brackets.

* * * * *

6200. Trade Reporting and Comparison

Entry Service (TRACE)

6210. Definitions

The terms used in this [paragraph]

Rule 6200 Series shall have the same

meaning as those defined in the

Association’s By-Laws and Rules unless

otherwise specified.

(a) The term [‘‘TRACE eligible

Security’’] ‘‘TRACE-eligible security’’

shall mean all United States dollar

denominated debt securities that are

registered with the Securities and

Exchange Commission and issued by

United States and/or foreign private

corporations and that are depository

eligible securities as defined in Rule

11310(d); all debt securities qualified as

PORTAL securities pursuant to the Rule

5000 Series; all investment-grade rated

debt securities that are issued pursuant

to Section 4(2) of the Securities Act of

1933 and that are depository eligible

securities pursuant to Rule 11310(d).