[Federal Register Volume 65, Number 230 (Wednesday, November 29, 2000)]
[Notices]
[Pages 71169-71174]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30374]


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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\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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 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.
    \4\ See 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).
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    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.
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    \5\ See Securities Exchange Act Release No. 42698 (April 18, 
2000), 64 FR 24523.
    \6\ See 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.
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II. Background and Description of the Proposal

A. Background

    NASD Rule 2340, ``Customer Account Statements,'' requires general 
securities

[[Page 71170]]

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.
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    \7\ A 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).
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    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\
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    \8\ See 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'').
    \9\ See 1994 Letter, supra note 10.
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    In June 1994, the Division requested information from the NASD 
concerning whether it would be appropriate for self-regulatory 
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\
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    \10\ See 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'').
    \11\ See Limited Partnership Letter, supra note 10.
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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.
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    \12\ See File No. SR-NASD-97-12.
    \13\ See Securities Exchange Act Release No. 38451 (March 27, 
1997), 62 FR 15945.
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    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\
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    \14\ See Letter from Suzanne E. Rothwell, Chief Counsel, 
Corporate Financing, NASD Regulation, to Katherine A. England, 
Assistant Director, Division, Commission, dated March 27, 2000.
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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\
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    \15\ Under 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).
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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.
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    \16\ NASD 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.
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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.

[[Page 71171]]

    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\
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    \17\ See Amendment Nos. 1 and 2, supra notes 3 and 4.
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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\
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    \18\ See 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.''
    \19\ See Amendment No. 1 supra note 3.
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    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\
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    \20\ See Amendment No. 2 supra note 4.
    \21\ See Amendment No. 2 supra note 4.
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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.
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    \22\ Telephone 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'').
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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\
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    \23\ See note 6, supra.
    \24\ See IPA Letter, CNL Letter, and Resourcephoenix.com Letter, 
supra note 6.
    \25\ See Merrill Lynch II, supra note 6.
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    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

[[Page 71172]]

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\
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    \26\ See Merrill Lynch II, supra note 6.
    \27\ See Merrill Lynch II, supra note 6.
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    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\
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    \28\ See IPA Letter, supra note 6.
    \29\ See IPA Letter, supra note 6.
    \30\ See CNL Letter Resourcephoenix.com Letter, supra note 6.
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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\
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    \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).
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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,

[[Page 71173]]

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\
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    \33\ See Amendment Nos. 1 and 2, supra notes 3 and 4.
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    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\
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    \34\ See IPA Letter, supra note 6. See also CNL Letter and 
Resourcephoenix.com Letter, supra note 6.
    \35\ See IPA Letter, supra note 6.
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    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\
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    \36\ See 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.
    \37\ See Amendment No. 1, supra note 3.
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    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).
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    \38\ However, 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.
    \39\ See Amendment No. 1, supra note 3.
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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\
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    \40\ See note 10, supra.
    \41\ See NASD Rule 2810.
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    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

[[Page 71174]]

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.
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    \42\ See November 20 Conversation, supra note 22.
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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.
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    \43\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\44\
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    \44\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-30374 Filed 11-28-00; 8:45 am]
BILLING CODE 8010-01-M