Federal Register / Vol. 62, No. 64 / Thursday, April 3, 1997 / Notices 15945

1Paragraph (a)(4) of NASD Rule 2810, ‘‘Direct

Participation Programs,’’ defines a DPP as ‘‘a

program which provides for flow-through tax

consequences regardless of the structure of the legal

entity or vehicle for distribution including, but not

limited to, oil and gas programs, real estate

programs, agricultural programs, cattle programs,

condominium securities, Subchapter S corporate

offerings and all other programs of a similar nature.

. . .’’ According to NASD Regulation, this

definition would cover most limited partnerships

and specifically excludes real estate investment

trusts.

estimated that four closed-end funds are

affected by the rule each year, and that

they file approximately 23 reports in

total each year (based on the average of

0 to 12 reports filed annually by each

fund) requiring one hour per report, for

a total of 23 annual burden hours.

General comments regarding the

estimated burden hours should be

directed to the Desk Officer for the

Securities and Exchange Commission at

the address below. Any comments

concerning the accuracy of the

estimated average burden hours for

compliance with Commission rules and

forms should be directed to Michael E.

Bartell, Associate Executive Director,

Office of Information Technology,

Securities and Exchange Commission,

450 Fifth Street, N.W., Washington, D.C.

20549 and Desk Officer for the

Securities and Exchange Commission,

Office of Information and Regulatory

Affairs, Office of Management and

Budget, Room 3208, New Executive

Office Building, Washington, D.C.

20503.

Dated: March 26, 1997.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–8471 Filed 4–2–97; 8:45 am]

BILLING CODE 8010–01–M

Sunshine Act Meetings

Notice is hereby given, pursuant to

the provisions of the Government in the

Sunshine Act, Pub. L. 94–409, that the

Securities and Exchange Commission

will hold the following meetings during

the week of April 7, 1997.

An open meeting will be held on

Tuesday, April 8, 1997, at 10:00 a.m. A

closed meeting will be held on

Wednesday, April 9, 1997, at 10:00 a.m.

Commissioners, Counsel to the

Commissioners, the Secretary to the

Commission, and recording secretaries

will attend the closed meeting. Certain

staff members who have an interest in

the matters may also be present.

The General Counsel of the

Commission, or his designee, has

certified that, in his opinion, one or

more of the exemptions set forth in 5

U.S.C. 552b(c) (4), (8), (9)(A) and (10)

and 17 CFR 200.402(a) (4), (8), (9)(i) and

(10), permit consideration of the

scheduled matters at the closed meeting.

Commissioner Hunt, as duty officer,

voted to consider the items listed for the

closed meeting in a closed session.

The subject matter of the open

meeting scheduled for Tuesday, April 8,

1997, at 10:00 a.m., will be:

The Commission will meet with

representatives from the American Society of

Corporate Secretaries to discuss a number of

issues of mutual interest, including the Plain

English pilot program and proposing release,

EDGAR and electronic dissemination of

information to shareholders, the shareholder

proposal rules, Rule 144, direct shareholder

communications, direct registration and

direct purchase plans, and lost securities

holders. For further information, please

contact Marija Willen at (202) 942–2840.

The subject matter of the closed

meeting scheduled for Wednesday,

April 9, 1997, at 10:00 a.m., will be:

Institution of injunctive actions.

Institution and settlement of administrative

proceedings of an enforcement nature.

At times, changes in Commission

priorities require alternations in the

scheduling of meeting items. For further

information and to ascertain what, if

any, matters have been added, deleted

or postponed, please contact: The Office

of the Secretary at (202) 942–7070.

Dated: April 1, 1997.

Jonathan G. Katz,

Secretary.

[FR Doc. 97–8652 Filed 4–1–97; 2:41 am]

BILLING CODE 8010–01–M

[Release No. 34–38451; File No. SR–NASD–

97–12]

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

March 27, 1997.

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

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on February 21, 1997,

NASD Regulation, Inc. (‘‘NASD

Regulation’’) filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) the proposed rule

change as described in Items I, II and III

below, which Items have been prepared

by 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

Rule 2340, ‘‘Customer Account

Statements,’’ of the Conduct Rules of the

National Association of Securities

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

to require general securities members to

provide estimated values for direct

participation program (‘‘DPP’’) 1

securities and real estate investment

trust (‘‘REIT’’) securities on customer

account statements under certain

circumstances. Below is the text of the

proposed rule change. Proposed new

language is italicized and proposed

deletions are bracketed.

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 (‘‘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) If a member participated in the

public offering of any direct

participation program (DPP) or real

estate investment trust (REIT) securities

(as these terms are defined below) and

an estimated value of DPP or REIT

securities is available pursuant to

subparagraphs (3)(A) (ii) or (iii), the

member shall list the DPP and/or REIT

securities on the statement with an

estimated value; except that the member

shall not include on the account

statement an estimated value that the

member believes is 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; or

(2) If the member or an affiliate of the

member, acting as a fiduciary, provides

estimated values of DPP and/or REIT

securities to accounts that are subject to

Employee Retirement Income Securities

Act (‘‘ERISA’’) and Internal Revenue

Service (‘‘IRS’’) regulations, the member

shall disclose the same valuations on

the statements of all other customers

owning such securities.

(3) If DPP and/or REIT securities are

listed on the statement with an

estimated value:

(A) such estimated value shall be:
15946 Federal Register / Vol. 62, No. 64 / Thursday, April 3, 1997 / Notices

2 ‘‘General securities member’’ 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 paragraphs (a)(2) and (a)(3). However, a

member which does not carry customer accounts

and does not hold customer funds and securities is

exempt from the provisions of NASD Rule 2340.

3See Letter from the Honorable Edward J.

Markey, Chairman, and the Honorable Jack Fields,

Ranking Republican Member, House Subcommittee,

Committee on Energy and Commerce, U.S. House

of Representatives, to Joseph R. Hardiman,

President and Chief Executive Officer, NASD, dated

March 9, 1994.

(i) developed from data which is as of

a date no more than 18 months prior to

the date the statement is issued; and

(ii) provided by an independent

source engaged by the member; and/or

(iii) provided in an annual report of

the DPP or REIT distributed to investors

pursuant to Sections 14(a) or 14(c) of

the Act, as applicable, or a periodic

report filed by the DPP or REIT with the

Commission under Sections 13 or 15(d)

of the Act; or

(iv) developed by the member, if

valuations pursuant to subparagraphs

(ii) and (iii) are not available; and

(B) the member shall segregate DPP

and/or REIT securities by listing them

on the statement separately from nonDPP and non-REIT securities and shall

include on the statement:

(i) a brief and easily-understood

description of the type of estimated

value provided (e.g., that the value

represents an estimate of the investor’s

interest in the assets owned by the DPP

or REIT or represents an estimate of the

value of the investor’s DPP and/or REIT

securities) and its source, and how a

customer may obtain a complete and

detailed explanation of the valuation

methodology employed; and

(ii) disclosure in close proximity to

the listing of DPP and/or REIT securities

that DPP and/or REIT securities are

generally illiquid securities and the

estimated value disclosed may not be

realizable if the customer seeks to

liquidate the security.

(4) In disclosing on the statement an

estimated value of DPP and/or REIT

securities, the member shall not;

(A) aggregate the estimated value of

DPP and/or REIT securities with the

value of any other securities in any subtotal on the statement;

(B) aggregate the estimated value of

DPP and/or REIT securities with the

value of any other securities in the total

account value unless the statement

includes the total estimated value of

DPP and/or REIT securities and the

disclosure required by subparagraph

(3)(B)(ii) in close proximity to the total

account value; and

(C) include the original issue price of

a DPP or REIT security as the estimated

value (unless valuation of the securities

by another method indicates the same

dollar amount as the original issue

price).

(5) Notwithstanding subparagraphs

(b)(1)–(4), if a retirement account

statement prepared in compliance with

ERISA and IRS regulations includes

DPP and/or REIT securities and

individual values are not provided for

any of the assets in the account, the

member shall disclose on the statement

that DPP and/or REIT securities are

generally illiquid securities.

(6) If the DPP and/or REIT securities

are listed on the statement without a

price and without an estimated value,

the member shall segregate the DPP

and/or REIT securities by listing them

on the statement separately from nonDPP and non-REIT securities and shall

include on the statement disclosures

that: DPP and/or REIT securities are

generally illiquid securities; the value of

the security may be different than its

purchase price; and, if applicable,

accurate valuation information is not

available.

[(b)] (c) Definitions For purposes of

this Rule[,];

(1) the term ‘‘account activity’’ shall

include, but not be 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 or funds in

the possession or control of the member.

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

term ‘‘general securities member’’ shall

refer 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) the term ‘‘direct participation

program securities’’ shall include equity

securities issued by a ‘‘direct

participation program’’ as defined in

Rule 2810 that would be included on a

customer’s statement of account even if

not held by the member, 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) the term ‘‘real estate investment

trust securities’’ shall include equity

securities issued by a real estate

investment trust as defined in Section

856 of the Internal Revenue Code that

would be included on a customer’s

statement of account even if not held by

the member, 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.

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 Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

(a) Rule 2340 of the NASD Conduct

Rules (formerly, Article III, Section 45 of

the NASD Rules of Fair Practice)

requires general securities members to

provide account statements to

customers on at least a quarterly basis.2

The account statement must contain a

description of any securities position,

money balances or account activity in

the accounts since the prior account

statements were sent. Under NASD Rule

2340, ‘‘account activity’’ 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 or

funds in the possession or control of the

member.

Background

By letter dated March 9, 1994, the

Subcommittee on Telecommunications

and Finance of the U.S. House of

Representatives (‘‘House

Subcommittee’’), expressed to the NASD

(as well as the SEC, the National

Association of State Securities

Administrators, and the Investment

Program Association) its concern

regarding the information provided to

customers on account statements

regarding the current value of nonpublicly traded partnership securities.3
Federal Register / Vol. 62, No. 64 / Thursday, April 3, 1997 / Notices 15947

4See Letter from Brandon Becker, Director,

Division, Commission, to Richard G. Ketchum,

Executive Vice President and Chief Operating

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

Letter’’).

5See Letter from Richard G. Ketchum, Executive

Vice President and Chief Operating Officer, NASD,

to the Honorable Edward J. Markey, Chairman,

House Subcommittee, Committee on Energy and

Commerce, U.S. House of Representatives, and the

Honorable Jack Fields, Ranking Republican, House

Subcommittee, Committee on Energy and

Commerce, U.S. House of Representatives, dated

May 10, 1994; and Letter from Richard G. Ketchum,

Executive Vice President and Chief Operating

Officer, NASD, to Brandon Becker, Director,

Division, Commission, dated August 19, 1994.

6According to the NASD, the reporting

requirements of the Act do not impose a mandatory

obligation on general partners or trustees to provide

an estimated value to investors in a periodic report

or in the annual report.

The correspondence noted that the

partnerships that are the subject of their

concern do not trade on a regular basis

and, thus, regular market quotes are not

available. The House Subcommittee

urged that investors in non-publicly

traded partnerships should be provided

information on the performance of their

investments and expressed concern that

there may be serious shortcomings in

current valuation reporting with respect

to such securities.

In addition, on June 14, 1994, the

NASD received correspondence from

the Division of Market Regulation

(‘‘Division’’) of the Commission

requesting the NASD’s views on

whether it would be appropriate for selfregulatory organizations to require that

members make certain disclosures on

customer account statements.4

Specifically, the June 14 Letter asks for

the NASD’s views regarding whether it

would be appropriate for self-regulatory

organizations to require broker-dealers

to make the following disclosures on

customer account statements: (i) there is

no liquid market for most limited

partnership interests; (ii) the values

reported on account statements, if any,

may not reflect the values at which

customers can liquidate their positions;

and (iii) if a value is reported, the source

of the value, a short description of the

methodology used to determine the

value, and the date the value was last

determined.

By letters dated May 10, 1994, and

August 19, 1994, the NASD expressed

concern to Congress and the SEC that

there were inconsistencies in the

manner in which members included

valuations for DPP securities on

customer account statements and

indicated that the Association was

moving forward to examine the need for

regulation in this area.5 NASD

Regulation has determined to amend

NASD Rule 2340 to provide regulatory

guidance to members regarding the

disclosure of values for DPP securities

on customer account statements in order

to regulate the manner in which

information is provided to investors

regarding the performance of their DPP

investment assets.

In particular, NASD Regulation has

been concerned that a significant

number of NASD members continue to

carry DPP securities on customer

account statements at the original

purchase price. NASD Regulation

believes that this practice needs to be

eliminated. In addition, NASD

Regulation proposes to apply the

proposed amendment to NASD Rule

2340 to the securities of certain REITs,

which are excluded from the

Association’s definition of DPP security

in paragraph (a)(4) of NASD Rule 2810,

in order to ensure similarity of

treatment under NASD Rules of the two

products.

Description of Proposed Amendments

to NASD Rule 2340

Scope and Definitions

NASD Regulation proposes to apply

the new requirements in NASD Rule

2340 to DPP securities and REIT

securities. The definitions of DPP and

REIT securities proposed in

subparagraphs (c)(3) and (4) of NASD

Rule 2340 only encompass unlisted

DPPs and REITs, since an investment in

listed securities provides investors with

some measure of liquidity and market

values. Thus, the definitions 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. The

definition of DPP securities proposed in

subparagraph (c)(3) also excludes any

program registered as a commodity

pool, since 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.

Requirements to Place Estimated Values

on Customer Account Statements and

Guidance on Appropriate Sources of

Valuations—Subparagraphs (b)(1)–(2)

The proposed rule change contains

two specific circumstances under which

general securities members are obligated

to provide customers with estimated

values for DPP and/or REIT securities in

their customers’ accounts.

In the first circumstance, under

subparagraph (b)(1) of the proposed rule

change, if a general securities member

participated in the public offering of

DPP or REIT securities, then the

member must list the DPP/REIT

securities on its customer account

statements with estimated values if such

values are available pursuant to

subparagraphs (b)(3)(A) (ii) or (iii) of the

proposed rule change. Where a general

securities member participated in the

public offering of DPP or REIT

securities, NASD Regulation believes

that the member should inform its

customers of the estimated value of the

DPP or REIT securities. Subparagraph

(b)(3)(A)(iii) permits a member to

include an estimated value that is

contained in an annual report

distributed to investors pursuant to

Sections 14(a) or 14(c) of the Act or in

a periodic report filed with the

Commission under Sections 13 or 15(d)

of the Act.6 This provision is intended

to address the concern of members

regarding their liability for disclosing an

estimated value by permitting the

member to rely on the liabilities under

the federal securities laws that attach to

the general partner’s or trustee’s

disclosure.

Subparagraph (b)(3)(A)(ii) permits a

member to include an estimated value

provided by an independent source

engaged by the member. Thus, when a

member is obligated to include an

estimated value for DPP/REIT securities

on customer account statements under

subparagraph (b)(1), the member may

include valuations from both an

independent source and an annual/

periodic report, if the member

determines to do so.

In considering this mandatory

obligation, NASD Regulation

determined that there are circumstances

where the member should be required to

refrain from using an estimated value

that the member believes is

inappropriate. Therefore, proposed

subparagraph (b)(1) provides that a

member shall not include an estimated

value of the securities on the account

statement if the member believes that

the estimated value was inaccurate as of

the date of the valuation or is no longer

accurate due to a material change in the

operations or assets of the program.

With respect to the latter phrase, the

assets of a real estate limited

partnership would be considered to be

impaired, for example, where the lessee

fails to perform under the lease.

Similarly, the sale of a property would

be considered a material change because

the sale reduces the value of the

program.

In the second circumstance, under

subparagraph (b)(2) of the proposed rule

change, if a general securities member

or its affiliate acts as a fiduciary in

connection with partnership or trust

securities which are held in retirement

accounts and is disclosing individual
15948 Federal Register / Vol. 62, No. 64 / Thursday, April 3, 1997 / Notices

7According to NASD Regulation, the Employee

Retirement Income Securities Act (‘‘ERISA’’) and

Internal Revenue Service (‘‘IRS’’) regulations

require, at least annually, that a retirement account

fiduciary provide to the account holder a statement

of the total value of all the assets in the account.

8The adoption of such an exception does not

represent a view that the proposed requirement to

provide individual ERISA/IRA valuations to other

customers of the broker-dealer will discourage

members from providing such individual

valuations. To the contrary, fiduciaries increasingly

are providing individual values for each asset in a

retirement account in order to permit the account

holder to make withdrawals where the account

holder has reached the age when ERISA/IRS

regulations require annual mandatory withdrawals

that do not exceed a percentage-of-assets limitation.

DPP/REIT estimated values to

retirement account holders,7 then the

member must disclose the same

valuations on the statements of all other

customers owning such securities.

NASD Regulation believes that when a

member or its affiliate acts as a fiduciary

for retirement accounts and provides

individual DPP/REIT security values to

its retirement account customers, other

customers of the broker/dealer should

receive the same values being provided

to retirement account customers. NASD

Regulation states that the requirement to

disclose the ERISA or IRS valuation to

other customers would not conflict with

the fiduciary and custodial obligations

imposed by the Department of Labor

and the IRS.

However, according to NASD

Regulation, neither the Department of

Labor (which administers ERISA

regulations) or the IRS (which

administers IRA and other retirement

products) specifically requires

fiduciaries to provide individual values

for any assets held in the retirement

account. Therefore, if the general

securities member acting as a fiduciary

does not provide individual values for

the DPP and REIT securities in the

retirement account, proposed new

subparagraph (b)(5), discussed more

fully below, provides an exception from

the requirement to disclose individual

values for assets held in a retirement

account.8

Appropriate Source for Estimated

Values—Subparagraph (b)(3)(A)

Proposed subparagraph (b)(3)(A) of

NASD Rule 2340 requires that, where

DPP and/or REIT securities are listed on

a customer account statement with an

estimated value, such values shall be:

(1) Provided by an independent source

engaged by the member; or (2) from a

valuation provided in an annual report

distributed to investors or in a periodic

report that must be filed with the SEC

(discussed more fully above). A member

may use an estimated value from either

or both of these sources. Under

proposed subparagraph (b)(3)(A)(iv), a

member may develop an estimated

value for the DPP/REIT securities only

when a valuation by an independent

source or from an SEC annual or

periodic report is not available.

Subparagraph (b)(3)(A)(i) requires that

any value provided must be developed

from data which is as of a date no more

than 18 months prior to the date the

customer account statement is issued.

NASD Regulation believes that this

requirement is appropriate because an

estimated value, accurate upon its first

use on a customer account statement,

may become stale due to length of time

or occurrence of subsequent events

(such as the sale of a major asset of the

partnership). 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

financials contained in the Form 10–K

of the DPP or REIT that is filed by

March 30 and is based on financial

statements dated December 31 of the

prior year.

Accordingly, the 18-month standard

will allow a member to continue to use

a valuation based, for example, on the

December 31, 1995, financials during

April, May, and June 1997, while a new

estimated value based on the December

31, 1996, financials is being developed.

In developing an objective standard,

NASD Regulation considered whether

investors would be disadvantaged if an

event occurred that would render an

estimated value disclosed on customer

account statements obsolete during the

18-month period. As set forth above, it

is the responsibility of the member to

not include an estimated value on the

account statement that the member

believes was inaccurate at the time it

was developed or is no longer accurate

as a result of a material change in the

operations or assets of the program or

trust.

Segregation of DPP/REIT Securities—

Subparagraphs (b)(3)(B) and (b)(6)

Subparagraph (b)(3)(B) requires that

an estimated value provided for DPP/

REIT securities on a customer’s account

statement be segregated from other

securities into a separate location on the

customer account statement. NASD

Regulation believes that investment in

non-publicly traded DPP and REIT

securities and the estimated values that

may be disclosed for those securities

regarding their performance differ

sufficiently from the prices of other

securities that customers will benefit

from having the DPP/REIT securities

grouped together. In addition, NASD

Regulation believes that the segregation

of these securities into a separate

location on the customer account

statement should also lessen the

possibility of misleading customers

regarding the estimated values for DPP/

REIT securities since the valuations will

be distinguished from listed securities

and accompanied by cautionary

disclosures.

Subparagraph (b)(6) of the proposed

rule change provides that DPP/REIT

securities listed on customer account

statements without an estimated value

shall also be segregated. Thus, the

requirement to segregate DPP/REIT

securities will apply regardless of

whether the security is listed with or

without an estimated value.

Disclosure of the Source of the

Estimated Value—Subparagraph

(b)(3)(B)(i)

Proposed subparagraph (b)(3)(B)(i)

requires members to provide a brief and

easily-understood statement relating to

the source of the estimated value,

provided that the member informs the

customer of how to obtain a more

complete and detailed explanation of

the methodology. The provision

includes two examples of such a brief

statement: (1) ‘‘the value represents an

estimate of the investor’s interest in the

assets owned by the DPP or REIT;’’ or

(2) ‘‘the value . . . represents an

estimate of the value of the investor’s

DPP and/or REIT securities.’’ Another

example of acceptable disclosure is that

the estimated value is ‘‘an estimate of

value provided to (member’s name) by

an independent valuation service on an

annual basis based on information

available to the service on (date).’’

An example of the disclosure a

member may use to inform the customer

of how to obtain a more complete

explanation of the valuation

methodology is: ‘‘A general description

of the methodology used by the

independent valuation service to

determine its estimate of value is

available by telephoning (telephone

number).’’

Disclosure of Nature of DPP/REIT

Securities—Subparagraph (b)(3)(B)(ii)

Proposed subparagraph (b)(3)(B)(ii)

requires disclosure in close proximity to

the location of the DPP/REIT securities

on the account statement that DPP

securities generally are illiquid

securities and the estimated value

disclosed may not be realizable if the

customer seeks to liquidate the security.

NASD Regulation considers the

requisite disclosure to be sufficiently

proximate if it is located on the same
Federal Register / Vol. 62, No. 64 / Thursday, April 3, 1997 / Notices 15949

9 15 U.S.C. § 78o–3.

page where the DPP and/or REIT

securities are listed.

Aggregation of Estimated Values for

DPP/REIT Securities with the Value of

Other Securities in Sub-Totals and in

the Total Account Value—

Subparagraphs (b)(4) (A) and (B)

Proposed subparagraph (b)(4)(A)

prohibits a general securities member

who discloses an estimated value for a

DPP and/or REIT security on a customer

account statement from aggregating the

estimated value of the DPP/REIT

securities with the value of any other

securities in any sub-total on the

statement. Proposed subparagraph

(b)(4)(B) allows a member to include the

estimated value of the DPP/REIT

securities in the total account value on

the statement if the member provides

disclosure in close proximity to the total

account value of the sub-total for DPP/

REIT securities and of the illiquid

nature of the securities, as required by

subparagraph (b)(3)(B)(ii), as discussed

above. NASD Regulation considers

‘‘close proximity’’ to require that the

sub-total for DPP/REIT securities and

the cautionary disclosure appear on the

same page as the total account value.

Use of Purchase Price—Subparagraph

(b)(4)(C)

Proposed subparagraph (b)(4)(C)

prohibits members from using the

original purchase price of a DPP or REIT

security on a customer account

statement as the estimated value unless

the valuation of the DPP or REIT by

another method indicates the same

dollar amount as the original issue

price. Thus, regardless of the mandatory

obligations in proposed subparagraphs

(b)(1) and (b)(2) to disclose an estimated

value for DPP/REIT securities under

certain circumstances, the member may

not use the original purchase price as

the required estimated value (unless the

valuation of the DPP or REIT by another

method indicates the same dollar

amount as the original issue price).

Retirement Account Statements With No

Individual Values—Subparagraph (b)(5)

Proposed subparagraph (b)(5) states

that if a retirement account statement

prepared in accordance with ERISA and

IRS regulations includes an aggregate

value of the assets held in the account,

but does not provide individual values

for any of the assets, then the member

must disclose on the account statement

only that DPP and/or REIT securities

included in the account are generally

illiquid securities. As a result of the

exception provided in subparagraph

(b)(5) from subparagraphs (b) (1)–(4), the

member may include the value of DPP/

REIT securities in the total account

value. NASD Regulation believes that

since individual values are not provided

for any of the assets in the retirement

account, the other provisions that

would, in particular, require disclosures

along with the display of the total

account value, are unnecessary.

Required Disclosure for Unpriced

Securities—Subparagraph (b)(6)

When a member discloses no

valuation for DPP/REIT securities on a

customer account statement, proposed

subparagraph (b)(6) requires the member

to segregate the DPP/REIT securities on

the account statement and include

disclosures that DPP/REIT securities are

generally illiquid securities, that the

value of the security may be different

from its purchase price, and, if

applicable, that accurate valuation

information is not available.

Implementation of Proposed Rule

Change

In order to provide members (or 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 Commission

approval. During that time, NASD

Regulation will issue a Notice to

Members announcing the Commission’s

approval of the proposed rule change

and the anticipated effective date. In

addition, the staff of the Corporate

Financing Department will respond to

inquiries by members and their service

organizations regarding compliance

with the proposed rule change. To the

extent that interpretive issues arise

during this period that are generally

applicable to those members that are

subject to the proposed rule change, the

Association will issue a Notice to

Members to clarify for all members the

application of the rule change.

(b) NASD Regulation believes that the

proposed rule change is consistent with

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

the Act,9 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 and performance

of securities issued by non-publicly

traded DPPs and REITs in which such

customers have invested, while

providing safeguards for both member

firms and public customers against the

publication of inaccurate, and therefore

misleading, 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

The proposed rule change was

published for comment in Notice to

Members 94–96 (December 1994).

Thirty-nine comments were received in

response thereto from 36 commenters. A

copy of the Notice to Members is

attached as Exhibit 2 to the rule filing.

A copy of the comment letters received

in response thereto are attached as

Exhibit 3 to the rule filing. Thirty of the

36 commentators generally favored

NASD Regulation’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.

Notice to Members 94–96 published

an original version of the proposed rule

change which required that customer

account statements:

1. Segregate DPP securities from other

securities on the account statement;

2. If illiquid DPP securities are listed

without a price, include disclosure that

accurate pricing information is not available

because the value of the security is not

determinable until the liquidation of the

partnership and no secondary market exists;

3. If DPP securities are 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 the

value of the DPP securities in the customer

account net worth calculation; and

b. Include disclosure of the methodology

used for obtaining the valuation; and

c. Include disclosure that DPP securities

generally are illiquid securities and that 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 that the regulatory

concerns surrounding the value of DPP

securities should extend only to

unlisted DPPs and REITs, since an

investment in Nasdaq or exchange-listed

securities provides investors with some

measure of liquidity and market
15950 Federal Register / Vol. 62, No. 64 / Thursday, April 3, 1997 / Notices

10NASD Regulation expanded the proposal

published for comment in Notice to Members 94–

96 to include non-publicly traded REIT securities

(which are not included in the Association’s

definition of DPP security) in order to ensure

similarity of treatment under NASD Rules for these

products.

11ERISA and IRS regulations require, at least

annually, that a retirement account fiduciary

provide to the account holder a value for the

aggregate of all the assets in the account. However,

as noted in footnote eight, other ERISA/IRS

regulations requiring mandatory annual

withdrawals by the account holder place pressure

on a member acting as a fiduciary to provide

individual values for each asset in a retirement

account.

values.10 Accordingly, NASD

Regulation revised its proposal to adopt

a definition of DPP and REIT securities

in new subparagraphs (c) (3) and (4) of

NASD Rule 2340 that excludes

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, since 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 versus Estimated Values

NASD Regulation amended the

proposal published for comment to

eliminate the word ‘‘price’’ and insert

the phrase ‘‘estimated value’’

throughout the revised 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’s account

statement. However, except in the case

of those DPPs/REITs which are publicly

listed and traded, estimated values of

DPP/REIT securities are not likely to be

realizable if a customer seeks to

liquidate his or her investment.

Requirements to Place Estimated Values

on Customer Account Statements and

Guidance on Appropriate Sources of

Valuations—Subparagraphs (b) (1) and

(2)

The provisions of the proposal

published for comment that provide

guidance for the disclosure of DPP

securities with an estimated value on

customer account statements received

the most comments. The commenters

generally believed that investors should

be provided with a value for their DPP

securities. However, they 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, i.e., that investors

in non-publicly traded partnerships and

trusts should know how their

investments are 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. A

member that was not part of the

underwriting syndicate for the initial

public offering would not have

conducted due diligence. Therefore, the

member would not have the usual

ongoing relationship with the general

partner or trust advisor that would

permit the member to assess the

reliability and validity of an estimated

value provided by the general partner/

trust advisor or any other source. In

particular, when a customer’s DPP/REIT

securities are transferred to a brokerdealer after acquiring them through

another member, NASD Regulation

determined that it would be an

inappropriate burden for the member to

be required to provide estimated values

for the many different partnerships and

trusts held by its customers if the

member did not participate in the initial

public offering of the DPP or REIT.

NASD Regulation determined that

members should be required to provide

customers who have DPP or REIT

securities in their general securities

accounts with estimated values under

two specific circumstances: (1) when

the member participated in the

underwriting of the initial or, although

rare, follow-on public offering of the

partnership or trust securities and had

the opportunity to conduct due

diligence and develop a relationship

with the sponsor or general partner; and

(2) when the member or its affiliate acts

as a fiduciary in connection with

partnership or trust securities which are

held in retirement accounts and are

disclosing individual DPP/REIT security

values to retirement account holder.11

NASD Regulation has revised the

proposal published for comment in the

Notice to Members to reflect these

requirements by adopting new

subparagraphs (b)(1) and (b)(2) of NASD

Rule 2340.

However, to address concerns that the

proposed rule change would require

members to provide estimated values for

DPP/REIT securities held in a retirement

account, although neither the

Department of Labor (which administers

ERISA Regulations) or the IRS (which

administers IRA, and other retirement

type products) specifically require

fiduciaries to provide individual values

for DPP/REIT securities and any other

assets held in the retirement account,

NASD Regulation proposed new

subparagraph (b)(5) to provide an

exception from the requirement to

disclose individual values if the

member only provides an aggregate

value for the entire retirement account.

See discussion below of subparagraph

(b)(5).

Appropriate Source for Estimated

Values—Subparagraph (b)(3)(A)

Commenters expressed concern that

the proposal published for comment did

not provide guidance on the different

sources of an estimated value

considered appropriate by the

Association. Accordingly, NASD

Regulation has amended its original

proposal to include a provision in

subparagraph (b)(3)(A) of NASD Rule

2340 that will require the member’s

estimated value for DPP or REIT

securities to be provided by an

independent source engaged by the

member, or be from a valuation in the

DPP’s or REIT’s annual report

distributed to investors, or from a

periodic report filed with the SEC by the

DPP or REIT. The member may develop

a value for the DPP or REIT only if a

valuation by an independent source or

from an annual or SEC periodic report

is not available.

Prohibition on Using Stale Data—

Subparagraph (b)(3)(A)(i)

Many commenters stated that an

estimated value, accurate upon its first

use on a customer account statement,

may become stale or inaccurate due to

lengthy time or 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, NASD

Regulation has amended its original

proposal to include a provision in

subparagraph (b)(3)(A)(i) of NASD Rule

2340 that will preclude 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, proposed

subparagraph (b)(2) provides an

exception to the mandatory requirement

that a member that participated in the
Federal Register / Vol. 62, No. 64 / Thursday, April 3, 1997 / Notices 15951

12 17 CFR 200.30.–3(a)(12).

distribution of a DPP or REIT security

provide an estimated value for such

securities on its customers’ account

statements where the member believes

that the estimated 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.

Segregation of DPP/REIT Securities—

Subparagraphs (b)(3)(B) and (b)(6)

NASD Regulation considered and

ultimately rejected the views of several

commenters who objected to the

requirement that DPP and REIT

securities be segregated from other

securities into a separate location on the

customer account statement. NASD

Regulation believes that investments in

non-publicly traded DPP and REIT

securities and the estimated values

which may be disclosed regarding their

performance differ sufficiently from the

prices of other securities that customers

will benefit from having the securities

grouped together for ease of

presentation and review.

In addition, NASD Regulation

believes that the segregation of DPPs

and REITs into a separate location on

the customer account statement should

lessen the possibility of misleading

customers regarding values since they

will be distinguished from listed

securities. NASD Regulation also

determined that the requirement to

segregate DPP/REIT securities should

apply regardless of whether the security

is listed with or without an estimated

value. Therefore, proposed

subparagraphs (b)(3)(B) and (b)(6) set

forth the requirement to segregate DPP

and REIT securities.

Use of Purchase Price—Subparagraph

(b)(4)(C)

In response to the correspondence of

the SEC, NASD Regulation amended the

proposal published for comment to add

a new provision in subparagraph

(b)(4)(C) prohibiting members from

using the original purchase price of a

DPP or REIT security on a customer

account statement as the estimated

value. NASD Regulation provided

additional language to clarify that the

same dollar value of the purchase price

may be used when a valuation

methodology results in the estimated

value and purchase price being

equivalent.

Required Disclosure for Unpriced

Securities—Subparagraph (b)(6)

In response to comments, NASD

Regulation amended the proposal

published for comment to require the

following disclosure on the account

statement where a member provides no

valuation for a DPP or REIT: that DPP

and/or REIT securities generally are

illiquid securities; the value of the

security may be different than its

purchase price; and, if applicable, that

accurate valuation information is not

available. This disclosure replaces the

provision in the proposal published for

comment that would have required a

statement that the value of the DPP

security is not available until the

liquidation of the partnership and that

no active secondary market exists.

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 reason for so finding or (ii)

as to which the self-regulatory

organization consents, the Commission

will:

(a) By order approve such 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.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, DC 20549. 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 at

the Commission’s Public Reference

Section, 450 Fifth Street, N.W.,

Washington, DC 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 number SR–NASD–97–12 and

should be submitted by April 24, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–8470 Filed 4–2–97; 8:45 am]

BILLING CODE 8010–01–M

SMALL BUSINESS ADMINISTRATION

Small Business Investment Company;

Computation of Alternative Maximum

Annual Cost of Money to Small

Businesses

13 CFR 107.855 limits the maximum

annual Cost of Money (as defined in 13

CFR 107.50) that may be imposed upon

a Small Business in connection with

Financing by means of Loans or through

the purchase of Debt Securities. The

cited regulation incorporates the term

‘‘Debenture Rate’’, which is defined in

13 CFR 107.50 in terms that require SBA

to publish, from time to time, the rate

charged on ten-year debentures sold by

Licensees to the public.

Accordingly, Licensees are hereby

notified that effective the date of

publication of this Notice, and until

further notice, the Debenture Rate, plus

the 1 percent annual fee which is added

to this Rate to determine a base rate for

computation of maximum cost of

money, is 8.38 percent per annum.

13 CFR 107.855 does not supersede or

preempt any applicable law imposing

an interest ceiling lower than the ceiling

imposed by its own terms. Attention is

directed to Section 308(i) of the Small

Business Investment Act of 1958, as

amended, regarding that law’s Federal

override of State usury ceilings, and to

its forfeiture and penalty provisions.

(Catalog of Federal Domestic Assistance

Program No. 59.011, small business

investment companies)

Dated: March 28, 1997.

Don A. Christensen,

Associate Administrator for Investment.

[FR Doc. 97–8431 Filed 4–2–97; 8:45 am]

BILLING CODE 8025–01–P

DEPARTMENT OF STATE

[Public Notice 2526]

Bureau of Oceans and International

Environmental and Scientific Affairs;

International Harmonization of

Chemical Safety and Health

Information

AGENCY: Bureau of Oceans and

International Environmental and

Scientific Affairs (OES); Department of

State.

ACTION: Notice regarding Government

activities on international

harmonization of chemical safety and