18662 Federal Register / Vol. 62, No. 73 / Wednesday, April 16, 1997 / Notices

2Rule 144(e) provides that, after the one-year

holding period has expired, a holder of restricted

securities that is an affiliate of the issuer may not

sell, in any three-month period, more than the

greater of (1) 1% of the issuer’s outstanding shares

or (2) the average weekly reported volume of

trading in the shares over the preceding four

calendar weeks.

3Section 61(a)(3) permits a BDC to issue options

pursuant to an executive compensation plan

provided that certain requirements are satisfied.

Deferred Fee at December 31, 1996, of

$10,784,028 had been paid in shares at

the net asset value of such shares at

December 31, 1996 ($24.00), the Fund

would have issued 449,334 shares with

an aggregate current market value on

that date of $7,245,511, or $16.125 per

share, a discount of approximately 33%.

12. The shares of Fund’s common

stock issued in payment of the Deferred

Fee will not be registered under the

Securities Act of 1933 (‘‘Securities

Act’’). Consequently, they will be

restricted from resale for a minimum of

one year as ‘‘restricted securities’’ under

rule 144(d) under the Securities Act and

will be subject to the volume limitations

on the amount of securities that may be

sold thereafter. Under Rule 144(e),

based on the 4,300,682 shares of Fund’s

common stock outstanding on December

31, 1996, and assuming that

approximately 450,000 shares are issued

to ECMC in payment of the deferred fee,

ECMC could sell approximately 47,500

shares (1% of the shares of common

stock outstanding) every three months

after it has held the shares for one year.2

Thus, without taking into account the

average weekly trading volume of the

shares (which did not exceed 47,500

shares in a recent four calendar week

period), it would take more than three

years for ECMC to realize the total value

of the Deferred Fee after receiving the

shares representing payment of the Fee.

Applicants’ Legal Analysis

1. Section 63 of the Investment

Company Act provides that section 23

of the Act shall apply to a BDC to the

same extent as if it were a registered

closed-end investment company, with

certain exceptions. Section 23(a)

prohibits registered closed-end

companies from issuing their securities

for services. Applicants believe that, to

the extent that the payment of the

Deferred Fee in shares of the Fund’s

common stock represents the issuance

of such shares for services, the payment

may be deemed to violate section 23(a).

2. Section 205(a)(1) of the Advisers

Act generally prohibits an investment

adviser from having an advisory

agreement that provides for it to receive

compensation on the basis of a share of

capital gains upon or capital

appreciation of a client’s funds. Section

205(b)(3) of the Advisers Act provides

that section 205(a)(1) shall not apply to

an agreement between an investment

adviser and a BDC for the adviser to

receive a limited performance fee based

on realized gains computed net of

realized and unrealized losses, provided

that, among other things, the BDC does

not also have outstanding any option

issued pursuant to section 61(a)(3) of

the Investment Company Act.3

Applicants believe that, to the extent

that the calculation of the Deferred Fee

provides that all unrealized capital

appreciation or gains be deemed

realized, such calculation may be

deemed to violate section 205(a)(1).

3. Section 6(c) of the Investment

Company Act and section 206A of the

Advisers Act provide that the SEC may

exempt any person or transaction from

any provision of the Investment

Company Act and the Advisers Act if

such exemption is appropriate in the

public interest and consistent with the

protection of investors and the purposes

fairly intended by the policy and

provisions of each Act. Applicants

believe that these standards are satisfied

for the reasons stated below.

4. Applicants contend that payment of

the Deferred Fee in shares of the Fund’s

common stock is beneficial to the Fund

and its shareholders because it will

permit the Fund to retain cash

otherwise required to pay the Deferred

Fee and assist in better aligning

management’s compensation with the

Fund’s shareholders’ objective of

increasing the market value of the

Fund’s shares. Applicants believe that

the loss of the accrued incentive

compensation by ECC and ECMC would

not be in the best interest of the Fund

because it would penalize the very

persons for whom the board of directors

wishes to create incentives.

5. Applicants argue that elimination

of the Deferred Fee also will

significantly reduce expenses and the

expense ratio of the Fund. By

eliminating the Deferred Fee, applicants

note that the expenses of the Fund

would have been reduced from

$10,857,087 to $3,310,381 for the year

ended December 31, 1996, and the

expense ratio of the Fund would have

been reduced from 13.1% to 4.0% for

1996.

6. Applicants believe that Congress

may have excluded unrealized gains

from the calculation of performance fees

under section 205(b)(3) in part because

it was concerned about the possible

overcompensation of the BDC’s adviser

resulting from overvaluation of the

BDC’s portfolio securities. Applicants

assert that this concern will be

addressed by basing the Deferred Fee on

a valuation of the Fund’s portfolio

securities provided by an independent

appraiser selected by the Independent

Directors.

7. Applicants state that Congress

permitted the payment of incentive

compensation under section 205(b)(3)

only if the BDC did not also have a stock

option plan. Applicants believe that this

condition may have arisen from a

concern that management might be paid

twice with respect to the same capital

gains. Applicants note that the Fund

proposes to issue to directors and

officers of the Fund stock options

exercisable at the market price on the

date of issuance. Applicants therefore

believe there would be a risk that

management may receive additional

compensation based on the same capital

gain if the shares of common stock

issued in payment of the Deferred Fee

were issued at market value and the

subsequent realization of a capital gain

previously deemed realized in

determining the Deferred Fee reduced

the market discount on the Fund’s net

asset value. Applicants assert that

payment of the Deferred Fee in shares

of common stock at net asset value

eliminates this risk because ECMC and

ECC would not receive any benefit from

the current market discount on the

Fund’s net asset value.

Applicants’ Condition

Applicants agree that any order of the

SEC granting the requested relief will be

subject to the condition that the shares

of the Fund’s common stock to be

issued in payment of the Deferred Fee

will be valued at the net asset value of

such shares on the same date as of

which the Deferred Fee is determined.

For the SEC, by the Division of Investment

Management, under delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–9804 Filed 4–15–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Investment Company Act Release No.

22612; 812–10400]

Smith Barney Inc., et al.; Notice of

Application

April 9, 1997.

AGENCY: Securities and Exchange

Commission (‘‘SEC’’).

ACTION: Notice of Application for

Exemption under the Investment

Company Act of 1940 (the ‘‘Act’’).
Federal Register / Vol. 62, No. 73 / Wednesday, April 16, 1997 / Notices 18663

1 Investment Company Act Release Nos. 20296

(May 16, 1994) (notice) and 20344 (June 8, 1994)

(order).

APPLICANTS: Smith Barney Incorporated

(the ‘‘Sponsor’’); and Corporate

Securities Trust, Directions Unit

Investment Trust, Government

Securities Trust, Harris Upham Tax

Exempt Fund, E.F. Hutton Corporate

Income Trust, E.F. Hutton Tax-Exempt

Trust, E.F. Hutton Trust for Government

Guaranteed Securities, Hutton

Investment Trust, Hutton Telephone

Trust, Hutton Utility Trust, Michigan

Fund, Penn State Tax-Exempt

Investment Trust, Pennsylvania Fund,

Smith Barney Shearson Unit Trusts,

Tax-Exempt Municipal Trust, Tax

Exempt Securities Trust, The TaxExempt Trust, The Uncommon Values

Unit Trust, Equity Focus Trust, Angels

With Dirty Faces Trust, The

Countryfund Opportunity Trust (each

an ‘‘Existing Trust’’); and any other

future unit investment trust sponsored

by the Sponsor (collectively, with the

Existing Trusts, the ‘‘Trusts’’).

RELEVANT ACT SECTIONS: Order requested

pursuant to section 6(c) for exemptions

from sections 2(a)(3), 2(a)(35), 22(d) and

26(a)(2) of the Act and rule 22c–1

thereunder, and pursuant to section

11(a) for an exemption from section

11(c).

SUMMARY OF APPLICATION: Applicants

request an order to modify a condition

to an existing order (the ‘‘Prior Order’’) 1

and to permit the Trusts to impose sales

charges on a deferred basis and waive

the deferred sales charge in certain

cases, exchange Trust units having

deferred sales charges, and exchange

units of a terminating series of a Trust

for units of the next available series of

that Trust.

FILING DATE: The application was filed

on October 8, 1996, and amended on

February 26, 1997.

HEARING OR NOTIFICATION OF HEARING: An

order granting the application will be

issued unless the SEC orders a hearing.

Interested persons may request a

hearing by writing to the SEC’s

Secretary and serving applicants with a

copy of the request, personally or by

mail. Hearing requests should be

received by the SEC by 5:30 on May 5,

1997 and should be accompanied by

proof of service on applicants, in the

form of an affidavit or, for lawyers, a

certification of service. Hearing requests

should state the nature of the writer’s

request, the reason for the request, and

the issues contested. Persons may

request notification of a hearing by

writing to the SEC’s Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth

Street, NW., Washington, DC 20549.

Applicants, c/o Laurie A. Hesslein,

Smith Barney Inc., 388 Greenwich

Street, 23rd Floor, New York, NY 10013.

FOR FURTHER INFORMATION CONTACT:

Kathleen L. Knisely, Staff Attorney, at

(202) 942–0517 or Mercer E. Bullard,

Branch Chief, at (202) 942–0564

(Division of Investment Management,

Office of Investment Company

Regulation.)

SUPPLEMENTARY INFORMATION: The

following is a summary of the

application. The complete application is

available for a fee from the SEC’s Public

Reference Branch.

Applicants’ Representations

1. Each of the Trusts is a unit

investment trust registered or to be

registered as an investment company

under the Act and is sponsored or will

be sponsored by the Sponsor. Each of

the Trusts consists of one or more series

of separate unit investment trusts

issuing securities registered or to be

registered under the Securities Act of

1933 (the ‘‘Series’’). Applicants request

that the relief sought herein apply to the

Trusts and to future series of the Trusts.

2. Each Series is created by a trust

indenture among the Sponsor, a banking

institution or trust company as trustee,

and an evaluator. The Sponsor acquires

a portfolio of securities, which is then

deposited with a trustee in exchange for

certificates representing fractional

undivided interests in the deposited

portfolio (‘‘Units’’). The Units are then

offered to the public through the

Sponsor, underwriters and dealers at a

public offering price which, during the

initial offering period, is based upon the

aggregate market value of the underlying

securities plus an up-front sales charge.

The sales charge currently ranges from

1.50% to 4.70% of the public offering

price, generally depending upon the

terms of the underlying securities. The

maximum charge is usually subject to

reduction in compliance with rule 22d–

1 under the Act under certain stated

circumstances disclosed in the

prospectus, such as for a volume

discount purchase.

3. Applicants seek exemptive relief to

permit payment of the sales charge for

Units of any Series of any of the Trusts

to be made on a deferred basis (the

‘‘deferred sales charge’’ or ‘‘DSC’’). The

Sponsor will determine the maximum

amount of the sales charge per Unit, and

this maximum amount will be stated in

the prospectus for the applicable Series.

The Sponsor will have the flexibility to

defer the collection of all or part of the

sales charge initially determined as

described above over a period (the

‘‘Collection Period’’) subsequent to the

settlement date for the purchase of

Units, provided that the Sponsor will in

no event add to the deferred amount of

the sales charge determined as

described above any additional amount

for interest or any similar or related

charge to reflect or adjust for in any way

any ‘‘time-value of money’’ calculation

related to such deferral. Applicants also

intend to offer certain scheduled

variations to the deferred sales charge

such as volume discounts and waivers

under certain circumstances.

4. The Sponsor presently anticipates

collecting a portion of the total sales

charge ‘‘up front,’’ i.e., immediately

upon purchase of Trust Units. The

outstanding balance of the sales charge

per Trust Unit as of the initial date of

deposit will be collected over the

remaining collection Period relevant to

each particular Trust Series.

5. The amount of the DSC per Unit as

of the initial date of deposit will be

stated in the prospectus as a dollar

amount and/or as a percentage. The

table required by item 2 of Form N–1A

(modified as appropriate to reflect the

difference between unit investment

trusts and open-end management

investment companies) and a schedule

setting forth the number and date of

each installment payment will be

included in the prospectus. The

duration of the Collection Period shall

also be stated in such prospectus.

6. A ratable portion of the sales charge

remaining to be collected will be

deducted (‘‘Distribution Deductions’’)

from income distributions on the Units,

from amounts received on the maturity

or sale of securities or from a

combination thereof, or may be paid by

the Series on a periodic basis. Such

payment amounts may be advanced by

the trustee, who will be reimbursed

from the income account of the Series

(the ‘‘Income Account’’) or from the

capital or principal account of the Series

(the ‘‘Capital Account’’) upon the

receipt of the proceeds from the

maturity or sale of securities, until the

total amount per Unit is collected, or

deducted from the proceeds of sale,

exchange, redemption or termination.

The total of all these amounts will not

exceed the sales charge per Unit. The

DSC may be paid out of the Income or

Capital Accounts of the Series and

securities may be sold in order to pay

any portion of the DSC due on a certain

date in the event that income is

insufficient to pay any amount due on

such date.

7. The Sponsor intends to deduct any

amount of the unpaid DSC expense from

the proceeds of any redemption of Units
18664 Federal Register / Vol. 62, No. 73 / Wednesday, April 16, 1997 / Notices

or of any sale of Units to the Sponsor.

In general, if the Sponsor were to

impose a DSC on the redemption or sale

of Units, a determination would be

made as to whether a DSC applies to a

particular redemption or sale of Units.

For such purposes, it will be assumed

that Units owned by a particular

investor on which the total aggregate of

Distribution Deductions have been

collected (and therefore for which no

DSC is due) are liquidated first. Any

Units disposed of over and above such

amounts will be subject to the DSC,

which will be applied on the

assumption that Units held for the

longest time by such investor are

redeemed first.

8. The Sponsor may adopt a

procedure of waiving the DSC payable

out of net sales or redemption proceeds

under certain circumstances which will

be disclosed in the current prospectus

for each Series of Trust affected. Any

such waiver of the DSC will be

implemented in accordance with the

provisions of rule 22d–1.

9. Applicants’ Prior Order permits the

applicants to: (a) make certain exchange

offers between specified funds (the

‘‘Exchange Privilege’’); (b) make certain

exchange offers to holders of any

registered unit investment trust carrying

a specified sales load (the ‘‘Conversion

Privilege’’); and (c) publicly offer units

of the trusts without previously

privately placing at least $100,000 of

units. Under the Prior Order, applicants

may charge a sales charge at the time of

the exchange or conversion not to

exceed 1.5% of the unit being acquired

on each exchange. Applicants seek to

modify a condition to the Prior Order to

permit exchanges and conversions of

Units of Series at a reduced, as opposed

to specified, sales charge (the ‘‘Revised

Exchange and Conversion Privilege’’).

10. Applicants also propose to offer a

rollover privilege (the ‘‘Rollover

Privilege’’) which would allow holders

the ability to roll over any or all of their

Units in a Series which is terminating

(the ‘‘Terminating Trust’’) for Units in

one or more new Series (the ‘‘Rollover

Trust’’) at a reduced sales charge. The

Revised Exchange and Conversion

Privilege and Rollover Privilege would

extend to all exchanges, conversions,

and rollovers of Units sold either with

a fixed sales charge or with a DSC for

Units of one or more Series (‘‘Exchange

Trust’’ or ‘‘Conversion Trust’’) or

Rollover Trust sold either with a fixed

sales charge or with a DSC.

11. A holder must notify the Sponsor

of this desire to exercise his Rollover

Privilege. Exercise of the Rollover

Privilege is subject to the following

conditions: (i) the Sponsor must be

maintaining a secondary market in the

Units of the available Rollover Trust, (ii)

at the time of the Holder’s election to

participate in the Rollover Privilege,

there must also be Units of the Rollover

Trust available for sale, and (iii)

exchanges will be effected in whole

Units only.

12. Investors who purchase Units

under the Revised Exchange and

Conversion Privilege or Rollover

Privilege will pay a lower sales charge

than that which would be paid by a new

investor. The applicable reduced sales

charge will be applied when an investor

exchanges or converts his Units within

five months of his acquisition for Units

of a Series with a lower sales charge. An

adjustment would be made, however, if

Units of any Series are exchanged or

converted within five months of

acquisition for Units of a Series with a

higher sales charge. In such cases, the

exchange or conversion fee will be the

greater of (i) the applicable reduced

sales charge or (ii) an amount which,

together with the sales charge already

paid on the Units being exchanged or

converted, equals the normal sales

charge on the Units of a Trust Series

being acquired through such exchange

or conversion. This method of

determining the exchange fee will also

be applied in the case where the

exchange of Units is from a Series of a

Trust which is terminating for Units of

one or more new Series of such Trust.

Applicant’s Legal Analysis

1. Under section 6(c), the Commission

may exempt any person or transaction

from any provision of the Act if and to

the extent that such exemption is

necessary or appropriate in the pubic

interest and consistent with the

protection of investors and the purposes

fairly intended by the policy and

provisions of the Act.

2. Section 2(a)(32) defines a

‘‘redeemable security’’ as any security,

other than short term paper, under the

terms of which the holders upon its

presentation to the issuer or a person

designated as the issuer, is entitled to

receive approximately his proportionate

share of the issuer’s current net assets,

or the cash equivalent thereof. Section

4(2) defines a unit investment trust as

an investment company that issues only

redeemable securities. Applicants

submit that the imposition of the DSC

would not cause the Units of the Trusts

to fall outside the definition of

redeemable securities in section 2(a)(32)

of the Act. In order to avoid uncertainty

in this regard, however, applicants

request an exemption from section

2(a)(32) to the extent necessary to

permit implementation of the DSC

under the proposed deferred sales

charge program.

3. Section 2(a)(35) defines the term

‘‘sales load’’ to be the difference

between the sales price and that portion

of the proceeds from its sale which is

received and invested or held for

investment by the depositor or trustee.

Applicants submit that the DSC is

within the section 2(a)(35) definition of

sales load, but for the timing of the

imposition of the charge. Applicants

therefore request an exemption from

section 2(a)(35) to the extent necessary

to implement the proposed DSC.

4. Section 22(c) and rule 22c–1

require that the price of a redeemable

security issued by an investment

company for purposes of sale,

redemption, and repurchase be based on

the security’s current net asset value.

Applicants submit that, although the

DSC will be deducted at the time of

redemption or repurchase from the

holder’s proportionate liquidation

proceeds, such deduction does not in

any way affect the calculation of net

asset value used to determine the

redemption price for the Units. In order

to avoid any possibility that questions

might be raised regarding the

applicability of rule 22c–1, applicants

request an exemption from the rule to

the extent necessary or appropriate to

permit applicants to implement the DSC

under the proposed deferred sales

charge program.

5. Section 22(d) requires an

investment company and its principal

underwriter and dealers to sell any

redeemable security issued by such

investment company only at the current

public offering price described in the

investment company’s prospectus. Sales

loads were historically deemed to be

subject to the provisions of section 22(d)

because they were traditionally a

component of the public offering price;

hence all investors were charged the

same sales load. Rule 22d–1 was

adopted to permit registered investment

companies and principal underwriters

and dealers thereof to sell any

redeemable securities issued by such

company with scheduled variations in

its sales load, subject to certain

conditions. In the interest of clarity,

applicants request that an exemption

from the provisions of section 22(d) in

order to permit scheduled variations or

waivers of the DSC under certain

circumstances.

6. Section 26(a)(2) prohibits a trustee

or custodian of a unit investment trust

from collecting from the trust as an

expense any payment to a depositor or

principal underwriter thereof.

Applicants state that in order to avoid

any possibility that questions may be
Federal Register / Vol. 62, No. 73 / Wednesday, April 16, 1997 / Notices 18665

1 15 U.S.C. § 78s(B)(1)(1988).

2The proposed rule change was originally

submitted on January 29, 1997. The NASD

subsequently submitted Amendment No. 1 that

removed certain unnecessary text. Letter from

Suzanne E. Rothwell, Associate General Counsel,

NASD Regulation, to Katherine A. England,

Assistant Director, Division of Market Regulations,

SEC, dated February 20, 1997.

raised as to the propriety of the trustee

disbursing these charges to the Sponsor,

applicants request an exemption from

section 26(a)(2) to the extent necessary

to permit the trustee to collect these

deductions and disburse them to the

Sponsor as contemplated by the

deferred sales charge program.

7. Section 11(c) prohibits any type of

offers of exchange of the securities of a

registered unit investment trusts for

securities of any other investment

company unless the terms of the offer

have been approved by the SEC.

Applicants assert that certain savings in

sales related expenses involving repeat

investors may appropriately be passed

along to such investors, which savings

will be recognized by a reduction in the

sales charge of the unit exchanged into.

Applicants maintain that the reduction

in the sales charge paid for units of the

Series exchanged into is consistent with

the provisions of the Act whether the

sales charge on the units exchanged into

is collected up-front and/or on a

deferred basis.

8. Applicants represent that holders

will not be induced or encouraged to

participate in the Revised Exchange and

Conversion Privilege or Rollover

Privilege through an active advertising

or sales campaign. The Sponsor

recognizes its responsibility to its

customers against generating excessive

commissions through churning and

represents that the sales charge

collected will not be a significant

economic incentive to salesmen to

promote inappropriately the Revised

Exchange and Conversion Privilege or

Rollover Privilege. The Sponsor also

believes that the operation and

implementation of the DSC program

will be adequately disclosed and

explained to potential investors as well

as unitholders.

Applicants’ Conditions

Applicants agree that any order

granting the requested relief will be

subject to the following conditions:

1. Applicants agree that whenever the

Revised Exchange and Conversion

Privilege or Rollover Privilege is to be

terminated or its terms are to be

amended materially, any holder of a

security subject to that privilege will be

given prominent notice of the

impending termination or amendment

at least 60 days prior to the date of

termination or the effective date of the

amendment, provided that: (a) no notice

need be given if the only material effect

of an amendment is to reduce or

eliminate the sales charge payable at the

time of an exchange, to add one or more

new Series eligible for the Revised

Exchange and Conversion Privilege or

the Rollover Privilege, or to delete a

Series which has terminated; and (b) no

notice need be given if, under

extraordinary circumstances, either (i)

there is a suspension of the redemption

of Units of an Exchange, Conversion or

Rollover Trust under section 22(e) of the

Act and the rules and regulations

promulgated thereunder, or (ii) an

Exchange, Conversion or Rollover Trust

temporarily delays or ceases the sale of

its Units because it is unable to invest

amounts effectively in accordance with

applicable investment objectives,

policies and restrictions.

2. An investor who purchases Units

under the Revised Exchange and

Conversion Privilege or Rollover

Privilege will pay a lower sales charge

than that which would be paid for the

Units by a new investor. The reduced

sales charge will be reasonably related

to the expense of providing such

service, and may include an amount

that will fairly and adequately

compensate the Sponsor.

3. Applicants agree that the

prospectus of each Series and any sales

literature or advertising that mentions

the existence of the Revised Exchange

and Conversion Privilege or the Rollover

Privilege will disclose that they are

subject to termination and that their

terms are subject to change.

4. Each Series offering Units subject to

a DSC will include in its prospectus the

table required by Item 2 of Form N–1A

(modified as appropriate to reflect the

differences between unit investment

trusts and open-end management

investment companies) and a schedule

setting forth the number and date of

each installment payment.

5. Applicants agree to continue to

comply with all of the conditions

contained in the Prior Order, except that

condition 2 of the Prior Order is

amended by condition 2 above.

For the Commission, by the Division of

Investment Management, under delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–9802 Filed 4–15–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38491; File No. SR–NASD–

97–06]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change by

National Association of Securities

Dealers, Inc., Relating to the Scope of

the Uniform Practice Code

April 9, 1997.

On February 20, 1997, the NASD

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

filed with the Securities and Exchange

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

the proposed rule change pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’) 1 To

amend Rule 11100 of the Uniform

Practice Code (‘‘Code’’) of the National

Association of Securities Dealers, Inc.,

(‘‘NASD’’ or ‘‘Association’’), to clarify

the scope of the Code and the exception

for transactions settled through a

clearing agency.2 No comment letters

were received. The Commission is

approving the proposed rule change.

I. Background

The introductory language in

paragraph (a) of Rule 11100 states the

general standard that ‘‘all over-thecounter secondary market transaction in

securities between members shall be

subject to the provisions of this Code.

* * *’’ According to NASD Regulations,

that introductory language does not

encompass those provisions of the Code

that address the rights and liabilities of

the members participating in the

transaction or provide procedures that

are not related to securities transactions,

e.g., the setting of ex-dates and the

transfer of customer accounts. In

addition, subparagraph (a)(1) of the Rule

11100 of the Code excludes securities

transactions compared, cleared or

settled through a registered clearing

agency from the provisions of the Code.

NASD Regulation believes that

exception is technically not available

when the rules of the clearing agency

require that the Code or the rules of

other relevant markets apply to the

transaction. Finally, since the SEC’s

adoption of Rule 144A in 1991, NASD

Regulation believes that members were

uncertain as to whether the Code is

applicable to transactions in restricted