2204 Federal Register / Vol. 62, No. 10 / Wednesday, January 15, 1997 / Notices

12 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 37131

(Apr. 19, 1996), 61 FR 18452.

4See letter from James Frith, Jr., President,

Chicago Partnership Board, Inc. (‘‘CPB’’), to

Jonathan G. Katz, Secretary, SEC, dated May 14,

1996 (‘‘CPB Letter No. 1’’); letter from James F.

Fotenos, Attorney, Fotenos & Suttle, P.C., to

Jonathan G. Katz, Secretary, SEC, dated May 22,

1996 (‘‘Fotenos & Suttle Letter’’); letter from James

Frith, Jr., President, CPB, to Jonathan G. Katz,

Secretary, SEC, dated June 10, 1996 (‘‘CPB Letter

No. 2) (concentrating primarily on the Qualified

Matching Service Safe Harbor); letter from James

Frith, Jr., President, CPB, to Jonathan G. Katz,

Secretary, SEC, also dated June 10, 1996 (‘‘CPB

Letter No. 3) (focusing on the NASD’s standardized

Distribution Allocation Agreement form); letter

from George E. Hamilton, President, NAPEX, to

Jonathan G. Katz, Secretary, SEC, dated June 10,

1996 (‘‘NAPEX Letter’’); letter from Gregory S. Paul,

President, American Partnership Services (‘‘APS’’),

to Jonathan G. Katz, Secretary, SEC, dated June 10,

1996 (‘‘APS Letter’’); letter from Laura J. Lacey,

President, Nationwide Partnership Marketplace Inc.

(‘‘NPM’’), to Jonathan G. Katz, Secretary, SEC, dated

June 26, 1996 (‘‘NPM Letter’’).

5See letter from Joan Conley, Corporate Secretary,

NASD, to Katherine A. England, Assistant Director,

Division of Market Regulation, SEC, dated October

16, 1996 (‘‘NASD Response’’).

6See letter from Joan Conley, Corporate Secretary,

NASD, to Katherine A. England, Assistant Director,

Division of Market Regulation, SEC, dated

November 26, 1996 (‘‘Amendment No. 1’’).

Amendment No. 1 explained when a DPP trade

needs to be reported, made technical corrections to

the proposal so that it now conforms with the

NASD Manual’s new format, clarified the

implementation schedule for these new rules, and

extended the time period for Commission action.

7The NASD defines a DPP as a program that

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,

agriculture programs, condominium securities,

Subchapter S corporate offerings and all other

programs similar in nature, regardless of the

industry represented by the program, or any

combination thereof. Excluded from the definition

are real estate investment trusts, tax qualified

pension and profit sharing plans pursuant to

Sections 401 and 403(a) of the Internal Revenue

Code and individual retirement plans under Section

408 of that code, tax sheltered annuities pursuant

to Section 403(b) of the Internal Revenue Code, and

any company including separate accounts,

registered pursuant to the Investment Company Act

of 1940. Proposed NASD Rule 6910(a); NASD Rule

2810(a)(4).

8 Dennis C. Hensley, A Study of the NASD

‘‘Electronic Bulletin Board’’ for Limited

Partnerships in American Bar Association, Section

of Corporation, Banking and Business Law,

Committee on Partnerships and Unincorporated

Business Organizations, Publicly Traded Limited

Partnerships IV–25 (Aug. 2, 1983). Nearly 20% of

the NASD membership responded. Id. of those

members, 68% favored the development of such a

system. Id. Among those members who dealt in

DPPs, the percentage of those in favor of the idea

rose to be over 80%. Id.

9NASD Notice to Members 82–13.

10Although most of the concerns raised by the

commenters were specific to that proposal, some of

the comments focused on issues that are pertinent

to the current rule proposal (e.g., potential tax law

implications, appropriate level of general partner

involvement, and costs). See File No. SR–NASD–

83–1 (comment letters attached as Exhibit 2 to the

Form 19b–4).

11File No. SR–NASD–83–1.

12Securities Exchange Act Release No. 19675A

(May, 9, 1983), 48 FR 21693 (publishing notice of

File No. SR–NASD–83–1).

13Letter from Frank J. Wilson, then-Executive

Vice President, Legal and Compliance, NASD, to

Stuart J. Kaswell, then-Branch Chief, Over-theCounter Regulation, SEC, dated August 20, 1985.

14See NASD Notice to Members 91–69 (‘‘NTM–

91–69’’) (publishing the Committee’s findings and

noting that the primary concern of the study was

to determine how the market currently operates,

whether it functions efficiently, and whether NASD

members are in compliance with the applicable

securities laws and rules).

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, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the Exchange. All submissions

should refer to File No. SR–BSE–96–12

and the submitted by February 5, 1997.

For the Commission, by the Divisions of

Market Regulation, pursuant to delegated

authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–901 Filed 1–14–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38132; File No. SR–NASD–

96–08]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Granting Approval

to Proposed Rule Change and Notice

of Filing of, and Order Granting

Accelerated Approval to, Amendment

No. 1 to the Proposed Rule Change

Relating to Quotation and Reporting

Requirements of Direct Participation

Programs

January 7, 1997.

I. Introduction

On March 12, 1996, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’) submitted to the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposed rule change to

permit the quotation of Direct

Participation Programs (‘‘DPPs’’) on the

OTC Bulletin Board Service (‘‘OTCBB’’

or ‘‘OTC Bulletin Board’’) and require

all transactions in DPPs to be reported

through the Automated Confirmation

Transaction Service (‘‘ACT’’).

The proposed rule change was

published for comment in the Federal

Register on April 25, 1996.3 The

Commission received seven comment

letters concerning this proposal.4 The

NASD initially responded to these

comments in a letter dated October 16,

1996.5 On November 26, the NASD

submitted Amendment No. 1 to the

proposed rule change.6 After careful

consideration of all of the comments,

the Commission has decided to approve

the proposal, including Amendment No.

1 on an accelerated basis.

II. Background

In response to findings by the NASD’s

Direct Participation Programs

Committee (‘‘DPP Committee’’ or

‘‘Committee’’) and recently issued

Internal Revenue Service (‘‘IRS’’)

regulations, the NASD submitted a

proposed rule change to permit the

quotation of DPPs 7 on the OTCBB by

NASD members and, subject to a few

exceptions, require that all transactions

in DPPs be reported through ACT.

A. NASD Study of DPPs

The NASD has contemplated the

implementation of a system that

facilitates the dissemination of

information concerning DPPs for quite

some time. In fact, the NASD began

examining this issue as early as 1980

when it solicited its members’ opinions

on this topic in the form of a voluntary

questionnaire mailed to all of its

members.8 The positive reaction to the

questionnaire prompted the NASD to

design the ‘‘Electronic Bulletin Board’’

system, draft the necessary rules, and

solicit comments from its members

regarding these rules and ‘‘the overall

concept of such a system.’’ 9 The NASD

received eighteen comment letters, most

of which supported the concept.10 After

considering these comments, the NASD

filed a proposed rule change with the

Commission on January 20, 1983.11

After notice of this proposed rule

change was published by the

Commission, additional comment letters

were received.12 Subsequently, the

NASD decided to further analyze the

issues raised in the comment letters and

withdrew the proposal on August 21,

1985.13

The NASD revisited this issue in

1990. At the direction of the DPP

Committee, NASD staff undertook a

study of the nature and operation of the

secondary market for limited

partnership securities.14 This study

indicated that approximately $90 billion

was invested in public DPPs in the

1970s and 1980s by more than ten

million investors. The programs were

organized to invest in a variety of
Federal Register / Vol. 62, No. 10 / Wednesday, January 15, 1997 / Notices 2205

15The NASD estimated at the time that

approximately two dozen participants acted as

principal or agent for customers in a fragmented

secondary market that, in the aggregate, transferred

ownership of an estimated $250 to $300 million

worth of limited partnership securities annually. Id.

16See also William Power, Market for Limited

Partnerships Is Rife with ‘‘Predatory Pricing,’’

NASD Finds, Wall St. J., Nov. 18, 1991, at C1

(discussing the DPP Committee’s findings).

17 15 U.S.C. 1–9602.

18 I.R.C. Section 7704(a) providing that a publicly

traded partnership is treated as a corporation for

federal tax purposes unless the partnership meets

the 90% qualifying income test of Section 7704(c)

or qualifies as an ‘‘existing partnership’’ as defined

in Treas. Reg. § 1.7704–2).

19See 60 FR 62026 (Dec. 4, 1995) (adopting Treas.

Reg. § 1.7704–1 and discussing the definition of a

publicly traded partnership under Section 7704(b)

of the Code).

20 I.R.C. Section 7704(b); Treas. Reg. § 1.7704–

1(a)(1).

21Treas. Reg. § 1.7704–1(b).

22 Id. Section 1.7704–(c)(1). For example, a

partnership interest is readily tradable if it is

regularly quoted by persons such as brokers or

dealers who are making a market in the partnership

interests; the holder of the partnership interest has

a readily available and ongoing opportunity to sell

or exchange the partnership interest through a

public means of obtaining or providing information

of offers to buy, sell, or exchange the partnership

interest; or prospective buyers and sellers otherwise

have the opportunity to buy, sell, or exchange the

partnership interest in a time frame and with the

requisite regularity and continuity described above.

Id. Section 1.7704–1(c)(2).

23 Id. Section 1.7704–1(c)(3).

24 Id. Section 17704–1(e) (listing transfers not

involving trading). Among the types of transfers

included on this list are transfers at death,

including transfers from an estate or testamentary

trust; transfers between members of a family; and

transfers involving distributions from a qualified

retirement plan or an individual retirement

account.

25 Id. Section 1.7704–1(f) (listing the necessary

qualifications for a redemption or repurchase

agreement).

26 Id. Section 1.7704–1(g) (detailing the

requirements that a QMS must abide by).

27 Id. Section 1.7704–1(h) (exempting partnership

interests issued pursuant to certain private

placement transactions).

28 Id. Section 1.7704–1(j). Under this safe harbor

provision, there is no actual trading in a

partnership’s interests if the sum of the percentage

interests in partnership capital or profits transferred

during the taxable year of the partnership does not

exceed 2% of the total interests in partnership

capital or profits. Private transfers, transfers

pursuant to redemption and repurchase agreements

meeting the specified requirements, and transfers

pursuant to a QMS are disregarded for purposes of

applying the 2% rule.

For partnerships that were actively engaged in an

activity before December 4, 1995, this rule applies

for taxable years beginning after December 31, 2005.

Until then, these partnerships may continue to rely

on Notice 88–75, 1988–2 C.B. 386, including its

2%–5% safe harbor. This transitional relief expires,

however, if the partnership adds a substantial new

line of business within the meaning of Treas. Reg.

§ 1.7704–2. Id. § 1.7704–1(1)(2).

industries including, but not limited to,

real estate, oil and gas, cable television,

commodities, and equipment leasing.

Although these securities were not

intended to be liquid and tradeable, the

study found that a secondary market in

DPP securities nevertheless had

developed.15

In addition, the Committee found that

some market participants were

miscalculating markups, markdowns,

spreads, and expenses in the DPP

market; were making little effort to

determine an investor’s suitability to

purchase DPP securities; had no

knowledge as to the applicability of

transaction reporting requirements; and

were violating NASD rules concerning

predatory pricing practices, best

execution, and due diligence on behalf

of customers.16 The Committee also

found that some members were not

complying with the requirement to file

sales literature with the NASD and were

improperly doing business with

nonmember broker-dealers. In addition,

some members were not properly

disclosing expenses being charged in

connection with the purchase or sale of

a DPP, conflicts of interest the brokerdealer may have with a customer, and

the basis on which the member was

recommending the price at which the

securities were being bought or sold.

B. Tax Status of DPPs

In formulating a response to the

Committee’s findings, the NASD was

aware that facilitation of a more

centralized means for the quotation of

DPPs could cause these securities to be

deemed ‘‘publicly traded partnerships’’

under the Internal Revenue Code (‘‘IRC’’

or ‘‘Code’’).17 This would lead to the

unintended result of DPPs being treated

as corporations for federal tax

purposes.18 To assist partnerships

wishing to avoid this result, the IRS

issued regulations in December 1995

that clarified the circumstances under

which interests in partnerships may be

quoted without negatively affecting

their tax status.19

For tax purposes, a publicly traded

partnership is defined as a partnership

whose interests are traded on an

established securities market, a

secondary securities market, or the

substantial equivalent of a secondary

market.20 An established securities

market includes: national securities

exchanges registered pursuant to

Section 6 of the Act; national securities

exchanges exempt from registration

because of the limited volume of

transactions conducted thereon; foreign

securities exchanges; and interdealer

quotation systems that regularly

disseminate firm quotations by

identified brokers or dealers by

electronic means or otherwise.21 A

secondary market or the substantial

equivalent thereof is an entity or

arrangement that, based on all of the

facts and circumstances, readily permits

partners to buy, sell, or exchange their

partnership interests in a manner that is

economically comparable to trading on

an established securities market.22

The broad reach of this expansive

definition is tempered by five

nonexclusive safe harbor provisions.23

These safe harbors include transfers not

involving trading (private transfers); 24

redemption or repurchase agreements

meeting certain requirements; 25

transfers through a qualified matching

service (‘‘QMS’’); 26 certain private

placement transactions; 27 and a 2% de

minimus rule.28 Transfers that qualify

for one of the safe harbors are

disregarded when determining whether

interests in a partnership are readily

tradable on a secondary market or

substantial equivalent thereof.

III. Description of the Proposal

The NASD believes the majority of

DPP resale transactions are necessitated

by events that force the sale of the

partnership unit upon the limited

partner. Such events include estate sales

by trustees due to the death of a limited

partner, liquidation of IRA accounts,

divorce, and unexpected or

extraordinary expenses such as major

medical procedures or a post-secondary

education. From this, the NASD

concludes that the inefficiencies of the

fragmented secondary market for DPPs

tend to disproportionately affect

investors who need liquidity, rather

than investors who are merely seeking

liquidity.

According to the NASD, the proposed

changes to its rules concerning ACT and

the OTCBB address this concern and the

concerns raised in the DPP Committee’s

report. Moreover, the NASD believes the

changes reflect the requirements

contained in the IRS regulations so that

the quotation of DPPs on the OTC

Bulletin Board would not, by itself, have

negative tax status consequences for the

issuers or the holders of these securities.

A. Quotes on the OTC Bulletin Board

Generally, the treatment of DPPs

quoted on the OTC Bulletin Board will

be similar to that of foreign securities

and ADRs currently—no firm prices will

be displayed. NASD members will be

permitted to insert only nonfirm prices

or unpriced indications of interest (‘‘bid

wanted’’ or ‘‘offer wanted’’ and ‘‘name

only’’ entries). These nonfirm prices or

indications of interest will provide the
2206 Federal Register / Vol. 62, No. 10 / Wednesday, January 15, 1997 / Notices

29See 17 CFR 240.15c2–11 (governing the

initiation or resumption of quotations by a brokerdealer for over-the-counter securities in a nonNasdaq interdealer quotation medium).

30The proposed reporting requirements do not

apply to (1) transactions made in reliance on

Section 4(2) of the Securities Act of 1933, (2)

transactions where the buyer and seller have agreed

to trade at a price substantially unrelated to the

current market for the DPP (e.g. gifts), or (3)

transactions executed on a registered national

securities exchange or through Nasdaq. See

proposed NASD Rule 6920(g).

31Certain minor changes have been made to the

definition of the term ‘‘ACT eligible security’’ to

clarify that transactions in Nasdaq SmallCap and

certain other OTC securities must be reported

through ACT as well.

32The date of the trade plus one.

33The NASD’s understanding is that members

who effect transactions in DPPs predominately act

in the capacity of agent. For reporting purposes, the

concepts of agency and principal have the same

meaning as those terms are commonly used or

understood, unless otherwise noted in proposed

NASD Rule 6900.

34As proposed, NASD Rule 6920 provides that a

member may use the ACT Service Desk if it

averaged five fewer trades per day during the

previous calendar quarter. In calculating the

average number of trades per day, transactions in

any security must be included, not just transactions

in DPPs.

35See Fotenos & Suttle Letter, supra note 4; CPB

Letter No. 2, supra note 4; APS Letter, supra note

4.

36See CPB Letter No. 2, supra note 4 (asserting

that an IRS ruling is required to allow QMSs to

participate in the OTCBB without affecting their

status as a QMS); APS Letter, supra note 4 (claiming

that certain general partners will use the absence of

such a ruling as an excuse to restrict the trading of

their DPPs).

37See letter from William P. O’Shea, Chief,

Branch 3, Office of the Assistant Chief Counsel, IRS,

to Richard G. Ketchum, Executive Vice President

and Chief Operating Officer, NASD, dated October

7, 1996 and attached as Exhibit 3 to the NASD

Response (‘‘IRS Ruling’’).

basis for the negotiations that will take

place in order to complete a transaction

in a DPP security. The OTCBB display

screen will reflect the inside market, last

sale, previous close, volume and, if

available, distribution information.

In addition, only NASD members will

be permitted to apply to place unpriced

entries or indicative quotes on the OTC

Bulletin Board. The requirements of

Rule 15c2–11 will apply and, thus,

firms generally will be required to

submit Form 211 prior to initiating a

quotation of a DPP on the OTC Bulletin

Board, unless an exemption applies.29

Finally, there is no provision for any

automatic executions of DPPs on the

OTCBB.

B. ACT Trade Reporting

Subject to certain limited

exceptions,30 all secondary market

transactions in DPPs will be required to

be reported to the NASD, without regard

to whether the DPP was the subject of

a quotation on the OTCBB.31 Firms will

report the transaction on ‘‘T+1,’’ 32

designate it ‘‘as of’’ the previous day,

and include the time of execution.

Member firms that have the operational

capability to report transactions within

ninety seconds of execution, however,

may do so. The NASD has prepared a

symbol directory to facilitate transaction

reporting in DPPs.

The transactions will be reported

through ACT for reporting purposes

only.33 Thus, ACT will not be used to

facilitate clearance and settlement of

these securities notwithstanding the

possibility that a particular DPP eligible

for inclusion on the OTCBB also may be

eligible for clearing with a clearing

agency. Moreover, the OTCBB will not

assist parties in completing the transfer

documents and other forms necessary to

clear and settle a transaction in a DPP

security.

The NASD recognizes that some

member firms who participate in this

market may not have the capability to

report transactions through ACT.

Members without direct access to ACT

may report such transactions through

the ACT Service Desk if the member

averaged a limited number of

transactions per day during the previous

calendar quarter.34 Alternatively, such

members may consider obtaining a

computer-to-computer interface

(‘‘CTCI’’) or a Nasdaq Workstation.

IV. Summary of Comments

The Commission received seven

comment letters concerning this

proposal. Although the commenters

discussed a number of different topics,

their comments generally addressed one

of two categories: tax issues and clearing

issues. The NASD responded to these

comments in letters dated October 16,

1996 and November 26, 1996.

A. Tax Issues

1. IRS Private Letter Ruling

Several commenters noted that the

NASD did not obtain a ruling from the

IRS assuring the NASD that the proposal

would not run afoul of Section 7704 of

the IRC and the regulations promulgated

thereunder.35 The commenters stated

that this is particularly important in

light of the fact that the NASD sought

such a ruling from the IRS on a prior

occasion concerning a similar five

percent safe harbor as set forth in IRS

Notice 88-75, 1988-2 C.B. 386. Without

such a ruling, they claimed that the

liquidity and efficiency of the market

would be reduced.36 Therefore, the

commenters maintained that, due to the

importance of the proposal to the

secondary market, its approval should

be conditioned upon the NASD

obtaining a favorable ruling from the

IRS.

In response, the NASD asserted that

the IRS regulations were clear and

unambiguous in that the inclusion of

quotations on the OTCBB would not

constitute an established securities

market, a secondary securities market,

or the substantial equivalent thereof

and, therefore, a ruling from the IRS was

not necessary to approve the proposal.

Nevertheless, the NASD obtained a

private letter ruling from the IRS to gain

absolute certainty regarding the impact

of this proposal on the tax status of

DPPs. Specifically, the IRS ruled that:

(1) the OTCBB is not an established

securities market for purposes of

Section 7704(b) of the IRC and Section

1.7704–1(b) of the Income Tax

Regulations; (2) a partnership whose

interests are displayed on the OTCBB

will not be considered to be publicly

traded solely by reason of being

displayed on the OTCBB because the

OTCBB undertakes to display

partnership interests in compliance

with Example 2 of Treasury Regulation

1.7704–1(j)(2); (3) such partnerships

may rely on this ruling provided it is

not revoked and the OTCBB continues

to operate in a manner consistent with

the facts represented; (4) calculations

relating to qualification for any

applicable safe harbor in Treasury

Regulation 1.7704–1 or in IRS Notice

88–75 remain the responsibility of the

partnerships whose interests are traded

and are not the responsibility of the

NASD, The Nasdaq Stock Market Inc.,

NASD Regulation, Inc., or the OTCCBB;

and (5) notwithstanding that the OTCBB

does not meet the requirements to be a

QMS under Treasury Regulation

1.7704–1(g), matching services eligible

for participation in the OTCBB may

utilize the OTCBB to display nonfirm

prices and unpriced indications of

interest without disqualifying

themselves as a QMS, provided that

they otherwise meet all of the

requirements for a QMS under Treasury

Regulation 1.7704–1(g).37 Compliance

with the requirements for a QMS will be

the sole responsibility of the matching

service, not the NASD, The Nasdaq

Stock Market, Inc., NASD Regulation,

Inc., or the OTCBB.

2. Procedural Safeguards

One commenter requested that the

NASD provide additional information

concerning the procedures the NASD

would employ to reasonably assure

general partners that the DPP securities

of the partnerships they manage would

not afoul of the safe harbors in Treasury
Federal Register / Vol. 62, No. 10 / Wednesday, January 15, 1997 / Notices 2207

38See Fotenos & Suttle Letter, supra note 4.

39See Amendment No. 1 supra note 6; IRS

Ruling, supra note 37. To assist the general partners

with such compliance, the NASD will make

transaction reporting information available for a

nominal fee.

40See CPB Letter No. 2, supra note 4.

41See Amendment No. 1 supra note 6. See also

IRS Ruling supra note 37.

42See Fotenos & Suttle Letter, supra note 4;

NAPEX Letter, supra note 4.

43For example, transfers in the DPP secondary

market are subject to the approval of the general

partner(s), which often impose informational

requirements. In addition, the prior consent of a

state regulator may be required under certain

circumstances. See Dudley Muth et al., Transferring

Limited Partnership Interests, Real Est. Sec. J.

Winter 1981, at 51 (detailing the transfer process of

a DPP).

44See Amendment No. 1, supra note 6. Proposed

NASD Rule 6910(e) defines the ‘‘date of execution’’

as ‘‘the date when the parties to a transaction in a

DPP have agreed to all of the essential terms of the

transaction, including the price and number of

units to be traded.’’

45See CPB Letter No. 1, supra note 4; NAPEX

Letter, supra note 4.

46See Amendment No. 1, supra note 6. The

NASD also indicated that the effective date will be

no later than 90 days following the publication of

that Notice to Members. should this schedule need

to be revised, the NASD stated that it will

immediately notify the Commission.

47See NAPEX Letter, supra note 4.

48See CPB Letter No. 3, supra note 4; NAPEX

Letter, supra note 4; APS Letter, supra note 4. For

example, one commenter asserted that it is often

necessary to prepare two sets of transfer documents

to effect transactions because many general partners

refuse to honor the NASD’s forms. NAPEX Letter,

supra note 4.

49NASD Response, supra note 5.

50See Securities Exchange Act Release No. 38042

(Dec. 11, 1996), 61 FR 66339 (publishing notice of

Continued

Regulation 1.7704–01.38 The NASD

addressed this comment by noting that

virtually all partnership agreements

require that general partners first

approve all transfers of partnership

interests and grant the general partner

the authority to reject transfers that may

jeopardize the tax status of the

partnership. The NASD explained that

the proposal would not affect the

fiduciary responsibility currently born

by general partners of ensuring the tax

status of their DPPs. Thus, the

monitoring of the safe harbor threshold

levels would continue to be the

responsibility of the general partners.39

3. Qualified Matching Services

One comment letter discussed the

potential impact the proposal might

have on the QMS safe harbor.40 The

commenter alleged that a shadow of

uncertainty would be cast on the status

of QMSs that also wished to publish

quotes on the OTCBB because the

OTCBB was not a QMS. The commenter

claimed that such dual participation

would jeopardize the QMS status of

those members. In order to protect their

QMS safe harbor status, the commenter

predicted that QMSs would not publish

quotes on the OTCBB and thereby lead

to further fragmentation of the DPP

market. In addition, the commenter

asserted that this uncertainty would

disadvantage those firms that made the

investment in becoming qualified as a

QMS because some general partners will

simply suspend all trading at the 2%

level, regardless of who is involved in

the trades. To avoid these problems, the

commenter suggested that the NASD

modify the rules of the OTCBB to

accommodate different turnover levels

and obtain a private letter ruling from

the IRS that specified that publishing

nonfirm quotes on the OTC Bulletin

Board would not disqualify a system as

a QMS.

The NASD responded by noting that

the proposal would have no effect

whatsoever on the application of the

QMS safe harbor because a QMS could

maintain its status by simply complying

with that safe harbor’s requirements

while utilizing the OTCBB.41 Moreover,

the NASD asserted that QMSs may

actually enjoy some advantages over

non-QMS participants utilizing the

OTCBB because QMSs could continue

to utilize the OCTBB until the 10%

QMS safe harbor level was reached,

while other OCTBB participants will be

effectively capped by the IRS

regulations at the 2% de minimis level.

B. Clearing Issues

1. Timing of Trade Reports

The commenters requested further

guidance concerning the timing of DPP

trade reporting.42 The commenters

explained that transfers in the DPP

secondary market differ significantly

from transfers in other secondary

securities markets in that these contracts

are subject to a number of unique

contingencies.43 These contingencies

often cause significant delays in the

transfer process. As a result, many

‘‘trades’’ fail. Therefore, the commenters

requested that the NASD reconsider

when a trade takes place for ACT

reporting purposes.

The NASD explained that an

obligation to report a transaction in a

DPP security is triggered on the day

following the ‘‘date of execution.’’ 44

Once an agreement to trade has been

reached, the NASD expects the

appropriate member to report the

transaction. The NASD believes

delaying the transaction report until a

later date when the transfer actually

occurs could mislead market

participants and regulators who need to

access the current value of a DPP.

In addition, the NASD does not

believe it is necessary for the reporting

member to submit a correction or fail to

notice if a transfer does not take place

after a transaction is reported. The

NASD maintained that the subsequent

events that may impair the process of

transferring a DPP do not negate the

circumstances surrounding the events

that initially gave rise to the intent to

trade the security.

2. OTC Bulletin Board Symbols

The commenters questioned the

ability of the NASD’s current six digit

symbol format to sufficiently service all

of the DPPs in existence, inquired

whether it would be necessary to report

a DPP transaction through ACT if a

NASD symbol did not exist, and

requestd that the NASD provide a

symbol directory at least sixty days

prior to the final implementation of this

proposal so that NASD members would

have ample time to input this

information into their computer

systems.45

In response to these comments, the

NASD assured the Commission that it

will announce the effective date of the

proposed rule change in a Notice to

Members no later than forty-five days

following commission approval of the

proposed rule change and, in no event,

will that effective date be sooner than

forty-five days after Commission

approval of the proposal.46

3. Associated Costs

One commenter asserted that the

proposal would increase its costs and

reduce its allowable compensation.47

The commenter attributed the increase

in costs to the proposal’s reporting

requirement, the need for additional

equipment, and reduced spreads.

4. Standardized Transfer Forms

Several commenters contended that

the NASD’s standardized transfer forms,

including the standardized distribution

allocation agreement, contain flaws that

render them useless.48 The commenters

maintained that distribution terms are

extremely material to the quoted price

and, therefore, quotations on the OTC

Bulletin Board should not be allowed

until this matter is resolved.

In response, the NASD emphasized

the importance of the standardized

forms, but also acknowledged the

difficulty of bringing total uniformity to

every transfer in this market.49 As a

result, the NASD has filed a proposed

amendment to NASD Rule 11580 that

would permit members to modify the

forms after receiving authorization from

NASD Regulation staff.50
2208 Federal Register / Vol. 62, No. 10 / Wednesday, January 15, 1997 / Notices

File No. SR–NASD–96–42). Currently, NASD Rule

11580 does not allow NASD members to modify the

NASD’s standardized forms concerning limited

partnership interests.

51 15 U.S.C. 78O–3(b)(6).

52 15 U.S.C. 78c(f) (as added by the ‘‘National

Securities Markets Improvement Act of 1996’’).

53 15 U.S.C. 78O–3(b)(2).

54The Commission notes that the proposal also

promotes many of the same policy considerations

Congress found appropriate for the development of

the National Market System. For example, the

proposal should improve the efficiency of DPP

market operations, broaden the distribution of

market information, enhance the NASD’s market

oversight capabilities, and foster competition

among market participants through the use of new

data processing and communications techniques.

See 15 U.S.C. 78k–1(a)(1).

55Senate Comm. on Banking, Housing, and

Urban Affairs, Limited Partnership Rollup Reform

Act of 1993, S. Rep. No. 121. 103d Cong., 1st Sess.,

4 (1993). See also Deborah A. DeMott, Rollups of

Limited Partnerships: Questions of Regulation and

Fairness, 70 Wash. U. L.Q. 617 (1992) in Limited

Partnerships: Hearings on H.R. 617 Before the

Subcomm. on Telecommunications and Finance of

the House Committee on Energy and Commerce,

103d Cong., 1st Sess., 114–15 (1993) (classifying the

limited partnership interests sold by broker-dealers

as an overwhelmingly ‘‘retail’’ product because 8

million of the 11 million purchasers of these

securities were individual investors).

56House Comm. on Energy and Commerce,

Limited Partnership Rollup Reform Act of 1993,

H.R. Rep. No. 21, 103 Cong., 1st Sess., 7 (1993);

Securities Exchange Act Release No. 29883 (Oct. 30,

1991), 56 FR 57237 (adopting rules intended to

enhance the quality of information provided to

investors in connection with transactions involving

rollups of limited partnerships). See also C. David

Chase, Mugged on Wall Street 195 (1987)

(espousing the author’s personal opinion that it is

easier to divorce one’s spouse than to separate from

a partnership).

57The longer the holding period, the more likely

an event requiring a limited partner to sell his

interest will occur (e.g., death, liquidation of an IRA

account, divorce, or an extraordinary expense such

as a major medical procedure or post-secondary

education). See also NASD Response, supra note 5

(asserting that, in the aggregate, this market

transfers an estimated $250 to $300 million worth

of DPP securities annually).

58One commenter suggested that the Commission

delay its consideration of the proposed rule change

until it had rendered a decision regarding two

pending NASD petitions for rulemaking. See NPM

Letter, supra note 4 (discussing the NASD’s

pending rulemaking petitions concerning the

applicability of Rules 10b–17, 17Ad–2, 17Ad–3,

17Ad–4, and 17Ad–6 to the DPP market). The

NASD withdrew its request concerning the

modification of SEC transfer agent rules under

Section 17A of the Act on December 23, 1996. See

letter from Suzanne E. Rothwell, Associate General

Counsel, NASD Regulation, Inc., to Jonathan G.

Katz, Secretary, SEC, dated December 20, 1996 (File

No. 4–387) Although the pending rulemaking

petition addresses important issues, the

Commission believes the issues presented in the

proposed rule change may be addressed

independently of those matters.

59See Securities Exchange Act Release No.

37619A, 61 FR 48289 n.58, n.122 (Sept. 12, 1996)

(adopting the ‘‘Order Execution Obligation Rules’’

and noting that past Commission enhancements to

transparency have resulted in improved liquidity).

One commenter claimed that the proposal will

harm liquidity because it will reduce spreads

which, in turn, will decrease members’

compensation and, ultimately, cause market

participants to reevaluate the services that they

wish to provide. NAPEX Letter, supra note 4. The

Commission recently addressed a similar concern

in connection with its adoption of the Order

Execution Obligation Rules. By mandating the

display of customer limit orders under most

circumstances, the Commission recognized that

increased transparency may reduce market maker

profits through the narrowing of spreads and, as a

result, may force less efficient competitors to stop

making markets in some of the securities that they

then quoted. Nevertheless, the Commission did not

believe the Order Execution Obligation Rules would

have a significant negative impact on the market

because customers are the ultimate source of

liquidity for the markets. Order Execution

Obligation Rules, supra note 59, at n.118. See also

‘‘Why Protect Investors?’’ Remarks by SEC

Chairman Arthur Levitt Before the Commonwealth

Club, San Francisco, California (May 17, 1996)

available on SEC World Wide Web site at

‘‘www.sec.gov/news/spchindx.htm#chair’’ (noting

that a market can exist without brokers, but it

cannot exist without investors). Similarly, the

Commission believes the proposal’s benefits of

increased investor protection, elevated liquidity,

and improved efficiency outweigh its associated

costs, including the potential loss of liquidity

provided by market makers.

60One commenter expressed concern that

approval of the proposal will cause the volume of

DPP transactions to explode and unduly exacerbate

certain clearance and settlement issues that

currently exist in this market. See NPM Letter,

supra note 4. So also Muth et al., supra note 43

(detailing the complicated clearance and settlement

process). The Commission disagrees. Although

more investors, traders, and dealers may be willing

to participate in a fairer, more transparent, more

competitive DPP market, any potential increase in

the volume of transactions that may occur in this

market is limited by the applicable IRC provisions

and the rules and regulations promulgated

thereunder. Furthermore, this inhibition on volume

should prevent these long-term investments from

being converted into short-term speculative

securities and minimize any potential effect on the

primary market for DPPs.

61SEC, Division of Market Regulation, Market

2000: An Examination of Current Equity Market

Developments IV–3 (Jan. 1994) (‘‘Market 2000

V. Discussion

The Commission finds that the

proposed rule change is consistent with

the requirement of the Act and the rules

and regulations thereunder applicable to

a national securities association.

Specifically, the Commission believes

the proposed rule change is consistent

with Section 15A(b)(6) 51 because it is

designed to promote just and equitable

principles of trade, to prevent

fraudulent and manipulative acts, to

perfect the mechanism of a free and

open market, and, in general, to protect

investors and the public interest. In

making this finding, the Commission

notes that the proposal should promote

more efficient regulation of the DPP

market, as well as enhance

transparency, liquidity, and competition

in that market.52 The Commission also

believes the proposed rule change is

consistent with Section 15A(b)(2) 53

because it improves the NASD’s ability

to regulate the DPP market by increasing

its surveillance capabilities.54

During the 1980s, over $150 billion of

public limited partnership interests

were sold to approximately eleven

million U.S. investors, most of whom

were retail investors with an average

investment of ten thousand dollars.55

Investors usually purchased these

securities with the understanding that

they were long-term, illiquid

investments to be held until the holding

period expired and the partnership was

liquidated.56 The holding period of

many of these securities, however, had

to be extended beyond the originally

anticipated five to ten year holding

period due to weakness in the

underlying value of many partnership

assets. This extended holding period

has contributed to the development of a

viable secondary market for DPP

securities.57 Given the size and nature of

this market, it is important that it

operate efficiently and fairly. In this

regard, the proposal represents a

positive, evolutionary change in the

DDP market.58 It increases transparency

without adversely affecting the tax

status of the quoted securities or

inhibiting the clearance and settlement

process.

A. Benefits of the Proposal

By increasing transparency, the

proposed rule change should enhance

investor protection and increase the

actual and perceived fairness of the DPP

market. The proposal should benefit

investors by improving their ability to

secure better prices in DPP transactions

and by making it easier for them to

monitor the quality of executions they

receive from their intermediaries.

Moreover, the increased transparency

should assist regulators by expanding

their market oversight capabilities and

their ability to monitor member

handling of DPP transactions and

markups. Finally, the increased

transparency should assist NASD

members to fulfill their regulatory

responsibilities and help prevent

overreaching by certain members of

other, previously less informed

members.

In addition, the proposal should

promote liquidity in the DPP market by

encouraging greater investor

participation.59 For example, a more

transparent market can reduce trading

costs by decreasing spreads and, as

noted previously, facilitate the

investors’ ability to monitor the quality

of executions they receive. This should

foster investor confidence in the DPP

market and, as a result, investors should

be more willing to participate.60 This

increased participation should elevate

the level of liquidity in the DPP

market.61
Federal Register / Vol. 62, No. 10 / Wednesday, January 15, 1997 / Notices 2209

Study’’); Securities Exchange Act Release No. 37273

(June 4, 1996), 61 FR 29438 (noting that the depth

and liquidity of any particular security is

dependent on numerous variables, including the

degree of customer buying and selling interest in

the security and the quality and capitalization of

the issuer).

62American Bar Association, Committee on

Partnerships and Unincorporated Business

Organizations, Publicly Traded Limited

Partnership, 39 Bus. Law. 717–18 (1984)

(explaining that secondary sales of limited

partnership often result in a ‘‘haphazard search’’ to

find a buyer for the unit).

63See supra note 30 (listing the limited

exemptions from the reporting requirement).

64One commenter asserted that utilizing nonfirm

quotes and unpriced indications of interest will

encourage market participants to place unrealistic

bids to attract sellers. See NAPEX Letter, supra note

4. This assertion, however, overlooks at least three

policing mechanisms inherent in a competitive

market.

First, the existence of other quotes limit the

ability of a market participant to place an

unrealistic quote to attract interest and then move

away form this quote once negotiations begin.

Assume, for example A, B, and C each place a bid

on the OTCBB for a particular DPP at $1050, $1025,

and $1000 respectively. Naturally, a prospective

seller would begin negotiating with the most

favorable bidder, in this case A. If A attempts to

reduce its bid lower than $1025, A risks losing the

transaction because A does not know B’s

intentions—B may be willing to pay $1025.

Second, members are under a duty to provide

their customers with best execution as to price.

NTM–91–69 points out that this requires a member

to obtain quotations from at least three dealers to

determine the best interdealer market price for a

non-Nasdaq security. For example, if W, X, Y, and

Z each place a bid on the OTCBB for a particular

DPP at $1050, $1025, $1000, and $975 respectively,

the seller’s broker would contact, at a minimum, W,

X, and Y. If W, X, and Y are only willing to trade

at prices below Z’s bid, the broker should contact

Z as well.

Third, the Commission notes that NASD Rule

3310 prohibits members from publishing any

quotation for any security without having

reasonable cause to believe that such quotation is

a bona fide quotation and is not published for any

deceptive or manipulative purpose.

65This information will be accessible from almost

6,000 Nasdaq Workstations and an additional

290,000 market data vendor terminals. NASD

Repsonse, supra note 5.

66Market 2000 Study, supra note 61, at IV–1.

67One commenter claimed that the reporting

requirement would increase members’ costs by

requiring them to procure additional equipment.

See NAPEX Letter, supra note 4. The Commission

does not believe the proposal will have a significant

impact on the NASD’s membership as a whole

because this justifiable cost will be limited to a

relatively small group of members. Cf. NTM–91–69,

supra note 14 (finding that the DPP market was

consisted primarily of two dozen participants acting

as principal or agent); CPB Letter No. 2, supra note

4 (claiming to have effectuated one-third of all

transactions reported to independent sources since

1992); NASD Response, supra note 5 (noting that

the NASD interviewed all identifiable participants

in the secondary market for DPPs). Moreover, the

Commission notes that members that average five

or fewer trades per day for the previous calendar

quarter will not need to acquire any additional

equipment because they may utilize the ACT

Service Desk to report their trades. Proposed NASD

Rule 6920. Thus, of this already limited group, only

active members who do not already possess the

necessary equipment will be affected. See also

supra note 59 and accompanying text (discussing

the costs associated with increased transparency).

68As noted above, the commenters raised several

concerns regarding the potential tax implications

they believed the proposed rule change could have.

Specifically, the commenters requested that: (1) the

NASD obtain a private letter ruling from the IRS

stating that the inclusion of a DPP on the OTCBB

would not, by itself, transform that DPP into a

publicly traded partnership; (2) the NASD detail

what procedural protections were going to exist to

ensure that the IRS safe harbor provisions were not

exceeded; and (3) the NASD consider the potential

impact the proposal could have on QMSs.

69See Treas. Reg. § 1.7704–1(j)(2) (setting forth in

Example 2 a hypothetical situation that is virtually

identical to the NASD’s proposed rule change).

70 IRS Ruling, supra note 37.

71 IRS Ruling, supra note 37.

72Nevertheless, the NASD has indicated that it

will assist general partners by making transaction

data available to them for a nominal fee. The

Commission notes, however, that the NASD’s rules

currently do not contain the formula by which such

charges will be calculated. Therefore, the NASD

must submit a proposed rule change to the

Commission pursuant to Section 19 of the Act

before charging such a fee. Moreover, given that this

fee will be imposed on non-NASD members, it must

be submitted for full notice and comment because

it does not qualify for immediate effectiveness

pursuant to Section 19(b)(3)(A) of the Act. See 15

U.S.C. 78s(b); Securities Exchange Act Release No.

35123 (Dec. 20, 1994), 59 FR 66692 (amending Rule

19b–4 and stating that, as a matter of general policy,

a proposed rule change that establishes or changes

a fee applicable to nonmembers must be filed under

Section 19(b)(2) of the Act for full notice and

comment).

73 IRS Ruling, supra note 37.

74Certain transactions, such as those not

involving trading, are not subject to a strict,

predetermined cap. See supra notes 23 to 28 and

accompanying text (providing a general explanation

of the IRS safe harbor provisions).

The proposal also fosters market

efficiency by helping unite the

extremely fragmented DPP market. The

current structure of this market requires

the DPP securities be traded ‘‘in the

dark’’ (i.e., with little or not

transparency for those trades). This

prevents investors from assessing the

overall supply and demand for a

particular DPP security and,

consequently, hampers their ability to

determine that security’s optimal price.

Furthermore, this opaque trading makes

price competition difficult and

inefficient.62

The proposal addresses both of these

inefficiencies. First, by requiring that all

transactions in DPP securities be

reported through ACT63 and permitting

quotes and market information to be

disseminated via the OTC Bulletin

Board, the proposal provides investors

with valuable information that enhances

their ability to accurately determine the

current value of a DPP, discern the

direction of recent trading activity, and

determine whether significant trading is

occurring between, or outside of, the

displayed nonfirm quotes. Second, the

proposed rule change fosters price

competition in this market 64 because

pricing information will be more readily

available.65

In sum, the increased transparency

should reduce the effects of

fragmentation and encourage

competition.66 Thus, the Commission

believes that proposal’s benefits of

increased transparency for the DPP

market outweigh its potential costs.67

B. Tax Issues

Although most of the commenters’

concerns 68 are explicitly addressed in

Treasury Regulation 1.7704–1,69 the

NASD obtained a private letter ruling

that, among other things, specifically

addresses each of their tax concerns.70

In that ruling, the IRS explained that (1)

the OTCBB is not an established

securities market, a secondary securities

market, or the substantial equivalent

thereof and (2) the calculations relating

to qualification for any applicable safe

harbor in Treasury Regulation 1.7704–1

or IRS Notice 88–75 are the sole

responsibility of the partnerships whose

interests are traded.71 Thus, there is no

need for the NASD to make any

additional modifications to the

OTCBB.72

The IRS also clarified that a QMS may

utilize the OTCBB without jeopardizing

its status as a QMS, as long as the QMS

continues to comply with all of the

applicable safe harbor provisions.73

Hence, a member that has made the

capital investment to become a QMS

may enjoy an advantage over those

members that are not a QMS because the

IRS regulations permit QMSs to

facilitate transactions until the 10%

QMS safe harbor threshold is met, while

members relying on the de minimis safe

harbor are capped at 2%.74 This

advantage should promote competition

and increase the market’s liquidity by

encouraging other NASD members to

become QMSs.

C. Clearing Issues

1. Trade Reporting

Notwithstanding the unique

contingencies that exist in a DPP

transaction, the Commission believes it

is appropriate for the NASD to require

its members to report transactions in

DPP securities as soon as an agreement

to trade has been reached. By reporting

transactions by T+1, the member will be

reporting the current trading interest in

a particular DPP. If the reporting

requirement were postponed until the

date the transfer actually takes place,

investors would be receiving

information that was several weeks, or

possibly months, old. The usefulness of

such information to parties attempting

to ascertain the current value of a DPP
2210 Federal Register / Vol. 62, No. 10 / Wednesday, January 15, 1997 / Notices

75Of course, members must correct inaccurate

trade reports. For example, a member must correct

a trade reported at $680 if, in fact, the trade price

was $860.

76The Commission assumes that the parties are

bargaining in good faith when they reach an

agreement that is subsequently reported through

ACT. Cf. NASD Rule 3310 (prohibiting members

from publishing the notice of a purchase or sale of

any security without having reasonable cause to

believe that such transaction was a bona fide

purchase or sale).

77Amendment No. 1, supra note 6.

78This list will automatically be incorporated

into the Nasdaq Workstation’s on-line symbols

directory when the proposed rule change becomes

effective. If members would like a copy of this list

prior to the proposal’s implementation, however,

they simply have to contact the Nasdaq Market

Operations staff in Trumbull, Connecticut, and an

electronic or paper copy will be provided.

79The Commission believes the current six digit

format is sufficient to service the DPP market.

Contra NAPEX Letter, supra note 4. After polling

the major market participants, the NASD

represented that it anticipates approximately 2,000

DPP securities to be quoted on the OTCBB.

Telephone conversation between Andrew S.

Margolin, Senior Attorney, The Nasdaq Stock

Market, Inc., and Anthony P. Pecora, Attorney,

Division of Market Regulation, SEC (Jan. 3, 1996).

Notwithstanding that the NASD intends to utilize

the prefixes of ‘‘xx,’’ ‘‘yy,’’ and ‘‘zz’’ to indicate DPP

securities, the remaining four digits still provide

ample capacity because a surplus of approximately

86,000 symbols will exist to accommodate

unanticipated or new DPP securities. In addition,

the Commission does not believe the expense

associated with mandating an entirely new,

expanded symbol format to ensure the symbols

assigned clearly indicate the issuer of a particular

DPP outweighs the potential benefits such a

convenience would confer upon NASD members.

80 15 U.S.C. 70o–3, 78s(b)(2).

81 15 U.S.C. 78s(b)(2).

82 17 CFR 200.30–3(a)(12).

is minimal when compared to

information reported by T+1. Moreover,

reporting a trade when the agreement

occurs, rather than waiting until the

transfer actually takes place, is

consistent with current industry

practice for other securities.

The Commission also does not believe

it is necessary for members to submit a

notice at a later date if a trade fails due

to the unique post-trade contingencies

that exist in the DPP market.75

Ultimately, the price of a security is

determined by two factors: the amount

of money a buyer is willing to spend to

acquire a certain amount of a particular

security and the amount of money a

seller is willing to accept to sell the

same amount of that security. It is this

information that investors value the

most. The fact that a transaction fails at

a later date because a general partner

refuses to acknowledge the trade does

not disparage the quality of the

previously reported information

concerning current market interest.76

2. Implementation

The Commission believes the NASD’s

implementation plan adequately

addresses the commenters’ concerns.

The NASD intends to announce the

effective date of the proposed rule

change in a Notice to Members within

forty-five days following the date of this

order. This effective date will be no later

than 90 days following the publication

of that Notice to Members but, in no

event, will the effective date be sooner

than forty-five days after the date of this

order.77 This implementation schedule

should provide the NASD’s members

with ample time to procure any

necessary equipment and enter any

essential data into their computer

systems.

To facilitate transaction reporting, the

NASD has compiled a comprehensive

list of symbols that will be utilized by

members when reporting a transaction

through ACT.78 If a symbol does not

exist for a particular DPP, a member

simply calls the ACT Service Desk

before reporting the transaction, and a

symbol will be assigned.79

D. Amendment No. 1

The Commission finds good cause for

approving Amendment No. 1 prior to

the thirtieth day after the date of

publication of notice thereof in the

Federal Register. Amendment No. 1

simply updates the proposal’s internal

citations to conform with the new rule

numbering system that was

implemented by the NASD after it filed

SR–NASD–96–08 with the Commission.

Therefore, the Commission believes that

granting accelerated approval to

Amendment No. 1 is appropriate and

consistent with Section 15A and Section

19(b)(2) of the Act.80

Interested persons are invited to

submit written data, views and

arguments concerning Amendment No.

1 to the proposed rule change. Persons

making written submissions should file

six copies thereof with the Secretary,

Securities and Exchange Commission,

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

20549. Copies of the submission, all

subsequent amendments, all written

statements with respect to the proposed

rules change that are filed with the

Commission, and all written

communications relating to Amendment

No. 1 between the Commission and any

persons, other than those that may be

withheld from the public in accordance

with the provisions of 5 U.S.C. § 552,

will be available for inspection and

copying in the Commission’s Public

Reference Room. Copies of such filing

will also be available at the principal

office of the NASD. All submissions

should refer to File No. SR–NASD–96–

08 and should be submitted by February

5, 1997.

VI. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,81 that the

proposed rule change (SR–NASD–96–

08) is approved, including Amendment

No. 1 on an accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.82

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–896 Filed 1–14–97; 8:45 am]

BILLING CODE 8010–01–M

DEPARTMENT OF STATE

[Public Notice No. 2499]

Shipping Coordinating Committee

Subcommittee on Safety of Life at Sea

Working Group on Dangerous Goods,

Solid Cargoes and Containers; Notice

of Meeting

The Working Group on Dangerous

Goods, Solid Cargoes and Containers

(DSC) of the Subcommittee on Safety of

Life at Sea (SOLAS) will conduct an

open meeting at 9:30 AM on January 31,

1997, in Room 2415, at U.S. Coast Guard

Headquarters, 2100 2nd Street, S.W.,

Washington, DC 20593–0001. The

purpose of the meeting is to finalize

preparations for the Second Session of

the DSC Subcommittee of the

International Maritime Organization

(IMO) which is scheduled for February

24–28, 1997, at the IMO Headquarters in

London.

The agenda items of particular

interest are:

a. Amendment 29 to the International

Maritime Dangerous Goods (IMDG)

Code, its Annexes and Supplements

including harmonization of the IMDG

Code with the UN Recommendations on

the Transport of Dangerous Goods.

b. Implementation of Annex III of the

Marine Pollution Convention (MARPOL

73/78), as amended.

c. Development of measures

complementary to the Irradiated

Nuclear Fuel (INF) Code.

d. Amendments to SOLAS chapters VI

and VII.

e. Bulk carrier safety: need for fitting

water level alarms in cargo holds.

f. Revision of the format of the IMDG

Code.

g. Loading and unloading of bulk

cargoes.

h. Cargo securing manual.

i. Reports on incidents involving

dangerous goods or marine pollutants in

packaged form on board ships or in port

areas.