30134 Federal Register / Vol. 60, No. 109 / Wednesday, June 7, 1995 / Notices

3See, Securities Exchange Act Release No. 23619

(September 15, 1986); 51 FR 33968 (September 24,

1986).

4MIPS are preferred securities issued by a parent

company’s subsidiary, which is structured as a

limited partnership or limited liability company.

The subsidiary issues MIPS to investors and invests

the proceeds in convertible subordinated

debentures of the parent. Interest on the debentures

of the parent are paid to the subsidiary, which in

turn pays the equivalent rate of interest to MIPS

holders in the form of dividends. MIPS are eligible

to be listed on a national securities exchange or The

Nasdaq Stock Market and have flow-through tax

consequences for investors, which means that they

are considered direct participation programs and,

therefore, subject to Section 34. 5 15 U.S.C. 78o–3.

an application for inclusion on Nasdaq

or listing on a registered national

securities exchange has been approved.

In order to address the increased

transparency and liquidity associated

with the nature of the secondary

markets for freely tradeable direct

participation program securities, the

NASD amended the DPP rule to, among

other things, exempt freely tradeable

direct participation program securities

from the suitability requirements of

Subsections 34(b)(3) (A) and (B) of the

DPP rule.3 At the time, the NASD

determined that since the disclosure

requirements in the DPP rule were

primarily designed for direct

participation program securities that

lacked liquidity and marketability, no

purpose was served by applying the

same criteria to freely tradeable direct

participation program securities.

Freely tradeable direct participation

program securities, however, continue

to be subject to the discretionary

account prohibitions of Article III,

Section 34. Currently, Subsection

34(b)(3)(D) of the DPP rule states, in

part, that ‘‘* * * no member shall

execute any transaction in a direct

participation program in a discretionary

account without prior written approval

of the transaction by the customer.’’ The

provision applies to transactions in all

direct participation program securities,

whether freely tradeable or not. The

NASD considers discretionary

transactions in direct participation

program securities which are illiquid

and for which no ready market exists to

be an improper use of discretionary

power. Recently, the NASD considered

whether Monthly Income Preferred

Securities (‘‘MIPS’’), a new financial

instrument which is a freely tradeable

direct participation program security,

ought to be subject to the discretionary

account restrictions in Article III,

Section 34.4 In its consideration, the

NASD determined that the concerns

which attach to the use of discretionary

authority for illiquid, unmarketable

direct participation program securities

are not present with freely tradeable

direct participation program securities.

Therefore, the NASD is proposing

reversing the order of current

Subsections (b)(3)(C) and (D) to Section

34 and to add a reference to

Subparagraph 3(C) in new Subparagraph

3(D) to exclude freely-tradeable direct

participation program securities from

the prohibition on transactions in

discretionary accounts without written

approval. The exclusion for freely

tradeable direct participation program

securities in newly designated

Subparagraph (3)(D) also restricts the

availability of the exclusion to members

that are not affiliated with the direct

participation program. Where such an

affiliation is present, the NASD believes

that substantial conflict of interest and

regulatory concerns continue to exist

and the exclusion should not be made

available.

The NASD believes that recognizing

the use of discretionary authority for

transactions in freely tradeable direct

participation program securities is

consistent with 1986 amendments to

Section 34 exempting freely tradeable

participation program securities from

the suitability and disclosure

requirements of Section 34. Such

suitability and disclosure requirements,

which are necessary where direct

participation program securities lack

liquidity and marketability, were found

to be unnecessary where a ready, liquid

market exists.

Nothwithstanding the relief provided

by the proposed rule from the

prohibition in Article III, Section 34

against discretionary transactions in

freely tradeable direct participation

program securities, such transactions

would, however, remain subject to the

general discretionary account

requirements contained in Article III,

Section 15 of the Rules of Fair Practice.

The NASD believes that the proposed

rule change is consistent with the

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

Act,5 which require that the rules of the

Association be designed to prevent

fraudulent and manipulative acts and

promote just and equitable principles of

trade, in that the proposed rule change

relieves members of their obligation to

comply with prohibitions against

discretionary transactions in direct

participation program securities in

situations which do not present the

regulatory concerns that the

prohibitions were intended to address,

and provides for regulatory consistency

in the treatment of discretionary

transactions in freely tradeable

securities.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD 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

Written comments were neither

solicited nor received.

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 reasons 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, D.C. 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with Commission,

and all written communications relating

to the proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–95–21 and should be

submitted by June 28, 1995.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority, 17 CFR 200.30–3(a)(12).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–13897 Filed 6–6–95; 8:45 am]

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