Amendments to Appendix F Regarding Freely Tradable Partnership Units Effective Immediately
TO: All NASD Members and Other Interested Persons
ATTN: Direct Participation Programs Department
This notice announces the adoption of exemptions from the special suitability and disclosure requirements of Appendix F to Article III, Section 34 of the NASD Rules of Fair Practice for freely tradable limited partnerships. The exemptions relate to primary and secondary public offerings of and secondary market transactions in freely tradable partnership units, depositary receipts or assignee units quoted on the NASDAQ System or listed on a registered national securities exchange.
The NASD has adopted amendments to Sections 3 and 4 of Appendix F to Article III, Section 34 of the NASD Rules of Fair Practice, which are effective immediately. The text of the amended sections is attached.
The amendments provide exemptions for primary and secondary offerings and secondary market transactions in direct participation program securities from the suitability provisions contained in Section 3 and the requirement in Section 4 that NASD members inform potential investors of the facts pertaining to the lack of liquidity and marketability of the program securities.
Appendix F was adopted for the purpose of regulating the distribution of and secondary transactions in direct participation program securities. These securities are usually partnerships and have traditionally been illiquid. Investors are generally required to hold an investment in a direct participation program for a number of years in order to fully realize the benefits of the investment. The nature of a direct participation program security, therefore, presents special concerns regarding its suitability for investors, the adequacy and accuracy of the disclosure in the offering document, and other program arrangements that Article III, Section 34 and Appendix F, adopted thereunder, were intended to address.
Recently, however, an increasing number of direct participation programs have issued partnership units, depositary receipts for such units, or assignee units of limited partnership interests that are freely tradable in a manner generally analogous to common stocks and are quoted on the NASDAQ System or listed on registered national securities exchanges. Therefore, the NASD undertook a review of the application of Appendix F to freely tradable program units.
Subsection 3(a) of Appendix F prohibits a member from distributing a direct participation program that has not established or disclosed in the program prospectus standards of suitability. Subsection 3(b) of Appendix F requires members, when "recommending the purchase, sale or exchange of an interest in a direct participation program," to obtain certain enumerated information, make an affirmative finding of suitability, and retain a record of the basis for that finding. These requirements were specifically included in light of the absence of liquidity in the market for limited partnerships, as well as to assure that the unique tax status and investment characteristics of the program are considered in secondary market transactions, and in initial distributions.
The NASD has reviewed the purposes of the special suitability requirements contained in subsections 3(a) and 3(b) of Appendix F and has concluded that these special requirements are not necessary for freely tradable program units. It is important to note, however, that transactions in freely tradable partnership units remain subject to the general suitability requirements of Article III, Section 2 of the NASD Rules of Fair Practice.
Subsection 4(d) of Appendix F requires NASD members to inform potential investors of the facts relating to the lack of liquidity and marketability of investments in direct participation programs prior to the execution of such transactions. Compliance with this subsection is unnecessary where an active trading market exists or will exist for the program units.
SUMMARY OF AMENDMENTS
The NASD has amended subsections 3(a) and 3(b) and subsection 4(d) of Appendix F to exempt from those provisions:
In addition, with respect to primary offerings, the new exemption requires the issuer to make a good-faith representation that inclusion on the NASDAQ System or listing on a registered national securities exchange will occur within a reasonable period of time following the formation of the program.
Questions regarding this notice should be directed to the NASD Corporate Financing Department at (202) 728-8258.
Frank J. Wilson
Executive Vice President
Legal and Compliance
AMENDMENTS TO APPENDIX F ARTICLE III, SECTION 34 NASD RULES OF FAIR PRACTICE*
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* New language is underlined; deleted language is in brackets.