King & Spalding
Nov. 17, 1992
INQUIRY LETTER
KING & SPALDING
101 Peachtree Street
ATLANTA, GEORGIA 30303-1763
November 13, 1992
VIA HAND DELIVERY
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Michael L. Hermsen, Esq.
Division of Corporation Finance
Dear Sirs:
On behalf of Dean Witter Reynolds, Inc., Kidder, Peabody & Co.
Incorporated, PaineWebber Incorporated and Shearson Lehman Brothers Inc. (the
"Firms"), we respectfully request that the Division of Corporation Finance of
the Securities and Exchange Commission (the "Commission") issue an
interpretative letter confirming that each of the Firms may operate a matching
service (individually, a "Firm Matching Service"; collectively, the "Firm
Matching Services") for the purpose of facilitating sales by its customers of
interests (the "Interests") in non-publicly traded limited partnerships and
other direct participation programs (collectively referred to as
"partnerships"), under the circumstances outlined below, without registration of
the Interests under the Securities Act of 1933, as amended (the "Act").
A. Background.
Commencing in October of 1991, certain of the Firms initially contacted
the Commission through this firm concerning the status of Firm Matching Services
under the Act in light of the Commissions position in Securities Act Release
No. 6900, Limited Partnership Reorganizations and Public Offerings of Limited
Partnership Interests, Securities Act Release No. 33-6900, Vol. 6 Fed. Sec. L.
Rep. (CCH) 71,125 at 61,987 (June 17, 1991). In the intervening months, members
of this firm and representatives of certain of the Firms have had numerous
telephone conferences and discussions with members of the Commissions staff to
discuss the operation of the Firm Matching Services and various related issues
arising under the Act.
In Release
No. 6900, the Commission expressed concern about an increase in certain matching
services and crossing arrangements established by limited partnerships or real
estate investment trusts relating to transactions in their securities. In
pertinent part, Release No. 6900 stated as follows:
There
appears to have been a recent increase in the number of limited partnerships or
real estate investment trusts attempting to create an alternative secondary
market for their security interests. The most common method used has been a form
of matching service, crossing arrangement or some other such liquidity
enhancement plan through which a person wishing to sell an equity interest will
be matched with someone who is seeking to buy an equity interest. . . . Usually,
the general partner, advisor or one of their affiliates structures the
arrangement and facilitates the matching of potential buyers and sellers. . . .
If the
general partner, advisor or one of their affiliates is involved in the crossing
arrangement, the sale of securities through the arrangement is an offer or sale
by the issuer for purposes of Section 2(3) and Section 5 of the Securities Act.
Therefore, the issuer must register under Section 5 of that Act a good faith
estimate of the number of shares expected to be purchased through the
arrangement. The issuer also must undertake to keep the registration statement
evergreen during the existence of the arrangement. This treatment is similar
to that accorded employee stock purchase plans and dividend reinvestment plans
for determining whether registration is required under the Securities Act.
It is not
clear whether Release No. 6900 was intended to address arrangements such as the
Firm Matching Services, which in each case had existed for many years and been
operated without involvement by the issuer partnerships whose securities are
being traded, except, of course, to the extent that the relevant partnership
agreements required ministerial, administrative action by an issuer partnership
in connection with the transfer of partnership interests. Nonetheless, the broad
language utilized by the Commission to the effect that involvement by an
affiliate in a crossing arrangement causes the transaction to involve an offer
or sale by the issuer, gave rise to substantial concern in the securities
industry and the investing public. See, e.g., Regulation Could Shake Up
Partnership Resale Market, Wall St. J., Sept. 12, 1991; Merrill to Stop
Offer of Matching Services In Partnership Sales, Wall St. J., Sept. 30, 1991
at C27; Merrill Lynch Offers Help to Customers Seeking to Sell Battered
Partnerships, Wall St. J., Nov. 4, 1992 at C1. In fact, in response to
Release No. 6900, in late 1991 many of the Firms and other New York Stock
Exchange member firms suspended the operation of the Firm Matching Services and
similar arrangements.
The Firms
believe that the scope of Release No. 6900 should not be extended to include the
Firm Matching Services. The Firms are of this view for two reasons: First, as a
matter of law, the Firms believe that transactions effected in connection with
the Firm Matching Services do not involve an offer or sale of securities by the
issuer partnerships or otherwise involve an issuer, underwriter or dealer as
such terms are used in Section 4(1) of the Act, or, alternatively, are dealer
transactions within the meaning of Section 4(3) of the Act. Secondly, the Firm
Matching Services have provided the only meaningful source of liquidity to a
large group of relatively small investors. The effect of the termination of the
Firm Matching Services would be to deprive investors of market liquidity, which,
in the opinion of the Firms, is contrary to the public interest. These matters
will be discussed in more detail in the balance of this letter. Moreover, this
letter will set forth a series of guidelines suggested by the Commission during
the course of prior communications with the Firms as a basis upon which to
distinguish the Firm Matching Services from the arrangements referred to in
Release No. 6900.
B. Facts.
Prior to December of 1991, the Firm Matching Services were maintained by
each of the Firms as institutional services to their respective clients who held
partnership interests. Thousands of interests in non-publicly traded
partnerships were purchased and sold through Firm Matching Services each year.
In terms of dollar volume, an aggregate of $38 million and $40 million in
interests were traded among customers of the Firms in 1990 and 1991,
respectively. During 1991, interests in a total of 393 partnerships (both
affiliated and unaffiliated) were listed and sold on the Firm Matching Services.
By matching potential purchasers and sellers, the Firms were able to provide a
source of liquidity to clients who held investments that were not otherwise
traded in an organized market.
The
following information relating to the operation of the Firm Matching Services
describes the procedures which were in place prior to December of 1991 and
would continue to be in effect upon the reinstituting of each of the Firm
Matching Services pursuant to this letter.
The
function of the Firm Matching Services is to introduce potential buyers to
holders of partnership interests who have indicated a desire to sell their
interests and to assist these parties in completing their transactions. The
terms of any transaction, including the purchase price, are determined through
negotiations between the buyer and the seller. The Firm operating a Firm
Matching Service receives certain fees, portions of which may be allocated by
such Firm to cover the costs of operating the Firm Matching Service or to
compensate the Firm broker representing the purchaser in the transaction. Any
fees paid in connection with Firm Matching Service transactions do not exceed
amounts which are customary within the industry for brokerage transactions of a
similar size and nature.
Each
Firms Matching Service is operated solely by that Firm. Only brokers of that
Firm may access the Firm Matching Service to identify potential sellers of
interests, none of whom is an affiliate of either the Firm or the listed
partnership. Only partnership interests that were initially sold to the public
by a Firm as underwriter or selling agent are allowed to be traded pursuant to
that Firms Matching Service. In each case, the issuer partnerships exert no
control over the operations of a Firms Matching Service. Their only role is to
take those ministerial actions required by the relevant partnership agreements
in connection with the transfer of partnership interests, which occur only after
a trade has taken place. These actions relate to such matters as issuing
certificates evidencing the existence of the partnership interests, recording
the change of ownership on the partnership records, assuring compliance with any
limitations imposed by the partnership on the transfer of units in order to
avoid treatment as a publicly traded partnership under the Internal Revenue
Code, and assuring compliance with any investor suitability requirements imposed
by the partnership upon subsequent purchasers of its partnership interests.
C. Analysis.
The maintenance of a Firm Matching Service by a Firm does not involve
a sale or a solicitation of an offer to purchase on the part of the issuer
partnership, even if the issuer partnership is an affiliate of the Firm.
Section
5(c) of the Act makes it unlawful for any person to offer to sell or solicit an
offer to purchase any security unless a registration statement has been filed
with respect to that security. Whether or not a person should be deemed to have
made a sale or a solicitation of an offer to purchase a security is a question
of fact that depends on the extent of the persons involvement in the
transaction. A person may be deemed to have solicited an offer to purchase
within the meaning of Section 5(c) even if the purpose of the solicitation is to
induce a purchase or an offer to purchase from some other person. See
Employee Stock Purchase Plans, Securities Act Release No. 4790, Volume 1 Fed.
Sec. L. Rep. (CCH) 1131, at 2102 (July 13, 1965). Therefore, whether or not the
operation of a Firm Matching Service constitutes the solicitation of an offer to
purchase partnership interests on the part of the issuer partnership depends on
the extent of that partnerships participation in the transaction. INQ03 Each
Firm Matching Service is operated solely by the sponsoring Firm. As described in
Section B above, the issuer partnerships are not involved in the operation of
the Firm Matching Services. The activities of the partnerships are limited
solely to those actions necessary to ensure compliance with the terms of their
partnership agreements. These activities do not involve any attempt or offer to
dispose of or solicitation of any offer to buy any partnership interests by the
issuer partnership. In fact, the issuer partnership undertakes no activity
whatsoever as the matching process occurs, and it is only called upon to act
after a matching trade has taken place and it has been presented with a request
to transfer its securities. Accordingly, the Firms believe that the activities
undertaken by the issuer partnerships are not sufficient to cause the operation
of a Firm Matching Service to constitute the solicitation of an offer to
purchase on the part of the issuer partnerships. Moreover, the Firms believe
that this lack of partnership participation distinguishes the Firm Matching
Services from the arrangements described in previous Commission no-action
letters. See Silver Falcon, Inc., SEC No-Action Letter, 1977-78 Transfer
Binder Fed. Sec. L. Rep. (CCH) 81,339, at 88,582 (September 26, 1977) (issuer
maintained matching arrangement); ChemLawn Corporation, SEC No-Action Letter,
1978 Transfer Binder Fed. Sec. L. Rep. (CCH) 81,735, at 80,938 (July 13, 1978)
(issuer maintained matching arrangement). INQ03 For purposes of determining
whether an offer has been made, the Act contains no provision that expressly
attributes an offer or sale of a security by a particular person to an affiliate
of that person solely by reason of the affiliation. However, the Firms have
noted that the staff of the Commission has taken the position in previous
no-action correspondence that the operation of a matching service by an
affiliate of an issuer may constitute the solicitation of an offer to purchase
interests on the part of the issuer when the activities of the matching service
are focused primarily on the securities of that particular issuer. Sierra
Capital Realty Trust VI Co. and Sierra Capital Realty Trust VII Co., SEC
No-Action Letter, 1990 Transfer Binder Fed. Sec. L. Rep. (CCH) 79,508, at
77,565 (July 5, 1990) (the "Sierra Capital Letter"). The Firms believe, however,
that by operating the Firm Matching Services in accordance with the guidelines
set forth in Section E below, the Firm Matching Services should be
distinguishable from those at issue in the Sierra Capital Letter.
Transactions pursuant to the Firm Matching Services do not involve an
underwriter within the meaning of the Section 2(11) of the Act.
Transactions pursuant to the Firm Matching Services do not involve an
"underwriter" as such term is used in Section 4(1) of the Act. An underwriter is
defined in Section 2(11) of the Act as any person who (1) has purchased from an
issuer or affiliate with a view to the distribution of any security; (2) offers
or sells for an issuer or affiliate in connection with the distribution of any
security; (3) participates or has a direct or indirect participation in any such
undertaking; or (4) participates or has a participation in the direct or
indirect underwriting of any such undertaking. Transactions effected pursuant to
the Firm Matching Services involve the purchases by one Firm customer from
another Firm customer who is not an affiliate of the issuer partnership.
Accordingly, the transaction should not be deemed to involve an underwriter for
purposes of the Act.
In
responding to at least one no-action request, the staff has concluded that
sellers utilizing a matching service who are affiliated with the issuer may be
deemed to be statutory underwriters. See ChemLawn Corporation, SEC
No-Action Letter, 1978 Transfer Binder Fed. Sec. L. Rep. (CCH) 81,735, at
80,938 (July 13, 1978). However, because none of the sellers in the Firm
Matching Services is an affiliate of the issuer partnerships, the Services
should not be deemed to involve an underwriter for purposes of the Act.
D. Market Impact.
Virtually none of the partnerships whose securities are traded through
the Firm Matching Services are in registration under the Act. As a result, the
cost of registering interests in hundreds of affiliated partnerships which trade
through Firm Matching Services each year would be prohibitive, and it is not
realistic to expect that the partnerships will undertake to register the
partnership interests in order to continue the operation of the Firm Matching
Services. Therefore, the practical effect of extending Release No. 6900 to the
Firm Matching Services is to cause the Firms to cease operation of their
Matching Services, at least in connection with affiliated partnerships.
As has
been evidenced since late in 1991, the termination of the Firm Matching Services
has significant negative consequences to the investing public. Without many of
the Firm Matching Services, many purchasers who have suffered a change in
circumstance and desire to sell partnership interests have no effective method
of identifying prospective purchasers and often have to sell at "fire sale"
prices to "vulture funds" and other opportunistic buyers. Also, without the
presence of the Firm Matching Services, the market value of the interests that
are traded may decline precipitously.
In
contrast to the negative effects of terminating the Firm Matching Services, the
registration of the interests traded on Firm Matching Services would not result
in a significant benefit to the investing public. The interests of full
disclosure to purchasers of securities would only be marginally served by
registering the subject interests. Each of the partnerships is subject to the
periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, and current financial and other information is therefore readily
available with respect to the partnership. It is unlikely that a current
prospectus would provide significantly enhanced disclosure to prospective
purchasers.
Given the
marginal benefits and prohibitive costs of registration, as well as the
likelihood that the Firm Matching Services would be terminated permanently if
registration were required, requiring registration of the interests traded
through the Firm Matching Services is not in the best interest of the investing
public.
E. Proposed Guidelines.
In the course of the Firms communications with the Commissions staff,
the staff has suggested six possible guidelines pursuant to which Firm Matching
Services might be operated without registration of the Interests under Section 5
of the Act. By operating a Firm Matching Service within the six proposed
guidelines, each Firm would ensure that the sale of Interests by Firm customers
pursuant to its Firm Matching Service will not result in a violation of Section
5 of the Act. The six guidelines are set forth below. For purposes of these
guidelines, "Sponsor" means the partnership issuing an Interest listed on a Firm
Matching Service, the general partners of such partnership and any entities or
persons controlling, controlled by or under common control with such issuer or
any of its general partners.
The
guidelines are as follows:
1. Only
the securities of partnerships that file quarterly and annual reports pursuant
to the Securities Exchange Act of 1934 would be listed on a Firm Matching
Service.
2. Active
promotion of a Firm Matching Service would be prohibited. Sponsors would be
permitted to make periodic announcements which include a statement as to the
existence and availability of the Firm Matching Service and instructions for
persons desiring to obtain additional information regarding the Firm Matching
Service.
3. The
solicitation of orders to sell Interests on a Firm Matching Service would be
prohibited.
4. The
solicitation of orders to purchase Interests on a Firm Matching Service would be
prohibited, other than (i) solicitations directed to current holders of
Interests in the partnership proposed to be sold or partnerships having similar
investment objectives and (ii) solicitations directed to customers who have
indicated an interest in buying Interests in the partnership proposed to be sold
or partnerships having similar investment objectives in the twelve months
immediately preceding the solicitation.
5.
Sponsors would be prohibited from undertaking any actions that would have the
effect of setting or affecting the price at which Interests are sold on a Firm
Matching Service. The following actions taken by Sponsors of a Firm Matching
Service would not be deemed to have the effect of setting or affecting the price
at which Interests are sold: (i) providing historical information with respect
to the purchase price of Interests, with respect to an individual Interest or
the average purchase price of an identified group of Interests, sold pursuant to
the Firm Matching Service or any other matching service or similar system
maintained by third parties; and (ii) providing assistance to clients in the
negotiation and completion of a Firm Matching Service transaction.
6.
Sponsors would be prohibited from executing any transaction pursuant to a Firm
Matching Service other than in an agency capacity on behalf of a purchaser or
seller.
F. Conclusion.
In addition to operating its Firm Matching Service in conformity with the
provisions outlined above, each Firm hereby represents that it will undertake to
operate its Firm Matching Service in a manner that complies in all material
respects with all other applicable federal and state law and regulatory
requirements, including all applicable rules and regulations of the National
Association of Securities Dealers, Inc.
For the
reasons stated herein, we would appreciate the Division of Corporation Finance
issuing a interpretative letter clarifying that the Firms may operate Firm
Matching Services, in accordance with the six guidelines outlined above, without
registration of the Interests under the Act.
If you
desire any additional information or wish to discuss further the issues
addressed in this letter or the October Letter, please contact the undersigned
at (404) 572-4903 or Mr. John D. Capers, Jr. of this office at (404) 572-4658.
In
accordance with Release No. 33-6269, seven additional copies of this letter are
enclosed.
Very truly yours,
Bruce N. Hawthorne
cc: Ms. Abigail Arms
Ms. Meredith Cross
STAFF REPLY LETTER
November 17, 1992
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE
Re: King & Spalding
Incoming letter dated November 13,
1992
The Division is of the view that the determination of whether
registration pursuant to the Securities Act of 1933 (the "Securities Act") is
required in connection with the operation by an issuer and/or its affiliates
(collectively, the "Sponsor") of a service (a "Matching Service") which
facilitates the secondary resale of limited partnership interests of the issuer
("Interests") turns upon the degree and type of participation in the Matching
Service by the Sponsor. It is the Divisions view that Securities Act
registration is not required for a Matching Service that is conducted in
accordance with the following guidelines:
1) All
limited partnerships whose Interests are listed on, or traded pursuant to, the
Matching Service report under Section 12 or Section 15(d) of the Securities
Exchange Act of 1934 ("Exchange Act").
2) Active
promotion of the Matching Service is prohibited. Sponsors may make periodic
announcements which include a statement as to the existence and availability of
the Matching Service and instructions for persons desiring to obtain additional
information regarding the Matching Service.
3) The
solicitation of orders to sell Interests on the Matching Service is prohibited.
4) The
solicitation of orders to purchase Interests on the Matching Service is
prohibited, other than (i) solicitations directed to current holders of
Interests in the partnership proposed to be sold or partnerships having similar
investment objectives, and (ii) solicitations directed to customers who have,
within the twelve months preceding the solicitation, indicated an interest in
buying Interests in the partnership proposed to be sold or partnerships having
similar investment objectives. The indication of interest must not have been
subsequently withdrawn by the potential purchaser. The Sponsor also must
maintain appropriate records to document the status of the interest of potential
purchasers.
5)
Sponsors are prohibited from undertaking any actions that would have the effect
of setting or affecting the price at which Interests are sold on the Matching
Service. The following actions taken by a Sponsor of a Matching Service would
not be deemed to have the effect of setting or affecting the price at which
Interests are sold: (i) providing historical information with respect to the
purchase price of Interests, with respect to an individual Interest or the
average purchase price of an identified group of Interests, sold pursuant to the
Matching Service or any other Matching Service or similar system maintained by
third parties; and (ii) providing assistance to clients in the negotiation and
completion of a Matching Service transaction. In addition, this guideline does
not prohibit a sponsor from responding to a customers request for advice
regarding a price that has been offered.
6)
Sponsors are prohibited from executing any transaction pursuant to a Matching
Service other than in an agency capacity on behalf of a purchaser or seller.
Noting
that each of the Firms referenced in your letter intends to operate its Matching
Service in compliance with the guidelines set forth above, the Division concurs
in your view that the Firms may resume operation of their Matching Services
without compliance with the registration provisions of the Securities Act. The
Division also notes the Firms undertaking to operate their Matching Services in
a manner that complies in all material respects with all other applicable
federal and state law and regulatory requirements, including all applicable
rules and regulations of the National Association of Securities Dealers, Inc.
("NASD").
The
Division of Market Regulation has asked us to advise you that the operation of
services for matching Interests in affiliated limited partnerships also may
implicate the exchange registration provisions of the Exchange Act. The
definition of the term "exchange" is set forth in Section 3(a)(1) of the
Exchange Act.!1 If a Matching Service meets the definition of an
exchange, its Sponsor must either register the service as a national securities
exchange under Section 6 of the Exchange Act, or obtain an exemption under
Section 5 of the Exchange Act from such registration.!2
Sponsors
of Matching Services also may be required to register as broker-dealers under
Section 15(b) of the Exchange Act, depending on the nature and extent of the
sponsors involvement in securities transactions. In general, factors that could
require broker-dealer registration include, among others, the sponsors
publication of price quotations, its involvement in negotiations or other
discussions with buyers and sellers, its handling of customer funds or
securities, whether it extends credit in connection with the transactions, and
whether it receives transaction-related compensation.!3
The
activities of the Matching Services and other similar programs operated by the
issuer and/or its affiliates also may raise questions as to the applicability of
other federal and state law requirements as well as those established by the
NASD to govern their members. Existing rules and regulations involving, among
other things, best execution of transactions and suitability of recommendations
are all applicable to the limited partnership secondary market.!4 For
example, broker-dealers effecting customer trades in Matching Services have a
duty to ensure that their customers obtain the "best execution" of their orders.
Broker-dealers also are required to make a suitability determination when
recommending that a customer engage in a limited partnership transaction.!5
The NASD requires members and associated persons, when recommending to an
investor the purchase, sale or exchange of a Direct Participation Program
("DPP") to have reasonable grounds to believe the recommendation is suitable for
the customer based on: the customers investment objectives; other investments;
financial situation and needs; tax status; and any other information known by
the member or associated person.!6 In addition, the member and
associated person must determine that the investor has the appropriate
investment objectives, is in a position to fully understand the risks and
benefits of the transaction, and has net worth sufficient to sustain the risks
involved in an investment in a DPP security.!7 Furthermore, this
requirement includes the obligation to make reasonable efforts to obtain the
customer information necessary to make the suitability determination. The NASD
has indicated that the requirement to make a suitability determination applies
not only to any initial distribution of partnership securities, but to secondary
market transactions as well.!8
Your
letter has not raised, and this response does not address, Securities Act
registration issues raised by distribution reinvestment plans and other similar
plans; these issues are discussed in Securities Act Releases 4790 and 5515.
Sincerely,
Michael L. Hermsen
Assistant Director
!1See Delta Government Options Corporation
("Delta"), Securities Exchange Act Release No. 27611 (January 12, 1990), 55 FR
1890. Initially, by Order dated January 12, 1989, the Commission granted Delta
temporary registration as a clearing agency under Section 17A of the Act,
without deciding whether the OTC options trading system of which Delta is a part
was an exchange. Securities Exchange Act Release No. 26450 (January 12, 1989),
54 FR 2010. On petition for review of the Commissions Order brought by the
Chicago Board of Trade ("CBT") and the Chicago Mercantile Exchange ("CME"), the
Seventh Circuit vacated and remanded that Order, and directed the Commission to
decide whether the Delta system was an exchange, and, based on that
determination, to either re-register Delta as a clearing agency or decline to do
so. 883 F.2d 525 (7th Cir. 1989).
The Commission complied with the Courts instruction, re-registering
Delta, on a temporary basis, as a clearing agency under Section 17A of the Act,
premised upon the finding the system was not an exchange. 55 FR 1890. The Order
was upheld in CBT and CME v. SEC, 923 F.2d 1270 (7th Cir. 1991),
rehearing en banc denied, No. 90-1246 (7th Cir. 1991).
!2The Division of Market Regulation has issued several
no-action letters addressing these provisions of the Exchange Act. Letters
issued by the staff to currently active trading systems include: (1) Franklin
Advantage, letter from William H. Heyman, Director, Division of Market
Regulation, SEC, to Steven J. Gray, dated November 22, 1991; (2) Exchange
Services, Inc., letter from William H. Heyman, Director, Division of Market
Regulation, SEC, to Patteson Branch, President, Exchange Services, Inc., dated
September 11, 1991; (3) Portfolio Trading Services, Inc., letter from William H.
Heyman, Deputy Director, Division of Market Regulation, SEC, to Richard S.
Soroko, Lippenberger, Thompson & Welch, dated May 16, 1991; (4) Wunsch Auction
Systems, Inc., letter from Richard G. Ketchum, Director, Division of Market
Regulation, SEC, to Daniel T. Brooks, Cadwalader, Wickersham & Taft, dated
February 28, 1991; (5) RMJ Securities -- Delta Government Options, letter from
Richard G. Ketchum, Director, Division of Market Regulation, SEC, to Robert A.
McTamaney, Carter, Ledyard & Milburn, dated January 12, 1989; (6) Instinet,
letter from Richard G. Ketchum, Director, Division of Market Regulation, SEC, to
Daniel T. Brooks, Cadwalader, Wickersham & Taft, dated August 8, 1986; (7)
POSIT, letter from Brandon Becker, Associate Director, Office of Self-Regulatory
Oversight, Division of Market Regulation, SEC, to Lloyd Feller, Morgan, Lewis &
Bockius, dated July 28, 1987; (8) NAPEX, letters from Michael J. Simon,
Assistant Director, Office of Self-Regulatory Oversight, Division of Market
Regulation, SEC, to D. Roger Glenn, Schifino & Fleischer, dated August 2, 1985,
and July 14, 1986.
!3See National Royalty Exchange, letter from Henry E.
Flowers, Division of Market Regulation, SEC, to Marc A. White, dated December
21, 1988; cf. Investex Investment Exchange Inc., letter from John M.
Ramsay, Division of Market Regulation, SEC, to Howard Wynn, Gusrae, Kaplan &
Bruno, dated April 9, 1990; Petroleum Information Corporation, letter from John
M. Ramsay, Division of Market Regulation, SEC, to Alan P. Baden, Vinson &
Elkins, dated November 28, 1989.
!4NASD District Business Conduct Committee v. Liquidity
Fund Investment Corp., Complaint No. C01910017, January 3, 1992.
!5NASD Securities Dealers Manual, Rules of Fair
Practice, Art. III, Section 2 and App. F to Art. III, Sec. 34.
!6NASD Notice To Members 91-69 (November 1991)
concerning the application of NASD Rules, Interpretations, By-laws, and Federal
Securities Laws to the Secondary Market in Direct Participation Program
Interests. The NASD requires a suitability determination, pursuant to Art. III,
Sec. 2 and App. F to Art. III, Sec. 34 of the Rules of Fair Practice, when a
broker-dealer recommends to an investor the purchase, sale or exchange of a DPP
security. Broker-dealers also must consider the suitability standards imposed by
state law when making a suitability determination.
!7Id.
!8Id.
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