Self-Regulatory Organizations; National Association of Securities Dealers, Inc. (n/k/a Financial Industry Regulatory Authority, Inc.); Order Approving Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 5 Relating to the Regulation of Compensation, Fees and Expenses in Public Offerings of Real Estate Investment Trusts and Direct Participation Programs, 27869-27873 [E8-10704]

Download as PDF Federal Register / Vol. 73, No. 94 / Wednesday, May 14, 2008 / Notices The subject matter of the Closed Meeting scheduled for May 15, 2008 will be: Formal orders of investigation; Institution and settlement of injunctive actions; Institution and settlement of administrative proceedings of an enforcement nature; Resolution of litigation claims; and an Adjudicatory matter. At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551–5400. Dated: May 8, 2008. Nancy M. Morris, Secretary. [FR Doc. E8–10721 Filed 5–13–08; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–57803; File No. SR–NASD– 2005–114] Self-Regulatory Organizations; National Association of Securities Dealers, Inc. (n/k/a Financial Industry Regulatory Authority, Inc.); Order Approving Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 5 Relating to the Regulation of Compensation, Fees and Expenses in Public Offerings of Real Estate Investment Trusts and Direct Participation Programs May 8, 2008. I. Introduction jlentini on PROD1PC65 with NOTICES On September 28, 2005, the National Association of Securities Dealers, Inc. (‘‘NASD’’) 1 filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 2 and Rule 19b–4 thereunder,3 proposed amendments to NASD Rule 2810. On June 12, 2006, NASD filed Amendment No. 1 to the 1 On July 26, 2007, the Commission approved a proposed rule change filed by NASD to amend NASD’s Certificate of Incorporation to reflect its name change to Financial Industry Regulatory Authority, Inc., or FINRA, in connection with the consolidation of the member firm regulatory functions of NASD and NYSE Regulation, Inc. See Securities Exchange Act Release No. 56146 (July 26, 2007), 72 FR 42190 (Aug. 1, 2007). 2 15 U.S.C. 78s(b)(1). 3 17 CFR 240.19b–4. VerDate Aug<31>2005 16:39 May 13, 2008 Jkt 214001 proposed rule change.4 The proposed rule change was published for comment in the Federal Register on July 17, 2006 (‘‘Original Proposal’’),5 and the Commission received six comments.6 On April 16, 2007, NASD submitted Amendment No. 2 to the proposed rule change, and on November 9, 2007 and January 2, 2008, FINRA submitted Amendment No. 3 and No. 4, respectively, to the proposed rule change.7 The Commission published the proposed rule change, as amended, for comment in the Federal Register on January 31, 2008 (‘‘Revised Proposal’’),8 and the Commission received six comments, which are discussed below in Section III.9 On April 11, 2008, FINRA submitted Amendment No. 5 to the proposed rule change.10 This notice and order solicits comment from interested persons on Amendment No. 5 and approves the proposed rule change, as amended, on an accelerated basis. The text of the proposed rule change is available at https://www.finra.org, the principal offices of FINRA, and the Commission’s Public Reference Room. II. Description of the Proposed Rule Change As discussed in more detail in the Original Proposal and Revised Proposal, FINRA is proposing to amend NASD Rule 2810 to address the regulation of compensation, fees and expenses in 4 Amendment No. 1 replaced and superseded the original rule filing. 5 See Securities Exchange Act Release No. 54118 (July 10, 2006), 71 FR 40569 (July 17, 2006) (SR– NASD–2005–114). 6 See letters from the Committee on Federal Regulation of Securities of the American Bar Association (Keith F. Higgins), dated Aug. 22, 2006; North American Securities Administrators Association (Patricia D. Struck), dated Aug. 11, 2006; Dominion Investor Services, Inc. (Kevin P. Takacs), dated Aug. 7, 2006; Investment Program Association (Rosemarie Thurston), dated Aug. 7, 2006; the Securities Division of Office of the Secretary of the Commonwealth of Massachusetts (Bryan Lantagne), dated Aug. 4, 2006; and Cambridge Legacy Group (Frank Akridge, Jr.), dated Aug. 4, 2006. 7 Each amendment replaced and superseded the earlier amendment. Amendment No. 4 also responded to comments on the Original Proposal. 8 See Securities Exchange Act Release No. 57199 (Jan. 25, 2008), 73 FR 5885 (Jan. 31, 2008) (SR– NASD–2005–114). 9 See letters from R.J. O’Brien Fund Management, LLC (Annette A. Cazenave), dated Apr. 28, 2008 (‘‘R.J. O’Brien’’); Michael V. Scillia, ASG Securities, Inc., dated Feb. 24, 2008 (‘‘Scillia’’); Committee on Federal Regulation of Securities of the American Bar Association (Keith F. Higgins), dated Feb. 22, 2006 (‘‘ABA Committee’’); Snyder Kearney LLC, dated Feb. 21, 2008 (‘‘Snyder’’); David Lerner, David Lerner Associates, Inc., dated Feb. 21, 2008 (‘‘Lerner’’); and Investment Program Association (Jack L. Hollander), dated Feb. 21, 2006 (‘‘IPA’’). 10 Amendment No. 5 responded to comments on the Revised Proposal and proposed several amendments to the proposed rule change. PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 27869 public offerings of direct participation programs (as defined in NASD Rule 2810(a)(4)) (‘‘DPPs’’) and unlisted real estate investment trusts (as defined in NASD Rule 2340(d)(4)) (‘‘REITs’’) (collectively ‘‘Investment Programs’’).11 Specifically, the proposed rule change addresses: (1) Compensation limitations and the use and allocation of offering proceeds; (2) disclosure regarding the liquidity of prior programs offered by the same sponsor; (3) sales loads on reinvested dividends; and (4) non-cash compensation provisions regarding the appropriate location for training and education meetings. The proposed rule change also adds REITs to provisions that already apply to DPPs, but does not make any substantive changes to these sections.12 III. Summary of Comments Received and FINRA Response In Amendment No. 5, FINRA responded to comments on the Revised Proposal and proposed additional amendments to the proposed rule change. A. Registered Representatives Engaged in de minimis and Incidental Sales Activities The proposed amendment to Rule 2810(b)(4)(C)(ii)(c) would exclude from the underwriting compensation limit 13 payments to registered representatives, including dual employees, engaged in the solicitation, marketing, distribution or sales of the offering whose functions in connection with that offering are solely and exclusively clerical and ministerial. The IPA suggested that this should be revised to permit a de minimis exception for payments to registered representatives whose functions are predominantly—i.e., at least 95 percent of the employee’s time—clerical or ministerial, but who 11 The DPPs and REITs that comprise Investment Programs typically are structured so that several affiliated entities make up the program. The affiliated entities include the sponsor, the trust or limited partnership, and a broker-dealer. 12 See proposed amendments to Rule 2810(b)(3)(A), Rule 2810(b)(4)(A), Rule 2810(b)(4)(B)(v), Rules 2810(b)(4)(D)–(G) and Rule 2810(b)(5). The proposed amendment to Rule 2810(b)(4)(G) also corrects a typographical error by citing ‘‘subparagraph (C),’’ instead of ‘‘subparagraph (E)’’ under the existing rule. 13 The underwriting compensation payable to underwriters, broker-dealers, or affiliates may not exceed ten percent of the gross proceeds of the offering, regardless of the source from which the compensation is derived. See current Rule 2810(b)(4)(B)(i) and Notice to Members 82–51. As explained in the Revised Proposal, the ten percent figure currently is FINRA policy. The proposed amendment to Rule 2810(b)(4)(B)(ii) would expressly state that all items of compensation shall not exceed ten percent of the gross proceeds of the offering. E:\FR\FM\14MYN1.SGM 14MYN1 27870 Federal Register / Vol. 73, No. 94 / Wednesday, May 14, 2008 / Notices on rare occasions may go beyond performing solely clerical and ministerial functions, such as answering questions. FINRA stated that the proposed amendment to Rule 2810(b)(4)(C)(ii)(c)(2) was intended to achieve clarity and ease of administration by excluding only those registered representatives whose functions are ‘‘solely and exclusively clerical and ministerial.’’ In response to comments, FINRA has amended proposed Rule 2810(b)(4)(C)(ii)(c)(3) to include registered representatives engaged in sales activities provided those activities are ‘‘de minimis and incidental to his or her clerical or ministerial functions.’’ However, FINRA stated that it did not intend to adopt a particular metric with respect to this exception, such as percentage of time spent, as it could serve as a tool to evade the purpose and spirit of the rule. FINRA stated that it expected the ‘‘de minimis and incidental’’ exception to be a very narrow one for registered persons whose sales activities are truly incidental to their job functions. FINRA noted that the exception in the proposed amendment to Rule 2810(b)(4)(D) for firms with ‘‘ten or fewer registered representatives’’ engaged in wholesaling is intended to apply to those firms that are most likely to have a need for personnel performing multiple functions. jlentini on PROD1PC65 with NOTICES B. Calculating Items of Underwriting Compensation Two commenters stated that proposed amendments to Rules 2810(b)(4)(C)(ii)(a)–(c) could result in double counting certain items for purposes of the underwriting compensation limit.14 For example, these commenters stated that payments received by a member that would be counted as underwriting compensation under the proposed amendment to Rule 2810(b)(4)(C)(ii)(a) would have to be counted again for purposes of the proposed amendments to Rules 2810(b)(4)(C)(ii)(b)–(c) when the member re-allows the payments to its registered representatives. FINRA responded that it did not intend that items of compensation already required to be counted under proposed amendments to Rule 2810(b)(4)(C)(ii)(a) be double-counted for purposes of the underwriting compensation limit. In response to these comments, FINRA has revised the 14 ABA Committee and IPA. VerDate Aug<31>2005 16:39 May 13, 2008 Jkt 214001 proposed amendments to Rules 2801(b)(4)(C)(ii)(b)–(c).15 C. Allocation of Compensation to Dual Employees in Connection With More Than One Offering Two commenters addressed proposed guidance with respect to allocation of payments to dual employees for purposes of the underwriting compensation limit where the dual employees receive payments for services in connection with more than one offering.16 Footnote 36 of the Revised Proposal provided guidance (‘‘Guidance’’) 17 that if a dual employee receives compensation for services provided in connection with more than one public offering, or for private placements in addition to offerings of Investment Programs, payments to such employees may be reasonably allocated between the offerings based on the time periods in which the employee was engaged in the offerings, if they are distinct, or based on the relative size of the offerings. The ABA Committee and IPA sought clarification as to whether the Guidance would apply only to dual employees to whom the exceptions from the underwriting compensation set forth in the proposed amendment to Rule 2810(b)(4)(D) are available. FINRA responded that its Corporate Financing Department (the ‘‘Department’’) will allocate compensation among multiple offerings with regard to all relevant payments and expenses, not just those for dual employees. The IPA also stated that the concepts addressed in the Guidance should be incorporated into the proposed amendments to Rule 2810 with general application to payments to dual employees among multiple offerings, not just the exceptions in Proposed Rule 2810(b)(4)(D). The ABA Committee suggested that the Guidance should allow the allocation of the salary of any registered representative. FINRA responded that it will continue its longstanding practice, with respect to a registered representative receiving compensation for services provided in connection with more than one public offering, or for private placements in addition to offerings of Investment Programs, of allowing 15 The ABA Committee also requested that the language in the proposed amendment to Rule 2810(b)(4)(B)(ii) be modified slightly to rearrange some commas and clarify that trail commissions are not paid with offering proceeds. FINRA has revised the text accordingly. 16 ABA Committee and IPA. 17 The Guidance appeared in the purpose section of the Revised Proposal and not the proposed rule text. PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 payments to such registered representatives to be allocated between the offerings on a reasonable basis taking into account relevant factors, including the time periods spent on particular offerings, the relative sizes of the offerings and the number of investors in each. FINRA noted that, in the course of its review of particular offerings, information and representations by members with respect to such factors will vary. As a result, FINRA determined not to codify these factors and their respective weights in the proposed rule change, but rather will continue its current review practices that permit reasonable basis allocations. D. Analysis of Employee Compensation 1. Per Employee Analysis in All Investment Programs The proposed amendment to Rule 2810(b)(4)(D) would have excepted from the underwriting compensation limit, subject to the Department’s determination, some portion of the nontransaction-based payments to a registered representative dual employee of an Investment Program with ‘‘fewer than ten people engaged in wholesaling.’’ The ABA Committee suggested that the exception should instead be available to smaller members that have fewer than ten registered representatives engaged in wholesaling with respect to an Investment Program in order to avoid the inclusion of persons who are not registered in the calculation.18 The IPA also asked FINRA to clarify the proposed rule to provide that in determining whether there are fewer than ten people engaged in wholesaling, only those persons engaged in wholesaling for a particular Investment Program should be counted, rather than all registered representatives who are employed by a sponsor or affiliate and engaged in wholesaling some other product of the sponsor or affiliate. The Revised Proposal explained that the Department would engage in the same detailed job function analysis with respect to certain compensation associated with smaller Investment Programs as it would with respect to certain compensation of the ten highest paid executives in any Investment Program. Accordingly, a member could provide detailed per-employee information to the Department from which the Department could conclude that certain salary and other non18 The ABA Committee also stated that the rule should be amended to clarify that it applies to a dual employee of a ‘‘member and the sponsor, issuer or other affiliate.’’ E:\FR\FM\14MYN1.SGM 14MYN1 Federal Register / Vol. 73, No. 94 / Wednesday, May 14, 2008 / Notices transaction-based compensation provided to the employee could be allocated to issuer expenses. In response to these comments, FINRA has amended the exception to clarify that for every program or REIT filed for review, the Department will engage in the detailed per-employee analysis. The proposed amendment to Rule 2810(b)(4)(D) would apply to ‘‘ten or fewer registered representatives’’ engaged in wholesaling if they are dual employees in a smaller Investment Program and to the ten highest paid executives in any Investment Program.19 FINRA also clarified that the rule would only apply to ‘‘ten or fewer registered representatives [of an Investment Program] engaged in wholesaling.’’ FINRA also clarified that the rule applied to a dual employee of a ‘‘member and the sponsor, issuer or other affiliate.’’ 20 The ABA Committee also suggested that the calculation of the number of persons engaged in wholesaling should only include those registered representatives directly contacting other members to solicit new selling agreements with respect to the specific Investment Program. FINRA disagreed. As discussed in the Revised Proposal, the Department expects to conduct accurate and efficient reviews of the individual’s job functions to determine whether the exceptions in proposed amendment to Rule 2810(b)(4)(D) would be available. FINRA stated that it does not believe it is useful or appropriate to conduct a two-step analysis of each registered representative’s functions (to analyze every registered representative’s activities to determine whether ten or fewer were engaged in wholesaling with regard to a specific Investment Program, and then to analyze the job functions of up to ten registered representatives to determine what portion of payments to them should be included in the underwriting compensation calculation). jlentini on PROD1PC65 with NOTICES 2. Top Ten Executives The proposed amendment to Rule 2810(b)(4)(D) would except from the 19 The wholesaling exception discussed in the Revised Proposal would have been available to an Investment Program with ‘‘fewer than ten people’’ engaged in wholesaling. In response to comments, FINRA stated that allowing the exception for ‘‘ten or fewer’’ registered representatives rather than ‘‘fewer than ten’’ would be consistent with the goal of clarity and ease of administration. 20 Telephone conversation among Gary Goldsholle, Vice President and Associate General Counsel, FINRA; Joseph Price, Vice President, Corporate Financing, FINRA; Adam Arkel, Assistant General Counsel, FINRA; Lourdes Gonzalez, Assistant Chief Counsel—Sales Practices, Commission; and Michael Hershaft, Special Counsel, Commission (May 7, 2008). VerDate Aug<31>2005 16:39 May 13, 2008 Jkt 214001 underwriting compensation limit, subject to the Department’s determination, some portion of the nontransaction-based payments to a registered representative dual employee who is one of the top ten highest paid executives based on non-transactionbased compensation in any Investment Program. The ABA Committee sought clarification as to whether the executives to whom this exception would be available must be registered representative dual employees. As discussed above, FINRA has amended the exception to make this clarification. Two commenters stated that the exception should not require that the dual employees must be executives or have executive titles.21 Further, both commenters suggested that the top-ten calculation should be based on nontransaction-based compensation ‘‘in connection with’’ an Investment Program.22 FINRA responded that the term ‘‘executive’’ is not intended as a formal job designation or title, but rather as a characterization of the registered representative dual employee’s role in the Investment Program. As explained in the Revised Proposal, the Department believes that it can identify and evaluate a small group of individuals performing executive job functions within an Investment Program. However, FINRA disagreed with the suggestion of amending the rule to base the top ten executive calculation on nontransaction-based compensation ‘‘in connection with’’ a particular Investment Program. As with firms with up to ten registered representatives engaged in wholesaling, FINRA does not believe it is useful or appropriate to conduct a two-step analysis for each executive (to determine the extent to which each executive’s compensation varies and is attributable to particular programs in order to identify the relevant executives eligible for the exception, and then to determine what portion of payments to them should be included in the underwriting compensation calculation). E. Issuer Expenses 1. Overhead Expenses Both the ABA Committee and the IPA stated that the proposed amendment to Rule 2810(b)(4)(C)(i) should be revised to clarify that issuer expenses, not just overhead expenses, that are reimbursed or paid for with offering proceeds must be included for purposes of the cap on organization and offering expenses. 21 ABA PO 00000 FINRA has revised the proposed amendment to Rule 2810(b)(4)(C)(i) to make this clarification. 2. Services for the Issuer The ABA Committee stated that the proposed amendment to Rule 2810(b)(4)(C)(i)(c) should clearly specify the scope of services provided by employees or agents of the sponsor or issuer that must be included for purposes of the cap on organization and offering expenses. When proceeds of an offering are used to pay issuer expenses, these payments or reimbursements must be identified in filings with the Department. FINRA responded that if the rule limited the scope of payments that could be made to employees or agents of the sponsor or issuer for performing services for the issuer to only those activities specifically described in the rule, some otherwise legitimate payments or reimbursements using offering proceeds would be prohibited. Accordingly, FINRA has not revised the proposed amendments to Rule 2810(b)(4)(C)(i)(c), other than to clarify that the proposed rule refers to services for the issuer. F. Liquidity and Marketability Disclosure The IPA expressed concern that the proposed amendments to Rule 2810(b)(3)(D) would impose upon members a burdensome due diligence review requirement with respect to the liquidity and marketability of an Investment Program. In its response, FINRA recognized the burdens associated with these requirements, but noted that the proposed amendment to Rule 2810(b)(3)(D) is intended to permit members to rely upon the liquidity and marketability information as provided to the member by the sponsor or general partner of an Investment Program, provided that the member does not know or have reason to know that the information is inaccurate. Accordingly, FINRA has not revised the proposed amendment to Rule 2810(b)(3)(D). G. Reinvested Dividends One commenter expressed concern regarding the prohibition set forth in the proposed amendment to Rule 2810(b)(4)(B)(vi) against sales loads on reinvested dividends for Investment Programs.23 After considering the comment, FINRA determined to maintain the prohibition on sales loads on reinvested dividends. FINRA emphasized that commenters on the Original Proposal supported this Committee and IPA. 22 Id. Frm 00078 23 Lerner. Fmt 4703 Sfmt 4703 27871 E:\FR\FM\14MYN1.SGM 14MYN1 27872 Federal Register / Vol. 73, No. 94 / Wednesday, May 14, 2008 / Notices amendment 24 and the amendment is intended to conform Rule 2810 to similar changes made to Rule 2830 with respect to sales loads on reinvested dividends for sales of mutual funds. Further, so as to avoid the indirect payment of sales loads on reinvested dividends for Investment Programs, FINRA has amended proposed Rule 2810(b)(4)(B)(ii) to clarify that the calculation of ‘‘ten percent of the gross proceeds of the offering’’ excludes securities purchased through the reinvestment of dividends. H. Due Diligence Services One commenter sought guidance as to what levels of detail and itemization, as required by the proposed amendment to Rule 2810(b)(4)(B)(vii), would be appropriate for an invoice prepared by a law firm conducting on behalf of a member due diligence services that are intended to be reimbursed as issuer expenses.25 FINRA responded that industry best practices may be effective in establishing a threshold for itemization rather than additional rulemaking. The commenter also sought guidance as to whether it would be permissible for the issuer or sponsor to reimburse the law firm directly, so that the member need not go through the extra step of first itself paying the law firm and then seeking reimbursement from the issuer or sponsor.26 FINRA responded that a law firm could not provide bona fide due diligence in an offering if its client was the issuer or sponsor rather than the broker-dealer. The method of reimbursement for due diligence services should be irrelevant so long as it does not undermine the law firm’s duties to its client, the brokerdealer.27 24 Massachusetts Securities Division and NASAA. 25 Snyder. jlentini on PROD1PC65 with NOTICES 26 Id. 27 FINRA also addressed two other comments. Scillia suggested that the five percent limitation on issuer expenses that currently exists in NASD Rule 2810 precludes offerings of smaller DPPs. FINRA disagreed with this comment. FINRA stated that the five percent limitation on issuer expenses pertains to the amount that may be used from offering proceeds. An issuer can spend additional funds from other sources. Thus, FINRA believes that the sponsor of a smaller DPP or REIT can absorb the higher fixed overhead costs owing to the small size of the offering. Finally, the five percent limitation on issuer expenses in the proposed rule change is not new and is consistent with the standards in existing NASD Rule 2810, which was approved by the SEC. See e-mail from Gary Goldsholle, Vice President and Associate General Counsel, FINRA, to Michael Hershaft, Special Counsel, Commission (May 7, 2008). With respect to the letter from R.J. O’Brien, FINRA stated that the comments were beyond the scope of the filing as the proposed rule change does not impose any new requirements with respect to commodity pool trail commissions. The issues raised in this letter were addressed by the SEC in VerDate Aug<31>2005 16:39 May 13, 2008 Jkt 214001 V. Discussion and Commission Findings IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning Amendment No. 5, including whether Amendment No. 5 is consistent with the Act. Comments may be submitted by any of the following methods: After careful review, the Commission finds that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,28 which require, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable Electronic Comments principles of trade, and, in general, to • Use the Commission’s Internet protect investors and the public comment form (https://www.sec.gov/ interest.29 The Commission notes that rules/sro.shtml); or the proposed rule change would codify • Send an e-mail to ruleFINRA’s longstanding policy of comments@sec.gov. Please include File applying certain regulatory Number SR–NASD–2005–114 on the requirements in NASD Rule 2810 to subject line. REITs. Paper Comments The Commission believes that • Send paper comments in triplicate clarifying the standards for determining to Nancy M. Morris, Secretary, the fairness and reasonableness of Securities and Exchange Commission, compensation, treating the use and 100 F Street, NE., Washington, DC allocation of offering proceeds in a more 20549–1090. explicit and objective manner, requiring disclosure regarding the liquidity of All submissions should refer to File prior programs offered by the same Number SR–NASD–2005–114. This file number should be included on the sponsor, prohibiting sales loads on subject line if e-mail is used. To help the reinvested dividends and enabling bona Commission process and review your fide training and education meetings to comments more efficiently, please use take place at appropriate locations, are only one method. The Commission will measures designed to prevent post all comments on the Commission’s fraudulent practices, promote just and Internet Web site (https://www.sec.gov/ equitable principles of trade, and rules/sro.shtml). Copies of the protect investors and the public interest. submission, all subsequent Accelerated Approval of Amendment amendments, all written statements No. 5 with respect to the proposed rule change that are filed with the The Commission finds good cause for Commission, and all written approving Amendment No. 5 to the communications relating to the proposed rule change prior to the proposed rule change between the Commission and any person, other than thirtieth day after the amendment is published for comment in the Federal those that may be withheld from the Register pursuant to Section 19(b)(2) of public in accordance with the the Act. Amendment No. 5 clarifies provisions of 5 U.S.C. 552, will be several provisions of the proposed rule available for inspection and copying in change, including calculating and the Commission’s Public Reference allocating compensation, requiring Room, 100 F Street, NE., Washington, issuer compensation to be included in DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. the cap on organization and offering expenses, and providing greater Copies of such filing also will be specificity regarding the prohibition on available for inspection and copying at sales loads on reinvested dividends. The the principal office of FINRA. All Commission believes that these changes comments received will be posted will provide greater clarity with respect without change; the Commission does to the applicability of and compliance not edit personal identifying with the proposed rule change, while information from submissions. You should submit only information that continuing to protect investors and the you wish to make available publicly. All public interest. Accordingly, the submissions should refer to File Commission finds that the accelerated Number SR–NASD–2005–114 and approval of Amendment No. 5 is should be submitted on or before June appropriate. 4, 2008. 28 15 an approval order issued in a prior rulemaking proceeding. See Securities Exchange Act Release No. 50335 (Sept. 9, 2004), 69 FR 55855 (Sept. 16, 2004) (SR–NASD–2004–136). Id. PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 U.S.C. 78o–3(b)(6). approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 29 In E:\FR\FM\14MYN1.SGM 14MYN1 Federal Register / Vol. 73, No. 94 / Wednesday, May 14, 2008 / Notices VI. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,30 that the proposed rule change, as amended (SR– NASD–2005–114), be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.31 Florence E. Harmon, Deputy Secretary. [FR Doc. E8–10704 Filed 5–13–08; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION Release No. 34–57802; File No. SR–FICC– 2008–02] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Require Demand Processing for BlindBrokered Repo Trades Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 notice is hereby given that on April 9, 2008, the Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which items have been prepared primarily by FICC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested parties. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FICC is seeking to amend the rules of the Government Securities Division (‘‘GSD’’) to mandate Demand Comparison submission and processing for blind-brokered repo trades that are submitted by a specified cut-off time. jlentini on PROD1PC65 with NOTICES II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FICC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FICC has prepared summaries, set forth in sections (A), (B), 30 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 31 17 VerDate Aug<31>2005 16:39 May 13, 2008 Jkt 214001 and (C) below, of the most significant aspects of these statements.2 (A) Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Background In 2001, the Government Securities Clearing Corporation (‘‘GSCC’’), the GSD’s predecessor, redesigned its comparison rules and procedures soon after the introduction of the real-time trade matching system. At that time, GSCC also moved the timing of its settlement guaranty from the point of netting to the point of comparison, which was much earlier in the day. In designing these changes, GSCC’s goal was to provide straight through processing by providing for easy identification and resolution of uncompared trades intraday in order to achieve 100 percent comparison. These changes reduced risk by ensuring that more transactions were compared and guaranteed by the clearing corporation earlier in the day so that intraday credit exposure to counterparties was minimized. As part of the redesign of the GSCC comparison rules, GSCC introduced Demand Comparison, which was a new type of comparison that was created to provide members with flexibility and control over the comparison process for trades executed via intermediaries.3 Demand Comparison strikes a balance between ‘‘bilateral comparison’’ (the traditional form of comparison), where each member is required to submit trade data to the clearing agency in order for the clearing agency to compare the trade, and ‘‘locked-in comparison,’’ where the trade is submitted as a compared trade to the clearing agency by one side or by one intermediary.4 Demand Comparison entails submission of trade data by approved intermediaries (e.g., brokers) called ‘‘Demand Trade Sources.’’ FICC deems a trade submitted for Demand Comparison to be compared upon FICC’s receipt of the trade data from the Demand Trade Source. However, if a dealer ‘‘does not know’’ a trade submitted on its behalf by a Demand Trade Source, the dealer is able to submit a DK (i.e., ‘‘don’t know’’) to the GSD. The receipt of a DK by FICC causes the demand comparison trade to 2 The Commission has modified the text of the summaries prepared by FICC. 3 Securities Exchange Act Release No. 44946 (October 17, 2001), 66 FR 53816 [File No. SR– GSCC–2001–01]. 4 A Treasury auction take-down trade is a typical example of a trade submitted for Locked-In Comparison. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 27873 no longer be deemed compared. In order to effect comparison for a demand comparison trade that has been DKed, the DK must be removed. If the member that sent the DK determines that it did so erroneously, the member is able to remove the DK so that the trade is compared.5 Modification of a DKed trade by the Demand Trade Source also removes the DK so that the trade is compared.6 The removal of the DK and modification of a DKed trade are subject to the prescribed time frames for Demand DK processing. 2. Proposal FICC’s current proposal is to mandate Demand Comparison for all blindbrokered repo trades that are submitted by 4 pm New York time. The GSD’s members acting as inter-dealer brokers for repos will be designated as approved Demand Trade Sources. Members on whose behalf the brokers submit trades will not need to separately authorize the brokers as their Demand Trade Sources for GSD’s purposes because GSD’s rules will do so. After approval of the rule change, counterparties to blind-brokered repo trades will still need to submit their trade data as they do currently. Dealers will need to monitor the broker submissions against them in order to submit DKs where necessary to block any further processing of the submission. In order to provide the dealer counterparties with adequate time by which to submit their DKs, especially for trades submitted close to the 4 p.m. deadline, GSD will create a 30 minute DK window following the 4 p.m. Demand Comparison submission deadline (until 4:30 p.m.) during which time the dealer counterparties can DK previously received demand trades; however, dealer counterparties will be able to submit DKs at any time during the Demand Comparison submission processing time frame. Under Demand Comparison processing, a dealer counterparty that does not submit a DK with respect to a blind-brokered repo trade submitted against it will be responsible for that trade. Blindbrokered repo trades submitted after the 4 pm deadline will be treated as trades submitted for ‘‘bilateral comparison’’ requiring two-sided submission and matching for comparison to occur. 5 Under this proposal to require Demand Comparison processing of blind-brokered repo trades, the cut-off time for removing DKs will be 8 pm New York time. 6 Under this proposal to require Demand Comparison processing of blind-brokered repo trades, the cut-off time for modifications by Demand Trade Sources will be 8:00 pm New York time. E:\FR\FM\14MYN1.SGM 14MYN1

Agencies

[Federal Register Volume 73, Number 94 (Wednesday, May 14, 2008)]
[Notices]
[Pages 27869-27873]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-10704]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57803; File No. SR-NASD-2005-114]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc. (n/k/a Financial Industry Regulatory Authority, Inc.); 
Order Approving Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 
Thereto and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 5 Relating to the Regulation of Compensation, Fees and 
Expenses in Public Offerings of Real Estate Investment Trusts and 
Direct Participation Programs

May 8, 2008.

I. Introduction

    On September 28, 2005, the National Association of Securities 
Dealers, Inc. (``NASD'') \1\ filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4 
thereunder,\3\ proposed amendments to NASD Rule 2810. On June 12, 2006, 
NASD filed Amendment No. 1 to the proposed rule change.\4\ The proposed 
rule change was published for comment in the Federal Register on July 
17, 2006 (``Original Proposal''),\5\ and the Commission received six 
comments.\6\
---------------------------------------------------------------------------

    \1\ On July 26, 2007, the Commission approved a proposed rule 
change filed by NASD to amend NASD's Certificate of Incorporation to 
reflect its name change to Financial Industry Regulatory Authority, 
Inc., or FINRA, in connection with the consolidation of the member 
firm regulatory functions of NASD and NYSE Regulation, Inc. See 
Securities Exchange Act Release No. 56146 (July 26, 2007), 72 FR 
42190 (Aug. 1, 2007).
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ Amendment No. 1 replaced and superseded the original rule 
filing.
    \5\ See Securities Exchange Act Release No. 54118 (July 10, 
2006), 71 FR 40569 (July 17, 2006) (SR-NASD-2005-114).
    \6\ See letters from the Committee on Federal Regulation of 
Securities of the American Bar Association (Keith F. Higgins), dated 
Aug. 22, 2006; North American Securities Administrators Association 
(Patricia D. Struck), dated Aug. 11, 2006; Dominion Investor 
Services, Inc. (Kevin P. Takacs), dated Aug. 7, 2006; Investment 
Program Association (Rosemarie Thurston), dated Aug. 7, 2006; the 
Securities Division of Office of the Secretary of the Commonwealth 
of Massachusetts (Bryan Lantagne), dated Aug. 4, 2006; and Cambridge 
Legacy Group (Frank Akridge, Jr.), dated Aug. 4, 2006.
---------------------------------------------------------------------------

    On April 16, 2007, NASD submitted Amendment No. 2 to the proposed 
rule change, and on November 9, 2007 and January 2, 2008, FINRA 
submitted Amendment No. 3 and No. 4, respectively, to the proposed rule 
change.\7\ The Commission published the proposed rule change, as 
amended, for comment in the Federal Register on January 31, 2008 
(``Revised Proposal''),\8\ and the Commission received six comments, 
which are discussed below in Section III.\9\ On April 11, 2008, FINRA 
submitted Amendment No. 5 to the proposed rule change.\10\
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    \7\ Each amendment replaced and superseded the earlier 
amendment. Amendment No. 4 also responded to comments on the 
Original Proposal.
    \8\ See Securities Exchange Act Release No. 57199 (Jan. 25, 
2008), 73 FR 5885 (Jan. 31, 2008) (SR-NASD-2005-114).
    \9\ See letters from R.J. O'Brien Fund Management, LLC (Annette 
A. Cazenave), dated Apr. 28, 2008 (``R.J. O'Brien''); Michael V. 
Scillia, ASG Securities, Inc., dated Feb. 24, 2008 (``Scillia''); 
Committee on Federal Regulation of Securities of the American Bar 
Association (Keith F. Higgins), dated Feb. 22, 2006 (``ABA 
Committee''); Snyder Kearney LLC, dated Feb. 21, 2008 (``Snyder''); 
David Lerner, David Lerner Associates, Inc., dated Feb. 21, 2008 
(``Lerner''); and Investment Program Association (Jack L. 
Hollander), dated Feb. 21, 2006 (``IPA'').
    \10\ Amendment No. 5 responded to comments on the Revised 
Proposal and proposed several amendments to the proposed rule 
change.
---------------------------------------------------------------------------

    This notice and order solicits comment from interested persons on 
Amendment No. 5 and approves the proposed rule change, as amended, on 
an accelerated basis. The text of the proposed rule change is available 
at https://www.finra.org, the principal offices of FINRA, and the 
Commission's Public Reference Room.

II. Description of the Proposed Rule Change

    As discussed in more detail in the Original Proposal and Revised 
Proposal, FINRA is proposing to amend NASD Rule 2810 to address the 
regulation of compensation, fees and expenses in public offerings of 
direct participation programs (as defined in NASD Rule 2810(a)(4)) 
(``DPPs'') and unlisted real estate investment trusts (as defined in 
NASD Rule 2340(d)(4)) (``REITs'') (collectively ``Investment 
Programs'').\11\ Specifically, the proposed rule change addresses: (1) 
Compensation limitations and the use and allocation of offering 
proceeds; (2) disclosure regarding the liquidity of prior programs 
offered by the same sponsor; (3) sales loads on reinvested dividends; 
and (4) non-cash compensation provisions regarding the appropriate 
location for training and education meetings. The proposed rule change 
also adds REITs to provisions that already apply to DPPs, but does not 
make any substantive changes to these sections.\12\
---------------------------------------------------------------------------

    \11\ The DPPs and REITs that comprise Investment Programs 
typically are structured so that several affiliated entities make up 
the program. The affiliated entities include the sponsor, the trust 
or limited partnership, and a broker-dealer.
    \12\ See proposed amendments to Rule 2810(b)(3)(A), Rule 
2810(b)(4)(A), Rule 2810(b)(4)(B)(v), Rules 2810(b)(4)(D)-(G) and 
Rule 2810(b)(5). The proposed amendment to Rule 2810(b)(4)(G) also 
corrects a typographical error by citing ``subparagraph (C),'' 
instead of ``subparagraph (E)'' under the existing rule.
---------------------------------------------------------------------------

III. Summary of Comments Received and FINRA Response

    In Amendment No. 5, FINRA responded to comments on the Revised 
Proposal and proposed additional amendments to the proposed rule 
change.

A. Registered Representatives Engaged in de minimis and Incidental 
Sales Activities

    The proposed amendment to Rule 2810(b)(4)(C)(ii)(c) would exclude 
from the underwriting compensation limit \13\ payments to registered 
representatives, including dual employees, engaged in the solicitation, 
marketing, distribution or sales of the offering whose functions in 
connection with that offering are solely and exclusively clerical and 
ministerial. The IPA suggested that this should be revised to permit a 
de minimis exception for payments to registered representatives whose 
functions are predominantly--i.e., at least 95 percent of the 
employee's time--clerical or ministerial, but who

[[Page 27870]]

on rare occasions may go beyond performing solely clerical and 
ministerial functions, such as answering questions.
---------------------------------------------------------------------------

    \13\ The underwriting compensation payable to underwriters, 
broker-dealers, or affiliates may not exceed ten percent of the 
gross proceeds of the offering, regardless of the source from which 
the compensation is derived. See current Rule 2810(b)(4)(B)(i) and 
Notice to Members 82-51. As explained in the Revised Proposal, the 
ten percent figure currently is FINRA policy. The proposed amendment 
to Rule 2810(b)(4)(B)(ii) would expressly state that all items of 
compensation shall not exceed ten percent of the gross proceeds of 
the offering.
---------------------------------------------------------------------------

    FINRA stated that the proposed amendment to Rule 
2810(b)(4)(C)(ii)(c)(2) was intended to achieve clarity and ease of 
administration by excluding only those registered representatives whose 
functions are ``solely and exclusively clerical and ministerial.'' In 
response to comments, FINRA has amended proposed Rule 
2810(b)(4)(C)(ii)(c)(3) to include registered representatives engaged 
in sales activities provided those activities are ``de minimis and 
incidental to his or her clerical or ministerial functions.'' However, 
FINRA stated that it did not intend to adopt a particular metric with 
respect to this exception, such as percentage of time spent, as it 
could serve as a tool to evade the purpose and spirit of the rule. 
FINRA stated that it expected the ``de minimis and incidental'' 
exception to be a very narrow one for registered persons whose sales 
activities are truly incidental to their job functions. FINRA noted 
that the exception in the proposed amendment to Rule 2810(b)(4)(D) for 
firms with ``ten or fewer registered representatives'' engaged in 
wholesaling is intended to apply to those firms that are most likely to 
have a need for personnel performing multiple functions.

B. Calculating Items of Underwriting Compensation

    Two commenters stated that proposed amendments to Rules 
2810(b)(4)(C)(ii)(a)-(c) could result in double counting certain items 
for purposes of the underwriting compensation limit.\14\ For example, 
these commenters stated that payments received by a member that would 
be counted as underwriting compensation under the proposed amendment to 
Rule 2810(b)(4)(C)(ii)(a) would have to be counted again for purposes 
of the proposed amendments to Rules 2810(b)(4)(C)(ii)(b)-(c) when the 
member re-allows the payments to its registered representatives.
---------------------------------------------------------------------------

    \14\ ABA Committee and IPA.
---------------------------------------------------------------------------

    FINRA responded that it did not intend that items of compensation 
already required to be counted under proposed amendments to Rule 
2810(b)(4)(C)(ii)(a) be double-counted for purposes of the underwriting 
compensation limit. In response to these comments, FINRA has revised 
the proposed amendments to Rules 2801(b)(4)(C)(ii)(b)-(c).\15\
---------------------------------------------------------------------------

    \15\ The ABA Committee also requested that the language in the 
proposed amendment to Rule 2810(b)(4)(B)(ii) be modified slightly to 
rearrange some commas and clarify that trail commissions are not 
paid with offering proceeds. FINRA has revised the text accordingly.
---------------------------------------------------------------------------

C. Allocation of Compensation to Dual Employees in Connection With More 
Than One Offering

    Two commenters addressed proposed guidance with respect to 
allocation of payments to dual employees for purposes of the 
underwriting compensation limit where the dual employees receive 
payments for services in connection with more than one offering.\16\ 
Footnote 36 of the Revised Proposal provided guidance (``Guidance'') 
\17\ that if a dual employee receives compensation for services 
provided in connection with more than one public offering, or for 
private placements in addition to offerings of Investment Programs, 
payments to such employees may be reasonably allocated between the 
offerings based on the time periods in which the employee was engaged 
in the offerings, if they are distinct, or based on the relative size 
of the offerings.
---------------------------------------------------------------------------

    \16\ ABA Committee and IPA.
    \17\ The Guidance appeared in the purpose section of the Revised 
Proposal and not the proposed rule text.
---------------------------------------------------------------------------

    The ABA Committee and IPA sought clarification as to whether the 
Guidance would apply only to dual employees to whom the exceptions from 
the underwriting compensation set forth in the proposed amendment to 
Rule 2810(b)(4)(D) are available. FINRA responded that its Corporate 
Financing Department (the ``Department'') will allocate compensation 
among multiple offerings with regard to all relevant payments and 
expenses, not just those for dual employees.
    The IPA also stated that the concepts addressed in the Guidance 
should be incorporated into the proposed amendments to Rule 2810 with 
general application to payments to dual employees among multiple 
offerings, not just the exceptions in Proposed Rule 2810(b)(4)(D). The 
ABA Committee suggested that the Guidance should allow the allocation 
of the salary of any registered representative.
    FINRA responded that it will continue its longstanding practice, 
with respect to a registered representative receiving compensation for 
services provided in connection with more than one public offering, or 
for private placements in addition to offerings of Investment Programs, 
of allowing payments to such registered representatives to be allocated 
between the offerings on a reasonable basis taking into account 
relevant factors, including the time periods spent on particular 
offerings, the relative sizes of the offerings and the number of 
investors in each. FINRA noted that, in the course of its review of 
particular offerings, information and representations by members with 
respect to such factors will vary. As a result, FINRA determined not to 
codify these factors and their respective weights in the proposed rule 
change, but rather will continue its current review practices that 
permit reasonable basis allocations.

D. Analysis of Employee Compensation

1. Per Employee Analysis in All Investment Programs
    The proposed amendment to Rule 2810(b)(4)(D) would have excepted 
from the underwriting compensation limit, subject to the Department's 
determination, some portion of the non-transaction-based payments to a 
registered representative dual employee of an Investment Program with 
``fewer than ten people engaged in wholesaling.'' The ABA Committee 
suggested that the exception should instead be available to smaller 
members that have fewer than ten registered representatives engaged in 
wholesaling with respect to an Investment Program in order to avoid the 
inclusion of persons who are not registered in the calculation.\18\
---------------------------------------------------------------------------

    \18\ The ABA Committee also stated that the rule should be 
amended to clarify that it applies to a dual employee of a ``member 
and the sponsor, issuer or other affiliate.''
---------------------------------------------------------------------------

    The IPA also asked FINRA to clarify the proposed rule to provide 
that in determining whether there are fewer than ten people engaged in 
wholesaling, only those persons engaged in wholesaling for a particular 
Investment Program should be counted, rather than all registered 
representatives who are employed by a sponsor or affiliate and engaged 
in wholesaling some other product of the sponsor or affiliate.
    The Revised Proposal explained that the Department would engage in 
the same detailed job function analysis with respect to certain 
compensation associated with smaller Investment Programs as it would 
with respect to certain compensation of the ten highest paid executives 
in any Investment Program. Accordingly, a member could provide detailed 
per-employee information to the Department from which the Department 
could conclude that certain salary and other non-

[[Page 27871]]

transaction-based compensation provided to the employee could be 
allocated to issuer expenses.
    In response to these comments, FINRA has amended the exception to 
clarify that for every program or REIT filed for review, the Department 
will engage in the detailed per-employee analysis. The proposed 
amendment to Rule 2810(b)(4)(D) would apply to ``ten or fewer 
registered representatives'' engaged in wholesaling if they are dual 
employees in a smaller Investment Program and to the ten highest paid 
executives in any Investment Program.\19\ FINRA also clarified that the 
rule would only apply to ``ten or fewer registered representatives [of 
an Investment Program] engaged in wholesaling.'' FINRA also clarified 
that the rule applied to a dual employee of a ``member and the sponsor, 
issuer or other affiliate.'' \20\
---------------------------------------------------------------------------

    \19\ The wholesaling exception discussed in the Revised Proposal 
would have been available to an Investment Program with ``fewer than 
ten people'' engaged in wholesaling. In response to comments, FINRA 
stated that allowing the exception for ``ten or fewer'' registered 
representatives rather than ``fewer than ten'' would be consistent 
with the goal of clarity and ease of administration.
    \20\ Telephone conversation among Gary Goldsholle, Vice 
President and Associate General Counsel, FINRA; Joseph Price, Vice 
President, Corporate Financing, FINRA; Adam Arkel, Assistant General 
Counsel, FINRA; Lourdes Gonzalez, Assistant Chief Counsel--Sales 
Practices, Commission; and Michael Hershaft, Special Counsel, 
Commission (May 7, 2008).
---------------------------------------------------------------------------

    The ABA Committee also suggested that the calculation of the number 
of persons engaged in wholesaling should only include those registered 
representatives directly contacting other members to solicit new 
selling agreements with respect to the specific Investment Program. 
FINRA disagreed. As discussed in the Revised Proposal, the Department 
expects to conduct accurate and efficient reviews of the individual's 
job functions to determine whether the exceptions in proposed amendment 
to Rule 2810(b)(4)(D) would be available. FINRA stated that it does not 
believe it is useful or appropriate to conduct a two-step analysis of 
each registered representative's functions (to analyze every registered 
representative's activities to determine whether ten or fewer were 
engaged in wholesaling with regard to a specific Investment Program, 
and then to analyze the job functions of up to ten registered 
representatives to determine what portion of payments to them should be 
included in the underwriting compensation calculation).
2. Top Ten Executives
    The proposed amendment to Rule 2810(b)(4)(D) would except from the 
underwriting compensation limit, subject to the Department's 
determination, some portion of the non-transaction-based payments to a 
registered representative dual employee who is one of the top ten 
highest paid executives based on non-transaction-based compensation in 
any Investment Program. The ABA Committee sought clarification as to 
whether the executives to whom this exception would be available must 
be registered representative dual employees. As discussed above, FINRA 
has amended the exception to make this clarification.
    Two commenters stated that the exception should not require that 
the dual employees must be executives or have executive titles.\21\ 
Further, both commenters suggested that the top-ten calculation should 
be based on non-transaction-based compensation ``in connection with'' 
an Investment Program.\22\
---------------------------------------------------------------------------

    \21\ ABA Committee and IPA.
    \22\ Id.
---------------------------------------------------------------------------

    FINRA responded that the term ``executive'' is not intended as a 
formal job designation or title, but rather as a characterization of 
the registered representative dual employee's role in the Investment 
Program. As explained in the Revised Proposal, the Department believes 
that it can identify and evaluate a small group of individuals 
performing executive job functions within an Investment Program. 
However, FINRA disagreed with the suggestion of amending the rule to 
base the top ten executive calculation on non-transaction-based 
compensation ``in connection with'' a particular Investment Program. As 
with firms with up to ten registered representatives engaged in 
wholesaling, FINRA does not believe it is useful or appropriate to 
conduct a two-step analysis for each executive (to determine the extent 
to which each executive's compensation varies and is attributable to 
particular programs in order to identify the relevant executives 
eligible for the exception, and then to determine what portion of 
payments to them should be included in the underwriting compensation 
calculation).

E. Issuer Expenses

1. Overhead Expenses
    Both the ABA Committee and the IPA stated that the proposed 
amendment to Rule 2810(b)(4)(C)(i) should be revised to clarify that 
issuer expenses, not just overhead expenses, that are reimbursed or 
paid for with offering proceeds must be included for purposes of the 
cap on organization and offering expenses. FINRA has revised the 
proposed amendment to Rule 2810(b)(4)(C)(i) to make this clarification.
2. Services for the Issuer
    The ABA Committee stated that the proposed amendment to Rule 
2810(b)(4)(C)(i)(c) should clearly specify the scope of services 
provided by employees or agents of the sponsor or issuer that must be 
included for purposes of the cap on organization and offering expenses. 
When proceeds of an offering are used to pay issuer expenses, these 
payments or reimbursements must be identified in filings with the 
Department. FINRA responded that if the rule limited the scope of 
payments that could be made to employees or agents of the sponsor or 
issuer for performing services for the issuer to only those activities 
specifically described in the rule, some otherwise legitimate payments 
or reimbursements using offering proceeds would be prohibited. 
Accordingly, FINRA has not revised the proposed amendments to Rule 
2810(b)(4)(C)(i)(c), other than to clarify that the proposed rule 
refers to services for the issuer.

F. Liquidity and Marketability Disclosure

    The IPA expressed concern that the proposed amendments to Rule 
2810(b)(3)(D) would impose upon members a burdensome due diligence 
review requirement with respect to the liquidity and marketability of 
an Investment Program. In its response, FINRA recognized the burdens 
associated with these requirements, but noted that the proposed 
amendment to Rule 2810(b)(3)(D) is intended to permit members to rely 
upon the liquidity and marketability information as provided to the 
member by the sponsor or general partner of an Investment Program, 
provided that the member does not know or have reason to know that the 
information is inaccurate. Accordingly, FINRA has not revised the 
proposed amendment to Rule 2810(b)(3)(D).

G. Reinvested Dividends

    One commenter expressed concern regarding the prohibition set forth 
in the proposed amendment to Rule 2810(b)(4)(B)(vi) against sales loads 
on reinvested dividends for Investment Programs.\23\ After considering 
the comment, FINRA determined to maintain the prohibition on sales 
loads on reinvested dividends. FINRA emphasized that commenters on the 
Original Proposal supported this

[[Page 27872]]

amendment \24\ and the amendment is intended to conform Rule 2810 to 
similar changes made to Rule 2830 with respect to sales loads on 
reinvested dividends for sales of mutual funds. Further, so as to avoid 
the indirect payment of sales loads on reinvested dividends for 
Investment Programs, FINRA has amended proposed Rule 2810(b)(4)(B)(ii) 
to clarify that the calculation of ``ten percent of the gross proceeds 
of the offering'' excludes securities purchased through the 
reinvestment of dividends.
---------------------------------------------------------------------------

    \23\ Lerner.
    \24\ Massachusetts Securities Division and NASAA.
---------------------------------------------------------------------------

H. Due Diligence Services

    One commenter sought guidance as to what levels of detail and 
itemization, as required by the proposed amendment to Rule 
2810(b)(4)(B)(vii), would be appropriate for an invoice prepared by a 
law firm conducting on behalf of a member due diligence services that 
are intended to be reimbursed as issuer expenses.\25\ FINRA responded 
that industry best practices may be effective in establishing a 
threshold for itemization rather than additional rulemaking. The 
commenter also sought guidance as to whether it would be permissible 
for the issuer or sponsor to reimburse the law firm directly, so that 
the member need not go through the extra step of first itself paying 
the law firm and then seeking reimbursement from the issuer or 
sponsor.\26\ FINRA responded that a law firm could not provide bona 
fide due diligence in an offering if its client was the issuer or 
sponsor rather than the broker-dealer. The method of reimbursement for 
due diligence services should be irrelevant so long as it does not 
undermine the law firm's duties to its client, the broker-dealer.\27\

IV. Solicitation of Comments
---------------------------------------------------------------------------

    \25\ Snyder.
    \26\ Id.
    \27\ FINRA also addressed two other comments. Scillia suggested 
that the five percent limitation on issuer expenses that currently 
exists in NASD Rule 2810 precludes offerings of smaller DPPs. FINRA 
disagreed with this comment. FINRA stated that the five percent 
limitation on issuer expenses pertains to the amount that may be 
used from offering proceeds. An issuer can spend additional funds 
from other sources. Thus, FINRA believes that the sponsor of a 
smaller DPP or REIT can absorb the higher fixed overhead costs owing 
to the small size of the offering. Finally, the five percent 
limitation on issuer expenses in the proposed rule change is not new 
and is consistent with the standards in existing NASD Rule 2810, 
which was approved by the SEC. See e-mail from Gary Goldsholle, Vice 
President and Associate General Counsel, FINRA, to Michael Hershaft, 
Special Counsel, Commission (May 7, 2008).
    With respect to the letter from R.J. O'Brien, FINRA stated that 
the comments were beyond the scope of the filing as the proposed 
rule change does not impose any new requirements with respect to 
commodity pool trail commissions. The issues raised in this letter 
were addressed by the SEC in an approval order issued in a prior 
rulemaking proceeding. See Securities Exchange Act Release No. 50335 
(Sept. 9, 2004), 69 FR 55855 (Sept. 16, 2004) (SR-NASD-2004-136). 
Id.
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 5, including whether Amendment No. 5 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASD-2005-114 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2005-114. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASD-2005-114 and should be 
submitted on or before June 4, 2008.

V. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the provisions of Section 15A(b)(6) of the 
Act,\28\ which require, among other things, that FINRA rules must be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest.\29\ The Commission notes 
that the proposed rule change would codify FINRA's longstanding policy 
of applying certain regulatory requirements in NASD Rule 2810 to REITs.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78o-3(b)(6).
    \29\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission believes that clarifying the standards for 
determining the fairness and reasonableness of compensation, treating 
the use and allocation of offering proceeds in a more explicit and 
objective manner, requiring disclosure regarding the liquidity of prior 
programs offered by the same sponsor, prohibiting sales loads on 
reinvested dividends and enabling bona fide training and education 
meetings to take place at appropriate locations, are measures designed 
to prevent fraudulent practices, promote just and equitable principles 
of trade, and protect investors and the public interest.

Accelerated Approval of Amendment No. 5

    The Commission finds good cause for approving Amendment No. 5 to 
the proposed rule change prior to the thirtieth day after the amendment 
is published for comment in the Federal Register pursuant to Section 
19(b)(2) of the Act. Amendment No. 5 clarifies several provisions of 
the proposed rule change, including calculating and allocating 
compensation, requiring issuer compensation to be included in the cap 
on organization and offering expenses, and providing greater 
specificity regarding the prohibition on sales loads on reinvested 
dividends. The Commission believes that these changes will provide 
greater clarity with respect to the applicability of and compliance 
with the proposed rule change, while continuing to protect investors 
and the public interest. Accordingly, the Commission finds that the 
accelerated approval of Amendment No. 5 is appropriate.

[[Page 27873]]

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\30\ that the proposed rule change, as amended (SR-NASD-2005-114), 
be, and hereby is, approved.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
---------------------------------------------------------------------------

    \31\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-10704 Filed 5-13-08; 8:45 am]
BILLING CODE 8010-01-P
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