<!DOCTYPE HTML PUBLIC "-//-//W3C//DTD HTML 3.2//EN">

<META name="generator" content="Microsoft Word - ICR_BurdenStatement_12-3-09.doc">
<META name="creation-date" content="03/12/2009 03:37:39 ">
<TITLE>Microsoft Word - ICR_BurdenStatement_12-3-09.doc</TITLE>

Information Collection Request
for UCMR 2
-- Renewal --
November 2009
David Munch and Brenda Parris
U.S. Environmental Protection Agency
Office of Ground Water and Drinking Water
26 West Martin Luther King Drive
Cincinnati, OH 45268

Information Collection Request for UCMR 2
November 2009
TABLE OF CONTENTS
— PART A OF THE SUPPORTING STATEMENT —
1 IDENTIFICATION OF THE INFORMATION COLLECTION ....................................... 1
1(a)
Title and Number of the Information Collection ........................................................ 1
1(b) Short Characterization ................................................................................................ 1
2 NEED FOR AND USE OF THE COLLECTION ............................................................... 3
2(a)
Need/Authority for the Collection .............................................................................. 3
2(b)
Practical Utility/Users of the Data .............................................................................. 4
3 NON-DUPLICATION, CONSULTATIONS AND OTHER COLLECTION CRITERIA 6
3(a) Non-duplication .......................................................................................................... 6
3(b)
Public Notice Required Prior to ICR Submission to OMB ........................................ 6
3(c) Consultations............................................................................................................... 6
3(d)
Effects of Less Frequent Collection............................................................................ 7
3(e) General Guidelines.................................................................................................... 10
3(f) Confidentiality .......................................................................................................... 11
3(g) Sensitive Questions................................................................................................... 11
4 RESPONDENTS AND THE INFORMATION ............................................................... 12
4(a)
Respondents and NAICS/SIC Codes........................................................................ 12
4(b) Information Requested.............................................................................................. 12
4(b)(i) Data Items.............................................................................................................. 12
4(b)(i)(a) Public Water System Reporting and Recordkeeping.................................... 12
4(b)(i)(b) State Reporting and Recordkeeping ............................................................. 14
4(b)(ii) Respondent Activities........................................................................................... 14
4(b)(ii)(a) Public Water System Activities ................................................................... 14
4(b)(ii)(b) State Activities............................................................................................. 16
5 INFORMATION COLLECTED–AGENCY ACTIVITIES, COLLECTION
METHODOLOGY, AND INFORMATION MANAGEMENT .............................................. 19
5(a) Agency Activities...................................................................................................... 19
5(a)(i) Regulatory Support Activities ............................................................................... 19
5(a)(ii) National and Regional Oversight/Data Analysis.................................................. 20
5(a)(iii) Costs for Small System Testing Program............................................................ 20
5(b) Information Collection Methodology and Management........................................... 21
5(c)
Small Entity Flexibility............................................................................................. 21
5(d) Collection Schedule .................................................................................................. 22
6 ESTIMATING THE BURDEN AND COST OF THE COLLECTION ........................... 24
6(a)
Estimating Burden and Cost to Public Water Systems............................................. 24
6(a)(i) Estimating Burden and Labor Costs...................................................................... 25
6(a)(i)(a) Reading the Regulations/Guidance Letter..................................................... 27
6(a)(i)(b) Monitoring Burden........................................................................................ 27
6(a)(i)(c) Reporting and Recordkeeping....................................................................... 28
6(a)(i)(d) Public Notification ........................................................................................ 29
i

Information Collection Request for UCMR 2
November 2009
6(a)(ii) Estimating Non-labor Costs.................................................................................. 29
6(a)(iii) Summary of Labor and Non-labor Costs to Public Water Systems .................... 31
6(b)
Estimating the Burden and Cost to States................................................................. 33
6(c)
Estimating Agency Burden and Cost........................................................................ 35
6(c)(i) Regulatory Support Activities ............................................................................... 36
6(c)(ii) National and Regional Oversight and Data Analysis ........................................... 37
6(c)(iii) Costs for Small System Testing Program............................................................ 37
6(c)(iv) Estimated Agency Cost and Burden.................................................................... 38
6(d)
Estimating the Respondent Universe and Total Burden and Costs .......................... 39
6(e)
Reasons for Change in Burden ................................................................................. 40
6(f) Burden Statement...................................................................................................... 41
— PART B OF THE SUPPORTING STATEMENT —
1 SURVEY OBJECTIVES, KEY VARIABLES, AND OTHER PRELIMINARIES ......... 45
1(a) Survey Objectives ..................................................................................................... 45
1(b) Key Variables............................................................................................................ 45
1(c) Statistical Approach.................................................................................................. 45
1(d) Feasibility.................................................................................................................. 45
2 SURVEY DESIGN........................................................................................................... 46
2(a)
Target Population and Coverage............................................................................... 46
2(b) Sample Design .......................................................................................................... 46
2(b)(i) Sampling Frame..................................................................................................... 46
2(b)(ii) Sample Size.......................................................................................................... 46
2(b)(iii) Stratification Variables........................................................................................ 46
2(b)(iv) Sampling Method ................................................................................................ 46
2(b)(v) Multi-Stage Sampling........................................................................................... 47
2(c) Precision Requirements ............................................................................................ 47
2(c)(i) Precision Targets ................................................................................................... 47
2(c)(ii) Nonsampling error................................................................................................ 47
2(d) Questionnaire Design................................................................................................ 47
3 PRETESTS AND PILOT TESTS ..................................................................................... 48
4 COLLECTION METHODS AND FOLLOW-UP............................................................ 49
4(a) Collection Methods................................................................................................... 49
4(b)
Survey Response and Follow-up .............................................................................. 49
5 ANALYZING AND REPORTING SURVEY RESULTS ............................................... 50
5(a) Data Preparation........................................................................................................ 50
5(b) Analysis..................................................................................................................... 50
5(c) Reporting Results...................................................................................................... 51
ii

Information Collection Request for UCMR 2
November 2009
— APPENDICES —
APPENDIX A: Relevant Authorities in the SDWA 1996 Amendments............................ A-1
APPENDIX B: Burden and Cost Exhibits for the Five-Year UCMR 2
Cycle of 2007-2011........................................................................................................ B-1
LIST OF EXHIBITS
Exhibit 1: UCMR 2 Contaminant List.......................................................................................... 13
Exhibit 2: Unregulated Contaminant Monitoring Reporting Requirements................................. 13
Exhibit 3: Time Line of UCMR Activities ................................................................................... 20
Exhibit 4: Systems to Participate in UCMR 2 Monitoring (January 2008-December 2010) ....... 25
Exhibit 5: UCMR 2 Sampling Activity Time Line for Cost and Burden Estimations ................. 26
Exhibit 6: Labor Rates Applied for Public Water Systems .......................................................... 27
Exhibit 7: Analytical Method Cost Estimates............................................................................... 30
Exhibit 8a: Yearly Cost to Systems, by System Size and by Type of Cost (2010-2012)............. 32
Exhibit 8b: Per System (Respondent) and Per Respondent UCMR Costs (2010-2012) .............. 33
Exhibit 9: Number of States in Each Size Category (State Resource Model Assumptions) ........ 34
Exhibit 10a: Yearly Cost and Burden to States for Implementation of UCMR (2010-2012) ...... 35
Exhibit 10b: Per State (Respondent) and Per Response UCMR Costs (2010-2012).................... 35
Exhibit 11a: Yearly Cost to EPA for UCMR Implementation, by Type of Cost (2010-2012) .... 38
Exhibit 11b: Summary of EPA Burdens and Costs for UCMR Implementation (2010-2012) .... 39
Exhibit 12: UCMR 2 National Cost Summary for the ICR period (2010-2012).......................... 40
Exhibit 13: UCMR 2 Per Respondent Burden and Cost Summary for the
ICR Period (2010-2012) .......................................................................................................... 42
Exhibit B-1a: Yearly Cost to Systems, by System Size and by Type of Cost (2007-2011)....... B-1
Exhibit B-1b: Per System (Respondent) and Per Response UCMR Costs (2007-2011)............ B-2
Exhibit B-2a: Yearly Cost and Burden to States for Implementation of UCMR (2007-2011) .. B-2
Exhibit B-2b: Per State (Respondent) and Per Response UCMR Costs (2007-2011)................ B-2
Exhibit B-3a: Yearly Cost to EPA for UCMR Implementation, by Type of Cost (2007-2011) B-3
Exhibit B-3b: Summary of EPA Burdens and Costs for UCMR Implementation (2007-2011) B-4
Exhibit B-4: National Cost Summary for UCMR 2 Implementation (2007-2011) .................... B-4
Exhibit B-5: UCMR 2 Per Respondent Burden and Cost Summary (2007-2011) ..................... B-5
iii

Information Collection Request for UCMR 2
November 2009
iv
ACRONYMS
ASDWA
Association of State Drinking Water Administrators
CCL
Contaminant Candidate List
CCR
Consumer Confidence Report
CFR
Code of Federal Regulations
CWS
Community Water System
DBP
Disinfection Byproduct
DBPR
Stage 1 Disinfection Byproducts Rule
DSMRT
Distribution System Maximum Residence Time
EPA
Environmental Protection Agency
EPTDS
Entry Point to the Distribution System
FR
Federal Register
FTE
Full Time Equivalent
GS
General Schedule
GWUDI
Ground Water under the Direct Influence of Surface Water
ICR
Information Collection Request
LCMRL
Lowest Concentration Minimum Reporting Level
MCL
Maximum Contaminant Level
MCLG
Maximum Contaminant Level Goal
MRL
Minimum Reporting Level
NAICS  North American Industry Classification System
NCOD
National Contaminant Occurrence Database
NPDWR
National Primary Drinking Water Regulation
NTNCWS
Non-transient Non-community Water System
OMB
Office of Management and Budget
OW
Office of Water
PA
Partnership Agreement
PT
Proficiency Testing
PWS
Public Water System
PWSID
Public Water System Identification
QA/QC
Quality Assurance/Quality Control
RFA
Regulatory Flexibility Act
SBA
Small Business Administration
SDWA
Safe Drinking Water Act
SRF
State Revolving Fund
UCMR
Unregulated Contaminant Monitoring Regulation

Information Collection Request for UCMR 2
November 2009
1
— PART A OF THE SUPPORTING STATEMENT —
1
IDENTIFICATION OF THE INFORMATION COLLECTION
1(a)
Title and Number of the Information Collection
Title:
Unregulated Contaminant Monitoring In Public Water
Systems (UCMR 2) (Renewal)
OMB Control Number:
2040-0270
EPA Tracking Number:
2192.03
1(b) Short Characterization
Section 1445(a)(2) of the Safe Drinking Water Act (SDWA), as amended in 1996,
requires that once every 5 years, beginning in August 1999, the United States Environmental
Protection Agency (EPA) issue a new list of no more than 30 contaminants to be monitored, and
procedures for placement of the monitoring data in the National Contaminant Occurrence
Database (NCOD). EPA’s program must also include a nationally “representative sample of
systems serving 10,000 or fewer persons” that will be required to monitor, and a frequency and
schedule for monitoring.
EPA published the revisions to the Unregulated Contaminant Monitoring Regulation
(UCMR) for public water systems (PWSs) on September 17, 1999 (64 FR 50556).
1
This revised
regulation included programmatic changes, and provided a list of contaminants for which
monitoring was required or would be required in the future.  UCMR 1 established a three-tiered
approach for monitoring contaminants based on the availability of analytical methods and
contaminant properties.
EPA developed a contaminant list and sampling design for the second UCMR cycle (i.e.,
UCMR 2) of 2007-2011. The rule for UCMR 2 (published January 4, 2007 (72 FR 367)) builds
on the established structure of UCMR 1 and makes some changes to the rule design. UCMR 2
monitoring takes place from January 2008 through December 2010. The applicable Information
Collection Request (ICR) period is 2010-2012. Estimates of implementation burden and cost
over the entire five-year UCMR 2 cycle of 2007-2011 are attached as Appendix B to this ICR.
Note that the complete five-year UCMR 2 cycle of 2007-2011 overlaps with the applicable ICR
renewal period only during 2010 and 2011. Moreover, PWSs will only be involved in active
monitoring during 2010 (i.e., one-third of this ICR period).
Assessment Monitoring, the largest in scale of the three UCMR monitoring components,
is being conducted from January 2008 through December 2010 by 800 systems serving 10,000 or
fewer people (hereafter referred to as small systems), and by all systems serving 10,001 and over
1
Transient non-community water systems and those systems that purchase all of their water from another
PWS are excluded from regulation.

Information Collection Request for UCMR 2
November 2009
2
people, for 10 “List 1” contaminants. Under Assessment Monitoring, contaminants for which
standard analytical techniques are available are monitored to assess national occurrence in
drinking water. The Screening Survey (for 15 “List 2” contaminants) is being conducted from
January 2008 through December 2010 by 800 systems serving 100,000 or fewer people, and all
systems serving more than 100,000 people (407 systems). Small systems will not be subject to
more than one component of UCMR 2 monitoring. For cost estimation and scheduling purposes,
EPA assumes that approximately one-third of systems will monitor during each of the three
monitoring years (2008 - 2010); thus, two-thirds of all systems required to conduct UCMR 2
monitoring were assumed to monitor during the first UCMR 2 ICR period of 2007-2009, and
one-third of systems required to conduct UCMR 2 monitoring are assumed to monitor during the
second UCMR 2 ICR period of 2010-2012.
Respondents to UCMR 2 include 1,280 small water systems (800 for Assessment
Monitoring, and 480 for the Screening Survey), the 3,633 large and very large PWSs, and the 56
States and primacy agents (referred to collectively as “States” for simplicity in this document),
for a total of 4,969 respondents (over the UCMR 2 implementation period of 2007-2011). The
frequency of response varies across respondents and years.
Small systems (those serving 10,000 or fewer) that are selected for UCMR 2 monitoring
will sample an average of 2.7 times per system (i.e., number of responses per system) across the
three-year ICR renewal period of 2010-2012. The average total burden per response for small
systems is estimated to be 1.8 hours. Large systems (those serving 10,001 to 100,000) and very
large systems (those serving more than 100,000) will sample and report an average of 3.1 and 3.6
times per system, respectively, across the three-year ICR period of 2010-2012. The average total
burdens per response for large and very large systems are estimated to be 3.8 and 8.7 hours,
respectively. The larger burden per response for the very large systems reflects the fact that these
systems typically have more sampling locations than large systems. States are assumed to incur 2
responses over the three-year ICR period related to coordination with EPA and systems, with an
average burden per response of 95.2 hours. In aggregate, during the ICR period of 2010-2012,
the average response (e.g., responses from systems and States) is associated with a total burden
of 5.8 hours, with a labor plus non-labor cost of $1,939 per response.
The annual average per respondent burden hours and costs for the ICR period of 2010-
2012 are: small systems — 1.6 hour burden at $44 for labor; large systems — 3.8 hours at $114
for labor, and $1,747 for analytical costs; very large systems — 10.4 hours at $369 for labor, and
$7,260 for analytical costs; and States — 63.5 hours at $3,499 for labor. Annual average burden
and cost per respondent (including both systems and States) is estimated to be 5.8 hours, with a
labor plus non-labor cost of $1,919 per respondent (note that small systems do not pay for testing
costs, so they only incur labor costs). The total annual burden for the ICR reporting period of
2010-2012 is 9,761 (with a labor cost of $387,096); the total annual analytical cost is $2.86
million.
The Agency estimates the annual burden to EPA for UCMR program activities during the
ICR years of 2010-2012 to be 5,720 hours, at an annual labor cost of $0.4 million. EPA’s annual
non-labor costs are estimated to be $1.1 million. Non-labor costs are primarily attributed to the
cost of sample testing for small systems (testing is just under 95 percent of non-labor).

Information Collection Request for UCMR 2
November 2009
3
2
NEED FOR AND USE OF THE COLLECTION
2(a) Need/Authority for the Collection
The information collected under this action is required by EPA to carry out its regulatory
development responsibilities under SDWA section 1445(a)(2), Monitoring Program for
Unregulated Contaminants. This section, as amended in 1996, requires that once every 5 years,
beginning in August 1999, the Agency issue a new list of no more than 30 contaminants to be
monitored, and procedures for placement of the monitoring data in NCOD. EPA’s program must
also include a nationally “representative sample of systems serving 10,000 or fewer persons” that
will be required to monitor, and a frequency and schedule for monitoring.
Section 1412(b)(4) of SDWA, as amended in 1996, requires EPA to promulgate
maximum contaminant level goals (MCLGs) and promulgate National Primary Drinking Water
Regulations (NPDWRs) for contaminants that: may have adverse human health effects; are
known to or anticipated to occur in PWSs; or, in the opinion of the Administrator, present an
opportunity for reducing health risks. The NPDWRs specify maximum contaminant levels
(MCLs) or treatment techniques for drinking water contaminants (42 USC 300g-1). An MCL
must be set as close to the MCLG as possible. NPDWRs apply to PWSs (42 USC 300f(1)(A)).
Section 1412(b)(1) requires the Agency to develop a list of unregulated contaminants for
regulatory consideration (i.e., the candidate contaminant list (CCL)), to issue regulations that
establish criteria for listing contaminants, and to carry out the UCMR Program. The Agency was
required to issue the list of contaminants by August 1999, and every 5 years thereafter.
Section 1445(a)(1) of the Act requires each PWS to “establish and maintain such records,
make such reports, conduct such monitoring, and provide such information as the Administrator
may reasonably require by regulation to assist him in establishing regulations, [or] ... in
evaluating the health risks of unregulated contaminants ...”. This section authorizes EPA to
require systems to monitor, provide the Agency with these data, and to maintain records of this
information.
In addition, section 1401(1)(d) of the SDWA 1996 Amendments defines NPDWRs to
include “criteria and procedures to assure a supply of drinking water which dependably complies
with such maximum contaminant levels; including accepted methods for quality control and
testing procedures ...”. This section authorizes EPA to require systems and laboratories to use
Agency-approved methods and quality assurance criteria for collecting and analyzing water
samples.
The sections from the SDWA 1996 Amendments, discussed above, are included as
Appendix A of this document, in order by section number.

Information Collection Request for UCMR 2
November 2009
4
2(b)
Practical Utility/Users of the Data
The unregulated contaminant monitoring data collected under the rule will be used to
support: (1) the development and interactive evolution of the CCL; (2) the Administrator’s
determination of whether to regulate a contaminant; and (3) regulation development. In addition,
if the contaminant has significant occurrence and health effects, EPA will use the results: as part
of an exposure assessment; for establishing the baseline for health effects and economic
analyses; for contaminant co-occurrence analysis; and for treatment technology evaluation,
including contaminant source management. Further, the results may suggest that the occurrence
of certain contaminants may be significant enough to initiate research on health effects and
treatment technology. Finally, the data may guide future source water protection efforts.
System-level records of the analytical results of this monitoring will be maintained by
each PWS. EPA-approved laboratories will report these results to EPA’s electronic data
reporting system. PWSs will review the information posted by the laboratory and submit the
approved data to the State and EPA, via the electronic reporting system.
The data collected through the UCMR program is being stored in the NCOD to facilitate
analysis and review of contaminant occurrence, to guide the development of the CCL process,
and to support the Administrator’s determination of whether or not to regulate a contaminant in
the interest of protecting public health.
The primary user of the information collected under this ICR will be EPA’s Office of
Water (OW). Other users of this information may include the following:
•
Primacy agencies, which include State regulators, Indian Tribes, and, in some instances,
EPA Regional Administrators
•
PWS managers
•
Staff from other EPA programs (such as Comprehensive Environmental Response,
Compensation, and Liability Act; the Resource Conservation and Recovery Act; and the
Office of Enforcement and Compliance Assurance)
•
Federal Emergency Management Administration
•
Centers for Disease Control and Prevention
•
Military bases
•
Rural Development Administration/Farmers Home Administration
•
Department of Interior
•
Department of Housing and Urban Development
•
United States Army Corps of Engineers
•
White House task forces
•
American Water Works Association
•
Association of Metropolitan Water Agencies
•
National Rural Water Association
•
National Association of Water Companies
•
Association of State Drinking Water Administrators (ASDWA)
•
Natural Resources Defense Council
•
Consumers Federation of America
•
Small Business Administration
•
Other environmental and industry groups

Information Collection Request for UCMR 2
November 2009
5
•
News organizations
•
Private industries
•
Individuals.

Information Collection Request for UCMR 2
November 2009
6
3
NON-DUPLICATION, CONSULTATIONS AND OTHER
COLLECTION CRITERIA
3(a) Non-duplication
The data required by UCMR are not available from any other source and are not
duplicative of information otherwise accessible to EPA. With public health protection as its top
priority, EPA drew upon several different sources in developing the UCMR 2 contaminant list.
In the early stages of list development, EPA began by identifying a broad list of over 200
contaminants. These contaminants were: (1) UCMR “reserved” contaminants (i.e., those
identified as priorities under UCMR 1 but reserved for later monitoring because methods were
not yet available); (2) contaminants on the first CCL (either deferred pesticides for which
additional information was needed or suspected endocrine disruptors); or (3) other emerging
contaminants (those identified as probable carcinogens or those that could be identified by
analytical methods used in measuring other priority UCMR contaminants). EPA pared down the
list based on previously established priorities, health effects, and the availability of an analytical
method and analytical reference standard.
3(b)
Public Notice Required Prior to ICR Submission to OMB
This ICR document supports the first Federal Register notice which requests public


[Federal Register: August 23, 2010 (Volume 75, Number 162)]
[Notices]
[Page 51832]
[DOCID:fr23au10-90]

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF HOMELAND SECURITY

Federal Emergency Management Agency

[Internal Agency Docket No. FEMA-3311-EM; Docket ID FEMA-2010-0002]

Rhode Island; Amendment No. 4 to Notice of an Emergency
Declaration

AGENCY: Federal Emergency Management Agency, DHS.

ACTION: Notice.

-----------------------------------------------------------------------

SUMMARY: This notice amends the notice of an emergency declaration for
the State of Rhode Island (FEMA-3311-EM), dated March 30, 2010, and
related determinations.

DATES: Effective Date: July 29, 2010.

FOR FURTHER INFORMATION CONTACT: Peggy Miller, Recovery Directorate,
Federal Emergency Management Agency, 500 C Street, SW., Washington, DC
20472,<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: Notice is hereby given that, pursuant to the
Supplemental Appropriations Act, 2010, Public Law 111-212, FEMA is
amending the cost-sharing arrangement concerning Federal funds provided
under the authority of the Robert T. Stafford Disaster Relief and
Emergency Assistance Act, 42 U.S.C. 5140b, 5172, and 5123 for the
emergency declared on March 30, 2010, for the State of Rhode Island due
to the damage resulting from severe storms and flooding. The Rhode
Island emergency declaration is amended as follows:

    Federal funds for emergency protective measures (Category B),
limited to direct Federal assistance, under the Public Assistance
program provided under this declaration are authorized at 90 percent
of total eligible costs.

(The following Catalog of Federal Domestic Assistance Numbers (CFDA)
are to be used for reporting and drawing funds: 97.030, Community
Disaster Loans; 97.031, Cora Brown Fund; 97.032, Crisis Counseling;
97.033, Disaster Legal Services; 97.034, Disaster Unemployment
Assistance (DUA); 97.046, Fire Management Assistance Grant; 97.048,
Disaster Housing Assistance to Individuals and Households in
Presidentially Declared Disaster Areas; 97.049, Presidentially
Declared Disaster Assistance--Disaster Housing Operations for
Individuals and Households; 97.050, Presidentially Declared Disaster
Assistance to Individuals and Households--Other Needs; 97.036,
Disaster Grants--Public Assistance (Presidentially Declared
Disasters); 97.039, Hazard Mitigation Grant.)

W. Craig Fugate,
Administrator, Federal Emergency Management Agency.
[FR Doc. 2010-20777 Filed 8-20-10; 8:45 am]
BILLING CODE 9111-23-P


[Federal Register: January 31, 2008 (Volume 73, Number 21)]
[Notices]
[Page 5885-5892]
[DOCID:fr31ja08-108]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57199; File No. SR-NASD-2005-114]

Self-Regulatory Organizations; National Association of Securities
Dealers, Inc. (n/k/a Financial Industry Regulatory Authority, Inc.);
Notice of Filing of Proposed Rule Change and Amendment Nos. 1, 2, 3 and
4 Relating to the Regulation of Compensation, Fees and Expenses in
Public Offerings of Real Estate Investment Trusts and Direct
Participation Programs

January 25, 2008.
    On September 28, 2005, pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ the National Association of Securities Dealers, Inc.
(``NASD'') \3\ filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') 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, which are discussed below in section
II.\6\ On April 16, 2007, NASD filed

Amendment No. 2.\7\ On November 9, 2007, FINRA filed Amendment No.
3.\8\ On January 2, 2008, FINRA filed Amendment No. 4 to respond to the
comments, and to make revisions to the rule change as described in
Items I, II, and III below, which Items have been prepared by FINRA.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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
Exchange Act Release No. 56146 (July 26, 2007), 72 FR 42190 (Aug. 1,
2007).
    \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 (``ABA Committee''); North American Securities
Administrators Association (Patricia D. Struck), dated Aug. 11, 2006
(``NASAA''); Dominion Investor Services, Inc. (Kevin P. Takacs),
dated Aug. 7, 2006; Investment Program Association (Rosemarie
Thurston), dated Aug. 7, 2006 (``IPA''); the Securities Division of
Office of the Secretary of the Commonwealth of Massachusetts (Bryan
Lantagne), dated Aug. 4, 2006 (``Massachusetts Securities
Division''); and Cambridge Legacy Group (Frank Akridge, Jr.), dated
Aug. 4, 2006.
    \7\ Amendment No. 2 replaced and superseded Amendment No. 1.
    \8\ Amendment No. 3 replaced and superseded Amendment No. 2.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    FINRA is proposing to amend NASD Rule 2810 to address the
regulation of compensation, fees and expenses in public offerings of
direct participation programs and real estate investment trusts. Below
is the text of the proposed rule change. Proposed new language is in
italics; proposed deletions are in brackets.
* * * * *

2810. Direct Participation Programs

    (a) No Change.
    (b) Requirements.
    (1) Application.
    No member or person associated with a member shall participate in a
public offering of a direct participation program, [or] a limited
partnership rollup transaction or, where expressly provided below, a
real estate investment trust as defined in Rule 2340(d)(4) (``REIT''),
except in accordance with this paragraph (b), provided however, this
paragraph (b) shall not apply to an initial or secondary public
offering of or a secondary market transaction in a unit, depositary
receipt or other interest in a direct participation program that
complies with subparagraph (2)(D).
    (2) No Change.
    (3) Disclosure.
    (A) Prior to participating in a public offering of a direct
participation program or REIT, a member or person associated with a
member shall have reasonable grounds to believe, based on information
made available to him by the sponsor through a prospectus or other
materials, that all material facts are adequately and accurately
disclosed and provide a basis for evaluating the program.
    (B) through (C) No Change.
    (D) Prior to executing a purchase transaction in a direct
participation program or a REIT, a member or person associated with a
member shall inform the prospective participant of all pertinent facts
relating to the liquidity and marketability of the program or REIT
during the term of the investment[;]. Included in the pertinent facts
shall be information regarding whether the sponsor has offered prior
programs or REITs in which disclosed in the offering materials was a
date or time period at which the program or REIT might be liquidated,
and whether the prior program(s) or REIT(s) in fact liquidated on or
around that date or during the time period. [provided, however, that
paragraph (b) shall not apply to an initial or secondary public
offering of a secondary market transaction in a unit, depositary
receipt or other interest in a direct participation program which
complies with subparagraph (2)(D).]
    (4) Organization and Offering Expenses.
    (A) No member or person associated with a member shall underwrite
or participate in a public offering of a direct participation program
or REIT if the organization and offering expenses are not fair and
reasonable, taking into consideration all relevant factors.
    (B) In determining the fairness and reasonableness of organization
and offering expenses that are deemed to be in connection with or
related to the distribution of the public offering for purposes of
subparagraph (A) hereof, the arrangements shall be presumed to be
unfair and unreasonable if:
    (i) Organization and offering expenses, as defined in subparagraph
(b)(4)(C), in which a member or an affiliate of a member is a sponsor
exceed an amount that equals fifteen percent of the gross proceeds of
the offering;
    [(i)] (ii) The total amount of all items of compensation from
whatever source, including offering proceeds and ``trail commissions''
payable to underwriters, broker/dealers, or affiliates thereof, [which
are deemed to be in connection with or related to the distribution of
the public offering,] exceeds an amount that equals ten percent of the
gross proceeds of the offering [currently effective compensation
guidelines for direct participation programs published by the
Association];[\*\]
    [(ii) Organization and offering expenses paid by a program in which
a member or an affiliate of a member is a sponsor exceed currently
effective guidelines for such expenses published by the
Association;\**\]
    (iii) No Change.
    (iv) Commissions or other compensation are to be paid or awarded
either directly or indirectly, to any person engaged by a potential
investor for investment advice as an inducement to such advisor to
advise the purchaser of interests in a particular program or REIT,
unless such person is a registered broker/dealer or a person associated
with such a broker/dealer; [or]
    (v) The program or REIT provides for compensation of an
indeterminate nature to be paid to members or persons associated with
members for sales of the program [units] or REIT, or for services of
any kind rendered in connection with or related to the distribution
thereof, including, but not necessarily limited to, the following: a
percentage of the management fee, a profit sharing arrangement,
brokerage commissions, an[d] over-riding royalty interest, a net
profits interest, a percentage of revenues, a reversionary interest, a
working interest, a security or right to acquire a security having an
indeterminate value, or other similar incentive items; [provided
however, that an arrangement which provides for continuing compensation
to a member or person associated with a member in connection with a
public offering shall not be presumed to be unfair and unreasonable if
all of the following conditions are satisfied:]
    [a. The continuing compensation is to be received only after each
investor in the program has received cash distributions from the
program aggregating an amount equal to his cash investment plus a six
percent cumulative annual return on his adjusted investment;]
    [b. The continuing compensation is to be calculated as a percentage
of program cash distributions;]
    [c. The amount of continuing compensation does not exceed three
percent for each one percentage point that the total of all
compensation pursuant to subparagraph (B)(i) received at the time of
the offering and at the time any installment payment is made fall below
nine percent; provided, however, that in no event shall the amount of
continuing compensation exceed 12 percent of program cash
distributions; and]
    [d. If any portion of the continuing compensation is to be derived
from the limited partners' interest in the program cash distributions,
the percentage of the continuing compensation shall be no greater than
the percentage of program cash distributions to which limited partners
are entitled at the time of the payment.]
    (vi) The program or REIT charges a sales load or commission on
securities that are purchased through the reinvestment of dividends,
unless the registration statement registering the securities under the
Securities Act of 1933 became effective prior to [the

effective date of this proposed rule change]; or
    (vii) The member has received reimbursement for due diligence
expenses that are not included in a detailed and itemized invoice,
unless the amount of the reimbursement is included in the calculation
of underwriting compensation as a non-accountable expense allowance,
which when aggregated with all other such non-accountable expenses,
does not exceed three percent of offering proceeds.
    (C) The organization and offering expenses subject to the
limitations in subparagraph (b)(4)(B)(i) above include the following:
    (i) Issuer expenses, including overhead expenses that are
reimbursed or paid for with offering proceeds, which include, but are
not limited to, expenses for:
    a. Assembling, printing and mailing offering materials, processing
subscription agreements, generating advertising and sales materials;
    b. Legal and accounting services provided to the sponsor or issuer;
    c. Salaries and non-transaction-based compensation paid to
employees or agents of the sponsor or issuer for performing services
for the sponsor or issuer;
    d. Transfer agents, escrow holders depositories, engineers and
other experts, and
    e. Registration and qualification of securities under federal and
state law, including taxes and fees and NASD fees;
    (ii) Underwriting compensation, which includes but is not limited
to items of compensation listed in Rule 2710(c)(3) including payments:
    a. To any wholesaling or retailing firm that is engaged in the
solicitation, marketing, distribution or sales of the program or REIT
securities;
    b. To any registered representative of a member who receives
transaction-based compensation in connection with the offering;
    c. To any registered representative who is engaged in the
solicitation, marketing, distribution or sales of the program or REIT
securities, other than one whose functions in connection with the
offering are solely and exclusively clerical or ministerial; or
    d. For training and education meetings, legal services provided to
a member in connection with the offering, advertising and sales
material generated by the member and contributions to conferences and
meetings held by non-affiliated members for their registered
representatives.
    (iii) Due diligence expenses incurred when a member affirmatively
discharges its responsibilities to ensure that all material facts
pertaining to a program or REIT are adequately and accurately disclosed
in the offering document.
    (D) Notwithstanding subparagraphs (b)(4)(C)(ii)b. and c. above,
information may be provided to NASD from which the Corporate Financing
Department can readily determine that some portion of a registered
representative's non-transaction based compensation should not be
deemed to be underwriting compensation if the registered representative
is either: a dual employee of a program or REIT with fewer than ten
people engaged in wholesaling; or a dual employee who is one of the top
ten highest paid executives based on non-transaction based compensation
in any program or REIT.
    [(C)] (E) All items of compensation paid by the program or REIT
directly or indirectly from whatever source to underwriters, brokers/
dealers, or affiliates thereof, including, but not limited to, sales
commissions, wholesaling fees, due diligence expenses, other
underwriter's expenses, underwriter's counsel's fees, securities or
rights to acquire securities, rights of first refusal, consulting fees,
finder's fees, investor relations fees, and any other items of
compensation for services of any kind or description, which are deemed
to be in connection with or related to the public offering, shall be
taken into consideration in computing the amount of compensation for
purposes of determining compliance with the provisions of subparagraphs
(A) and (B).
    [(D)] (F) The determination of whether compensation paid to
underwriters, broker/dealers, or affiliates thereof is in connection
with or related to a public offering, for purposes of this subparagraph
(4), shall be made on the basis of such factors as the timing of the
transaction, the consideration rendered, the investment risk, and the
role of the member or affiliate in the organization, management and
direction of the enterprise in which the sponsor is involved.
    (i) An affiliate of a member which acts or proposes to act as a
general partner, associate general partner, or other sponsor of a
program or REIT shall be presumed to be bearing investment risk for
purposes of this paragraph (b) if the affiliate:
    a. Through b. No Change.
    c. Has a net worth equal to at least five percent of the net
proceeds of the public offering or $1.0 million, whichever is less;
provided, however, that the computation of the net worth shall not
include an interest in the program offered but may include net worth
applied to satisfy the requirements of this paragraph (b) with respect
to other programs or REITs; and
    d. Agrees to maintain net worth as required by subparagraph c.
above under its control until the earlier of the removal or withdrawal
of the affiliate as a general partner, associate general partner, or
other sponsor, or the dissolution of the program or REIT.
    (ii) No Change.
    [(E)](G) Subject to the limitations on direct and indirect non-cash
compensation provided under subparagraph [(E)](C), no member shall
accept any cash compensation unless all of the following conditions are
satisfied:
    (i) Through (v) No Change.
    (5) Valuation for Customer Account Statements.
    No member may participate in a public offering of direct
participation program or REIT securities unless[:]
    [(A)] The general partner or sponsor of the program will disclose
in each annual report distributed to investors pursuant to Section
13(a) of the Act a per share estimated value of the direct
participation program securities, the method by which it was developed,
and the date of the data used to develop the estimated value.
    (6) No Change.
    (c) Non-Cash Compensation.
    (1) No Change.
    (2) Restriction on Non-Cash Compensation.
    In connection with the sale and distribution of direct
participation program or REIT securities, no member or person
associated with a member shall directly or indirectly accept or make
payments or offers of payments of any non-cash compensation, except as
provided in this provision. Non-cash compensation arrangements are
limited to the following:
    (A) Through (B) No Change.
    (C) Payment or reimbursement by offerors in connection with
meetings held by an offeror or by a member for the purpose of training
or education of associated persons of a member, provided that:
    (i) No Change.
    (ii) The location is appropriate to the purpose of the meeting,
which shall mean a United States [an] office of the offeror or the
member holding the meeting, or a facility located in the vicinity of
such office, or a United States regional location with respect to
meetings of associated persons who work within that region or, with
respect to [regional] meetings with direct participation programs or
REITs, a United States location at which a

significant or representative asset of the program or REIT is located;
    (iii) Through (iv) No Change.
    (D) Through (E) No Change.
    (d) No Change.

    [* A guideline for underwriting compensation of ten percent of
proceeds received, plus a maximum of 0.5% for reimbursement of bona
fide diligence expenses was published in Notice to Members 82-51
(October 19, 1982).]
    [** A guideline for organization and offering expenses of 15
percent proceeds received was published in Notice to Members 82-51
(October 19, 1982).]
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA 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. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA is proposing to amend Rule 2810 to address the regulation of
compensation, fees and expenses in public offerings of direct
participation programs (as defined in Rule 2810(a)(4)) (``DPPs'') and
unlisted real estate investment trusts (as defined in Rule 2340(d)(4))
(``REITs'') (collectively ``Investment Programs'').\9\ 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, however, these amendments do not make any substantive
changes to these sections.\10\
---------------------------------------------------------------------------

    \9\ 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.
    \10\ 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 to ``subparagraph (C),''
instead of ``subparagraph (E)'' under the existing rule.
---------------------------------------------------------------------------

a. Organization and Offering Expenses
    Rule 2810 provides three limitations on compensation and offering
expenses (``O & O expenses'') in Investment Programs. In the current
rule, as interpreted by NASD compensation guidelines, these expenses
are broken down into three categories: ``compensation,'' ``due
diligence,'' and ``issuer organization and offering expenses.'' First,
compensation payable to underwriters, broker-dealers, or affiliates may
not exceed 10 percent of the gross proceeds of the offering, regardless
of the source from which it is derived. Second, members or independent
due diligence firms may be reimbursed an additional 0.5 percent for
bona fide due diligence expenses. And third, total issuer O & O
expenses for programs in which the member is affiliated with the
program sponsor may not exceed 15 percent of the offering proceeds,
including any compensation and due diligence expenses.\11\
---------------------------------------------------------------------------

    \11\ See current Rule 2810(b)(4)(B)(i) and Notice to Members 82-
51. This 15 percent limitation on O & O expenses applies only to
sponsors that are affiliated with NASD members, while the 10 percent
compensation limitation applies to all DPPs.
---------------------------------------------------------------------------

    For offerings of programs in which the member is affiliated with
the sponsor, this allows an additional 4.5 percent for issuer O & O
expenses above the 10 percent underwriting compensation and 0.5 percent
due diligence expenses.
    As discussed below, the proposed rule change would make the Rule
more explicit and objective in its treatment of the allocation of
certain fees and expenses between issuer O & O expenses and
compensation (eliminating the current 0.5 percent limit on due
diligence expenses and modifying the limitations pertaining to due
diligence expenses).
i. Issuer Expenses
    In the Original Proposal, NASD proposed to codify the methodology
described in NASD Notice to Members 04-07 \12\ for allocating O & O
expenses between compensation, due diligence and issuer O & O expenses.
Under the Original Proposal, issuer O & O expenses would have included:
(i) Expenses, including overhead expenses, for assembling and mailing
offering materials, processing subscription agreements and generating
advertising and sales materials; (ii) legal services provided to the
sponsor or issuer; and (iii) salaries and non-transaction-based
compensation paid to employees or agents of the sponsor or issuer for
performing such services. Also included as part of issuer O & O
expenses would have been expenses incurred in connection with transfer
agents, escrow holders, depositories, engineers and other experts, and
registration and qualification of securities under federal and state
law, including taxes and fees and NASD fees.\13\
---------------------------------------------------------------------------

    \12\ In Notice to Members 04-07 (``Notice''), NASD requested
comment on a proposed rule change and interpretive policies
regarding the allocation of fees and expenses between issuers,
sponsors and broker-dealers for Investment Programs in which the
sponsors and broker-dealers offering such securities are affiliated.
The Notice also addressed due diligence practices and disclosure in
connection with Investment Programs as well as the allocation of
underwriter compensation and issuer organization and offering
expenses. The Notice also proposed prohibiting sales loads on
reinvested dividends in Investment Programs and closed-end funds.
Finally, the Notice requested comment on changes to two non-cash
compensation provisions in Rules 2710(i) and 2810(c): (1) A proposal
to amend what would constitute an ``appropriate location'' for
training and education meetings; and (2) new ``equal weighting'' and
``total production'' limitations for internal sales contests. NASD
received 10 comments on Notice to Members 04-07. Because the
Original Proposal discussed the Notice in detail, this proposal only
cites to the Notice when necessary.
    \13\ See Original Proposal amendment to Rule 2810(b)(4)(C)(i).
---------------------------------------------------------------------------

    Three commenters addressed the proposed treatment of issuer O & O
expenses.\14\ Two commenters generally supported the proposal.\15\ One
commenter suggested revising the proposed rule change to clarify that
the calculation of issuer expenses would only include those issuer O &
O expenses that are reimbursed or paid for with offering proceeds.\16\
This commenter believed that this clarification would be consistent
with NASD's longstanding policy to include in the limitations on issuer
O & O expenses only those expenses deemed to be in connection with the
public offering and reimbursed or paid for with offering proceeds. The
commenter also noted that the issuer's ``business overhead'' expenses,
such as rent, telephone, insurance and employee benefits are costs
generally not related to the public offering of an Investment Program's
securities and not paid for from offering proceeds.\17\
---------------------------------------------------------------------------

    \14\ ABA Committee, Massachusetts Securities Division and NASAA.
    \15\ Massachusetts Securities Division and NASAA.
    \16\ ABA Committee.
    \17\ Id.
---------------------------------------------------------------------------

    In addition, this commenter recommended that, to be consistent with
Rule 2710, NASD should clarify that issuer O & O expenses include
printing costs and accountants' fees,

which are typically borne by the issuer.\18\
---------------------------------------------------------------------------

    \18\ Id.
---------------------------------------------------------------------------

    Finally, the commenter suggested that the term ``issuer O & O
expenses'' should be changed to minimize confusion with the O & O
expenses for the entire offering, which are capped at an amount that
equals fifteen percent of the proceeds of an offering and include: (1)
``Issuer expenses;'' (2) ``items of compensation;'' and (3) ``due
diligence expenses.'' \19\
---------------------------------------------------------------------------

    \19\ Id.
---------------------------------------------------------------------------

    FINRA agrees that it has been longstanding NASD policy to include
in the limitations on issuer O & O expenses only those expenses deemed
to be in connection with the public offering and reimbursed or paid for
with offering proceeds. FINRA is amending the proposed rule change to
clarify this position \20\ and also to clarify that issuer expenses
include expenses related to printing costs and accounting fees.\21\
---------------------------------------------------------------------------

    \20\ Proposed amendment to Rule 2810(b)(4)(C)(i)-(ii).
    \21\ Proposed amendment to Rule 2810(b)(4)(C)(i)(a) (printing
costs) and Rule 2810(b)(4)(C)(i)(b) (accounting costs).
---------------------------------------------------------------------------

    Finally, FINRA has replaced the term ``issuer O & O expenses'' \22\
with ``issuer expenses'' \23\ to minimize confusion with the term ``O &
O expenses,'' which includes (1) issuer expenses; (2) items of
compensation; and (3) due diligence expenses.\24\
---------------------------------------------------------------------------

    \22\ Original Proposal amendment to Rule 2810(b)(4)(C)(i).
    \23\ Proposed amendment to Rule 2810(b)(4)(C)(i).
    \24\ See generally proposed amendment to Rule 2810(b)(4)(C).
---------------------------------------------------------------------------

    With these modifications, FINRA is re-proposing in Amendment No. 3
the same amendments regarding issuer expenses that were the subject of
the Original Proposal.
ii. Limits on Compensation
    As in the Original Proposal, the rule change would clarify that
amounts deducted from the offering proceeds or amounts paid to
underwriters, broker-dealers or affiliates as trail commissions over
time are to be treated as underwriting compensation.\25\ In addition,
paragraph (b)(4)(B)(ii) of Rule 2810 would be amended to expressly
state that all items of compensation shall not exceed ``ten percent of
the gross proceeds of the offering.'' \26\
---------------------------------------------------------------------------

    \25\ See proposed amendment to Rule 2810(b)(4)(B)(ii). The
proposed amendment deletes the requirement that the compensation be
``deemed to be in connection with or related to the distribution of
the public offering.'' This provision has been moved to proposed
Rule 2810(b)(4)(B).
    \26\ The ten percent figure currently is FINRA policy and is not
in the text of the Rule.
---------------------------------------------------------------------------

    Accordingly, all items of compensation paid from any source,
including offering proceeds, partnership assets or management fees,
would be subject to a ``hard cap'' of an amount that equals ten percent
of gross offering proceeds.\27\
---------------------------------------------------------------------------

    \27\ Proposed amendment to Rule 2810(b)(4)(B)(ii).
---------------------------------------------------------------------------

    The proposed rule change also limits total O & O expenses, as
defined in paragraph (b)(4)(C), to fifteen percent of gross proceeds in
an offering in which a member or an affiliate of a member is a
sponsor.\28\
---------------------------------------------------------------------------

    \28\ Proposed amendment to Rule 2810(b)(4)(B)(i).
---------------------------------------------------------------------------

    The proposed rule change also would delete paragraphs
(b)(4)(B)(v)(a) through (d) of Rule 2810 relating to continuing
compensation arrangements. Members have not relied on these provisions
since their adoption, and the limitations on continuing compensation
are included in paragraph (b)(4)(B)(i) of Rule 2810 as proposed to be
amended.
iii. Wholesaling and Dual Employees
    The amendments to Rule 2810(b)(4)(C)(ii)(a) in the Original
Proposal would have deemed underwriting compensation to include
payments to:

any wholesaler that is engaged in the solicitation, marketing,
distribution or sales of the program or REIT securities and any
employee of the wholesaler involved in the solicitation,
development, maintenance and monitoring of selling agreements and
relationships with broker/dealers and accounts and account holders
at broker/dealers[.]

    Commenters generally supported the proposal with regard to
wholesaling firms engaged in solicitation, marketing or distribution of
an Investment Program's securities, but believed that the description
of wholesaling activities by an employee of a wholesaler was too broad,
noting that it included clerical and administrative functions in
connection with the offering that traditionally had not been included
as underwriting compensation.\29\
---------------------------------------------------------------------------

    \29\ ABA Committee, IPA and NASAA. The Massachusetts Securities
Division and NASAA urged the SEC and NASD to bring greater scrutiny
to wholesaling activities, including how sponsors contact brokerage
personnel.
---------------------------------------------------------------------------

    The Original Proposal also would have deemed underwriting
compensation to include payments to:

any employee of a member and any dual employee of a member and the
sponsor, issuer or other affiliate who receives transaction-based
compensation unless information has been provided to NASD, with
regard to a program or REIT with fewer than ten people engaged in
wholesaling, from which the Corporate Financing Department can
readily conclude that the payments are made as consideration for
non-broker/dealer services[.] \30\

    \30\ Original Proposal amendment to Rule 2810(b)(4)(C)(ii)(b).
---------------------------------------------------------------------------

    Two commenters viewed the proposed treatment of payments to dual
employees who receive transaction-based compensation as too broad
because it failed to take into account situations in which such
employees only spend part of their time engaged in marketing,
distribution or sales of Investment Program securities.\31\
---------------------------------------------------------------------------

    \31\ ABA Committee and IPA.
---------------------------------------------------------------------------

    These commenters suggested an alternative approach of requiring the
sponsor to make a good faith allocation for payments to dual employees
(i.e., employees of a sponsor of an Investment Program and its
affiliated broker-dealer) between underwriting compensation and non-
distribution related expenses, so that only the allocable portion of a
dual employee's transaction-based compensation would be included in the
calculation of underwriting compensation.\32\
---------------------------------------------------------------------------

    \32\ Id.
---------------------------------------------------------------------------

    These commenters also suggested excluding from the rule's
underwriting compensation limits payments to those employees that
solely perform clerical, administrative or operational functions that
generally do not require such persons to be registered as a
representative or principal.\33\
---------------------------------------------------------------------------

    \33\ Id.
---------------------------------------------------------------------------

    FINRA revised the proposed amendments to Rules
2810(b)(4)(C)(ii)(a)-(b) described above in response to these comments.
The proposed rule change clarifies that payments to wholesaling or
retailing firms engaged in solicitation, marketing, distribution or
sales of Investment Program securities will be included in the
underwriting compensation limits.\34\
---------------------------------------------------------------------------

    \34\ Proposed amendment to Rule 2810(b)(4)(C)(ii)(a).
---------------------------------------------------------------------------

    The Original Proposal would have included payments to employees
engaged in wholesaling, regardless of whether they are registered. In
general, employees who engage in wholesaling would be required to be
registered as representatives under Rule 1031.\35\ Accordingly, as
described below, FINRA has amended the proposed rule change so that
only payments to employees who are registered persons would be included
in the underwriting compensation limits.
---------------------------------------------------------------------------

    \35\ If in the course of reviewing an offering of an Investment
Program, the Corporate Financing Department believes that an
individual is not properly registered, it will refer such matter to
the Member Regulation or Enforcement Departments for further review.
---------------------------------------------------------------------------

    First, the proposed rule change would include as underwriting
compensation

all payments to a registered representative (including a dual employee)
that receives transaction-based compensation in connection with the
sale or distribution of Investment Program securities, subject to two
exceptions for small companies and top executives discussed below.\36\
---------------------------------------------------------------------------

    \36\ Proposed amendment to Rule 2810(b)(4)(C)(ii)(b). 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.
---------------------------------------------------------------------------

    Second, with regard to payments to registered representatives who
do not receive transaction-based compensation in connection with the
sale or distribution of Investment Program securities, the proposed
rule change would treat as underwriting compensation payments to
employees who are engaged in the solicitation, marketing, distribution
or sales of the Investment Program securities, except individuals whose
functions in connection with the offering are solely and exclusively
clerical or ministerial.\37\
---------------------------------------------------------------------------

    \37\ Proposed amendment to Rule 2810(b)(4)(C)(ii)(c).
Notwithstanding the exemption in Rule 1060(a)(1) and the proposed
amendment to Rules 2810(b)(4)(C)(ii)(b)-(c) discussed above, certain
persons whose functions are solely and exclusively clerical or
ministerial may choose to be registered as representatives. See Rule
1031(a).
---------------------------------------------------------------------------

    While commenters suggested an alternative approach of requiring the
sponsor or affiliate to make a good faith allocation of payments to
dual-employees between underwriting compensation and issuer expenses,
FINRA believes the approach described above would be clearer and easier
to administer, and would promote more consistency with the application
of the rule among Investment Programs. Investment Programs should
easily be able to ascertain whether a registered person's activities
involve solicitation, marketing, distribution or sales of the
Investment Program securities, and whether those activities are
conducted solely and exclusively in a clerical or ministerial capacity.
Moreover, this approach should minimize the opportunity for an
Investment Program to mischaracterize dual employees' day-to-day
activities or to make allocations that are inconsistent with industry
standards.\38\
---------------------------------------------------------------------------

    \38\ Under the alternative approach suggested by the ABA
Committee and IPA, an Investment Program that misallocated payments
to dual employees to issuer expenses instead of underwriting
compensation would, compared to its competitors, have more offering
proceeds available under the compensation limits to market and sell
its securities.
---------------------------------------------------------------------------

    NASD proposed to modify and improve upon the burdensome process
involved when its Corporate Financing Department (``Department'')
reviews Investment Programs for compliance with the compensation
guidelines by analyzing information about job functions, time spent on
those functions, and compensation paid to dual employees whose job
functions include conducting a securities business. Commenters on
Notice to Members 04-07 urged NASD to continue to utilize the detailed
job function analysis in its review of compensation associated with
smaller Investment Programs, for which registered representatives are
more likely to work in both the securities business and operations and
administration. Accordingly, the Original Proposal provided that
Investment Programs with fewer than ten people engaged in wholesaling
could provide detailed per-employee information to the Department for
its review. Based on its review, the Department could conclude that
certain salary or other non-transaction-based payments made to the
employee will be allocated to issuer expenses, notwithstanding the fact
that the employee also received transaction-based compensation or spent
allocable portions of time engaged in securities business
activities.\39\ Commenters supported this approach to smaller
Investment Programs \40\ and the proposed rule change includes these
provisions.
---------------------------------------------------------------------------

    \39\ Original Proposal amendment to Rule 2810(b)(4)(C)(ii)(b).
    \40\ IPA, Massachusetts Securities Division and NASAA.
---------------------------------------------------------------------------

    Many Investment Programs' top executives are registered persons who
engage in multiple job functions among the program sponsor, wholesaler,
property or equipment manager, and portfolio manager. FINRA believes
that the Department can conduct an accurate and efficient review of
this small group of individuals, whose job functions should be
relatively easy to identify and evaluate given their level of
prominence within an Investment Program. Accordingly, in response to
comments, FINRA also is amending the Original Proposal to include the
same job function analysis for any dual employee that is one of the ten
highest paid executives in an Investment Program, based on his or her
non-transaction-based compensation.\41\
---------------------------------------------------------------------------

    \41\ Proposed amendment to Rule 2810(b)(4)(D).
---------------------------------------------------------------------------

iv. Training and Education Meetings, Legal Services, and Advertising
and Sales Materials
    The Original Proposal would have allocated to underwriting
compensation fees and payments for training and education meetings,
legal services provided to a broker-dealer participating in the
offering and advertising and sales material generated by a broker-
dealer participating in the offering.\42\ Two commenters supported
these provisions, while another commenter recommended technical
changes.\43\ FINRA has amended this proposal to include contributions
to conferences and meetings held by non-affiliated members for their
registered representatives.\44\
---------------------------------------------------------------------------

    \42\ Original Proposal amendment to Rule 2810(b)(4)(C)(iii)(c).
    \43\ The Massachusetts Securities Division and NASAA supported
the proposal. The ABA Committee recommended deleting ``legal
services'' from the proposal because it would be duplicative of NASD
Rule 2710(C)(3)(iii).
    \44\ Proposed amendment to Rule 2810(b)(4)(C)(ii)(d).
---------------------------------------------------------------------------

v. Due Diligence
    The Original Proposal would have eliminated the 0.5 percent limit
on due diligence expenses under Rule 2810 and would have required that
due diligence expenses combined with issuer expenses not exceed the
limits on O & O expenses in Rule 2810(b)(4)(B)(i).\45\ The Original
Proposal also would have required that a member not accept any payments
or reimbursements for due diligence expenses unless they are included
in a detailed and itemized invoice that is presented by the member to
the program sponsor or other entity that pays or reimburses due
diligence expenses.\46\
---------------------------------------------------------------------------

    \45\ Instead, the maximum amount of O & O expenses would have
remained fifteen percent of the gross proceeds of the offering
(which amount would include: (1) Issuer expenses; (2) compensation
up to the maximum of ten percent of gross proceeds; and (3) due
diligence expenses that are supported by a detailed and itemized
invoice).
    \46\ Proposed amendment to Rule 2810(b)(4)(B)(vii).
---------------------------------------------------------------------------

    Two commenters supported the proposed rule change.\47\ Two
commenters stated that the proposed rule change should allow due
diligence expense reimbursements without a detailed and itemized
invoice, and permit such expenses to be included in the 10 percent
compensation limitation as a non-accountable expense, which is subject
to a limit of up to three percent of the offering proceeds pursuant to
NASD Rule 2710(f)(2)(B).\48\ One commenter also requested clarification
that any payments for due diligence

expenses that are made pursuant to a detailed and itemized invoice will
not be included in the 10 percent limit on underwriting
compensation.\49\
---------------------------------------------------------------------------

    \47\ Massachusetts Securities Division and NASAA.
    \48\ ABA Committee and IPA.
    \49\ ABA Committee.
---------------------------------------------------------------------------

    Rule 2810 currently permits members to receive compensation up to
10 percent of the offering proceeds for services rendered in a
distribution. These payments may include un-itemized expense allowances
of up to three percent of the offering proceeds. FINRA agrees that it
is reasonable to include un-itemized due diligence expenses as part of
the underwriting compensation. FINRA, therefore, is amending the
proposal to include, as part of underwriting compensation, due
diligence reimbursements without a detailed and itemized invoice.\50\
However, any member seeking to include due diligence expense as part of
issuer expenses must submit an itemized invoice of their actual costs
incurred for bona fide due diligence expenses.\51\
---------------------------------------------------------------------------

    \50\ Proposed amendment to Rule 2810(b)(4)(B)(vii).
    \51\ Nothing in the proposed rule change would prohibit the
inclusion of a profit margin in the due diligence expense bill of a
firm that has conducted due diligence on behalf of a member and that
is not a member or an affiliate of a member. See NASD Notice to
Members 86-66 (``Due Diligence Expense Reimbursements in Connection
with Direct Participation Programs'').
---------------------------------------------------------------------------

    FINRA is also re-proposing to eliminate the 0.5 percent limit in
due diligence expenses.\52\
---------------------------------------------------------------------------

    \52\ See footnote accompanying existing Rule 2810(b)(4)(B)(i).
---------------------------------------------------------------------------

b. Liquidity Disclosure
    Rule 2810(b)(3)(D) currently provides that prior to executing a
purchase transaction in a direct participation program, a member or
person associated with a member shall inform the prospective
participant of all pertinent facts relating to the liquidity and
marketability of the program during the terms of the investment. FINRA
is concerned that some investors do not fully appreciate that the
liquidation of some sponsors' programs are frequently delayed.
    The Original Proposal would have amended Rule 2810(b)(3)(D) to
include REITs, and would have required members and their associated
persons to inform prospective investors whether the sponsor has offered
prior programs for which the prospectus disclosed a date or time period
when the program might be liquidated, and whether the prior programs,
in fact, liquidated on or around that date or time period. In addition,
members selling Investment Programs would be required to disclose to
investors whether prior programs offered by the program sponsor were,
in fact, liquidated on or during the date or time period disclosed in
the prospectuses for those programs. For example, if a sponsor has
offered ten prior programs and only two of them liquidated by the date
or time period set forth in the prospectus, the member would be
required to disclose these facts.
    Two commenters supported the proposal.\53\ One commenter objected
to the proposed liquidity disclosure stating that prospectus disclosure
typically includes a warning that the liquidity event or liquidation
may be delayed due to market conditions and other factors.\54\ In this
commenter's view, the liquidity disclosure provision would unfairly
characterize all situations in which a liquidity event was delayed as a
``failure'' or ``inappropriate.'' This commenter also stated that the
recordkeeping burdens of the proposal and the unwarranted negative
implications of such disclosure would outweigh the benefit. The
commenter suggested that if a liquidity disclosure requirement were to
be imposed, it should be done by an SEC rule rather than an NASD rule.
Alternatively, if adopted by NASD, it should only apply to Investment
Programs with fixed dates.\55\
---------------------------------------------------------------------------

    \53\ Massachusetts Securities Division and NASAA.
    \54\ ABA Committee.
    \55\ Id.
---------------------------------------------------------------------------

    FINRA is not persuaded by the commenter's suggestion that
additional disclosure regarding historical liquidity practices
necessarily creates ``unwarranted negative implications.'' Rather,
FINRA believes that the proposed disclosure requirement will help
investors make informed investment decisions based on the facts about a
sponsor's liquidity track record. FINRA recognizes that delays in
liquidity events may be due to market conditions and other factors
beyond the sponsor's control, and that, under certain circumstances,
investors ultimately may benefit from delays in liquidity events. When
these facts are relevant, they can be conveyed in addition to the facts
regarding the sponsor's liquidity track record providing investors with
a complete picture of liquidity issues.
    FINRA also notes that the proposal would not require a member to
``characterize'' a previous delay in liquidation. Rather, the proposed
rule change would require members to inform investors whether the
sponsor has previously disclosed a date or time period when prior
programs may be liquidated, and whether the programs were in fact
liquidated on or around that date or time period.
    Therefore, FINRA is re-proposing the amendment to Rule
2810(b)(3)(D) as in the Original Proposal.
c. Sales Loads on Reinvested Dividends
    The Original Proposal would have amended Rule 2810(b)(4)(B)(vi) to
prohibit sales loads on reinvested dividends for Investment Programs
after the effective date of the proposed rule change. Two commenters
strongly agreed with this proposal.\56\
---------------------------------------------------------------------------

    \56\ Massachusetts Securities Division and NASAA.
---------------------------------------------------------------------------

    FINRA is re-proposing this amendment to Rule 2810(b)(4)(B)(vi).
d. Non-Cash Compensation Provisions
i. Location of Training and Education Meetings
    The Original Proposal would have amended the current non-cash
compensation rule to provide that an ``appropriate location'' for
training and education meeting may include a location at which a
significant or representative Investment Program asset is located.\57\
This provision would recognize that an important part of bona fide
training and education meetings for Investment Programs may be
inspecting real estate, oil and gas production facilities, and other
types of assets that will be held and managed by the program,\58\ and
would provide that a training and education meeting may include a
location at which a ``significant or representative'' asset is located.
---------------------------------------------------------------------------

    \57\ Proposed amendment to Rule 2810(c)(2)(C)(ii).
    \58\ As discussed above, FINRA proposes to amend Rule 2810 so
that the Rule's compensation, disclosure and non-cash compensation
provisions expressly govern illiquid REITs (i.e., REITs as defined
in Rule 2340(d)(4)). The proposed rule change would not amend the
non-cash compensation provisions in Rule 2710, which currently are
identical to those in Rule 2810. Accordingly, the non-cash
compensation provisions regarding the location of training and
education meetings will be different for exchange-traded REITs under
Rule 2710 and illiquid REITs under Rule 2810.
---------------------------------------------------------------------------

    Commenters generally supported this aspect of the proposal; \59\
however, one commenter suggested that the rule should explicitly state
that the non-cash compensation provision applies to public offerings,
and not private placements.\60\
---------------------------------------------------------------------------

    \59\ IPA, Massachusetts Securities Division and NASAA.
    \60\ IPA (noting that it understands from conversations with
NASD staff that the non-cash compensation rules are not intended to
apply to private placements).
---------------------------------------------------------------------------

    Because Rule 2810 by its terms applies only to public offerings,
FINRA believes that such additional clarification in this section is

unnecessary. FINRA is re-proposing the amendment to Rule 2810(c)(2).
ii. Total Production and Equal Weighting Requirements
    In connection with the Original Proposal, NASD stated that it was
considering future amendments to Rule 2810 to incorporate the total
production and equal weighting conditions for internal sales contests
in its Investment Company Rule (Rule 2820) and Variable Contracts Rule
(Rule 2830) in the context of a broader non-cash compensation
rulemaking initiative.\61\
---------------------------------------------------------------------------

    \61\ See Notice to Members 05-40.
---------------------------------------------------------------------------

    Two commenters urged NASD to abolish sales contests because they
create incentives that are contrary to the obligations broker-dealers
have to their customers, such as fair dealing.\62\ As noted above,
FINRA will consider these issues in future rulemaking.
---------------------------------------------------------------------------

    \62\ Massachusetts Securities Division and NASAA.
---------------------------------------------------------------------------

e. Effective Date of the Proposed Rule Change
    FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice to be published no later than 60 days following
Commission approval. The effective date will be 30 days following
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the
provisions of section 15A(b)(6) of the Act,\63\ 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. The proposed rule change would codify FINRA's
longstanding policy of applying certain regulatory requirements in Rule
2810 to REITs. In context of Investment Programs, FINRA 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.
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    The Commission published the proposed rule change in the Federal
Register on July 17, 2006.\64\ The comment period closed on August 7,
2006. The Commission received six comments in response to the Federal
Register publication of the proposal. The comments are summarized in
Item II above.
---------------------------------------------------------------------------

    \64\ See Securities Exchange Act Release No. 54118 (July 10,
2006), 71 FR 40569 (July 17, 2006).
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml ); or
     Send an e-mail to<EMAIL_ADDRESS>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 (http://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 February 21, 2008.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\65\
---------------------------------------------------------------------------

    \65\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-1725 Filed 1-30-08; 8:45 am]

BILLING CODE 8011-01-P