[Federal Register Volume 61, Number 15 (Tuesday, January 23, 1996)]
[Notices]
[Pages 1805-1807]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-841]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36717; File No. SR-NASD-95-62]
Self-Regulatory Organizations; Notice of Proposed Rule Change by
National Association of Securities Dealers, Inc. Relating to Members'
Use of Blanket or Standing Assurances as to Stock Availability To
Satisfy Their Affirmative Determination Requirements Under the Prompt
Receipt and Delivery of Securities Interpretation When Effecting Short
Sales
January 16, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on January
11, 1996,1 the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by the NASD. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
\1\ The proposed rule change was initially submitted on December
27, 1995, but was amended prior to publication in the Federal
Register. The amendment corrects a technical error in the proposed
amended language and is available for copying in the Commission's
Public Reference Room.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The NASD is proposing to change the NASD's Prompt Receipt and
Delivery of Securities Interpretation (``Interpretation'') issued by
the NASD Board of Governors under Article III, Section 1 of the NASD
Rules of Fair Practice. Specifically, the NASD proposes to amend the
Interpretation to provide that under certain circumstances members may
rely on ``blanket'' or standing assurances as to stock availability to
satisfy their affirmative determination requirements under the
Interpretation. The following is the complete text of the proposed rule
change. Additions are italicized and deletions are bracketed.
Interpretation of the Board of Governors
Prompt Receipt and Delivery of Securities
* * * * *
Section (b)(4)(c)
The manner by which a member or person associated with a member
annotates compliance with the ``affirmative determination'' requirement
contained in subsection (b)(2) above (e.g., marking the order ticket,
recording inquiries in a log, etc.) is not specified by this
Interpretation and, therefore, shall be decided by each member.
[However, an affirmative determination and annotation of that
affirmative determination must be made for each and every transaction
since a ``blanket'' or standing assurance that securities are available
for borrowing is not acceptable to satisfy the affirmative
determination requirement.] Members may rely on ``blanket'' or standing
assurances that securities will be available for borrowing on
settlement date to satisfy their affirmative determination requirements
under this Interpretation, provided: (1) the information used to
generate the ``blanket'' or standing assurance is less than 24-hours
old; and (2) the member delivers the security on settlement date.
Should a member relying on a blanket or standing assurance fail to
deliver the security on settlement date, the Association shall deem
such conduct inconsistent with the terms of this Interpretation, absent
mitigating circumstances adequately documented by the member.
[[Page 1806]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD 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. The NASD 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
On September 12, 1994, the SEC approved an NASD rule change (SR-
NASD-94-32) that amended the Interpretation.2 Specifically, the
Interpretation, as amended, requires members to annotate, on the trade
ticket or on some other record maintained for that purpose by the
member firm, the following information when effecting a short sale
transaction: 3
\2\ Securities Exchange Act Release No. 34653 (September 12,
1994), 59 FR 47965 (September 19, 1994).
\3\ The rule change did not modify any exemptions from the
affirmative determination requirements that are presently contained
in the Interpretation. Specifically, transactions in corporate debt
securities, bona fide market making transactions by members in
securities in which they are registered as Nasdaq market makers,
bona fide market maker transactions in non-NASDAQ securities in
which the market maker publishes two-sided quotations in an
independent quotation medium, and proprietary transactions by
members that result in fully hedged or arbitraged positions, are
still exempt from the affirmative determination requirements for
short sales.
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1. If a customer assures delivery, the member must annotate that
conversation noting the present location of the securities; whether the
securities are in good deliverable form; and whether they will be
delivered to the firm within time for settlement; or
2. If the member locates the stock, the member must annotate the
identity of the individual and firm contacted who offered assurance
that the shares would be delivered or were available for borrowing by
settlement date; and the number of shares needed to cover the short
sale.
The amendment also provided that the manner by which a member or
person associated with a member annotates compliance with this
``affirmative determination'' requirement (e.g., marking the order
ticket, recording inquiries in a log, etc.) is left for each individual
firm to decide. In addition, the amendment also clarified that an
affirmative determination and annotation of that affirmative
determination must be made for each and every transaction since a
``blanket'' or standing assurance that securities are available for
borrowing is not acceptable to satisfy the affirmative determination
requirement (``standing assurance provision''). Thus, by requiring
firms to annotate each and every affirmative determination, the
amendment made clear the NASD's policy that firms cannot rely on daily
fax sheets of ``borrowable stocks'' to satisfy their affirmative
determination requirements under the Interpretation.
In NASD Notice to Members 94-80, the NASD announced that the
effective date of the amendments to the Interpretation would be
November 30, 1994. Based upon feedback from a broad spectrum of NASD
members that compliance with the amended Interpretation would not be
possible by November 30, 1994, due to a variety of operational
adjustments that needed to be made, the NASD decided to postpone the
effective date of the amendments to the Interpretation until January 9,
1995, to give member firms sufficient time to prepare for the rule
change.
In addition, in light of the NASD's concern that the prohibition
against the use of daily fax sheets and other ``blanket'' or standing
assurances may have created an unnecessarily burdensome regulatory
requirement for NASD members, the NASD decided to postpone the
effective date of the standing assurance provision until February 20,
1996, to give the NASD the opportunity to determine whether to amend or
delete the rule or let it go into effect as approved by the SEC.4
Even though the NASD has delayed the effective date of the standing
assurance provision, the Interpretation, as amended, still requires
members to make an affirmative determination as to stock availability
for every short sale transaction and annotate that such a determination
was made.
\4\ See Securities Exchange Act Release Nos. 35207 (January 10,
1995), 60 FR 3445 (January 17, 1995); and 36245 (September 18,
1995), 60 FR 49307 (September 22, 1995).
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Accordingly, after having had an opportunity to reexamine the
standing assurance provision, the operational impact it would have on
member firms, and other regulatory requirements applicable to short
sales, the NASD is now proposing to delete the standing assurance
provision and replace it with a provision that would allow NASD members
to rely on daily fax sheets under some circumstances. Specifically,
under the proposal, a member could rely on a ``blanket'' or standing
assurance that securities will be available for borrowing on settlement
date to satisfy its affirmative determination requirement under the
Interpretation, provided: (1) The information used to generate the
``blanket'' or standing assurance is less than 24-hours old; and (2)
the member delivers the security on settlement date. The proposal also
provides that, should a member relying on a ``blanket'' or standing
assurance fail to deliver the security on settlement date, the NASD
will deem such conduct inconsistent with the terms of the
Interpretation, absent mitigating circumstances adequately documented
by the member.
The NASD believes this proposal strikes a reasonable balance
between the need to prevent naked, potentially abusive short selling
activity and the need to avoid the imposition of rules that impose
unnecessarily burdensome regulatory requirements. Specifically, while
the proposal does not categorically prohibit the use of daily fax
sheets to make affirmative determinations, it does impose conditions on
the use of fax sheets (i.e., they cannot be based on information older
than 24 hours) and it clearly alerts members relying on daily fax
sheets to the risk that they shall be in violation of the
Interpretation if they subsequently fail to deliver the security sold
short. Thus, contrary to the standing assurance provision, members
would have the flexibility under the proposal to exercise their
judgement as to whether it would or would not be appropriate to rely on
a fax sheet. As noted above, however, even though firms would have the
flexibility to use fax sheets under the proposal, should a member use a
fax sheet and subsequently fail to deliver the stock, the NASD would
view such failure to deliver to be conduct inconsistent with the
Interpretation. In this connection, in instances where a member fails
to deliver after having relied on a fax sheet, the proposal also
provides that the NASD may consider mitigating circumstances adequately
documented by the member. The NASD believes this further illustrates
the reasonableness of its proposal.
For the above reasons, the NASD believes the proposed rule change
is consistent with Section 15A(b)(6) of the Act. Section 15A(b)(6)
requires that the rules of a national securities association be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in
[[Page 1807]]
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, to remove impediments to
and perfect the mechanism of a free and open market and a national
market system and in general to protect investors and the public
interest. In addition, the NASD believes that its proposal will serve
to conform the NASD's affirmative determination rule with the New York
Stock Exchange's (``NYSE'') affirmative determination rule, thereby
promoting uniformity and consistency in the application and
interpretation of parallel NASD and NYSE rules and avoiding member firm
confusion. In sum, the NASD believes the proposal will ease some of the
operational concerns raised by members with respect to the standing
assurance provision, without compromising the regulatory purposes
served by the Interpretation.
B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD believes that the proposed rule change will not result in
any burden on competition that is not necessary or appropriate in
furtherance of purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the NASD 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. In particular, the Commission seeks
comment on whether the benefits associated with the annotation
requirement contained in the Interpretation outweigh those associated
with the use of a fax sheet to an extent necessary to justify a
presumption that reliance on a fax sheet will be deemed conduct
inconsistent with the Interpretation in the case of a ``fail to
deliver'' situation. In addition, the Commission seeks comment on the
extent to which interested persons perceive a problem associated with
the possibility of an arbitrary application of the Interpretation.
Persons making written submissions should file six copies thereof with
the Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rule
change that are filed with 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. Copies of such filing will also be available for
inspection and copying at the principal office of the NASD. All
submissions should refer to file number SR-NASD-95-62 and should be
submitted by February 13, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.5
\5\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-841 Filed 1-22-96; 8:45 am]
BILLING CODE 8010-01-P
