[Federal Register Volume 65, Number 5 (Friday, January 7, 2000)]
[Notices]
[Pages 1208-1210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-390]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42306; File No. SR-NASD-99-37]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to the use of Hard To Borrow Lists
January 3, 2000.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 4, 1999, the National Association of Securities Dealers, Inc.
(``NASD''), through its wholly owned subsidiary, NASD Regulation, Inc.
(``NASD Regulation'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. On
November 1, 1999, the NASD filed Amendment No. 1 to the proposed rule
change with the Commission.\3\ The Commission is publishing this notice
to solicit comments on the proposed rule change as amended from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Alden Adkins, Senior Vice President and
General Counsel, NASD Regulation, to Katherine England, Assistant
Director, Division of Market Regulation, the Commission, dated
October 26, 1999. The substance of Amendment No. 1 is incorporated
into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASD Regulation is proposing to amend NASD Rule 3370 to permit the
use of a ``Hard to Borrow'' list to comply with affirmative
determination requirements for short sales. The text of the proposed
rule change is set forth below. Additions are italicized and deletions
are bracketed.
* * * * *
Rule 3370. Prompt Receipt and Delivery of Securities
(a) No change
(b) No change
(1) No change
(2) No change
(3) No change
(4) ``Affirmative Determination''
(A) No change
(B) No change
(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 the Rule and,
therefore, shall be decided by each member. Members may rely on
``blanket'' or standing assurances (i.e., ``Easy to Borrow'' lists)
that securities will be available for borrowing on settlement date to
satisfy their affirmative determination requirements under this rule.
[,] For any short sales executed in Nasdaq National Market (NNM) or
national securities exchange-listed (listed) securities, members also
may rely on ``Hard to Borrow'' lists indicating NNM or listed
securities that are difficult to borrow or unavailable for borrowing on
settlement date to satisfy their affirmative determination requirements
under this Rule, provided that: (i) any securities restricted pursuant
to UPC 11830 must be included in such a list; and (ii) the creator of
the list attests in writing on the document or otherwise that any NNM
or listed securities not included on the list are easy to borrow or are
available for borrowing. Members are permitted to use Easy to Borrow or
Hard to Borrow lists provided: (i) the information used to generate the
list [``blanket'' or standing assurance] is less than 24 hours old; and
(ii) the member delivers the security on settlement date. Should a
member relying on an Easy to Borrow or Hard to Borrow list [blanket or
standing assurance] fail to deliver the security on settlement date,
the Association shall deem such conduct inconsistent with the terms of
this Rule, absent mitigating circumstances adequately documented by the
member.
(5) No change
* * * * *
[[Page 1209]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD Regulation 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. NASD Regulation 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
Currently, NASD Rule 3370, which was designed to prevent abusive
short selling and ensure that short sellers satisfied their settlement
obligations, requiring members to make an affirmative determination
prior to executing certain short sales and to maintain a written record
of that affirmative determination. This Rule essentially requires that
a member must make an affirmative determination that it will receive
delivery of the subject security, or can borrow or otherwise provide
delivery of the security, by settlement date. Although the Rule
provides that a member firm must record the identity of both the
individual and the firm contacted who offered assurances that the
subject security would be delivered by settlement date or be available
for borrowing by settlement date, the manner in which compliance with
this Rule is to be evidenced is not specified by the Rule.
The Rule does, however, in specified circumstances, permit member
firms to rely on ``blanket'' or standing assurances that certain,
specified securities will be available for borrowing on settlement date
to satisfy their affirmative determination obligations.\4\ Such
``blanket'' assurances are commonly referred to as ``Easy to Borrow''
lists. The use of ``Hard to Borrow'' lists (i.e., lists reflecting
stocks that are difficult to borrow or unavailable for borrowing) is
not specifically allowed by the Rule. It is the understanding of NASD
Regulation staff that the New York Stock Exchange (NYSE) currently
permits its members to rely on such lists.
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\4\ See Release No. 34-36859 (February 20, 1996), 61 FR 7127
(February 26, 1996) (File No. SR-NASD-95-62), approving reliance on
``blanket'' assurances.
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The proposed amendment will permit member firms to rely on a ``Hard
to Borrow'' list for any short sales executed in The Nasdaq Stock
Market (Nasdaq) National Market (NM) or national securities exchange-
listed securities, provided that any securities restricted pursuant to
Uniform Practice Code (UPC) 11830 must be included on such a list \5\
and that the creator of the list attests in writing that any Nasdaq NM
or national securities exchange-listed securities not included on the
list are easy to borrow or are available for borrowing. Operationally,
a member firm would refer to the ``Hard to Borrow'' list before
executing a short sale in a given security. If the subject security is
not on the list, the member firm would have conducted the requisite
affirmative determination and can execute the short sale without taking
any further steps to satisfy the affirmative determination rule.
Conversely, if the security is on the list, then a member firm would
not be able to execute the short sale without taking additional steps
to ensure the security's availability. Member firms that rely on ``Hard
to Borrow'' lists would be required, under the Rule, to maintain and
keep such lists to satisfy the requirements of the Rule that such
affirmative determinations be annotated. Lastly, the same requirements
that apply to ``Easy to Borrow'' lists also will apply to ``Hard to
Borrow'' lists.\6\
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\5\ A security becomes restricted pursuant to UPC 11830 when the
total number of shares that market participants have failed to
deliver in that security exceeds 0.5% of the total shares
outstanding. In practice, securities with large fail-to-deliver
positions are difficult to borrow.
\6\ A member firm is permitted to use an ``Easy to Borrow'' list
if the information used to generate the ``blanket'' or standing
assurance is less than 24 hours old and the member firm delivers the
security on settlement date. If the member firm does not deliver the
security on settlement date, disciplinary action could be initiated.
As stated above, these same restrictions would apply to the use of a
``Hard to Borrow'' list.
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The use of ``Hard to Borrow'' lists will be permitted only for
Nasdaq NM and national securities exchange-listed securities, and not
for Nasdaq SmallCap and over-the-counter (OTC) equity securities, for
two reasons. First, other short-sale rules apply to Nasdaq NM and
national securities exchange-listed securities (NASD Rule 3350 and SEC
Rule 10a-1, respectively) to which Nasdaq SmallCap and OTC equity
securities are not subject. Second, Nasdaq NM and national securities
exchange-listed securities are liquid and highly capitalized, and are
less likely to be subject to short sale abuses than Nasdaq SmallCap and
OTC equity securities, which generally are more thinly traded and
illiquid and potentially more vulnerable to short sale abuses.
Therefore, the use of ``Hard to Borrow'' lists will still not be
permitted for Nasdaq SmallCap and OTC Equity securities, and member
firms will continue to be required to take active steps to determine
stock availability for these more illiquid securities, thus providing
additional investor protection.
2. Statutory Basis
NASD Regulation believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) \7\ of the Act,
which requires, among other things, that the NASD's rules 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. NASD Regulation believes that the
proposed rule change is consistent with Section 15A(b)(6) of the Act
because it will reduce the administrative burdens that are placed on
member firms when they comply with the affirmative determination rule
and will expedite the process of executing short sale transactions,
thus providing faster and possibly better executions for public
investors. The proposed rule change also will allow member firms to use
the same affirmative determination procedures that NASD Regulation
understands are used on the NYSE for both Nasdaq NM and national
securities exchange-listed securities, thereby promoting uniformity and
consistency in the application and interpretation of parallel NASD and
NYSE rules and avoiding member firm confusion.
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\7\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASD Regulation 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, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
Written 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
[[Page 1210]]
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 NASD Regulation 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 is consistent with the Act. 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-
0609. 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 the filing will also be
available for inspection and copying at the principal offices of the
NASD. All submissions should refer to File No. SR-NASD-99-37 and should
be submitted by January 28, 2000.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-390 Filed 1-6-00; 8:45 am]
BILLING CODE 8010-01-M
