00-32649. Self-Regulatory Organizations; The National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change Relating to Options Position Reporting Requirements and Application of Options Position and Exercise Limits to Trades ...

December 13, 2000.

I. Introduction

On June 14, 2000, the National Association of Securities Dealers, Inc. (“NASD” or “Association”), through it wholly owned subsidiary, NASD Regulation, Inc. (“NASD Regulation”), submitted to the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) ^[1] and Rule 19b-4 thereunder,^[2] a proposed rule change to apply options position reporting requirements and options position and exercise limits to trades with non-member brokers and dealers.

The proposed rule change was published for comment in the Federal Register on September 7, 2000.^[3] No comments were received. This order approves the proposal.

II. Description of the Proposal

Presently, the NASD's options position limits, exercise limits, and reporting requirements, Rules 2860(b)(3), 2860(b)(4) and 2860(b)(5), respectively, apply to: (1) Account in which a member has an interest; (2) an account in which a member's partner, officer, director or employee has an interest, or (3) a customer account.

However, the NASD's definition of “customer” excludes a broker or dealer; therefore, non-member brokers and dealers are currently outside the scope of these rules. To bring non-member brokers and dealers within the purview of NASD Rule 2860, the NASD proposed to amend the rule to: (1) Require members to report the options positions that they effect for non-member brokers and non-member dealers where such positions meet the reporting thresholds under NASD rules; (2) apply the NASD's options position and exercise limits to members that effect trades for non-member brokers and non-member dealers; (3) codify an interpretive position with respect to which firms are required to report standardized options positions under the NASD's options position reporting requirements; and (4) clarify that a member may have its clearing firm report options positions to the NASD.

In addition, the NASD proposed several technical amendments to the options position reporting requirements to take into account staff interpretive positions with respect to reporting standardized and conventional options. Specifically, the amendments codify options position reporting requirements set forth in Notice to Members 94-46, which states that the reporting requirements are “applicable to all standardized options positions established by members of their customers.” Access firms are defined in the requirements as NASD members that conduct a business in exchange-traded options but are not themselves members of the options exchange upon which such options are listed and traded. Limiting reporting of standardized options positions under NASD rules to access firms only avoids imposing duplicative reporting requirements on NASD members who are also members of an options exchange, inasmuch as members of an options exchange (i.e., dual members) are required to report positions on standardized options pursuant to the rules of the options exchange(s) of which they are a member.

Finally, the rule proposal clarifies that, consistent with current practice, a member may report positions directly to the Association or have such positions reported to the Association by another firm. According to the Association, this amendment would not eliminate the member's ultimate responsibility to ensure that the firm reporting the positions on the member's behalf makes the necessary filings with the NASD.

III. Discussion

The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to national securities association. Specifically, the Commission finds that the proposal to amend NASD Rule 2860 is consistent with section 15A(b)(6) of the Act.^[4]

Section 15A(b)(6) ^[5] requires that the rules of the registered 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 regulating, clearing, settling, processing information with respect to, 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.^[6]

The Commission believes that the proposed rule change will protect individual investors and the public by enabling the NASD to better monitor the financial exposure of its member firms. The Commission also believes that the proposed rule change will result in consistent application of position and exercise limits by ensuring that trades effected by NASD members on behalf of non-member brokers and non-member dealers are also subject to those limits. Finally, the Commission believes that the proposed provisions clarifying options reporting procedures, and other technical amendments, are also consistent with the overall objective of the rule proposal.

It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act,^[7] that the proposed rule change (SR-NASD-00-36) be, and hereby is, approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[8]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  Securities Exchange Act Release No. 43220 (August 29, 2000), 65 FR 54334.

4.  15 U.S.C. 78o-3(b)(6).

5.  Id.

6.  In approving this rule change, the Commission notes that it has considered the proposal's impact on efficiency, competition, and capital formation, consistent with Section 3 of the Act. 15 U.S.C. 78c(f).

7.  15 U.S.C. 78s(b)(2).

8.  17 CFR 200.30-3(a)(12).