[Federal Register Volume 60, Number 30 (Tuesday, February 14, 1995)]
[Notices]
[Pages 8436-8437]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3567]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35339; File No. SR-NASD 94-71]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change Relating to the
Application of ``Do Not Reduce'' and ``Do Not Increase'' Instructions
With Respect to the Repricing of Open Orders
February 7, 1995.
On December 7, 1994, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities
and Exchange Commission (``SEC'' or ``Commission'') a proposed rule
change to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'')\1\ and Rule 19b-4 thereunder.\2\ The rule change amends
Article III, Section 46 of the Rules of Fair Practice,\3\ which governs
adjustment of open orders, relating to the applicability of this
section to orders marked ``do not reduce'' (``DNR'') and ``do not
increase (``DNI''). The provisions of Section 46 deal with the
adjustment of open orders in the event of a payment or distribution. As
amended, the rule will neither apply to orders marked DNR where the
dividend is payable in cash, nor to orders marked DNI where the
dividend is payable in stock, provided that the price of such DNI
orders shall be adjusted as required by the rule.
\1\15 U.S.C. 78s(b)(1).
\2\17 CFR 240.19b-4.
\3\NASD Manual, of Fair Practice, Article III, Section 46, (CCH)
2200F.
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Notice of the proposed rule change, together with its terms of
substance was provided by issuance of a Commission release\4\ and by
publication in the Federal Register.\5\ No comments were received in
response to the notice. This order approves the proposed rule change.
\4\Securities Exchange Act Release No. 35169 (December 28,
1994).
\5\60 FR 2169 (January 6, 1995).
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Article III, Section 46 of the Rules of Fair Practice, which became
effective September 15, 1994, requires a member to adjust the price and
size of an open order in proportion to the dividend or other
distribution on the day the security is quoted ``ex'',\6\ before the
member may permit the order to be executed. The amendment has been
proposed in response to an inconsistency in the definition of the terms
DNR and DNI between the NASD's Section 46 and New York Stock Exchange
(``NYSE'') Rule 118,\7\ on which Section 46 was patterned. Because
Section 46 was intended to operate in the same manner as NYSE Rule 118,
the NASD filed the proposed rule change to amend the definitions of DNR
and DNI to conform to the definitions in Rule 118.
\6\The ``ex-date'' represents the day on which the underlying
security is traded without a specific dividend or distribution. NASD
Manual, Uniform Practice Code, Section 3(e), (CCH) 3503.
\7\NYSE Guide, Handling of Orders and Reports, Rule 118, (CCH)
2118.
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Under NYSE Rule 118, a DNR instruction applies only with respect to
cash dividends. An order with a DNR instruction will not be reduced in
price in the event of a cash dividend. Such an order will, however, be
reduced in price and increased in size in the event of a stock dividend
or split. In addition, under NYSE Rule 118, a DNI instruction applies
only with respect to order size adjustments in the event of stock
dividends. While an order with a DNI instruction will not increased in
size, it will be reduced in price in the event of a stock dividend or
split. An order with a DNI instruction is inapplicable in the event of
a cash distribution because the [[Page 8437]] number of shares is not
affected by a cash distribution and, therefore, no order size
adjustment is necessary.
Currently, under Section 46, a DNR instruction applies to both cash
and stock distributions. For example, the price of an order marked DNR
would not be adjusted under the current definition in Section 46 even
in the event of a 2 for 1 or similar stock dividend. Such a dividend
would halve the quotes for the security, but the order would remain at
the original price, far out of line with the adjusted market for that
security. Similarly, all orders marked DNI would not be subject to the
current adjustment provisions of Section 46. While an order marked DNI
would not be increased in size in the event of stock dividend, it also
would not be reduced in price pursuant to the provisions of Section 46.
For customers who understand the operation of Section 46 to be the
same as NYSE Rule 118, leaving the current definitions in place could
result in unexpected executions of certain open orders. To address this
concern, the NASD has proposed to amend the applicability of Section 46
to orders marked DNR and DNI. Pursuant to the amendment, the provisions
of the rule will not apply to orders marked DNI where the distribution
is payable in cash, nor to orders marked DNI where the distribution is
payable in stock, provide, however, that the price of such DNI orders
will be adjusted as required by the rule.
The Commission has determined to approve the NASD's proposal. The
Commission finds that the rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to the NASD, including the requirements of Section 15A(b)(6)
of the Act.\8\ Section 15A(b)(6) requires, in part, that the rules of a
national securities association be designed to promote just and
equitable principles of trade; 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. The proposed
rule change acts to remedy an unintentional inconsistency between
Section 46 and NYSE Rule 118. The rule change also protects against the
unexpected and unintended execution of open orders.
\8\15 U.S.C. 78o-3(b)(6).
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change SR-NASD-94-71 be, and hereby is,
approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
\9\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-3567 Filed 1-13-95; 8:45 am]
BILLING CODE 8010-01-M
