[Federal Register Volume 61, Number 38 (Monday, February 26, 1996)]
[Notices]
[Pages 7127-7128]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4261]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36859; File No. SR-NASD-95-62]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Accelerated Approval of Proposed Rule
Change Amending the Prompt Receipt and Delivery of Securities
Interpretation Relating to Short Sales
February 20, 1996.
I. Introduction
On January 11, 1996, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities
and Exchange Commission (``SEC'' or ``Commission'') a proposed rule
change \1\ pursuant to Section 19(b)(1) of the Securities Exchange Act
of 1934 (``Exchange Act'') \2\ and Rule 19b-4 thereunder.\3\ The rule
change amends the 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.\4\ 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.
\1\ The proposed rule change initially was submitted on December
27, 1995, but was amended subsequent to its original filing. The
amendment corrected a technical error in the proposed amended
language and is available for copying in the Commission's Public
Reference Room.
\2\ 15 U.S.C. Sec. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
\4\ NASD Manual, Rules of Fair Practice, Art. III, Sec. 1, (CCH)
para.2151.04.
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Notice of the proposed rule change, as amended, together with its
terms of substance was provided by issuance of a Commission release \5\
and by publication in the Federal Register.\6\ One comment letter was
received in response to the Commission release, in support of the
NASD's proposal. This order approves the proposed rule change.
\5\ Securities Exchange Act Release No. 36717 (January 16,
1996).
\6\ 61 FR 1805 (January 23, 1996).
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II. Description
On September 12, 1994, the SEC approved an NASD rule change that
amended the Interpretation.\7\ As part of that rule change, the NASD
amended the Interpretation to make clear that the use of a ``blanket''
or standing assurance that securities are available for borrowing is
not acceptable to satisfy the affirmative determination requirement
(``standing assurance provision'').\8\ Based upon feedback from a broad
spectrum of NASD members, the effective date of the standing assurance
provision was postponed so as to give the NASD an opportunity to
reexamine the issue.\9\
\7\ Securities Exchange Act Release No. 34653 (September 12,
1994), 59 FR 47965 (September 19, 1994).
\8\ These ``blanket'' or standing assurances often are sent via
facsimile to member firms.
\9\ 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 reexamination, the NASD is now proposing to
replace the standing assurance provision with a new provision.
Specifically, under the amendment, a member may rely on a ``blanket''
or standing assurance that securities will be available for borrowing
on settlement date to satisfy its affirmative determination
[[Page 7128]]
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 amendment 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.
III. Comments
As noted above, the Commission received one comment letter in
response to the NASD's proposed rule change. The law firm of Rosenman &
Colin, on behalf of a number of firms, expressed strong support for the
NASD's proposal.\10\ The Firms believe that the ability to rely on
``blanket'' or standing assurances that securities are available for
borrowing avoids the potential burdens that would be placed on the
systems and personnel of clearing firms, institutional lenders, and
introducing firms if the ban on such standing assurances becomes
effective. The Firms believe that reliance on standing assurances will
enable firms to continue to conduct business effectively, while
minimizing situations where a member fails to deliver securities on
settlement date. In addition, the Firms support the provision that will
allow a member that relies on a standing assurance to present
mitigating circumstances if a fail to deliver situation occurs.
Further, the Firms note that it is important for the policies of the
NASD and the New York Stock Exchange (``NYSE'') to be consistent with
respect to the affirmative determination requirement, especially for
firms with dual membership.
\10\ Letter from Donald M. Nisonoff, Special Counsel, Rosenman &
Colin, to Jonathan G. Katz, Secretary, SEC (February 15, 1996). The
letter was submitted on behalf of Nomura Securities International,
Inc., CS First Boston, Bear, Stearns & Co., PaineWebber
Incorporated, Pershing Division of Donaldson, Lufkin & Jenrette,
Jefferies & Company, Inc., OTA Limited Partnership, and Susquehanna
Brokerage Services, Inc. (``the Firms'').
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IV. Discussion
The Commission has determined to approve the NASD's proposal. The
Commission finds that the rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to the NASD, including the requirements of
Section 15A(b)(6) of the Exchange Act.\11\ 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 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.
\11\ 15 U.S.C. 78o-3(b)(6).
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The amendment allows firms to utilize standing assurances in
satisfying their affirmative determination requirements. According to
the commenter, many firms have effective compliance procedures that
incorporate the use of standing assurances. The amendment provides
members the flexibility to determine whether it is appropriate to rely
on a standing assurance in a given situation. The proposal, however,
also puts members on notice that reliance on standing assurances may be
deemed conduct inconsistent with the Interpretation under certain
circumstances. The Commission believes that this flexible approach will
act not only to ease compliance burdens where appropriate, but also to
protect against conduct inconsistent with the purposes of the
Interpretation.
In addition, the NASD's amendment conforms the Interpretation to
the NYSE's interpretation of its own affirmative determination
rule.\12\ The Commission believes that consistent application of both
rules will result in more efficient compliance with such rules.
\12\ See NYSE Rule 440C; NYSE Information Memo 91-41 (October
18, 1991).
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V. Conclusion
The Commission finds good cause for approving the proposed rule
change prior to the 30th day after the date of publication of notice of
filing thereof in the Federal Register. The Commission believes that
accelerated approval is appropriate given the fact that the amendment
provides for greater flexibility while not compromising the integrity
of the Interpretation, and conforms the NASD's Interpretation with
current NYSE practice.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act, that the instant rule change SR-NASD-95-62 be, and hereby
is, approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-4261 Filed 2-26-96; 8:45 am]
BILLING CODE 8010-01-M
