[Federal Register Volume 59, Number 153 (Wednesday, August 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19523]
[[Page Unknown]]
[Federal Register: August 10, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34487; File No. SR-NASD-94-32]
Self-Regulatory Organizations; Notice of Proposed Rule Change by
National Association of Securities Dealers, Inc. Amending the Prompt
Receipt and Delivery of Securities Interpretation Relating to Short
Sales
August 4, 1994.
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 July 28,
1994, 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.1 The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
\1\The NASD amended the proposed rule change subsequent to the
original filing on May 26, 1994. Amendment No. 1 was filed in order
to clarify that the proposal applies to both NASD members and
persons associated with NASD members.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is proposing to amend 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. Specifically, the NASD proposes to amend the Interpretation
to require members to annotate their affirmative determinations as to
stock availability that are required to be made when effecting short
sales. 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
It shall be deemed a violation of Article III, Section 1 of the
Rules of Fair Practice of the Association for a member or person
associated with a member to violate the provisions of the following
interpretation thereof:
(a) Purchases: No member or person associated with a member may
accept a customer's purchase order for any security unless it has
first ascertained that the customer placing the order of its agent
agrees to receive securities against payment in an amount equal to
any execution, even though such an execution may represent the
purchase of only a part of a larger order.
(b) Sales:
(1) Long Sales
No member or person associated with a member shall accept a long
sale order from any customer in any security unless:
(A) The member has possession of the security;
(B) The customer is long in his account with the member;
(C) The member or person associated with a member makes an
affirmative determination that the customer owns the security and
will deliver it in good deliverable form within five (5) business
days of the execution of the order; or
(D) The security is on deposit in good deliverable form with a
member of the Association, a member of a national securities
exchange, a broker-dealer registered with the Securities and
Exchange Commission, or any organization subject to state or federal
banking regulations and that instructions have been forwarded to
that depository to deliver the securities against payment.
(2) Short Sales
(A) Customer short sales. No member or person associated with a
member shall accept a ``short'' sale order for any customer in any
security unless the member or person associated with a member makes
an affirmative determination that the member [it] will receive
delivery of the security from the customer or that the member [it]
can borrow the security on behalf of the customer for delivery by
settlement date. This requirement shall not apply, however, to
transactions in corporate debt securities.
(B) Proprietary short sales. No member or person associated with
a member shall effect a ``short'' sale for its own account in any
security unless the member or person associated with a member makes
an affirmative determination that the member [it] can borrow the
securities or otherwise provide for delivery of the securities by
settlement date. This requirement will not apply to transactions in
corporate debt securities, to bona fide market making transactions
by a member in securities in which it is registered as a Nasdaq
market maker, to bona fide market maker transactions in non-Nasdaq
securities in which the market maker publishes a two-sided quotation
to an independent quotation medium, or to transactions which result
in fully hedged or arbitraged positions.
(3) Public Offering
In the case of a public offering of securities, paragraph 1
hereof shall not apply during the period from the commencement of
the public offering until seven (7) business days following the date
of settlement between the underwriter and the issuer of the
securities; provided, however, that the member or person associated
with a member believes in good faith that the customer has purchased
the securities.
(4) ``Affirmative Determination''
(A) To satisfy the requirements for an ``affirmative
determination'' contained in subsection (b)(1)(C) above for long
sales, the member or person associated with a member must make a
notation on the order ticket at the time [he takes] the order is
taken which reflects [his] the conversation with the customer as to
the present location of the securities in question, whether they are
in good deliverable form and [his] the customer's ability to deliver
them to the member within five (5) business days.
(B) To satisfy the requirement for an ``affirmative
determination'' contained in subsection (b)(2) above for customer
and proprietary short sales, the member or person associated with a
member must keep a written record which includes:
(i) if a customer assures delivery, the present location of the
securities in question, whether they are in good deliverable form
and the customer's ability to deliver them to the member within five
(5) business days; or
(ii) if the member of person associated with a member locates
the stock, the identity of the individual and firm contacted who
offered assurance that the shares would be delivered or that were
available for borrowing by settlement date and the number of shares
needed to cover the short sale.
(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.
(5) No change.
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
The NASD is proposing an amendment to the Interpretation dealing
with affirmative determinations made by members, or those persons
associated with such members, in connection with short sales. The
proposed amendment to the Interpretation establishes a requirement for
a member to annotate the affirmative determination made before
effecting a short sale. The affirmative determination requirement
already appears in the Interpretation and requires members or
associated persons to assure that securities are available to cover the
short position. The Interpretation currently requires the executing
member or an associated person, in connection with any sale, to make an
affirmative determination that delivery will be received from the
customer or that the securities will be able to be borrowed by
settlement date. For long sales, the affirmative determination is
required to be noted on the order ticket at the time the order is
placed. However, the rule does not require that such determination be
evidenced in any specific manner for short sales.
The new rule would require members or associated persons to
annotate, on the trade ticket or on some other record maintained for
that purpose by the member firm, the following information:
1. If a customer assures delivery, the member or associated person
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 or associated person locates the stock, an
annotation must be made that identifies 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 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.\2\
\2\Pursuant to Rule 440C, The New York Stock Exchange (``NYSE'')
also requires NYSE members to make affirmative determinations prior
to effecting short sales and to annotate such determinations. NYSE
Information Memo 91-41 (October 18, 1991).
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The NASD believes that requiring such annotations will enhance
member compliance with affirmative determination requirements already
imposed by the Interpretation and will enable the NASD to examine
member compliance with the requirements more effectively. Requiring
firms to annotate each and every affirmative determination also will
make clear the NASD's longstanding policy that firms cannot rely on
daily facsimile sheets of ``borrowable stocks'' to satisfy their
affirmative determination requirements under the Interpretation. The
annotation requirement will preclude this practice as members or their
associated persons will have to annotate the name of the person
contacted and number of shares for each short sale.
Requiring annotation of affirmative determinations will also
enhance the NASD's ability to examine for compliance with various other
NASD short sale rules including those found in Article III, Section 21
of the Rules of Fair Practice (record keeping) and in the Uniform
Practice Code, Section 71 (mandatory delivery requirements for certain
restricted securities). Further, the annotation requirement will assist
in examining for compliance with the short sale rule or ``bid test,''
recently approved by the SEC.\3\ Accordingly, the NASD is proposing to
amend the Interpretation to require that members or their associated
persons maintain a written record evidencing their compliance with the
affirmative determination requirement for each customer or proprietary
short sale.
\3\Securities Exchange Act Rel. No. 34277 (June 29, 1994).
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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 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. The proposal will enable the
NASD to more effectively enforce an already existing provision of the
Prompt Receipt and Delivery Interpretation requiring members or their
associated persons to affirmatively determine that shares relating to a
short sale are available for delivery to a purchaser.
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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street NW., Washington, DC 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-94-32 and
should be submitted by August 31, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
\4\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-19523 Filed 8-9-94; 8:45 am]
BILLING CODE 8010-01-M
