[Federal Register Volume 59, Number 180 (Monday, September 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23048]
[[Page Unknown]]
[Federal Register: September 19, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. 34-34653; File No. SR-NASD-94-32]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change Amending the Prompt Receipt and Delivery of Securities
Interpretation Relating to Short Sales
September 12, 1994.
On July 28, 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\1\ pursuant to Section 19(b)(1) of the Securities Exchange Act
of 1934 (``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\
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\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.
\2\15 U.S.C. 78s(b)(1).
\3\17 CFR 240.19b-4.
\4\NASD Manual, Rules of Fair Practice, Art. III, Sec. 1, (CCH)
2151.04.
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The NASD proposes to amend the Interpretation to require members or
persons associated with members, to annotate the affirmative
determination made prior to effecting a short sale. The affirmative
determination requirement already appears in the Interpretation and
requires, among other things, that members or associated persons assure
that the securities involved in a sale will be available 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. The
Interpretation as it currently reads, however, does not require that
such determination be evidenced in any specific manner with respect to
short sales.
Under the Interpretation as amended, members or associated persons
will be required to annotate, on the trade ticket or on some other
record maintained for that purpose by the member, the following
information in order to comply with the affirmative determination
requirement for short sales:
1. Where 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 the securities will be delivered to the firm within time
for settlement; or
2. Where the member or associated person locates the stock, an
annotation must be made that identifies not only the number of shares
needed to cover the short sale but also the individual and firm
contacted that offered assurance that the shares would be delivered or
were available for borrowing by settlement date.\5\
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\5\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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In its proposed amendment to the Interpretation, the NASD has not
specified the manner in which a member or person associated with a
member must annotate compliance with the affirmative determination
requirement applicable to short sales. It is clear, however, that the
affirmative determination requirement contained in the amendment to the
Interpretation applies to each and every transaction; a ``blanket'' or
standing assurance that securities are available for borrowing is not
acceptable to satisfy the requirement as is evidenced by the duty to
annotate.
Notice of the proposed rule change, as amended, together with its
terms of substance was provided by issuance of a Commission release\6\
and by publication in the Federal Register.\7\ No comments were
received in response to the Notice. This order approves the proposed
rule change.
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\6\Securities Exchange Act Rel. No. 34487 (August 4, 1994).
\7\59 FR 40931 (August 10, 1994).
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As the NASD indicated in its filing, requiring annotations will
enhance member compliance with the affirmative determination
requirement already imposed by the Interpretation and will enable the
NASD to examine member compliance with the rule more effectively. The
NASD also noted that the amendment will make clear the NASD's
longstanding policy that firms may not rely on daily facsimile sheets
of ``borrowable stocks'' to satisfy their obligations under the
Interpretation. The addition of the annotation requirement will
preclude this practice as members or their associated persons will have
to annotate the name of the person contacted, the name of the firm
contacted and the number of shares for each short sale.
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 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 of their
associated persons to affirmatively determine that shares relating to a
short sale are available for delivery to a purchaser.
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\8\15 U.S.C. 78o-3(b)(6).
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Requiring annotation of affirmative determinations will also
enhance the NASD's ability to examine for member compliance with
various other NASD short sale rules including those found in Article
III, Section 21 of the Rules of Fair Practice (record keeping)\9\ and
in the Uniform Practice Code, Section 71 (mandatory close-outs).\10\
Further, the annotation requirement will assist the NASD in examining
for member compliance with the short sale rule or ``bid test,''
recently granted temporary 18 month approval by the SEC.\11\
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\9\NASD Manual, Rules of Fair Practice, Article III, Sec. 21,
(CCH) 2171.
\10\NASD Manual, Uniform Practice Code, Sec. 71, (CCH) 3571.
\11\Securities Exchange Act Rel. No. 34277 (June 29, 1994), 59
FR 34885 (July 7, 1994).
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change SR-NASD-94-32 be, and hereby is,
approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-23048 Filed 9-16-94; 8:45 am]
BILLING CODE 8010-01-M
