[Federal Register Volume 59, Number 8 (Wednesday, January 12, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-688]


[[Page Unknown]]

[Federal Register: January 12, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33440; File No. SR-NASD-93-52]

 

Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to the 
Pricing of Open Orders

January 6, 1994.
    On September 23, 1993, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'')\1\ a proposed rule 
change pursuant to section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act''),\2\ and Rule 19b-4 thereunder.\3\ The proposal amends 
the NASD Rules of Fair Practice by requiring members holding open 
orders of securities quoted ex-dividend, ex-rights, ex-distribution or 
ex-interest to adjust the price and, if necessary, the size of the 
order by the amount of any dividend, payment or distribution on the day 
that the security is quoted ex-dividend, ex-rights, ex-distribution or 
ex-interest.
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    \1\On November 24, 1993, the NASD filed Amendment No. 1 with the 
Commission. Amendment No. 1 reports the result of an NASD member 
vote on the proposed rule change, which was published for member 
vote in NASD Notice to Members 93-61 (September 1993). The results 
of the member vote are as follows: 1,682 voting in favor, 232 
opposed, and 11 not voting, out of 1,925 ballots received.
    \2\15 U.S.C. 78s(b)(1) (1988).
    \3\17 CFR 240.19b-4 (1993).
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    Notice of the proposed rule change, together with the substance of 
the proposal, was provided by issuance of a Commission release 
(Securities Exchange Act Release No. 33000, October 1, 1993) and by 
publication in the Federal Register (58 FR 53600, October 15, 1993). No 
comment letters were received. This order approves the proposed rule 
change.
    The rule change approved herein amends Article III of the Rules of 
Fair Practice to require members holding open orders of securities 
quoted ex-dividend, ex-rights, ex-distribution or ex-interest to adjust 
the price and, if necessary, the size of the order by the amount of any 
dividend, payment or distribution on the day that the security is 
quoted ex-dividend, ex-rights, ex-distribution or ex-interest. The rule 
change exempts from its scope: (1) Open orders subject to the rules of 
a registered national securities exchange, (2) open stop orders to buy, 
and (3) open sell orders, as well as orders marked ``do not reduce'' or 
``do not increase.''
    The NASD does not currently require its members to adjust open 
orders of securities quoted ex-dividend, ex-rights, ex-distribution or 
ex-interest. An open order is an order to buy or sell which remains in 
effect until it is executed or cancelled, or expires. Such orders are 
also known as ``good 'til cancelled,'' ``limit,'' or ``stop limit.''\4\ 
The NASD believes it is important to adopt a standard for business 
practices and ethics in dealing with customer open orders. Because 
there is currently no NASD rule governing open orders, members adjust 
them according to their own procedures unless the rules of another 
self-regulatory organization apply to the transaction (e.g., New York 
Stock Exchange Rule 118). These procedures can vary from automatic 
adjustment, automatic withdrawal, reconfirmation of the order with the 
customer, or no action. Further, the procedures may vary among orders 
entered at the same firm because the orders are routed to different 
firms for execution. As a result, investors may find that their open 
orders are executed without adjustment after the ex-date at a higher 
cost per share than they intended based on their valuation of the 
security. For example, an investor entering a limit order for a 
security at $10 per share prior to the dividend date may have based his 
pricing judgment on the impending dividend declaration. If his order 
remains open after the ex-dividend date, he may find his order in the 
money and executed at the dividend-assuming price even though he would 
not be entitled to the dividend.
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    \4\A ``good 'til cancelled'' order is an order to buy which 
remains in effect until it is either executed or cancelled. A 
``limit order'' is an order to buy a stated amount of a security at 
a specified price, or at a better price, if obtainable after the 
order is given. A ``stop limit'' order to buy becomes a limit order 
executable at the limit price, or at a better price, if obtainable, 
when a transaction in the security occurs at or above the stop price 
after the order is given.
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    Moreover, the NASD believes the fact that some members adjust open 
orders on ex-dates while others do not, creates confusion for 
customers. The NASD believes that the rule change sets forth a uniform 
and predictable method for adjusting open orders, eliminates the 
potential unfairness associated with the failure to adjust these 
orders, and provides consistency in the adjustment of open orders for 
NASD members that are also members of the New York Stock Exchange and 
American Stock Exchange.
    Subsection (a) of the new Rule of Fair Practice requires a member 
holding an open order from a customer or broker-dealer, prior to 
executing or permitting the order to be executed, to adjust the price 
of the order by the amount of any dividend, payment or other 
distribution on the ex-date.
    Subsection (b) requires the member to reconfirm an open order prior 
to execution if the value of the distribution cannot be determined. 
Subsection (c) requires open orders to be cancelled where the security 
is the subject of a reverse split. Subsection (d) defines the term 
``open order'' as an order to buy which remains in effect for a 
definite or indefinite period of time until it is either executed, 
cancelled, or expires, including, but not limited to, orders marked 
``good 'til cancelled,'' ``limit'' or ``stop limit.''
    Finally, subsection (e) exempts: (1) Open orders subject to the 
rules of a registered national securities exchange, (2) open stop 
orders to buy, and (3) open sell orders, as well as orders marked ``do 
not reduce'' or ``do not increase.'' Open stop orders to buy and open 
sell orders are exempted because the assumptions underlying such an 
order may not include the value of an upcoming dividend; the 
combination of stop and limit prices in such an order makes the effect 
of repricing unpredictable. Orders marked ``do not reduce'' or ``do not 
increase'' are the method for the customer to state that he is aware of 
the implications of not adjusting the order on the ex-date.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to the NASD and, in particular, the requirements 
of section 15A(b)(6) of the Act.\5\ Section 15A(b)(6) requires, inter 
alia, that the NASD's rules be designed to prevent fraudulent and 
manipulative acts, promote just and equitable principles of trade, and 
protect investors and the public interest. The Commission believes that 
the creation of a single method of handling the adjustment of open 
orders after the ex-date will serve the interest of investor 
protection. For this reason, and for the reasons stated above, the 
Commission believes that the proposed rule change satisfies the 
requirements of section 15A(b)(6) of the Act.
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    \5\15 U.S.C.Sec. 78o-3.
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    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the instant rule change be, and hereby is, approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-688 Filed 1-11-94; 8:45 am]
BILLING CODE 8010-01-M