[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