[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