[Federal Register Volume 59, Number 182 (Wednesday, September 21, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23344]


[[Page Unknown]]

[Federal Register: September 21, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34673; File No. SR-NASD-94-46]

 

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by National 
Association of Securities Dealers, Inc., Relating to the Pricing of 
Open Orders

September 15, 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 August 
16, 1994, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the NASD. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is proposing to amend Article III, Section 46 of the Rules 
of Fair Practice\1\ to clarify that its provisions will not apply if an 
issuer does not notify the NASD of the declaration of a dividend or 
distributions. Below is the text of the proposed rule change. Proposed 
new language is italicized; proposed deletions are in brackets.
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    \1\NASD Manual, Rules of Fair Practice, Art. III, Sec. 46 (CCH) 
 2200F.
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Adjustment of Open Orders

Sec. 46.

* * * * *
    (e) The provisions of this rule shall not apply to [orders]: (1) 
orders governed by the rules of a registered national securities 
exchange; (2) orders marked ``do not reduce''; (3) orders marked ``do 
not increase;'' (4) open stop orders to buy; [or] (5) open sell 
orders[.1]; or (6) orders for the purchase or sale of securities where 
the issuer of the securities has not reported a dividend, payment or 
distribution pursuant to Rule 10b-17 under the Securities Exchange Act 
of 1934 (17 CFR Sec. 240.10b-17).

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 V 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

    Article III, Section 46 of the NASD Rules of Fair Practice, which 
is scheduled to go into effect on September 15, 1994, requires members 
to adjust open orders for securities when they are quoted ex-dividend, 
ex-rights, ex-distribution or ex-interest.\2\ Most members are on 
notice that a particular security has gone ex-dividend, ex-rights, ex-
distribution or ex-interest because Rule 10b-17 under the Act\3\ 
generally requires an issuer to give notice to the Association\4\ no 
later than ten days prior to the record date involved\5\ of a dividend 
or other distribution in cash or in kind, a stock split or reverse 
split, or a rights or other subscription offering. However, if an 
issuer does not comply with Rule 10b-17, the member holding an open 
order may not have notice of the record date and permit the order to be 
executed when the security is quoted ex-dividend. Accordingly, the NASD 
is proposing an amendment to Article III, Section 46 to provide that it 
will not apply where the issuer has not provided the notice required by 
Rule 10b-17.
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    \2\See NASD Notice to Members 94-9 (February 1994) and NASD 
Notice to Members 94-28 (April 1994).
    \3\17 CFR 240.10b-17 (1993).
    \4\If a security is listed on a national securities exchange or 
exchanges, the issuer of that security may give notice in accordance 
with the procedures of that exchange or exchanges in lieu of giving 
notice to the NASD.
    \5\An issuer may give notice on or before the record date in the 
event of a rights subscription or other offering if 10 days advance 
notice is not practical.
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    The NASD has not noted a widespread Rule 10b-17 compliance problem 
among domestic issuers. However, NASD member firms that do a business 
in foreign securities are required by Article III, Section 46 to adjust 
the price of an open order for a foreign security traded on a foreign 
exchange. In some cases, issuers of such securities are not required by 
the laws of the issuers' country of domicile to announce a dividend, 
and often such issuers do not declare dividends in advance. In some 
cases, the markets find out about dividends when there is a 
significant, unexplained price change in the security and the issuer or 
exchange confirms, in response to inquiries, that a dividend has been 
declared. In such a situation the firm may find itself in violation of 
Article III, Section 46 by permitting an open order to be executed for 
such a security after the dividend has been declared.
    In order to resolve the problem faced by member firms dealing in 
foreign securities or in securities of domestic issuers who have not 
complied with Rule 10b-17, the NASD has determined that an exemption 
for open orders for such securities from the coverage of the new 
section is necessary. Accordingly, the NASD is amending subsection (e) 
to Section 46 of the NASD Rules of Fair Practice to state that the 
obligation to reprice open orders does not apply with respect to 
securities where the issuer has not provided the required Rule 10b-17 
notice. Because Rule 10b-17 requires issuers to notify the NASD or 
national securities exchanges upon the declaration of a dividend or 
other distribution, using Rule 10b-17 as the basis for the exemption 
means that the obligations of Article III, Section 46 of the Rules of 
Fair Practice would attach only if an issuer has complied with Rule 
10b-17.
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act,\6\ which require that 
the rules of the association be designed to prevent fraudulent and 
manipulative acts, promote just and equitable principles of trade, and 
protect investors and the public interest, in that the proposed rule 
preserves the current obligation to adjust open orders after the ex-
date without imposing an obligation on members that would be difficult 
or impossible to meet if issuers did not announce dividends or 
distributions in advance of the ex-date.
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    \6\15 U.S.C. Sec. 78o-3.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The NASD has requested that the Commission find good cause pursuant 
to Section 19(b)(2) for approving the proposed rule change prior to the 
30th day after publication in the Federal Register. The NASD notes that 
Section 46 is scheduled to go into effect on September 15, 1994; the 
Section requires members to adjust open orders for securities when they 
are quoted ex-dividend, ex-rights, ex-distribution or ex-interest; and 
that it is impracticable for members to fulfill the obligations imposed 
by the Section if an issuer has not complied with the requirements of 
Rule 10b-17.
    Based on the NASD's representations that: (1) the laws of the home 
jurisdiction(s) of many foreign issuers do not require such issuers to 
announce the declaration of a dividend or distribution; (2) often such 
issuers do not declare dividends in advance; (3) markets often find out 
about dividends only after there has been a significant, unexplained 
price change in the security and the issuer or exchange confirms, in 
response to inquiries, that a dividend has been declared; and (4) it is 
impracticable for members to fulfill the obligations imposed by the 
Section if an issuer, whether foreign or domestic, has not complied 
with the requirements of Rule 10b-17, 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). Section 15A(b)(6) 
requires, in part, that the rules of the NASD be designed to prevent 
fraudulent and manipulative acts and practices and to protect investors 
and the public interest.
    The Commission finds good cause for approving the proposal on an 
accelerated basis to prevent NASD members from violating the provisions 
of Section 46 in circumstances in which such members cannot be expected 
to be able to comply with that Section. The Commission believes that 
the proposed rule change promotes the public interest by preserving a 
member's obligation to adjust open orders after the ex-date without 
imposing an obligation that would be difficult or impossible for that 
member to meet if an issuer does not announce dividends or 
distributions in advance of 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 and the rules and 
regulations thereunder.

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, N.W., Washington, D.C. 20459. 
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 SR-NASD-94-46 and should be 
submitted by October 12, 1994.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASD-94-46), 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. 94-23344 Filed 9-20-94; 8:45 am]
BILLING CODE 8010-01-M