[Federal Register Volume 60, Number 4 (Friday, January 6, 1995)]
[Notices]
[Pages 2169-2170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-369]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35169; File No. SR-NASD-94-71]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
the Application of ``Do Not Reduce'' and ``Do Not Increase''
Instructions With Respect to the Repricing of Open Orders
December 28, 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 December
7, 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. Below is the text of the proposed rule change.
Proposed new language is italicized and proposed deletions are
bracketed.
Adjustment of Open Orders
Sec. 46.
* * * * *
(e) The provisions of this rule shall not apply to: (1) orders
governed by the rules of a registered national securities exchange; (2)
orders marked ``do not reduce'' where the dividend is payable in cash;
(3) orders marked ``do not increase[;]'' where the dividend is payable
in stock, provided that the price of such orders shall be adjusted as
required by this rule; (4) open stop orders to buy; (5) open sell
orders; 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 Securities and Exchange Commission Rule 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 IV below. The NASD has prepared summaries, set forth in Section
(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 Rules of Fair Practice, which became
effective September 15, 1994, requires a member holding an open order,
prior to executing or permitting the order to be executed, to adjust
the price and size of the order in proportion to the dividend or other
distribution, on the day that the security is quoted ex. Since the rule
became effective, the NASD has discovered an inconsistency in the
definition of the terms ``Do Not Reduce'' (DNR) and ``Do Not Increase''
(DNI) between the NASD's Section 46 and [[Page 2170]] NYSE Rule 118, on
which Section 46 was patterned.
Under NYSE Rule 118, a DNR instruction applies only with respect to
cash dividends; i.e., an order with a DNR instruction would be reduced
in price and increased in size, in the event of a stock dividend or
split, but would not be reduced in price in the event of a cash
dividend. In addition, under NYSE Rule 118, a DNI instruction applies
only with respect to stock dividends, i.e., an order with a DNI
instruction would not be increased in size, but would be reduced in
price, in the event of a stock dividend. Because Section 46 was
intended to operate in the same manner as NYSE Rule 118, and the NASD
has determined to amend the definitions of DNR and DNI to conform to
the definitions in Rule 118.
For customers who understand the operation of Section 46 to be the
same as NYSE Rule 118, leaving the current definitions in place could
result in unexpected executions of open orders for such customers. For
example, the price of an order marked DNR would not be adjusted under
the current definition in Section 46 even in the event of a 2 for 1 or
similar stock dividend, while applying NYSE Rule 118 would result in an
adjustment. Such a dividend would halve the quotes for the security,
but the order would remain at the original price, far out of line with
the market for the security. Thus, the customer could be faced with a
purchase execution at twice the new market price for the security,
assuming that the original order was priced between the old bid and ask
quotations. The apparent rationale behind limiting the application of
the DNR instruction to cash dividends under NYSE Rule 118 (and the
proposed amendment to Section 46) is that cash dividends are less
likely to result in large quotation moves that would place an
unadjusted order very far out of line with the market.
Similarly, consistent with Rule 118, a DNI instruction should apply
only to order size adjustment in the event of a stock dividend. Because
orders are only adjusted (increased) in size in a sock dividend
situation, and price is never adjusted upward as a result of a
distribution, a DNI instruction would operate to prevent the size of an
order from being increased. This will prevent a customer from ending up
with more shares than he wanted or intended. Moreover, because a DNI
instruction only applies to the size of the order, the price of the
order in a dividend situation will be adjusted downward as required by
the rule.
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act in that the
clarification of the definitions of DNR and DNI will alleviate
confusion, and order executions that may be harmful to investors,
caused by the differences between Section 46 and NYSE Rule 118 and,
thereby, remove an impediment to the functioning of the market and
protect investors.
(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.
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 self-regulatory organization 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-94-71 and
should be submitted by January 27, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\1\
\1\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-369 Filed 1-5-95; 8:45 am]
BILLING CODE 8010-01-M