[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]



-----------------------------------------------------------------------

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).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-369 Filed 1-5-95; 8:45 am]
BILLING CODE 8010-01-M