[Federal Register Volume 60, Number 30 (Tuesday, February 14, 1995)]
[Notices]
[Pages 8436-8437]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3567]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35339; File No. SR-NASD 94-71]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to the 
Application of ``Do Not Reduce'' and ``Do Not Increase'' Instructions 
With Respect to the Repricing of Open Orders

February 7, 1995.
    On December 7, 1994, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') a proposed rule 
change to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder.\2\ The rule change amends 
Article III, Section 46 of the Rules of Fair Practice,\3\ which governs 
adjustment of open orders, relating to the applicability of this 
section to orders marked ``do not reduce'' (``DNR'') and ``do not 
increase (``DNI''). The provisions of Section 46 deal with the 
adjustment of open orders in the event of a payment or distribution. As 
amended, the rule will neither apply to orders marked DNR where the 
dividend is payable in cash, nor to orders marked DNI where the 
dividend is payable in stock, provided that the price of such DNI 
orders shall be adjusted as required by the rule.

    \1\15 U.S.C. 78s(b)(1).
    \2\17 CFR 240.19b-4.
    \3\NASD Manual, of Fair Practice, Article III, Section 46, (CCH) 
2200F.
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    Notice of the proposed rule change, together with its terms of 
substance was provided by issuance of a Commission release\4\ and by 
publication in the Federal Register.\5\ No comments were received in 
response to the notice. This order approves the proposed rule change.

    \4\Securities Exchange Act Release No. 35169 (December 28, 
1994).
    \5\60 FR 2169 (January 6, 1995).
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    Article III, Section 46 of the Rules of Fair Practice, which became 
effective September 15, 1994, requires a member to adjust the price and 
size of an open order in proportion to the dividend or other 
distribution on the day the security is quoted ``ex'',\6\ before the 
member may permit the order to be executed. The amendment has been 
proposed in response to an inconsistency in the definition of the terms 
DNR and DNI between the NASD's Section 46 and New York Stock Exchange 
(``NYSE'') Rule 118,\7\ on which Section 46 was patterned. Because 
Section 46 was intended to operate in the same manner as NYSE Rule 118, 
the NASD filed the proposed rule change to amend the definitions of DNR 
and DNI to conform to the definitions in Rule 118.

    \6\The ``ex-date'' represents the day on which the underlying 
security is traded without a specific dividend or distribution. NASD 
Manual, Uniform Practice Code, Section 3(e), (CCH) 3503.
    \7\NYSE Guide, Handling of Orders and Reports, Rule 118, (CCH) 
2118.
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    Under NYSE Rule 118, a DNR instruction applies only with respect to 
cash dividends. An order with a DNR instruction will not be reduced in 
price in the event of a cash dividend. Such an order will, however, be 
reduced in price and increased in size in the event of a stock dividend 
or split. In addition, under NYSE Rule 118, a DNI instruction applies 
only with respect to order size adjustments in the event of stock 
dividends. While an order with a DNI instruction will not increased in 
size, it will be reduced in price in the event of a stock dividend or 
split. An order with a DNI instruction is inapplicable in the event of 
a cash distribution because the [[Page 8437]] number of shares is not 
affected by a cash distribution and, therefore, no order size 
adjustment is necessary.
    Currently, under Section 46, a DNR instruction applies to both cash 
and stock distributions. 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. 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 adjusted market for that 
security. Similarly, all orders marked DNI would not be subject to the 
current adjustment provisions of Section 46. While an order marked DNI 
would not be increased in size in the event of stock dividend, it also 
would not be reduced in price pursuant to the provisions of Section 46.
    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 certain open orders. To address this 
concern, the NASD has proposed to amend the applicability of Section 46 
to orders marked DNR and DNI. Pursuant to the amendment, the provisions 
of the rule will not apply to orders marked DNI where the distribution 
is payable in cash, nor to orders marked DNI where the distribution is 
payable in stock, provide, however, that the price of such DNI orders 
will be adjusted as required by the rule.
    The Commission has determined to approve the NASD's proposal. The 
Commission finds that the rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to the NASD, including the requirements of Section 15A(b)(6) 
of the Act.\8\ Section 15A(b)(6) requires, in part, that the rules of a 
national securities association be designed to promote just and 
equitable principles of trade; 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 proposed 
rule change acts to remedy an unintentional inconsistency between 
Section 46 and NYSE Rule 118. The rule change also protects against the 
unexpected and unintended execution of open orders.

    \8\15 U.S.C. 78o-3(b)(6).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change SR-NASD-94-71 be, and hereby is, 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\

    \9\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-3567 Filed 1-13-95; 8:45 am]
BILLING CODE 8010-01-M