[Federal Register Volume 60, Number 57 (Friday, March 24, 1995)]
[Notices]
[Pages 15616-15618]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-7241]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35507; File No. SR-NASD-94-56]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Partial Approval of Proposed Rule Change 
Relating to the Three Business Day Settlement of Securities 
Transactions

March 17, 1995.
    On October 12, 1994, the National Association of Securities 
Dealers, Inc. (``NASD'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ On 
November 9, 1994, the NASD filed with the Commission Amendment No. 
1.\2\ The purpose of the proposed rule change is to amend the NASD's 
rules to provide for three business day settlement of securities 
transactions. The Commission published notice of the proposed rule 
change in the Federal Register on November 18, 1994.\3\ The commission 
granted partial, accelerated approval of the proposed rule change on 
November 30, 1994.\4\ On December 8, 1994, the NASD filed with the 
Commission Amendment No. 2.\5\ The amendments were techincal amendments 
that did not require republication of notice. One comment was received 
on the notice.\6\ As discussed below, the Commission is approving that 
portion of the proposed rule change relating to the three day 
settlement of securities transactions.\7\

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Letter from Suzanne E. Rothwell, Associate General Counsel, 
NASD, to Mark Barracca, Branch Chief, Over-the-Counter Regulation, 
Division of Market Regulation, Commission (November 8, 1994).
    \3\Securities Exchange Act Release No. 34966 (November 10, 
1994), 59 FR 59802.
    \4\Securities Exchange Act Release No. 35031 (November 30, 
1994), 59 FR 62761. The order approved that portion of the proposed 
rule change relating to the transfer of customer accounts between 
broker-dealers.
    \5\Letter from Suzanne E. Rothwell, Associate General Counsel, 
NASD, to Mark Barracca, Branch Chief, Over-the-Counter Regulation, 
Division of market Regulation, Commission (December 7, 1994). 
Amendment No. 2 eliminated the proposed amendment to Section 
64(a)(3) which would have shortened the time for confirmation of a 
customer order from the day after trade date to the trade date. 
Amendment No. 2 also lengthened by one day, from the first day after 
trade date to the second day after trade date, the time for a buying 
customer to provide agent instructions under Section 64(a)(4).
    \6\Letter from P. Howard Edelstein, President, Electronic 
Settlements Group, Thomson Trading Services, Inc. (A Thomson 
Financial Services Company), to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission (December 2, 1994).
    \7\With this order, the Commission has now approved all of File 
No. SR-NASD-94-56.
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I. Description

    On June 7, 1995, the standard settlement time frame for most 
securities transactions will be shortened from five business days after 
the trade date (``T+5'') to three business days after the trade date 
(``T+3'').\8\ The proposal amends certain provisions of the NASD's 
Uniform Practice Code (``UPC'') and the rules of Fair Practice 
(``RFP'') consistent with a T+3 settlement cycle. These amendments will 
become effective on the same date as Commission Rule 15c6-1, which 
establishes T+3 as the standard settlement time frame.\9\

    \8\On October 6, 1993, the Commission adopted Rule 15c6-1 under 
the Act (17 CFR 240.15c6-1), which establishes T+3 instead of T+5 as 
the standard settlement time frame for most broker-dealer 
transactions. Securities Exchange Act Release No. 33023 (October 6, 
1993), 58 FR 52891. The rule becomes effective June 7, 1995. 
Securities Exchange Act Release No. 34952 (November 9, 1994), 59 FR 
59137.
    \9\The transition from five day settlement to three day 
settlement will occur over a four day period. Friday, June 2, will 
be the last trading day with five business day settlement. Monday, 
June 5, and Tuesday, June 6, will be trading days with four business 
day settlement. Wednesday, June 7, will be the first trading day 
with three business day settlement. As a result, trades from June 2 
and June 5 will settle on Friday, June 9. Trades from June 6 and 
June 7 will settle on Monday, June 12.
    The proposed rule change will shorten the time periods established 
under the NASD's rules for taking certain actions related to 
settlement. Currently, Section 12(b) of the UPC states that for a 
regular way transaction delivery must be made on, but not before, the 
fifth business day following the trade date. The proposal shortens the 
delivery requirement to on, but not before, the third business day 
following the trade date. In addition, seller's option transaction 
deliveries may be made by the seller on any business day after the 
third business day, rather than after the fifth business day, following 
the trade date.
    Similarly, Article III, Section 26(m)(1) of the RFP is amended to 
require that members transmit payments received from customers for the 
purchase of investment company shares within three business days, 
rather than within five business days, after receipt of such customers' 
purchase orders or one business day following receipt of customer 
payments, whichever is later.
    Section 64(a)(4) of the UPC currently requires that customers that 
use an agent to pay for or to deliver securities must agree to furnish 
instructions to the agent no later than T+4 if buying on a receipt 
versus payment ``(RVP'') basis or no later than T+3 if the customer is 
selling on a delivery versus payment (``DVP'') basis. The proposed rule 
[[Page 15617]] change shortens the time period for furnishing such 
instructions to T+2 and T+1 for buying and selling customers, 
respectively.\10\

    \10\Section 64(a)(3) of the UPC currently requires that members 
accepting an order whereby payment or delivery is to be made to or 
by an agent of the customer must deliver a confirmation no later 
than T+1. The notice of the proposed rule change indicated that this 
time period would be shortened to trade date. The NASD has withdrawn 
this portion of the rule change. Supra note 5.
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    The Prompt Receipt and Delivery Interpretation of the Board of 
Governors, Article III, Section 1 of the RFP requires each member to 
make an affirmative determination that its customer owns the security 
and will deliver it in good deliverable form within five business days 
of the execution of an order in connection with a long sale. The 
interpretation also states that to satisfy the requests for an 
affirmative determination, the member must note on the order ticket at 
the time of the order the customer's ability to deliver the securities 
within five business days. The proposed rule change changes these time 
limits from five business days to three business days.
    To accommodate a three business day settlement cycle, it will be 
necessary to change the ex-dates with respect to cash and stock 
dividends, warrants, and interest.\11\ Section 5(b)(1) of the UPC 
currently provides that the ex-date with respect to cash dividends or 
distributions, stock dividends, or warrants which are less than 25% of 
the value of the security shall be the fourth business day preceding 
the record date of the fifth business day preceding the record date if 
the record date falls on a day designated as a non-delivery date 
provided that definitive information is received sufficiently in 
advance of the record date. Section 6(a) currently provides that all 
transactions, other than cash transactions, in bonds or other 
instruments of indebtedness which are traded flat shall be ex-interest 
on the forth business day preceding the record date if the record date 
falls on a business day, on the fifth business day preceding the record 
date if the record date does not fall on a business day, and on the 
fifth business day preceding the date on which an interest payment is 
to be made if no record date has been fixed. All of the time frames 
contained in Sections 5(b)(1) and 6(a) are being shortened by two 
business days. All the other time frames contained in Sections 5 and 6 
of the UPC are not being changed.

    \11\The ex-date indicates the interval between the announcement 
and payment of a distribution during which time an investor who 
purchases shares is not entitled to the distribution.
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    Section 46 of the UPC currently requires that interest to be added 
to the price of interest-paying securities be calculated up to but not 
including the fifth business day following the date of the transaction. 
The proposed rule change shortens the time frame so that interest is 
calculated up to but not including the third business day.

II. Comments
    The Commission received one comment letter from Thomson Trading 
Services, Inc. (``Thomson'') suggesting that additional regulatory 
changes may be necessary to implement T+3 settlement.\12\ Thomson 
believes that the NASD should amend Section 64 of the UPC which 
requires the use of a registered clearing agency's facilities for 
automated confirmations and acknowledgements.

    \12\Letter from Thomson, supra note 6.
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III. Discussion

    The Commission believes the proposed rule change is consistent with 
Section 15A of the Act and, therefore, is approving the proposal. 
Specifically, the Commission believes the proposal is consistent with 
Section 15A(b)(6)\13\ of the Act which requires that the rules of the 
NASD be designed 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.

    \13\15 U.S.C. Sec. 78o-3(b)(6) (1988).
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    Currently, the rules of the NASD and other self-regulatory 
organizations control the time frame for settlement of securities 
transactions. On June 7, 1995, the new settlement cycle of T+3 will be 
established as mandated by the Commission's Rule 15c6-1.
    As a result, the NASD's current rules for a T+5 settlement cycle 
will be inconsistent with the Commission's rule. This proposal amends 
the NASD's rules to harmonize them with the Commission's Rule 15c6-1 
and a T+3 settlement cycle.
    The commission believes that the benefits of a three day settlement 
cycle, as outlined in the release adopting Rule 15c6-1, apply equally 
to the NASD's proposed rule change.\14\ With a T+3 settlement cycle, 
fewer unsettled trades will be subject to credit and market risk, and 
there will be less time between trade execution and settlement for the 
value of those trades to deteriorate.\15\ By reducing risk to the 
clearance and settlement system, the NASD's proposed rule change 
furthers Section 15A's goals of protection of investors and of the 
public interest. The NASD's rules will assist the transition to a T+3 
cycle by providing guidelines for related matters such as ex-dates and 
delivery of agent instructions. Thus, the proposed rule change is 
consistent with Section 15A's goals of fostering cooperation and 
coordination with persons engaged in regulating, clearing, and settling 
transactions in securities and of perfecting the mechanism of a free 
and open market.

    \14\Supra note 7.
    \15\The Commission's release adopting Rule 15c6-1 stated that 
``the value of securities positions can change suddenly causing a 
market participant to default on unsettled positions. Because the 
markets are interwoven through common members, default at one 
clearing corporation or by a major market participant or end-user 
could trigger additional failures, resulting in risk to the national 
clearance and settlement system.'' Id.
    While Thomson's letter supports the NASD's efforts to shorten the 
settlement cycle for securities transactions, Thomson believes that the 
NASD should amend Section 64 of the UPC, which requires the use of a 
registered clearing agency's facilities for automated confirmation and 
acknowledgement of all DVP/RVP transactions.\16\ The NASD, in response 
to Thomson's letter, states that the NASD opposes amending Section 64 
because Thomson's system is not interfaced with other providers of 
confirmation/acknowledgement services and because Thomson is not 
subject to regulatory oversight.\17\ The NASD also states that 
Thomson's letter raises significant issues as to whether a third-party 
vendor of confirmation/affirmation services should be recognized to be 
equivalent to a registered clearing organization providing such 
services.\18\ Thomson provided a further comment letter 
[[Page 15618]] asserting that provision of a trade confirmation was not 
a depository function and therefore did not require the use of a 
depository registered with the Commission.\19\

    \16\Thomson asserts that Section 64 precludes vendors such as 
Thomson from competing with The Depository Trust Company (``DTC''), 
a registered clearing agency. Letter from Thomson, supra note 6. The 
self-regulatory organization confirmation trades to the facilities 
of a registered securities depository. These rules, however, were 
designed to facilitate high levels of trading volume. Further, as in 
the T+5 settlement cycle, an institutional investor will be free to 
choose the post-trade communication service provider as long as the 
trade is eventually confirmed and acknowledgement through a 
registered securities depository.
    \17\Letter from Elliott R. Curzon, Assistant General Counsel, 
NASD, to Christine Sibille, Senior Counsel, Office of Securities 
Processing, Division of Market Regulation, Commission (December 21, 
1994).
    \18\Letter from Suzanne E. Rothwell, Associate General Counsel, 
NASD, to Christine Sibille, Senior Counsel, Office of Securities 
Processing, Division of Market Regulation Commission (January 26, 
1995).
    \19\Letter from P. Howard Edelstein, President, Electronic 
Settlements Group, Thomson, to Jonathan G. Katz, Secretary, 
Commission (February 1, 1995).
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    The Commission believes that the issues raised by the Thomson 
letter need not be resolved prior to the approval of the NASD's 
proposed rule change. Discussions regarding Thomson's concern are 
underway among the Commission, Thomson, and DTC. DTC has submitted a 
rule filing that will establish a linkage between DTC and vendors such 
as Thomson.\20\ The Commission intends to consider whether self-
regulatory organization rules should continue to preclude use of 
private vendor systems for confirmation/affirmation services in DVP/RVP 
trades. However, if the NASD's proposed rule change being approved by 
this order is not approved prior to the June 7, 1995, effective date of 
the Commission's Rule 15c6-1, the NASD rules will conflict with the 
Commission Rule 15c6-1.

    \20\Securities Exchange Act Release No. 35332 (February 3, 1995) 
60 FR 8102 (notice of filing of proposed rule change).
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    As discussed above, Thomson's letter suggests that approval of the 
proposed rule change without amendments to Section 64 raises 
competitive concerns. Under the Act, the Commission's responsibility is 
to balance the perceived anticompetitive effects of a regulatory policy 
or decision against the purpose of the Act that would be advanced by 
the policy or decisions and the costs associated therewith. The 
Commission notes that any anticompetitive effects pointed to by Thomson 
are not caused by the proposed rule change being approved by this order 
but rather by an existing NASD rule. The Commission is reviewing 
Thomson's claim but does not believe that approval of this proposal 
will itself create any burdens on competition. Moreover, as discussed 
above, the rule advances fundamental purposes under the Act, namely the 
efficient clearance and settlement of securities.

IV. Conclusion

    For the reasons stated above, the Commission finds that the portion 
of the proposed rule change relating to three day settlement of 
securities transactions is consistent with Section 15A of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the portion of the rule change (File No. SR-NASD-94-56) containing 
the amendments to Sections 5, 6, 12, 46, and 64 of the UPC and Article 
III, Section 26(m)(1) and Article III, Section 1 of the RFP be and 
hereby is approved and will become effective on June 7, 1995.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\21\

    \21\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-7241 Filed 3-23-95; 8:45 am]
BILLING CODE 8010-01-M