[Federal Register Volume 61, Number 15 (Tuesday, January 23, 1996)]
[Notices]
[Pages 1805-1807]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-841]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36717; File No. SR-NASD-95-62]


Self-Regulatory Organizations; Notice of Proposed Rule Change by 
National Association of Securities Dealers, Inc. Relating to Members' 
Use of Blanket or Standing Assurances as to Stock Availability To 
Satisfy Their Affirmative Determination Requirements Under the Prompt 
Receipt and Delivery of Securities Interpretation When Effecting Short 
Sales

January 16, 1996.
    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 January 
11, 1996,1 the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') 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.

    \1\ The proposed rule change was initially submitted on December 
27, 1995, but was amended prior to publication in the Federal 
Register. The amendment corrects a technical error in the proposed 
amended language and is available for copying in the Commission's 
Public Reference Room.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The NASD is proposing to change the NASD's Prompt Receipt and 
Delivery of Securities Interpretation (``Interpretation'') issued by 
the NASD Board of Governors under Article III, Section 1 of the NASD 
Rules of Fair Practice. Specifically, the NASD proposes to amend the 
Interpretation to provide that under certain circumstances members may 
rely on ``blanket'' or standing assurances as to stock availability to 
satisfy their affirmative determination requirements under the 
Interpretation. The following is the complete text of the proposed rule 
change. Additions are italicized and deletions are bracketed.

 Interpretation of the Board of Governors
    Prompt Receipt and Delivery of Securities
* * * * *
Section (b)(4)(c)
    The manner by which a member or person associated with a member 
annotates compliance with the ``affirmative determination'' requirement 
contained in subsection (b)(2) above (e.g., marking the order ticket, 
recording inquiries in a log, etc.) is not specified by this 
Interpretation and, therefore, shall be decided by each member. 
[However, an affirmative determination and annotation of that 
affirmative determination must be made for each and every transaction 
since a ``blanket'' or standing assurance that securities are available 
for borrowing is not acceptable to satisfy the affirmative 
determination requirement.] Members may rely on ``blanket'' or standing 
assurances that securities will be available for borrowing on 
settlement date to satisfy their affirmative determination requirements 
under this Interpretation, provided: (1) the information used to 
generate the ``blanket'' or standing assurance is less than 24-hours 
old; and (2) the member delivers the security on settlement date. 
Should a member relying on a blanket or standing assurance fail to 
deliver the security on settlement date, the Association shall deem 
such conduct inconsistent with the terms of this Interpretation, absent 
mitigating circumstances adequately documented by the member. 

[[Page 1806]]


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 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

    On September 12, 1994, the SEC approved an NASD rule change (SR-
NASD-94-32) that amended the Interpretation.2 Specifically, the 
Interpretation, as amended, requires members to annotate, on the trade 
ticket or on some other record maintained for that purpose by the 
member firm, the following information when effecting a short sale 
transaction: 3

    \2\ Securities Exchange Act Release No. 34653 (September 12, 
1994), 59 FR 47965 (September 19, 1994).
    \3\ The rule change did not modify any exemptions from the 
affirmative determination requirements that are presently contained 
in the Interpretation. Specifically, transactions in corporate debt 
securities, bona fide market making transactions by members in 
securities in which they are registered as Nasdaq market makers, 
bona fide market maker transactions in non-NASDAQ securities in 
which the market maker publishes two-sided quotations in an 
independent quotation medium, and proprietary transactions by 
members that result in fully hedged or arbitraged positions, are 
still exempt from the affirmative determination requirements for 
short sales.
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    1. If a customer assures delivery, the member must annotate that 
conversation noting the present location of the securities; whether the 
securities are in good deliverable form; and whether they will be 
delivered to the firm within time for settlement; or
    2. If the member locates the stock, the member must annotate the 
identity of the individual and firm contacted who offered assurance 
that the shares would be delivered or were available for borrowing by 
settlement date; and the number of shares needed to cover the short 
sale.
    The amendment also provided that the manner by which a member or 
person associated with a member annotates compliance with this 
``affirmative determination'' requirement (e.g., marking the order 
ticket, recording inquiries in a log, etc.) is left for each individual 
firm to decide. In addition, the amendment also clarified that an 
affirmative determination and annotation of that affirmative 
determination must be made for each and every transaction since a 
``blanket'' or standing assurance that securities are available for 
borrowing is not acceptable to satisfy the affirmative determination 
requirement (``standing assurance provision''). Thus, by requiring 
firms to annotate each and every affirmative determination, the 
amendment made clear the NASD's policy that firms cannot rely on daily 
fax sheets of ``borrowable stocks'' to satisfy their affirmative 
determination requirements under the Interpretation.
    In NASD Notice to Members 94-80, the NASD announced that the 
effective date of the amendments to the Interpretation would be 
November 30, 1994. Based upon feedback from a broad spectrum of NASD 
members that compliance with the amended Interpretation would not be 
possible by November 30, 1994, due to a variety of operational 
adjustments that needed to be made, the NASD decided to postpone the 
effective date of the amendments to the Interpretation until January 9, 
1995, to give member firms sufficient time to prepare for the rule 
change.
    In addition, in light of the NASD's concern that the prohibition 
against the use of daily fax sheets and other ``blanket'' or standing 
assurances may have created an unnecessarily burdensome regulatory 
requirement for NASD members, the NASD decided to postpone the 
effective date of the standing assurance provision until February 20, 
1996, to give the NASD the opportunity to determine whether to amend or 
delete the rule or let it go into effect as approved by the SEC.4 
Even though the NASD has delayed the effective date of the standing 
assurance provision, the Interpretation, as amended, still requires 
members to make an affirmative determination as to stock availability 
for every short sale transaction and annotate that such a determination 
was made.

    \4\ See Securities Exchange Act Release Nos. 35207 (January 10, 
1995), 60 FR 3445 (January 17, 1995); and 36245 (September 18, 
1995), 60 FR 49307 (September 22, 1995).
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    Accordingly, after having had an opportunity to reexamine the 
standing assurance provision, the operational impact it would have on 
member firms, and other regulatory requirements applicable to short 
sales, the NASD is now proposing to delete the standing assurance 
provision and replace it with a provision that would allow NASD members 
to rely on daily fax sheets under some circumstances. Specifically, 
under the proposal, a member could rely on a ``blanket'' or standing 
assurance that securities will be available for borrowing on settlement 
date to satisfy its affirmative determination requirement under the 
Interpretation, provided: (1) The information used to generate the 
``blanket'' or standing assurance is less than 24-hours old; and (2) 
the member delivers the security on settlement date. The proposal also 
provides that, should a member relying on a ``blanket'' or standing 
assurance fail to deliver the security on settlement date, the NASD 
will deem such conduct inconsistent with the terms of the 
Interpretation, absent mitigating circumstances adequately documented 
by the member.
    The NASD believes this proposal strikes a reasonable balance 
between the need to prevent naked, potentially abusive short selling 
activity and the need to avoid the imposition of rules that impose 
unnecessarily burdensome regulatory requirements. Specifically, while 
the proposal does not categorically prohibit the use of daily fax 
sheets to make affirmative determinations, it does impose conditions on 
the use of fax sheets (i.e., they cannot be based on information older 
than 24 hours) and it clearly alerts members relying on daily fax 
sheets to the risk that they shall be in violation of the 
Interpretation if they subsequently fail to deliver the security sold 
short. Thus, contrary to the standing assurance provision, members 
would have the flexibility under the proposal to exercise their 
judgement as to whether it would or would not be appropriate to rely on 
a fax sheet. As noted above, however, even though firms would have the 
flexibility to use fax sheets under the proposal, should a member use a 
fax sheet and subsequently fail to deliver the stock, the NASD would 
view such failure to deliver to be conduct inconsistent with the 
Interpretation. In this connection, in instances where a member fails 
to deliver after having relied on a fax sheet, the proposal also 
provides that the NASD may consider mitigating circumstances adequately 
documented by the member. The NASD believes this further illustrates 
the reasonableness of its proposal.
    For the above reasons, the NASD believes the proposed rule change 
is consistent with Section 15A(b)(6) of the Act. Section 15A(b)(6) 
requires that the rules of a national securities association be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in 

[[Page 1807]]
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. In addition, the NASD believes that its proposal will serve 
to conform the NASD's affirmative determination rule with the New York 
Stock Exchange's (``NYSE'') affirmative determination rule, thereby 
promoting uniformity and consistency in the application and 
interpretation of parallel NASD and NYSE rules and avoiding member firm 
confusion. In sum, the NASD believes the proposal will ease some of the 
operational concerns raised by members with respect to the standing 
assurance provision, without compromising the regulatory purposes 
served by the Interpretation.

B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Comments were neither solicited nor received.

III. 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 NASD 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. In particular, the Commission seeks 
comment on whether the benefits associated with the annotation 
requirement contained in the Interpretation outweigh those associated 
with the use of a fax sheet to an extent necessary to justify a 
presumption that reliance on a fax sheet will be deemed conduct 
inconsistent with the Interpretation in the case of a ``fail to 
deliver'' situation. In addition, the Commission seeks comment on the 
extent to which interested persons perceive a problem associated with 
the possibility of an arbitrary application of the Interpretation. 
Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Washington, D.C. 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-95-62 and should be 
submitted by February 13, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.5

    \5\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-841 Filed 1-22-96; 8:45 am]
BILLING CODE 8010-01-P