[Federal Register Volume 61, Number 38 (Monday, February 26, 1996)]
[Notices]
[Pages 7127-7128]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4261]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36859; File No. SR-NASD-95-62]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Accelerated Approval of Proposed Rule 
Change Amending the Prompt Receipt and Delivery of Securities 
Interpretation Relating to Short Sales

February 20, 1996.

I. Introduction

    On January 11, 1996, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') a proposed rule 
change \1\ pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Exchange Act'') \2\ and Rule 19b-4 thereunder.\3\ The rule 
change amends the 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.\4\ 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.

    \1\ The proposed rule change initially was submitted on December 
27, 1995, but was amended subsequent to its original filing. The 
amendment corrected a technical error in the proposed amended 
language and is available for copying in the Commission's Public 
Reference Room.
    \2\ 15 U.S.C. Sec. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ NASD Manual, Rules of Fair Practice, Art. III, Sec. 1, (CCH) 
para.2151.04.
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    Notice of the proposed rule change, as amended, together with its 
terms of substance was provided by issuance of a Commission release \5\ 
and by publication in the Federal Register.\6\ One comment letter was 
received in response to the Commission release, in support of the 
NASD's proposal. This order approves the proposed rule change.

    \5\ Securities Exchange Act Release No. 36717 (January 16, 
1996).
    \6\ 61 FR 1805 (January 23, 1996).
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II. Description

    On September 12, 1994, the SEC approved an NASD rule change that 
amended the Interpretation.\7\ As part of that rule change, the NASD 
amended the Interpretation to make clear that the use of a ``blanket'' 
or standing assurance that securities are available for borrowing is 
not acceptable to satisfy the affirmative determination requirement 
(``standing assurance provision'').\8\ Based upon feedback from a broad 
spectrum of NASD members, the effective date of the standing assurance 
provision was postponed so as to give the NASD an opportunity to 
reexamine the issue.\9\

    \7\ Securities Exchange Act Release No. 34653 (September 12, 
1994), 59 FR 47965 (September 19, 1994).
    \8\ These ``blanket'' or standing assurances often are sent via 
facsimile to member firms.
    \9\ 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 reexamination, the NASD is now proposing to 
replace the standing assurance provision with a new provision. 
Specifically, under the amendment, a member may rely on a ``blanket'' 
or standing assurance that securities will be available for borrowing 
on settlement date to satisfy its affirmative determination 

[[Page 7128]]
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 amendment 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.

III. Comments

    As noted above, the Commission received one comment letter in 
response to the NASD's proposed rule change. The law firm of Rosenman & 
Colin, on behalf of a number of firms, expressed strong support for the 
NASD's proposal.\10\ The Firms believe that the ability to rely on 
``blanket'' or standing assurances that securities are available for 
borrowing avoids the potential burdens that would be placed on the 
systems and personnel of clearing firms, institutional lenders, and 
introducing firms if the ban on such standing assurances becomes 
effective. The Firms believe that reliance on standing assurances will 
enable firms to continue to conduct business effectively, while 
minimizing situations where a member fails to deliver securities on 
settlement date. In addition, the Firms support the provision that will 
allow a member that relies on a standing assurance to present 
mitigating circumstances if a fail to deliver situation occurs. 
Further, the Firms note that it is important for the policies of the 
NASD and the New York Stock Exchange (``NYSE'') to be consistent with 
respect to the affirmative determination requirement, especially for 
firms with dual membership.

    \10\ Letter from Donald M. Nisonoff, Special Counsel, Rosenman & 
Colin, to Jonathan G. Katz, Secretary, SEC (February 15, 1996). The 
letter was submitted on behalf of Nomura Securities International, 
Inc., CS First Boston, Bear, Stearns & Co., PaineWebber 
Incorporated, Pershing Division of Donaldson, Lufkin & Jenrette, 
Jefferies & Company, Inc., OTA Limited Partnership, and Susquehanna 
Brokerage Services, Inc. (``the Firms'').
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IV. Discussion

    The Commission has determined to approve the NASD's proposal. The 
Commission finds that the rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to the NASD, including the requirements of 
Section 15A(b)(6) of the Exchange Act.\11\ 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 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.

    \11\ 15 U.S.C. 78o-3(b)(6).
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    The amendment allows firms to utilize standing assurances in 
satisfying their affirmative determination requirements. According to 
the commenter, many firms have effective compliance procedures that 
incorporate the use of standing assurances. The amendment provides 
members the flexibility to determine whether it is appropriate to rely 
on a standing assurance in a given situation. The proposal, however, 
also puts members on notice that reliance on standing assurances may be 
deemed conduct inconsistent with the Interpretation under certain 
circumstances. The Commission believes that this flexible approach will 
act not only to ease compliance burdens where appropriate, but also to 
protect against conduct inconsistent with the purposes of the 
Interpretation.
    In addition, the NASD's amendment conforms the Interpretation to 
the NYSE's interpretation of its own affirmative determination 
rule.\12\ The Commission believes that consistent application of both 
rules will result in more efficient compliance with such rules.

    \12\ See NYSE Rule 440C; NYSE Information Memo 91-41 (October 
18, 1991).
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V. Conclusion

    The Commission finds good cause for approving the proposed rule 
change prior to the 30th day after the date of publication of notice of 
filing thereof in the Federal Register. The Commission believes that 
accelerated approval is appropriate given the fact that the amendment 
provides for greater flexibility while not compromising the integrity 
of the Interpretation, and conforms the NASD's Interpretation with 
current NYSE practice.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that the instant rule change SR-NASD-95-62 be, and hereby 
is, approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\

    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-4261 Filed 2-26-96; 8:45 am]
BILLING CODE 8010-01-M