[Federal Register Volume 67, Number 15 (Wednesday, January 23, 2002)]
[Notices]
[Pages 3249-3251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1575]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45257; File No. SR-NASD-2001-85]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
Affirmative Determination Requirements for Short Sale Orders Received 
by Members From Non-Member Broker/Dealers

January 9, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 3250]]

(``Act'') \1\ and Rule 19b-4 thereunder, \2\ notice is hereby given 
that on November 27, 2001, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association''), through its wholly owned 
subsidiary, NASD Regulatiion, Inc. (``NASDR''), filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by NASDR. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASDR is proposing to amend Rule 3370(b)(2)(A) and the 
corresponding recordkeeping requirements under Rule 3370(b)(4)(B) (the 
``Affirmative Determination Requirements'') of the NASD to require 
that, before accepting a short sale order from a broker/dealers that is 
not an NASD member (``non-member broker/dealer''), a member must make 
an affirmative determination that the member will receive delivery of 
the security from the non-member broker/dealer or that the member can 
borrow the security on behalf of the non-member broker/dealer for 
delivery by settlement date.
    Below is the text of the proposed rule change. Proposed new 
language is underlined; proposed deletions are in brackets.
* * * * *

Rule 3370. Prompt Receipt and Delivery of Securities

* * * * *
(b)(2) ``Short Sales''
    (A) Customer non-member broker/dealer short sales
    No member or person associated with a member shall accept a 
``short'' sale order for any customer or non-member broker/dealer in 
any security unless the member or person associated with a member makes 
an affirmative determination that the member will receive delivery of 
the security from the customer or non-member broker/dealer or that the 
member can borrow the security on behalf of the customer or non-member 
broker/dealer for delivery by settlement date. This requirement shall 
not apply, however, to transactions in corporate debt securities, and 
proprietary orders of a non-member broker/dealer that meet one of the 
exceptions in subparagraph (B) below.
* * * * *
    (3) No change
    (4) ``Affirmative Determinations''
    (A) No change
    (B) To satisfy the requirement for an ``affirmative determination'' 
contained in paragraph (b)(2) above for customer, non-member broker/
dealer, and proprietary short sales, the member or person associated 
with a member must keep a written record [which] that includes:
    (i) if a customer or non-member broker/dealer assures delivery, the 
present location of the securities in question, whether they are in 
good deliverable form and the customer's or non-member broker/dealer's 
ability to deliver them to the member within three (3) business days; 
or
    (ii) No change
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASDR 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. NASDR 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

1. Purpose
    Rule 3370(b)(2)(A) provides that no member or person associated 
with a member shall accept a short sale order for any customer in any 
security unless the member or person associated with a member makes an 
affirmative determination that the member will receive delivery of the 
security from the customer or that the customer or that the member can 
borrow the security on behalf of the customer for delivery by 
settlement date. For purposes of Rule 3370(b)(2), the term ``customer'' 
is defined in NASD Rule 0120(g) and excludes a broker or dealer.\3\
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    \3\ Rule 0120(g) states that the term ``customer'' shall not 
include a broker or dealer.
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    As a result, the requirements of Rule 3370(b)(2)(A) generally would 
not apply directly to orders received by a member from another broker/
dealer (the ``originating broker/dealer''). This does not present 
regulatory concerns where the originating broker/dealer is also an NASD 
member, because, as a member, the originating broker/dealer would have 
an independent obligation to comply with the Affirmative Determination 
Requirements with respect to the order. Non-member broker/dealers, 
however, are not subject to NASD rules and, therefore, are not 
independently required to comply with the NASD's Affirmative 
Determination Requirements. Thus the Affirmative Determination 
Requirements generally do not apply to short sale orders that originate 
with a non-member broker/dealer and are subsequently routed to an NASD 
member.
    NASDR believes that the failure to have uniform application of the 
Affirmative Determination Requirements affects the integrity of the 
marketplace by possibly resulting in increased fails to deliver and 
also creates regulatory disparity by allowing certain firms to effect 
short sales outside the purview of the NASD's Affirmative Determination 
Requirements.
    To address these concerns, the proposed rule change would amend 
Rule 3370(b)(2)(A) to require that no member or person associated with 
a member shall accept a short sale order for any customer, or any non-
member broker/dealer in any security unless the member or person 
associated with a member makes an affirmative determination that the 
member will receive delivery of the security from the customer or non-
member broker/dealer, or that the member can borrow the security on 
behalf of the customer or non-member broker/dealer for delivery by 
settlement date. In such instances, members also would be required to 
comply wit the corresponding recordkeeping requirements under Rule 
3370(b)(4)(B).
    While NASD members generally are required to make affirmative 
determinations for both customer and proprietary orders, there are 
limited exceptions for proprietary orders that are bona fide market 
making, bona fide fully hedged or bona fide fully arbitraged 
transactions.\4\ Under the proposed rule change, if a member can 
establish and document that a proprietary order it has received from a 
non-member broker/dealer meets one of these exceptions, it would be in 
compliance with the proposed amendments to the Affirmative 
Determination Requirements.
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    \4\ Rule 3370(b)(2)(B).

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[[Page 3251]]

2. Statutory Basis
    NASDR believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act, which requires, among other 
things, that the Association's rules be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASDR believes that applying Affirmative Determination 
Requirements to short sale orders of non-member brokers/dealers will 
ensure the integrity of the marketplace by minimizing possible fails to 
deliver and eliminating regulatory disparities created when short sale 
orders are not conducted in compliance with the Affirmative 
Determination Requirements.

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

    NASDR 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

    NASDR has neither solicited nor received written comments on the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
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-2001-85 and 
should be submitted by February 13, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-1575 Filed 1-22-02; 8:45 am]
BILLING CODE 8010-01-M