[Federal Register Volume 69, Number 37 (Wednesday, February 25, 2004)]
[Notices]
[Pages 8717-8718]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4117]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49285; File No. SR-NASD-2004-031]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by National Association of 
Securities Dealers, Inc. Relating to Establishing an Effective Date For 
NASD Rule 3370, Affirmative Determination Requirements

February 19, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on February 13, 2004, NASD filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by NASD. NASD has designated the proposed rule 
change as constituting a stated policy, practice, or interpretation 
with respect to the meaning, administration, or enforcement of an 
existing rule series under paragraph (f)(1) of Rule 19b-4 under the 
Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. 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.
    \3\ 17 CFR 240 19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is filing a proposed rule change to establish April 1, 2004 as 
the effective date of the amendments to Rule 3370 (the ``Affirmative 
Determination Rule'') that the SEC approved in November 2003.\4\ The 
amendments expand the scope of the affirmative determination 
requirements to include orders received from broker/dealers that are 
not members of NASD (``non-member broker/dealers''). As revised, Rule 
3370 applies to orders received by member firms from both customers and 
non-member broker/dealers, as well as most firm proprietary orders. The 
revisions also add an exception for ``proprietary'' short sales of non-
member broker/dealers provided the member can establish that the order 
meets certain conditions.
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    \4\ See Securities Exchange Act Release No. 48788 (Nov. 14, 
2003); 68 FR 65978 (Nov. 24, 2003).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its original rule filing with the Commission, 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. 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

1. Purpose
    NASD is filing the proposed rule change to establish April 1, 2004 
as the effective date for the amendments to NASD Rule 3370 that the SEC 
approved in November 2003.\5\ Now, Rule 3370(b)(2)(A) and the 
corresponding recordkeeping requirements under Rule 3370(b)(4)(B) 
require that, prior to accepting a short sale order from a broker/
dealer 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 the settlement date. In addition, Rule 
3370(b)(2)(A) provides exemptions for, among others, proprietary orders 
of member firms that are bona fide market making transactions, or 
transactions that result in bona fide fully hedged or arbitraged 
positions. Proprietary orders of a non-member broker/dealer likewise 
are exempt from the affirmative determination requirements if they meet 
the same conditions for the exemptions applicable to proprietary orders 
of member firms, and the following two conditions are satisfied: (1) 
The non-member broker/dealer must be registered with the SEC; and (2) 
if using the market maker exemption, the non-member broker/dealer is 
registered or qualified as a market maker in the securities and is 
selling such securities in connection with bona fide market making.
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    \5\ Id.
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    Pursuant to the SEC's approval of SR-NASD-2001-85, the amendments 
to Rule 3370 will go into effect on February 20, 2004. However, NASD 
seeks to delay implementation of these provisions until April 1, 2004. 
NASD understands from input received by industry participants that it 
would be very difficult to comply with the new requirements without 
making significant technological changes to their systems. For example, 
according to the NASD, when members receive orders from either another 
member or a non-member broker/dealer, the broker/dealers placing the 
orders are identified by a specific market participant identifier 
(``MPID''). Currently, members'' systems do not distinguish between the 
MPIDs of members and non-member broker/dealers. To comply with the new 
affirmative requirements, members will have to be able to distinguish 
the members' MPIDs from the non-member broker/dealers' MPIDs. NASD 
understands that to do so, firms will have to make sizeable programming 
changes that will allow firms to tag each MPID as belonging to either a 
member or non-member broker/dealer and create a master list of MPIDs 
that show which MPIDs belong to members and which belong to non-member 
broker/dealers. NASD believes that extending the effective date of the 
Rule 3370 amendments until April 1, 2004 will provide members 
sufficient time to make the necessary changes to their systems.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\6\ which requires, among 
other things, that NASD rules must 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. NASD believes that applying affirmative determination 
requirements to short sale orders of non-member brokers/dealers will 
ensure the integrity of the

[[Page 8718]]

marketplace by minimizing possible fails to deliver and eliminate 
regulatory disparities created when certain short sale orders are not 
conducted in compliance with the affirmative determination 
requirements. NASD further believes that extending the effective date 
will ensure that members have sufficient time to make the necessary 
programming changes to be able to comply with the new affirmative 
determination requirements.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD 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

    Written comments were neither solicited nor received.

III. Date Of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The proposed rule change has been filed by NASD as a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule series under Rule 
19b-4(f)(1) under the Act.\7\ Consequently, it has become effective 
pursuant to section 19(b)(3)(A) of the Act \8\ and Rule 19b-4(f)(1) 
thereunder.\9\
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    \7\ 17 CFR 240.19b-4(f)(1).
    \8\ 15 U.S.C. 78s (b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(1).
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    At any time within 60 days of this filing, the Commission may 
summarily abrogate this proposal if it appears to the Commission that 
such action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
changes are 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. 
Comments may also be submitted electronically at the following email 
address: [email protected]. All comment letters should refer to 
File No. SR-NASD-2004-031. This file number should be included on the 
subject line if email is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in hard 
copy or by email but not by both methods.
    Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule changes that are filed 
with the Commission, and all written communications relating to the 
proposed rule changes 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 
filings will also be available for inspection and copying at the 
principal offices of the NASD. All submissions should refer to the file 
numbers SR-NASD-2004-031 and should be submitted by March 17, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-4117 Filed 2-24-04; 8:45 am]
BILLING CODE 8010-01-P