[Federal Register Volume 70, Number 148 (Wednesday, August 3, 2005)]
[Notices]
[Pages 44707-44709]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4117]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52131; File No. SR-NASD-2005-093]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Amendments to NASD Rule 3370

July 27, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 20, 2005, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by NASD. NASD has designated 
the proposed rule change as constituting a ``non-controversial'' rule 
change under paragraph (f)(6) 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend Rule 3370 to clarify that members must 
make certain affirmative determinations when effecting long sales and 
document compliance with those affirmative determination requirements. 
Below is the text of the proposed rule change. Proposed new language is 
in italics; proposed deletions are in brackets.
* * * * *
3370. [Purchases]Prompt Receipt and Delivery of Securities

(a) Purchases

    No member or person associated with a member may accept a 
customer's purchase order for any security unless it has first 
ascertained that the customer placing the order or its agent agrees to 
receive securities against payment in an amount equal to any execution, 
even though such an execution may represent the purchase of only a part 
of a larger order.

(b) Long Sales

    No member or person associated with a member shall accept a long 
sale order from any customer in any equity security unless the order 
meets the requirements applicable to long sales set forth in Regulation 
SHO. To the extent a member or person associated with a member does not 
have physical possession or control of the securities, the member or 
person associated with a member must document, at the time the order is 
taken, the communication with the customer as to the present location 
of the securities in question, whether they are in good deliverable 
form and the customer's ability to deliver them to the member by 
settlement date. For purposes of this rule, the term ``customer'' 
includes a non-member broker-dealer.
* * * * *

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

    In its 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
    On June 23, 2004, the SEC adopted certain provisions of a new short 
sale regulation, designated Regulation SHO.\4\ Regulation SHO consists 
of, among other provisions, SEC Rule 200(g), requirements for marking 
sell order of equity securities, and SEC Rule 203(a), delivery 
requirements for long sales.\5\ Specifically, SEC Rule 200(g) of 
Regulation SHO requires that sell orders in all equity securities be 
marked either ``long,'' ``short,'' or ``short exempt.''

[[Page 44708]]

Pursuant to SEC Rule 200(g), an order can be marked ``long'' only when 
the seller owns the security being sold and the security either is in 
the physical possession or control of the broker-dealer or it is 
reasonably expected that the security will be in the physical 
possession or control of the broker-dealer no later than settlement. 
Subject to certain exceptions, SEC Rule 203(a) requires that a broker-
dealer selling an equity security marked long will be able to deliver 
the security on settlement date without borrowing the security. 
Regulation SHO's long sale delivery requirements, together with the 
long sale order marking requirements, require broker-dealers, prior to 
executing the order, to confirm the customer's ownership of the 
security and its ability to deliver the security by settlement date.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 50103 (July 28, 
2004), 69 FR 48008 (August 6, 2004).
    \5\ The compliance date for SEC Rule 200(g) and SEC Rule 203(a) 
was January 3, 2005.
---------------------------------------------------------------------------

    As noted in the adopting release for Regulation SHO, the SEC has 
indicated its expectation that self-regulatory organization (``SRO'') 
rules that overlapped with the provisions of Regulation SHO would be 
repealed. Accordingly, NASD repealed, among other rules, NASD Rule 
3370(b) that, in part, required members to undertake the following 
obligations in connection with a long sale: (1) To make an affirmative 
determination as to the location of the securities, (2) to determine 
whether the securities are in deliverable form and in fact can be 
delivered within 3 business days; and (3) to document such information 
in writing (collectively, the ``affirmative determination 
requirements''). NASD staff has received inquiries as to whether the 
affirmative determination requirements continue to apply, given that 
these requirements are not explicitly provided in Regulation SHO.
    As a result, NASD is proposing to amend Rule 3370 to re-adopt 
expressly the affirmative determination requirements as they now relate 
to member obligations with respect to long sales under Regulation 
SHO.\6\ NASD believes that this proposed amendment will clarify a 
member's obligations in connection with sale transactions that are 
marked long. Specifically, the member must comply with the requirements 
applicable to long sales in Regulation SHO and, to the extent the 
member or person associated with the member does not have physical 
possession or control of the securities, make and document, at the time 
the order is taken, an affirmative determination as to the location of 
the security, that they are in good deliverable form, and the 
customer's ability to deliver such securities on settlement date. As 
with Regulation SHO, absent countervailing circumstances, it may not be 
reasonable to rely on the representation of a customer that an order is 
``long'' if the customer has had prior failures to deliver in a 
security.
---------------------------------------------------------------------------

    \6\ Note: The deletion of the affirmative determination 
requirements in connection with the adoption of Regulation SHO was 
unintentional.
---------------------------------------------------------------------------

    NASD proposes to make the proposed rule change operative on the 
date of filing.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) \7\ of the Act, 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 the proposed rule change will more 
clearly state a member's obligations in connection with sale 
transactions that are marked long, and is consistent with the Act.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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 Change Received From Members, Participants, or Others

    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 is filed pursuant to paragraph (A) of 
Section 19(b)(3) \8\ and Rule 19b-4(f)(6).\9\ Because the foregoing 
proposed rule change does not: (i) Significantly affect the protection 
of investors or the public interest; (ii) impose any significant burden 
on competition; and (iii) become operative for 30 days from the date on 
which it was filed, or such shorter time as the Commission may 
designate, it has become effective pursuant to Section 19(b)(3)(A) of 
the Act and Rule 19b-4(f)(6) thereunder.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to the thirty days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. NASD has requested 
that the Commission waive the thirty day operative delay requirement to 
re-adopt expressly the affirmative determination requirements as they 
now relate to member obligations with respect to long sales under 
Regulation SHO.
    The Commission, consistent with the protection of investors and the 
public interest, has determined to make the proposed rule change 
effective as of the date of this order.\10\ The Commission notes that 
the affirmative determination requirements with respect to member long 
sales were unintentionally deleted when NASD repealed rules that 
overlapped with the provisions of Regulation SHO.
---------------------------------------------------------------------------

    \10\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change 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 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2005-093 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2005-093. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will

[[Page 44709]]

post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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, 100 F Street, NE., Washington, DC 20549-9303. Copies of 
such filing also will be available for inspection and copying at the 
principal office of NASD.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to the File Number SR-NASD-2005-
093 and should be submitted on or before August 23, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4117 Filed 8-2-05; 8:45 am]
BILLING CODE 8010-01-P