Interpretive Letter to Name Not Public
April 27, 2001
This is in response to your letter to Mr. Jeffrey Holik dated March 29, 2001, in which you request an interpretation of NASD Rule 3370 on behalf of Firm A, a broker/dealer that is registered with the SEC, is a member of the NASD and is a registered market maker on the Nasdaq Stock Market, Inc. Specifically, you seek an interpretation regarding a member's obligation under NASD Rule 3370(b)(1) and (b)(2)(A) to make an affirmative determination that a customer owns (or has the ability to borrow and/or deliver) securities prior to accepting a long or short sale order from a customer. Firm A seeks confirmation that a registered market maker in a Nasdaq security is not required to make an affirmative determination or any other inquiry under Rules 3370(b)(1) or 3370(b)(2)(A) in connection with orders that it receives from other registered broker/dealers.
Rule 3370(b)(1) requires that:
"... no member or persons associated with a member shall accept a long sale order from any customer in any security (except exempt securities other than municipals) unless: (A) The member has possession of the security; (B) The customer is long in his account with the member; (C) The member or person associated with a member makes an affirmative determination that the customer owns the security and will deliver it in good deliverable form within three (3) business days of the execution of the order; or (D) The security is on deposit in good deliverable form with a member of the Association, a member of a national securities exchange, a broker/dealer registered with the Commission, or any organization subject to state or federal banking regulations and that instructions have been forwarded to that depository to deliver the securities against payment. "
Rule 3370(b)(2)(A) requires that:
"[n]o 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 member can borrow the security on behalf of the customer for delivery by settlement date. This requirement shall not apply, however, to transactions in corporate debt securities. "
The term "customer " as used in these two provisions is defined in NASD Rule 0120(g) as not including a broker or dealer. As a result, Rules 3370(b)(1) and 3370(b)(2)(A) would not apply to orders received by a Nasdaq market maker from other registered broker/dealers.
Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation. This letter addresses only the application of Rule 3370(b)(1) and Rule 3370(b)(2) to the facts you have described in your letter, and does not address any other rule or interpretation of the Association, or all the possible regulatory and legal issues involved.
Stephanie M. Dumont
Associate General Counsel