Interpretive Letter to Robinson Markel, Esq., Rosenman & Colin, LLP
June 20, 2000
Robinson Markel, Esq.
Rosenman & Colin, LLP
575 Madison Avenue
New York, NY 10022-2585
Re: Request for Interpretation File Number SR-NASD-99-37 – Hard to Borrow List
Dear Mr. Markel:
This letter is in response to your request dated March 30, 2000, to Mary Revell for interpretive guidance regarding the use of "Hard to Borrow" lists to comply with the affirmative determination requirement for short sales pursuant to Rule 3370. On March 30, 2000, the Securities and Exchange Commission ("SEC") approved amendments to Rule 3370 regarding the use of "Hard to Borrow" lists to meet the requirements of Rule 3370.1 The National Association of Securities Dealers ("NASD") on May 9, 2000, published Notice to Members 00-28, which advised members of the SEC's approval of the amendments to Rule 3370 and described the nature of the amendments.2 I have enclosed copies of both items for your reference.
Your inquiry concerns subparagraph (b)(4)(C) of Rule 3370, which states:
"…Should a member relying on an Easy to Borrow or Hard to Borrow list fail to deliver the security on settlement date, the Association shall deem such conduct inconsistent with the terms of this Rule, absent mitigating circumstances adequately documented by the member."
Specifically, your inquiry concerns the circumstances that would be sufficient to mitigate the inability to deliver securities on settlement date where a member has relied upon an Easy to Borrow or Hard to Borrow list. In your letter, you list the following scenario:
(i) A member executes a short sale in a given security and satisfies the affirmative determination requirements of Rule 3370 exclusively by determining that the security in question is not included in a "Hard to Borrow" list, thereby meeting the requirements of clauses (i) (list must include securities restricted under UPC 11830) and
(ii) (list creator must attest that NNM or listed securities not included on the list are easy to borrow or are available for borrowing) of the second sentence, and clause (i) of the third sentence (list must be less than 24 hours old), of subparagraph (b)(4)(C) of the Rule; (ii) On settlement date, a member fails to deliver the security sold short because of inability to actually borrow the security, notwithstanding its absence from the "Hard to Borrow" list and the attestation by the list creator, made not more than 24 hours before the short sale was executed, that securities not on the list are easy to borrow or are available for borrowing; and
(iii) Adequately documents reasonable efforts to borrow the security in question.
In addition, your letter states that the "reasonableness of the efforts to borrow" involves a subjective judgment and that, for the purposes of your request, you assume that the NASD would be the judge of the reasonableness of the situation.
While we recognize that the above scenario contains the proper procedural elements necessary for a "Hard to Borrow" list to comply with Rule 3370(b)(4)(C), we do not believe that the procedures are in and of themselves facts or circumstances constituting mitigating circumstances for failure to deliver the securities on settlement date. We do recognize, however, that the "adequate documentation of reasonable efforts to borrow" may be a factor in demonstrating whether a particular fact pattern will be considered a mitigating circumstance, but standing alone, would not constitute a mitigating circumstance. In other words, reliance on a "Hard to Borrow" list that otherwise complies with Rule 3370(b)(4) and a showing of reasonable efforts to borrow the security does not relieve a member of the requirement to deliver the security on settlement date, absent documented mitigating circumstances.
I hope this letter is responsive to your inquiry. Please note that the opinions expressed in this letter are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation. This letter responds only to the issues you have raised based on the facts as you have described them in your letter, and does not necessarily address any other rule or interpretation of the NASD or all the possible regulatory and legal issues involved.
Please do not hesitate to contact me should you have any further questions about this issue. I can be reached at (202) 728-8159.
Gregory J. Dean
Assistant General Counsel
|cc:||David Leibowitz, Vice President, Director - District
1 SEC Release Number 34-42571, 65 Federal Register 16993 (March 30, 2000).
2 "SEC Approves Use of Hard to Borrow List to Comply with the Affirmative Determination Requirement for Short Sales (Rule 3370)," (Notice to Members 00-28, May 2000).