Notice to Members 99-28
NASD Reminds Members of Obligations Relating to the Short-Sale Rule
This Notice to Members supersedes Notice to Members 98-65, restates the views of NASD Regulation, Inc. (NASD RegulationSM) and The Nasdaq Stock Market® (Nasdaq®) concerning National Association of Securities Dealers, Inc. (NASD®) Rule 3350 (Short-Sale Rule) that were discussed in Notice to Members 98-65, and corrects a statement concerning the use of cross-guaranteed accounts for Regulation T purposes.
In 1994, the Short-Sale Rule was adopted to stop market-destabilizing speculative short sales in Nasdaq National Market® (NNM) securities. To prevent this conduct, the Short-Sale Rule prohibits member firms from executing customer short sales and non-Market Maker proprietary short sales in an NNM security at or below the current inside bid when the current inside bid is lower than the previous inside bid.
It has come to the attention of NASD Regulation and Nasdaq that certain NASD members may be assisting customers in the circumvention of this Rule. Specifically, these members are failing to net security positions of accounts for customers who maintain accounts in their name and exercise control over, or operate in concert with, other accounts with a strategy designed to circumvent the Short-Sale Rule. The failure to net these positions has permitted these customers, who operate the two accounts with a single investment strategy, to avoid application of the Short-Sale Rule. Members are expected to establish and maintain supervisory procedures to detect and deter this improper trading activity. The purpose of this Notice is to highlight for members that, depending on the facts and circumstances, they may be required to net positions for accounts that are related or under common control to determine whether a sale is long or short and subject to the Short-Sale Rule requirements. NASD Regulation is committed to ensuring strict adherence to the Short-Sale Rule and will carefully review whether firms have engaged in the conduct described in this Notice in examinations and investigations. Violations of the Short-Sale Rule will be vigorously pursued.Questions concerning this Notice should be directed to the Office of General Counsel, The Nasdaq Stock Market, Inc., at (202) 728-8294; or the Legal Section, Market Regulation, NASD Regulation, at (301) 590-6410.