Proposed Amendments to Article III, Sections 21(b) and 41 of the NASD Rules of Fair Practice and the Interpretation of the Board of Governors Concerning Short Sales
IMPORTANT MAIL VOTE
OFFICERS, PARTNERS AND PROPRIETORS
TO: All NASD Members
LAST VOTING DATE IS APRIL 5, 1987.
NASD members are invited to vote on proposed amendments to Article III, Sections 21(b) and 41 of the NASD Rules of Fair Practice. The NASD Board of Governors has reviewed the applicablity of recent regulation of short-sale practices by NASD members to various types of securities and believes its appropriate to propose certain amendments.
The proposed amendment to Article III, Section 2l(b) would exclude corporate debt securities from the requirement to mark customer order tickets "long" or "short."
The proposed amendment to Article III, Section 41 would exclude convertible debentures from the requirement to report to the NASD on a monthly basis aggregate short positions in NASDAQ securities in all customer and proprietary firm accounts.
The proposed amendments have been approved by the NASD Board of Governors and now require membership approval. Prior to becoming effective, the proposed amendments must also be approved by the Securities and Exchange Commission. The text of the proposed amendments is attached as Exhibit 1.
During the past year, the NASD Board of Governors adopted rules providing for additional regulation of short-sale practices in the over-the-counter market. Article III, Section 21 of the NASD Rules of Fair Practice was amended to require the marking of customer order tickets "long" or "short" in all over-the-counter transactions.
Amendments to the Board of Governors' Interpretation on Prompt Receipt and Delivery of Securities were also adopted creating separate procedures for the acceptance of "long" and "short" orders from customers and establishing new requirements for accepting customer short-sale orders.
In addition, the NASD adopted Article III, Section 41 of the NASD Rules of Fair Practice, which requires members to maintain a record of aggregate short positions in NASDAQ securities in all customer and proprietary firm accounts and to report such information to the NASD on a monthly basis.
Since the new short-sale requirements became effective, questions have arisen regarding the applicability of the new rules to various types of securities. As a result, the Board reviewed the new requirements to determine whether they should be applicable to all securities traded over-the-counter, all securities included in the NASDAQ System, only straight equity over-the-counter or NASDAQ securities, or any other category of securities. Based on this review, the Board has approved certain amendments to the NASD short-sale rules.
SUMMARY OF PROPOSED AMENDMENTS
Article III, Section 21(b)
Article III, Section 2l(b) of the NASD Rules of Fair Practice currently requires that customer order tickets in all transactions be marked "long" or "short." The proposed amendment would exclude corporate bonds from this requirement. Thus, order tickets in over-the-counter transactions in securities, other than corporate debt securities, will be required to be marked "long" or "short." However, municipal or government securities are not subject to the NASD short-sale rules.
Interpretation of the Board of Governors on Prompt Receipt and Delivery of Securities
Recent amendments to the Interpretation of the Board of Governors on Prompt Receipt and Delivery of Securities (Interpretation) established separate procedures for the acceptance of "long" and "short" orders from customers and new requirements for acceptance of customer short-sale orders. The Board has approved an amendment to the Interpretation that will exclude corporate bonds from the short-sale requirements established by the Interpretation.
Pursuant to Article VII of the NASD By-Laws, amendments to an Interpretation of the Board of Governors do not require a membership vote. The text of the proposed amendment to the Interpretation is attached as Exhibit 2 for informational purposes only.
Article III, Section 41
Article III, Section 41 of the NASD Rules of Fair Practice currently requires members to maintain a record of aggregate short positions in all NASDAQ securities in all customer and proprietary firm accounts and to report these totals to the NASD on a monthly basis. The proposed amendment would exclude convertible debentures from this reporting requirement. Aggregate short positions in common shares, rights and warrants included in the NASDAQ System will be required to be reported.
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The Board believes that the proposed amendments to Article III, Sections 21(b) and 41 of the NASD Rules of Fair Practice are necessary and appropriate and recommends that members vote their approval.
Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than April 5, 1987.
Questions concerning this notice may be directed to T. Grant Callery, NASD Office of General Counsel, at (202) 728-8285.
Frank J. Wilson
Executive Vice President and General Counsel
PROPOSED AMENDMENTS TO NASD RULES OF FAIR PRACTICE*
Marking of Customer Order Tickets
Reporting of Aggregate "Short" Positions
Each member shall maintain a record of total "short" positions in all customer and proprietary firm accounts in common shares, rights and warrants [securities] included in the NASDAQ System and shall regularly report such information to the Corporation in such a manner as may be prescribed by the Corporation. Reports shall be made as of the close on the settlement date falling on the 15th of each month, or, where the 15th is a non-settlement date, on the preceding settlement date. Reports shall be received by the Corporation no later than the second business day after the reporting settlement date.
(For Informational Purposes Only)
PROPOSED AMENDMENT TO THE INTERPRETATION OF THE BOARD OF GOVERNORS*
Prompt Receipt and Delivery Of Securities
It shall be deemed a violation of Article III, Section 1 of the Rules of Fair Practice for a member to violate the provisions of the following interpretation thereof:
No member or person associated with a member shall accept a long sale order for any customer in any security unless:
No member or person associated with a member shall accept a "short" sale order for any customer in any security unless the member makes an affirmative determination that it will receive delivery of the security from the customer or 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.
In the case of a public offering of securities, paragraph (b)(l)(c) hereof shall not apply during the period from the commencement of the public offering until seven (7) business days following the date of settlement between the underwriter and the issuer of the securities; provided, however, that the member believes in good faith that the customer has purchased the securities.
To satisfy the requirements of "reasonable assurance" contained in subparagraph (l)(c) above, each member or person associated with a member shall make a notation on the memorandum for each customer order at the time the order is taken reflecting the customer's representation as to the present location of the securities, whether they are in good deliverable form, and the customer's ability to deliver the securities to the member within five (5) business days.
* New language is underlined; deleted language is bracketed.
* New language is underlined.