Notice To Members 88-95

SEC Approval of Amendment to NASD Rules of Fair Practice Re: Prompt Payment for Investment Company Shares — Effective Date: January 1, 1988

Published Date:

SUGGESTED ROUTING*

Senior Management
Legal & Compliance
Operations
Trading

*These are suggested departments only. Others may be appropriate for your firm.

EXECUTIVE SUMMARY

The Securities and Exchange Commission recently approved an amendment to Article III, Section 26 of the NASD Rules of Fair Practice. This amendment, which replaces the Interpretation of the Board of Governors Relating to Prompt Payment by members for shares of investment companies, establishes time frames within which members must transfer payment for investment company shares to investment companies or their agents. The text of the amendment follows this notice.

BACKGROUND

On October 31, 1988, the SEC approved a proposed rule change providing for a new paragraph (m) to Article III, Section 26 of the NASD Rules of Fair Practice. Since 1955, prompt payment by NASD members for investment company shares that they had sold to customers has been governed by the NASD Board of Governors Prompt Payment Interpretation. That interpretation did not, however, include a definition of the term "prompt payment." That interpretation has been rescinded and replaced by the new paragraph (m) to Section 26. The amendment, as approved by the Commission, was adopted pursuant to member vote, which was solicited in Notice to Members 87-44.

EXPLANATION OF AMENDMENT

New Section 26(m) defines the term "prompt payment" in two sets of circumstances.

(1) The new rule will require members, including underwriters, who engage in direct retail transactions with customers to transmit payments that are received from their customers to investment companies or their agents by the later of the trade date plus five business days or the end of one business day following receipt of the customer's payment for such shares.
(2) The second paragraph of the rule requires members that are underwriters and that engage in wholesale transactions with other members to trans mit payments received from such members to the funds or their agents by the end of two business days following the receipt of such funds.

Effective Date

In order to facilitate changes in internal firm procedures that will be required by this rule, the NASD has determined that the rule will become effective January 1, 1989. The text of the new rule is attached. Questions concerning this notice can be directed to A. John Taylor, Vice President, Investment Companies/Variable Contracts, NASD, at (202) 728-8328.

AMENDMENT TO NASD RULES OF FAIR PRACTICE

Investment Companies

Sec. 26

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Prompt Payment for Investment Company Shares

m
(1) Members (including underwriters) that engage in direct retail transactions for investment company shares shall transmit payments received from customers for such shares, which such members have sold to customers, to payees (i.e., underwriters, investment companies, or their designated agents) by (1) the end of the fifth business day following receipt of a customer's order to purchase such shares or by (2) the end of one business day following receipt of a customer's payment for such shares, whichever is the later date.
(2) Members that are underwriters and that engage in wholesale transactions for investment company shares shall transmit payments for investment company shares, which such members have received from other members, to investment company issuers or their designated agents by the end of two business days following receipt of such payments.