Notice To Members 95-36

SEC Approves T+3-Related Amendments To The NASD Uniform Practice Code And Rules Of Fair Practice

Published Date:

May 01, 1995

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Executive Summary

On March 17, 1995, the Securities and Exchange Commission (SEC) approved the NASD's amendments to Sections 5, 6, 12,46, and 64 of the Uniform Practice Code (the UPC) and Sections 1 and 26 of the Rules of Fair Practice (the RFP) to conform the NASD's rules to the three-day settlement cycle (T+3 settlement) mandated in SEC Rule 15c6–1, scheduled to take effect on June 7, 1995.¹ The amendments to the NASD's rules will also take effect on June 7, 1995.

Description Of Amendments

Following the SEC's adoption of Rule 15c6–1 mandating settlement of securities transactions no later than three days after trade date (T+3), the NASD adopted amendments to the Association's UPC and the RFP. To conform the NASD's rules to the T+3 settlement cycle mandated by Rule 15c6–1, these amendments, which the SEC approved on March 17, 1995, take effect on June 7, 1995. The amendments are described below.

Uniform Practice Code Sections 5 And 6

The amendments to Sections 5 and 6 of the UPC, which prescribe the formula for establishing ex-dates for securities following dividends or other distributions, shorten all the time frames under the Sections by two business days.

Section 12

Section 12 prescribes delivery dates for various transaction circumstances. Subsection 12(b) states that for a "regular way" transaction, delivery must be made on, but not before, the fifth business day after the trade date. The amendment shortens the delivery requirement to the third business day. In addition, the amendment provides that in "seller's option" transactions delivery may be made by the seller on any business day following the third business day after the trade date, rather than the fifth business day.

Section 46

Section 46 requires the calculation of interest up to, but not including, the fifth business day after the trade date. The amendment shortens the time to the third business day.

Section 64

Subsection 64(a)(4) states that in a transaction whereby payment or delivery is to be made to or by an agent of the customer, the customer must agree to furnish instructions to the agent no later than T+4 if the customer is buying COD, or T+3 if the customer is selling POD. The amendments shorten the time period for furnishing such instructions to T+2 and T+l, respectively.

Rules Of Fair Practice

Article m, Section 1

The Prompt Receipt and Delivery Interpretation requires a member to make an affirmative determination, in connection with a long sale, that the customer owns the security and will deliver it in good deliverable form within five business days of order execution. The interpretation also contains a definition of the term "affirmative determination," which applies to long sales and which requires members to note the customer's ability to delivery the securities within five business days. The amendment changes the time limit to three days.

Article III, Section 26(m)(1)

Article III, Section 26(m)(1) requires members to transmit payments received from customers for the purchase of investment company shares by the fifth business day after receipt of a customer's order, or one business day after receipt of a customer's payment, whichever is later. The amendment shortens the five-day transmittal requirement to three days and leaves the one-day alternative unchanged.

The NASD has agreed to an implementation plan for transition to a T+3 settlement cycle proposed by the National Securities Clearing Corporation (NSCC) for early June 1995.²

Questions regarding this Notice may be directed to Nasdaq Market Operations at (203) 375–9609.

¹ The rule filing also included amendments to Section 65 of the UPC relating to customer account transfers. The SEC approved the amendments to Section 65 on November 30, 1995, to coincide with improvements in the Automated Customer Account Transfer System (ACATS). The amendments to Section 65 are not in this Notice, but were published in the NASD Manual and distributed to on-line vendors of the Manual.

² The NSCC plan is to double-up settlement for two trade dates to move from T+5 to T+4 and then repeat the process to move from T+4 to T+3. Thus, for trade date Friday, June 2, trades will settle on the following Friday, June 9 (T+5), and for trade date Monday, June 5, trades will also settle on Friday, June 9 (T+4). The same doubled-up settlement will be used for trade dates Tuesday, June 6 and Wednesday, June 7, both of which will settle on Monday, June 12.

Text Of Amendments To The Uniform Practice Code And The Rules Of Fair Practice

(Note: New text is underlined; deletions are in brackets.)

UNIFORM PRACTICE CODE

Sec. 1 through Sec. 4 No change.

Transactions in Securities "Ex-Dividend," "Ex-Rights" or "Ex-Warrants"

Sec. 5.

Designation of ex-date

(a) No change. Normal ex-dividend, ex-warrants dates

(b)

(1) In respect to cash dividends or distributions, or stock dividends, and the issuance or distribution of warrants, which are less than 25% of the value of the subject security, if the definitive information is received sufficiently in advance of the record date, the date designated as the "ex-dividend date" shall be the [fourth] second business day preceding the record date if the record date falls on a business day, or the [fifth] third business day preceding the record date if the record date falls on a day designated by the Committee as a non-delivery date.

(2) and (3) No change.

Transactions "Ex-Interest" in Bonds Which Are Dealt in "Flat"

Sec. 6.

Normal ex-interest dates

(a) All transactions, except "cash" transactions, in bonds or similar evidences of indebtedness which are traded "flat" shall be "ex-interest" as prescribed by the following provisions:

(1) On the [fourth] second business day preceding the record date if the record date falls on a business day.

(2) On the [fifth] third business day preceding the record date if the record date falls on a day other than a business day.

(3) On the [fifth] third business day preceding the date on which an interest payment is to be made if no record date has been fixed, (b) No change.

Sec. 7 through Sec. 11 No change.

Sec. 12. Dates of Delivery For "cash"

(a) No change.

"Regular way"

(b) In connection with a transaction "regular way" delivery shall be made at the office of the purchaser on, but not before, the [fifth] third business day following the date of the transaction.

"Seller's option"

(c) In connection with a transaction "seller's option," delivery shall be made at the office of the purchaser on the date on which the option expires; except that delivery may be made by the seller on any business day after the [fifth] third business day following the date of transaction and prior to the expiration of the option, provided the seller delivers at the office of purchaser, on a business day preceding the day of delivery, written notice of intention to deliver.

(d) through (h) No change.

Sec. 13 through Sec. 45 No change.

Computation of Interest Sec. 46.

Interest to be added to the dollar price

(a) In the settlement of contracts in interest-paying securities other than for "cash," there shall be added to the dollar price interest at the rate specified in the security, which shall be computed up to but not including the [fifth] third business day following the date of the transaction. In transactions for "cash," interest shall be added to the dollar price at the rate specified in the security up to but not including the date of transaction.

(b) through (f) No change.

Sec. 47 through Sec. 63 No change.

Acceptance and Settlement of COD Orders

Sec. 64.

(a) No member shall accept an order from a customer pursuant to an arrangement whereby payment for securities purchased or delivery of securities sold is to be made to or by an agent of the customer unless all of the following procedures are followed:

(1) through (3) No change.

(4) The member shall have obtained an agreement from the customer that the customer will furnish his agent instructions with respect to the receipt or delivery of the securities involved in the transaction promptly upon receipt by the customer of each confirmation, or the relevant data as to each execution, relating to such order (even though such execution represents the purchase or sale of only a part of the order), and that in any event the customer will assure that such instructions are delivered to his agent no later than:

(i) in the case of a purchase by the customer where the agent is to receive the securities against payment (COD) the close of business on the [fourth] second business day after the date of execution of the trade as to which the particular confirmation relates; or

(ii) in the case of a sale by the customer where the agent is to deliver the securities against payment (POD), the close of business on the [third] first business day after the date of execution of the trade as to which the particular confirmation relates.

RULES OF FAIR PRACTICE ARTICLE III

Sec. 1.

Interpretation of the Board of Governors

Prompt Receipt and Delivery of Securities

(a) No change.

(b) Sales:

(1) Long Sales

(A) and (B) No change.

(C) The member makes an affirmative determination that the customer owns the security and will deliver it in good deliverable form within [five (5)] three (3) business days of the execution of the order; or

(D) No change.

(2) and (3) No change.

(4) "Affirmative Determination"

(a) To satisfy the requirements for an "affirmative determination" contained in subsection (b)(1)(C) above for long sales, the member or person associated with a member must make a notation on the order ticket at the time he takes the order which reflects his conversation with the customer as to the present location of the securities in question, whether they are in good deliverable form and his ability to deliver them to the member within [five (5)] three (3) business days.

(b) and (c) No change.

Investment Companies

Sec. 26.

(a) through (1) No change.

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] third business day following a 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) No change.