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Location: FINRA Manual > Notices > 1987 > 87-15 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

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87-15 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.

EXECUTIVE SUMMARY

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.

BACKGROUND

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.

* * * *

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.

Sincerely,

Frank J. Wilson
Executive Vice President and General Counsel

Attachments

Exhibit 1

PROPOSED AMENDMENTS TO NASD RULES OF FAIR PRACTICE*

Article III

See. 21

Marking of Customer Order Tickets

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•
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(b) A person associated with a member shall indicate on the memorandum for each customer order for the sale of any security whether the order is "long" or "short," except that this requirement shall not apply to transactions in corporate debt securities. An order shall be marked "long" only if (1) the customer's account is "long" the security involved or (2) the member is informed that the customer owns the security and will deliver it as soon as possible without undue inconvenience or expense.

Sec. 41

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.

Exhibit 2

(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:

(a) Purchases: No member or person associated with a member shall accept a customer's purchase order for any security unless it has first ascertained that the customer placing the order or its agent agrees to receive securities against payment in an amount equal to any execution, even though such an execution may represent the purchase of only a part of a larger order.

(b) Sales:

(1) Long Sales
No member or person associated with a member shall accept a long sale order for any customer in any security unless:

(A) the member has possession of the security;

(B) the customer is long in his account with the member;

(C) reasonable assurance is received by the member or a person associated with the member from the customer that the security will be delivered to it in good deliverable form within five (5) business days following the execution of the order; or

(D) the security is on deposit in good deliverable form with a member of the Association or an organization subject to state or federal banking regulations and instructions have been forwarded to the depository to deliver the securities against payment.

(2) Short Sales
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.

(3) Public Offering
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.

(4) Notation of Order
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.