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86-29 Proposed Amendment to Article III, Section 21 of the NASD Rules of Fair Practice Relating to Short Sales

IMPORTANT MAIL VOTE

OFFICERS, PARTNERS AND PROPRIETORS

TO: All NASD Members and Other Interested Persons

LAST VOTING DATE IS MAY 23, 1986

Members of the National Association of Securities Dealers, Inc. (NASD), are invited to vote on a proposed amendment to Article III, Section 21 of the NASD Rules of Fair Practice. The proposed amendment has been approved by the NASD Board of Governors and now requires the membership's approval.

The proposed amendment to Article III, Section 21 of the NASD Rules of Fair Practice would require customer order tickets to be marked "long" or "short." Under the proposal, an order may be marked "long" only if (1) the customer's account is "long" the security; 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. The text of the proposed amendment is attached as Exhibit 1.

The proposed amendment to Article III, Section 21 was published for comment on December 24, 1985 (Notice to Members 85-87). If approved by the membership, the proposed amendment will be filed with the Securities and Exchange Commission.

Also published for comment in Notice to Members 85-87 were proposed amendments to the Interpretation of the Board of Governors on Prompt Receipt and Delivery of Securities (Interpretation) that imposed specific requirements for members accepting "short" customer sell orders. Under the proposed amendments, a member would be prohibited from accepting a "short" sale order from a customer unless the member makes an affirmative determination that it will receive delivery of the security from the customer or that it can borrow the security on behalf of the customer for delivery by settlement date. These amendments were approved by the NASD Board of Governors and will be submitted to the Securities and Exchange Commission for approval. 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 amendments to the Interpretation is attached as Exhibit 2 for informational purposes only.

* * * * *

The Board of Governors believes that the amendment to Article III, Section 21 of the NASD Rules of Fair Practice is 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 May 23, 1986.

Questions concerning this notice may be directed to Mary S. Head, NASD Office of the General Counsel, at (202) 728-8284.

Sincerely,

Frank J. Wilson
Executive Vice President and General Counsel

Attachments

Exhibit 1

PROPOSED AMENDMENT TO ARTICLE III, SECTION 21 OF THE NASD RULES OF FAIR PRACTICE

Add a new subsection (b) and renumber the existing subsections:

Information on orders

(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." 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.

Exhibit 2

For Informational Purposes Only

PROPOSED AMENDMENTS TO THE INTERPRETATION OF THE BOARD OF GOVERNORS ON PROMPT RECEIPT AND DELIVERY OF SECURITIES

(Note: New language is underscored; language to be deleted is bracketed.)

It shall be deemed a violation of Article III, Section 1 of the Rules of Fair Practice of the Association for a member to violate the provisions of the following interpretation thereof:

(a) Purchases: No member may 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 persons associated with a member shall accept [execute] a long sale [sell] 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 person associated with a member, from the customer that the customer owns the security and will deliver [be delivered to] it in good deliverable form within five (5) business days of the execution of the order; or
(d) The security is on deposit in good deliverable form with a member of the Association, a member of a national securities exchange, a broker-dealer registered with the Securities and Exchange Commission, or any organization subject to state or federal banking regulations and that instructions have been forwarded to that 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 that it can borrow the security on behalf of the customer for delivery by settlement date.
(3) In the case of a public offering of securities, paragraph 1 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 for "reasonable assurance" contained in sub-paragraph (l)(c) above, 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) business days.


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