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86-20 Request for Comment on Proposed Rule Requiring Supervisory Procedures on Limit Orders
TO: All NASD Members and Other Interested Persons
On February 15, 1985, the NASD issued Notice to Members 85-12 discussing members' obligations in handling limit orders in over-the-counter securities.* That notice suggested that each member review its policies and procedures for handling limit orders and take steps to assure that salespeople, customers, and other members understand the way in which the firm handles limit orders. Notice 85-12 announced that the NASD would solicit comments on a proposed amendment to the Rules of Fair Practice that would require each member's internal supervisory procedures to specify whether the firm accepts limit orders and, if so, the procedures it follows in processing them. That proposed amendment is now being published for comment. The text of the amendment is attached.
The proposed amendment would add a new subsection to Article III, Section 27 of the Rules of Fair Practice. Section 27(a) requires that:
[e]ach member shall establish, maintain and enforce written procedures which will enable it to supervise properly the activities of each registered representative and associated person to assure compliance with applicable securities laws, rules, regulations and statements of policy promulgated thereunder and with the rules of this Association.
The new subsection would require that those written procedures contain a statement indicating whether the member accepts limit orders. If so, the member must establish, maintain, and enforce written procedures setting forth the circumstances under which it accepts limit orders and the manner in which it will handle those orders. The member's written procedures would also be required to include a statement of the priorities that will be accorded limit orders relative to transactions for the firm's proprietary accounts.
* * * * *
All members and other interested persons are invited to submit comments on the proposed amendment. Comments should be received no later than April 10, 1986, and should be directed to:
Mr. James M. Cangiano, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006
Comments received by the indicated date will be considered by the Ad Hoc Committee on Limit Orders and the Board of Governors. If the proposed amendment is approved by the Board, it must thereafter be submitted to the membership for a vote. Any rule change approved by the Board and the membership must be filed with and approved by the Securities and Exchange Commission before becoming effective.
Questions concerning this notice may be directed to Dennis C. Hensley, NASD Vice President and Deputy General Counsel, at (202) 728-8245 or T. Grant Callery, NASD Assistant General Counsel, at (202) 728-8285.
Frank J. Wilson
Executive Vice President Legal and Compliance
RULES OF FAIR PRACTICE
Amend Article III, Section 27 as follows:
Subsection (a): No change
Add new subsection (b) as follows:
Each member shall state in its written supervisory procedures whether it accepts limit orders, and, if so, the member shall establish, maintain and enforce written procedures setting forth the circumstances under which it will accept limit orders from customers or other members and the manner in which it will handle those orders. These procedures shall include a statement of the priorities that will be accorded to limit orders relative to transactions for the firm's proprietary accounts.
Redesignate subsections (b) - (f) as (c) - (g)
* In discussing legal principles affecting limit orders, that notice referred to Opper v. Hancock Securities Corporation, 250 F.Supp. 668 (1966), affd 367 F.2d 157 (2nd Circuit 1966), and incorrectly implied that the facts in Opper involved a limit order. In fact, the Court in Opper found the order to be a market order, but stated that its holding would have been the same for a limit order.