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90-15 Amendment to Uniform Practice Code Regarding Buy-In Procedures, Effective February 1, 1990

SUGGESTED ROUTING*

Internal Audit
Legal & Compliance
Operations
Systems

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

EXECUTIVE SUMMARY

The Securities and Exchange Commission has approved an amendment to Section 59 of the NASD's Uniform Practice Code to provide for the automation of the NASD's buy-in procedures. The provisions are effective for buy-ins instituted after February 1, 1990. The text of the amendment to Section 59 follows this notice.

EXPLANATION

The Securities and Exchange Commission has approved an amendment to the NASD's Uniform Practice Code that resulted from a review thereof to bring the code into conformity with current industry standards and practices. One of the sections that was reviewed was Section 59, pertaining to "buy-in" procedures.

The NASD Board, on the recommendation of the Uniform Practice Committee, adopted amendments to Section 59 to more clearly define the procedures that should be followed by broker-dealers in handling buy-ins. The new procedures are specifically designed to provide for the use of sophisticated and modern methods of sending "buy-in" notices and reflect current electronic notification and response methods. The amendments also eliminate provisions that are obsolete and provide greater precision regarding the procedures for manual transmission of buy-in notices.

The rule became effective for buy-ins initiated after February 1, 1990. Questions concerning this notice may be directed to Donald Catapano, Director of NASD Uniform Practice/TARS, at (212) 858-4350.

TEXT OF RULE CHANGE

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

Close-Out Procedure "Buying-in"

Sec. 59 A contract which has not been completed by the seller according to its terms may be closed by the buyer not sooner than the third business day following the date delivery was due, in accordance with the following procedure:

Notice of "buy-in"

(a)
(1) (Text unchanged.)
(2) For purposes of this rule written notice shall include an electronic notice througr a medium that provides for an immediate return receipt capability. Such electronic media shall include but not be limited to facsimile transmission, a computerized network facility, etc.

Information contained in "buy-in" notice

(b)
1. Every notice of buy-in shall state the date of the contract to be closed, [and] the quantity and contract price of securities covered by said contract, the settlement date of said contract and any other information deemed necessary to properly identify the contract to be closed. [and] Such notice shall state further that unless delivery is effected at or before a certain specified time, which may not be prior to 11:30 A.M. local time in the community where the buyer maintains his office, the security may be "bought-in" on the date specified for the account of the seller. If the originator of a "buy-in" in a depository eligible security is a participant in a registered securities depository, the "buy-in" may not be executed prior to 2:30 P.M., Eastern Time. [Every notice of buy-in transmitted pursuant to a buy-in issued by a registered clearing agency must contain the "buy-in reference number," if any, assigned by such registered clearing agency. This number, if preceded by the letters "EXT", will also indicate that the buy-in has already been extended seven (7) calendar days past its original proposed execution date pursuant to Section 59(g) of the UPC] Each "buy-in" notice shall also state the name and telephone number of the individual [with whom further discussions concerning the buy-in may be carried on or the telephone extension where an individual] authorized to pursue further discussions [can be reached] concerning the buy-in.
2. (Text unchanged.)
[3.] (Deleted in its entirety.)

Seller's failure to deliver after receipt of notice

(c)
(i)
(a) On failure of the seller to effect delivery in accordance with the "buy-in" notice, or to obtain a stay as hereinafter provided, the buyer may close the contract by purchasing all or [any] part of the securities necessary to [complete the contract] satisfy the amount requested in the "buy-in" notice. Securities delivered subsequent to the receipt of the "buy-in" notice should be considered as delivered pursuant to the "buy-in" notice. Delivery of the requisite number of shares, as stated in the "buy-in" notice, or [Such] execution will also operate to close-out all contracts covered under retransmitted notices of buy-in issued pursuant to the original notice of buy-in. A "buy-in" may be executed by a member from its long position and/or from customers' accounts maintained with such member.
(c)
(i)
(b) (Text unchanged.)
(c)
(ii) (Text unchanged.)

"Buy-in" not completed

(d) (Text unchanged.)

Partial delivery by seller

(e) (Text unchanged.)

Securities in transit

(f)
[1] If prior to the closing of a contract on which a "buy-in" notice has been given, the buyer receives from the seller written or comparable electronic notice stating that the securities are l) in transfer; [or] 2) in transit; 3) being shipped that day; or 4) due from a depository and giving the certificate numbers, except for those securities due from a depository, then the buyer must extend the execution date of the "buy-in" [may not execute "the buy-in"] for a period [not exceeding] of seven (7) calendar days from the date delivery was due under the "buy-in". Upon request of the seller, an additional extension of seven (7) calendar days may be granted by the Committee due to the circumstances involved. [provided the stock is in transfer and, due to the transfer agent, transfer is delayed.]
[(2)] (Deleted in its entirety.)

[Securities due from a registered clearing agency]

[(g)] (deleted in its entirety.)

Notice of executed "buy-in"

(g[h]) The party executing the "buy-in" shall immediately upon execution, but no later than the close of business, local time, where the seller maintains his office, [via TWX, Telex, hand delivery or other comparable written media, having the same immediate receipt capabilities,] notify the broker/dealer for whose account the securities were bought as to the quantity purchased and the price paid. Such notification should be in written or electronic form having immediate receipt capabilities. If [TWX, Telex or hand delivery are] this written media is not available the telephone shall be used for the purpose of [immediate] same day notification, and written or similar electronic notification [via telegram or mail-o-gram] having next day receipt capabilities must also be sent out simultaneously. In either case formal confirmation of purchase along with a billing or payment, (depending upon which is applicable), should be [mailed or delivered] forwarded as promptly as possible after the execution of the "buy-in". [Immediate similar [n]Notification of the execution of the "buy-in" shall be given to succeeding broker/dealers to whom a re-transmitted notice was [given] issued [under] pursuant to subsection (b) using the same procedures stated herein. If a re-transmitted "buy-in" is executed, it will operate to close out all contracts covered under the re-transmitted notices.

"Close-out" under committee or exchange rulings

(h[i]) (Text unchanged.)

Failure to Deliver and Liability Notice Procedures

(i[j])
(1) If a contract is for warrants, rights, convertible securities or other securities which 1) have been called for redemption; [or] 2) are due to expire by their terms; [or on which a call or expiration date is impending or is for securities which] 3) are the subject of [to] a tender or exchange offer; or 4) are subject to other [such] expiring events such as a record date for the underlying security and the last day on which the securities must be delivered or surrendered (the "expiration date") is the settlement date of the contract or later [any day after the settlement date, in addition to the close-out procedures set forth in paragraphs (a) - (h) of the Section.] the receiving member may deliver a Liability Notice to the delivering member as an alternative to the close-out procedures set forth in paragraphs (a) - (g). Such Notice must be issued using written or comparable electronic media having immediate receipt capabilities no later than one business day prior to the latest time and date of the offer or other event in order to obtain the protection provided by this rule.
(2) (Text unchanged.)
(3) (Text unchanged.)
(4) (Text unchanged.)

Contracts made for cash

(j[k]) Contracts made for "cash", or made for or amended to include guaranteed delivery on a specified date may be "bought-in" without notice during the normal trading hours on the day following the date delivery is due on the contract; otherwise, the procedures set forth in paragraphs (a) - (f) of this Section shall apply. In all cases, notification of executed "buy-in" must be provided pursuant to paragraph (g) of this Section. "Buy-ins" executed in accordance with this subsection shall be for the account and risk of the defaulting broker/dealer.

Information on notices

(k[l]) (Text unchanged.)

"Buy-in" desk required

(l[m]) Members shall have a "buy-in" section or desk adequately staffed to process and research all "buy-ins" during normal business hours.

Buy-in of accrued securities

(m[n]) (Text unchanged.)

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