FINRA Manual: Contents
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89-64 SEC Approval of Rule of Fair Practice Amendment Re: The Conduct of Accounts Engaged in Uncovered Short Option Transactions
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The Securities and Exchange Commission recently approved amendments to Appendix E to Article III, Section 33, of the NASD Rules of Fair Practice. These amendments will require members to develop and maintain written procedures for the approval, review, and supervision of customer accounts engaged in uncovered short option transactions. The revised rules also require members to distribute to customers a risk disclosure document concerning uncovered option writing. Members must be in compliance with these rule changes no later than March 1, 1990.
BACKGROUND AND SUMMARY
The amendments to Appendix E of the NASD Rules of Fair Practice conform to rule changes also made by the American Stock Exchange, the Chicago Board Options Exchange, the Midwest Stock Exchange, the new York Stock Exchange, the Pacific Stock Exchange, and the Philadelphia Stock Exchange (the "exchanges"). The NASD and the exchanges (the "SROs") have prepared the attached notice containing guidelines for compliance with the new rules for uncovered short option accounts.
The rule changes were promulgated by the SROs in consultation with industry representatives. The NASD supports these rule changes as a means of assuring that member firms that have public customers engaged in uncovered short option transactions focus increased attention on the suitability of such transactions for their customers and monitor activity in customer accounts on an ongoing basis.
In this regard, amendments to Section 16 of Appendix E will require firms to develop, implement, and maintain specific written procedures for the conduct of accounts engaged in short uncovered options transactions. Such procedures must include account approval, Senior Registered Options Principal (SROP) and/or Compliance Registered Options Principal (CROP) approval of exceptions to standards established by the member, minimum net equity requirements for such accounts, and delivery of a special disclosure statement to customers intended to increase awareness of the risks entailed in uncovered short option transactions.
Section 20 of Appendix E also has been amended. It will require that members develop and implement specific written procedures about supervision of customer accounts, maintaining un-covered short option positions, including specific standards for frequent supervisory review of such accounts.
Questions concerning this notice can be directed to P. William Hotchkiss, Director, Surveillance, at (202) 728-8235.
AMENDMENTS TO APPENDIX E TO ARTICLE III, SECTION 33 OF THE NASD RULES OF FAIR PRACTICE.
(Note: New language is underlined.)
Opening of Accounts
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Supervision of Accounts