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89-55 Proposed Amendments to the NASD Uniform Practice Code Re: Clearly Erroneous Trades; and Proposed Amendments to Article IX of the NASD Code of Procedure Re: Non-NASDAQ Grievances; Last Date for Comments: September 1, 1989

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REQUEST FOR COMMENTS

EXECUTIVE SUMMARY

The NASD requests comments on proposed amendments to the NASD Uniform Practice Code regarding "clearly erroneous trades" and on an amendment to Article IX of the NASD Code of Procedure to include certain non-NASDAQ grievances. The proposed amendments to the NASD Uniform Practice Code would (1) enable the Association to declare clearly erroneous trades null and void and (2) establish procedures for such determinations and appeals of such determinations. The proposed amendment to Article IX of the NASD Code of Procedure would expand its applicability from grievances involving only NASDAQ operations to grievances involving the operations of NASDAQ and of any other automated quotation, execution, or communication system owned or operated by the Corporation or one of its subsidiaries registered with the SEC.

BACKGROUND

NASD rules now are silent on the subject of clearly erroneous trades. In situations where a trade is obviously in error, the matter must be resolved by the members involved. The Association currently lacks the authority to declare such trades null and void, even though the erroneous quotation, execution, or report of such trade may be detrimental to the fair and orderly functioning of the market.

The proposed amendments reflect the NASD's observations that:

  • The Association should have the capability, as do exchange floor governors, to resolve disputes involving obvious errors in an expeditious manner;
  • Such capability would be beneficial to the membership in that it would provide an efficient mechanism for the disposition of disputes; and
  • Any such capability should provide for Board of Governors review.

In its consideration of these issues, the NASD has also noted that the Code of Procedure does not provide procedures for the resolution of grievances arising out of systems other than NASDAQ operated by the Association.

PROPOSED AMENDMENTS

As a result of these observations, the Board of Governors, the Trading Committee and the Uniform Practice Committee have discussed possible amendments to the Uniform Practice Code to address these concerns. These discussions have resulted in a proposal to amend the Uniform Practice Code to add a new section, Section 70.

Proposed Section 70 of the Uniform Practice Code would initially provide the Association the authority to declare a transaction null and void on the grounds that one or more terms of the transaction is clearly erroneous in cases where it "deems it necessary to maintain a fair and orderly market, and to protect investors and the public interest." The authority would extend to any transactions arising out of the use or operation of any automated quotation, execution, or communication system owned or operated by the Corporation or its subsidiaries that is approved by the SEC. The section is therefore intended to apply to transactions occurring not only in NASDAQ but also involving other systems such as the Order Confirmation Transaction (OCT) system.

The amendments set forth the procedures for declaring a transaction void. These procedures have been formulated to make them as expeditious as possible. A member may initiate the procedure orally (with written confirmation) on the same business day the transaction occurs by contacting a designated officer of the Corporation and requesting that a transaction be declared null and void. The initiating member, as well as all other members involved in the transaction, would be obligated to provide the Association such information as may be requested.

Under the procedures, the designated officer may determine that the transaction is "clearly erroneous and detrimental to the maintenance of a fair and orderly market and the protection of investors and the public interest" and may declare the transaction null and void. The officer may also decline to act if he or she believes that action is unnecessary or inappropriate. That may occur, for example, if the error is such that, although obvious, it has no bearing on the functioning of the market or would otherwise appear more appropriately resolved by other channels such as arbitration.

The procedures would require a written determination, although in most cases it is anticipated that oral notice of the determination will be given. The determination would then be appealable to the SOES Review Committee, provided the appeal was made within four market hours of notice of the determination. The SOES Review Committee, which was established by the Board in 1988, is proposed to be the appellate body in this instance because it is a committee that meets regularly and on short notice. The SOES Review Committee would be required to act within two business days of the determination. Under the procedures, it would consider the matter on the record or after a hearing, if it so ordered. Its determination would constitute final action by the Association and would be appealable to the Securities and Exchange Commission under the Securities Exchange Act of 1934.

Finally, in connection with its consideration of issues involving clearly erroneous trades, the Board noted that Article IX of the Code of Procedure is limited to grievances involving the NASDAQ System and its operations. The Code does not provide separate procedures for grievances involving other systems whose implementation has postdated the adoption of Article IX. The Board is proposing that Article IX be amended to expand its scope to cover redress for grievances arising out of the operation of "any automated quotation, execution, or communication system owned or operated by the Corporation or subsidiary thereof registered with the SEC," the grievances of which are not otherwise addressed by the Code of Procedure.

The Board of Governors believes that the proposed amendments to the Uniform Practice Code will enhance the integrity of the market and be beneficial to members and that the amendment to the Code of Procedure is necessary to provide a mechanism for redress of grievances that arise from systems other than NASDAQ.

The NASD encourages all members and interested persons to comment on the proposed amendments. Comments should be directed to Mr. Lynn Nellius, Secretary, National Association of Securities Dealers, Inc., 1735 K Street, NW, Washington, DC 20006.

Questions concerning this notice can be directed to Ms. Therese M. Haberle, Special Counsel, at (202) 728-8287.

Comments must be received no later than September 1, 1989. Changes to the Uniform Practice Code and Code of Procedure must be approved by the Board of Governors and filed with, and approved by, the SEC before becoming effective.

PROPOSED AMENDMENT TO THE UNIFORM PRACTICE CODE

(Note: New text is underlined.)

UNIFORM PRACTICE CODE

Clearly Erroneous Trades

Sec. 70.

Authority to Declare Transaction Void

(a)
(1) In circumstances in which the Association deems it necessary to maintain a fair and orderly market, and to protect investors and the public interest, the Association may, pursuant to the procedures set forth in paragraph (b), declare any transaction arising out of the use or operation of any automated quotation, execution, or communication system owned or operated by the Corporation or any subsidiary thereof approved by the Securities and Exchange Commission, null and void on the grounds that one or more of the terms of the transaction are clearly erroneous.
(2) For the purposes of this section, the terms of a transaction are clearly erroneous when there is an obvious error in any term, such as price, number of shares or other unit of trading, or identification of the security.
Procedures for Declaring a Transaction Void
(b)
(1) Any member or person associated with a member that seeks to have a transaction declared null and void pursuant to paragraph (a) shall notify an officer of the Corporation designated by the President of the transaction during NASDAQ operating hours on the same business day the transaction occurs, and shall provide such official all facts and information necessary for a determination under paragraph (a). Information communicated orally shall be confirmed promptly in writing. Each member and/or person associated with a member involved in the transaction shall provide the Association with any information requested by the Association in order to resolve the matter on a timely basis.
(2) An officer of the Corporation designated by the President shall review the information submitted and determine whether the transaction in dispute is clearly erroneous and detrimental to the maintenance of a fair and orderly market and the protection of investors and the public interest and may declare that the transaction be null and void. The official may decline to act upon a disputed transaction if he or she believes that action is unnecessary or inappropriate. The Association shall issue a written determination of the matter, setting forth the actions taken and the reasons therefore.
(3) A member or person associated with a member may appeal the determination under sub-paragraph (2) to the Board SOES Review Committee provided such appeal is made within four market hours of notification of such determination. For the purposes of this section, "market" hours shall mean those hours the NASDAQ market is open in the United States, Eastern Time. Upon consideration of the record, and after such hearings as it may order, the SQES Review Committee shall affirm, modify, reverse, dismiss, or remand the determination under subparagraph (2). The SOES Review Committee shall set forth specific grounds upon which its determination is based. The determination of the SOES Review Committee shall be issued within two business days of the determination under subparagraph (2). In any case where a person feels aggrieved by any decision of the SOES Review Committee taken pursuant to subparagraph (3), the person may make application for review to the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934, as amended.
(4) The decision of the SOES Review Committee shall be final and binding upon any member or person associated with a member and shall constitute final Association action on the matter in issue.

PROPOSED AMENDMENT TO THE CODE OF PROCEDURE

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

NASD Code of Procedure Article IX

Procedures on Grievances Concerning [the NASDAQ] Automated Systems

Purpose

Sec. 1. The purpose of this Article is to provide, where justified, redress for persons aggrieved by the [operations of the NASDAQ system] operation of any automated quotation, execution, or communication system owned or operated by the Corporation, or any subsidiary thereof registered with the Securities and Exchange Commission, not otherwise provided for by this Code, and to provide procedures for the handling of qualification matters pursuant to NASDAQ rules.


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