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89-44 Amendment to Uniform Practice Code Re: Mandatory Buy-Ins for Cash or Guaranteed Delivery, Effective June 1, 1989

SUGGESTED ROUTING*

Legal & Compliance
Operations
Systems
Trading

*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, which requires that, for transactions in NASDAQ securities where the buyer is a customer, other than another member, and a clearing corporation fails to effect delivery in accordance with a buy-in notice, the contract must be closed by purchasing for cash or for guaranteed delivery. This provision will be effective for buy-ins instituted after June 1, 1989. 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 was adopted by the NASD Board of Governors in response to a study by Irving M. Pollack on "Short Sale Regulation of NASDAQ Securities." The purpose of the new provision is to ensure that customers who are entitled to and who seek to do so are able to obtain delivery of their securities purchases, notwithstanding the fact that a clearing corporation buy-in has not produced delivery. This rule change provides that, upon the failure of a clearing corporation to make delivery of securities after a buy-in has been attempted, members will be required to close the contract by purchasing, for cash or guaranteed delivery, any portion of the securities not delivered through the clearing corporation buy-in process. The provision applies only to purchases of NASDAQ securities by customers, other than another NASD member, who seek to obtain delivery of their securities. Members should note that, as with other buy-ins, the amendment requires that members be prepared to defend the price at which the buy-in is executed relative to the current market price at the time of the buy-in.

Failure to comply with the provisions of the Code may subject members to disciplinary action in appropriate cases.

To provide members with an opportunity to notify appropriate personnel of this change and to make procedural changes as necessary, the requirements of the rule will become effective for buy-ins initiated after June 1, 1989.

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

Sec. 59. Buying-in

(a) and (b) are unchanged.

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. Such execution will also operate to close-out all contracts covered under re-transmitted 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. [In all cases, members must be prepared to defend the price at which the "buy-in" is executed relative to the current market at the time of the "buy-in."]
(c)
(i)
(b) For transactions in NASDAQ Securities where the buyer is a customer (other than another member), upon the failure of a clearing corporation to effect delivery in accordance with a buy-in notice, the contract must be closed by purchasing for "cash" in the best available market, or at the option of the buyer for guaranteed delivery, for the account and liability of the party in default all or any part of the securities necessary to complete the contract

As provided in subsections (i)(a) and (i)(b) hereof, members must be prepared to defend the price at which the "buy-in" is executed relative to the current market at the time of the "buy-in."

(c)
(ii) is unchanged
(d) through (n) are unchanged.

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