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93-86 SEC Approves Amendment to Section 65(f)(1) of the Uniform Practice Code Relating to Resolution of Fails Resulting From Account Transfers;

Effective February 1, 1994

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Executive Summary

On October 26, 1993, the Securities and Exchange Commission (SEC) approved an amendment to Section 65(f)(1) of the Uniform Practice Code (UPC) that clarifies the time frame within which members are required to initiate the resolution of fails resulting from account transfers. The text of the amendment, which takes effect February 1, 1994, follows the discussion below.

Background and Description of the Amendment

On October 26, 1993, the SEC approved an amendment to Section 65(f)(1) of the Uniform Practice Code (UPC) to clarify that the appropriate time frame for initiating the resolution of fails resulting from account transfers is 10 days after the date delivery is due. The measure applies to exceptions to certain types of securities for which a 30-days-after the date delivery is due is more appropriate.

The language of subsection 65(f)(1) of the UPC requires members to "promptly" resolve fails resulting from account transfers, as compared with NYSE Rule 412(c), which requires resolution of such fails within 10 days. The NASD determined that members should initiate a close-out within 10 days from the date delivery was due. However, to accommodate the wide variety of securities as well as associated delivery and transfer issues, typical of many over-the-counter securities, the amendment includes an exception to permit more time for certain types of securities, typical of the non-exchange market, for which a 10-day close-out period is not practicable.

For fail contracts resulting from customer account transfers, Section 65(f)(1) now requires the inclusion of such fails in the member's fail file, and requires the member to take steps to obtain physical possession or control of the failed securities, by initiating a buy-in procedure or otherwise, not more than 10 business days following the delivery date. The time frame within which a member is required to obtain taking possession or control of the failed securities is extended to 30 days for certain securities, including banker's acceptances, bond anticipation notes, certificates of deposit, commercial paper, FMAC certificates, FNMA certificates, foreign securities, GNMA certificates, limited partnership interests, municipal bonds, mutual fund shares (transferable), revenue anticipation notes, SBA certificates, and tax anticipation notes.

The amendment takes effect February 1, 1994. Questions regarding this Notice may be directed to Dorothy L. Kennedy, Assistant Director, Market Operations, at (203) 375-9609, and Robert J. Smith, Attorney, Office of General Counsel, at (202) 728-8176.

Text of Amendment to Section 65 of the Uniform Practice Code

(Note: New language is underlined; deleted language is bracketed.)

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Uniform Practice Code

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Customer Account Transfers

Sec. 65

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(f)
(1) Any fail contracts resulting from this account transfer procedure shall be included in a member's fail file and [shall be promptly resolved according to applicable close-out and liability procedures], not later than 10 business days following the date delivery was due, the member shall take steps to obtain physical possession or control of securities so failed to receive by initiating a buy-in procedure or otherwise; provided, that with respect to the following types of securities or instruments, not later than 30 business days following the date delivery was due, the member shall take steps to obtain physical possession or control of securities so failed to receive by initiating a buy-in procedure or otherwise:
(A) banker's acceptances;
(B) bond anticipation notes;
(C) certificates of deposit;
(D) commercial paper;
(E) FMAC certificates;
(F) FNMA certificates;
(G) foreign securities;
(H) GNMA certificates;
(I) limited partnership interests;
(J) municipal bonds;
(K) mutual fund shares (transferable);
(L) revenue anticipation notes;
(M) SBA certificates; and
(N) tax anticipation notes.* * * * *

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