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84-68 Amendments to the Uniform Practice Code to Provide for a Liability Notice Procedure and a Liability Notice Form
TO: All NASD Members
ATTN: Operations Principals, Cashiers and Buy-In Personnel
On October 19, 1984, amendments to Sections l(c) and 59(j), "Buy-In Procedures," of the Association's Uniform Practice Code, were approved by the SEC. The Code prescribes the manner in which over-the-counter securities transactions other than those cleared through a registered clearing agency are compared, cleared and settled between NASD member firms. These amendments to the Code apply to transactions between member firms which result in fails.
BACKGROUND AND EXPLANATION OF AMENDMENTS
The Uniform Practice Committee has reviewed NYSE Rule 180 and NSCC Liability Notice Procedures, which provide for notification to a broker-dealer which is failing to deliver securities, that it will be held liable for any damages caused by non-delivery of the involved securities. These rules and procedures have been effective in tender offers, exchange offers, mergers, conversions, and reorganization situations by protecting the buyer and placing liability on the seller when damages will result from the non-delivery of the securities.
The amendments to Section 59(j) of the Uniform Practice Code essentially bring to the over-the-counter securities market a similar liability procedure to that which currently exists for listed issues and those securities issues which are clearing eligible. Basically, these amendments bridge this regulatory gap, and now protect the buyer by providing for notice of liability to the seller.
It was the Committee's recommendation that any NASD rule combine features found in the NYSE and NSCC rules including the development of a standard liability notice which would state:
- the time frame for making delivery of the securities.
- the amount of damages involved, if known, at the time the liability notice is sent.
- the applicable buy-in procedures, in case of non-delivery.
- a definite time frame covered by the notice.
Section 59(j), which is attached as Exhibit A combines features contained in NYSE and NSCC rules and appears as a subsection of Section 59 of the Code, "Buy-Ins."
Under the new amendments, existing subsection 59(j) is deleted and replaced with new subsection (j), "Failure to Deliver and Liability Notice Procedure." The following is a brief description of the adopted amendments to the Code.
- Paragraph 1 permits the sending of a liability notice and defines under what conditions a notice may be sent. Also, it sets the minimum time frame for sending liability notices as no later than one business day prior to the expiration date of the offer or event.
- Paragraph 2 states that a delivering member shall be liable for damages arising from its failure to deliver and that a liability notice shall serve as notice of a claim for damages.
- Paragraph 3 defines the term "expiration date."
- Paragraph 4 clarifies the use of buy-ins to close out a contract when the liability notice procedure is not employed.
The sample Liability Notice (Exhibit B) contains the following information: original trade information, explanation of the offer or event on which liability protection is sought, expiration date information, estimated damages and reference to buy-in procedures.
Additionally, Section l(c) of the Uniform Practice Code (Exhibit C) is also being amended to provide language which provides that in cases of non-delivery of securities, the non-delivering party shall be liable damages, and that claims for such damage be made promptly.
EFFECTIVE DATE OF THE AMENDMENTS
The amendments described herein will be effective on January 1, 1985, so that liability notices issued on or after January 1, 1985 and buy-ins executed pursuant to those notices will be subject to the amended procedures.
The text of the amendments to Sections l(c) and 59(j) of the Association's Uniform Practice Code is attached along with a sample liability notice. Questions regarding these changes may be directed to Donald Catapano, Uniform Practice, (212) 839-6255.
John T. Wall
Executive Vice President
Member and Market Services
NEW SECTIONS 59(j) OF THE UNIFORM PRACTICE CODE:
OLD SECTION 59(j) DELETED
Failure to Deliver and Liability Notice Procedures
SAMPLE LIABILITY NOTICE - ON MEMBER'S LETTERHEAD
PDF TO BE INCLUDED
(New Language Underscored)
SCOPE OF UNIFORM PRACTICE CODE