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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.

Sincerely,

John T. Wall
Executive Vice President
Member and Market Services

Attachments

Exhibit A

NEW SECTIONS 59(j) OF THE UNIFORM PRACTICE CODE:
OLD SECTION 59(j) DELETED

Failure to Deliver and Liability Notice Procedures

(j)
(l) If a Contract is for warrants, rights, convertible securities or other securities which have been called for redemption or are due to expire or on which a call or expiration date is impending or is for securities which are subject to a tender or exchange offer or other such event and the last day on which the securities must be delivered or surrendered (the "expiration date") is the settlement date of the contract or any day after the settlement date, in addition to the close-out procedures set forth in paragraphs (a)–(h) of this Section, the receiving member may deliver a Liability Notice to the delivering member. Such Notice must be issued no later than one business day prior to the latest time and date of the offer or other event in order to obtain the protection provided by this rule.
(2) If the delivering Member fails to deliver the securities on the expiration date, the delivering Member shall be liable for any damages which may accrue thereby. The Liability Notice delivered in accordance with the provisions of this rule shall serve as notification by the receiving Member of the existence of a claim for damages. All claims for such damages shall be made promptly.
(3) For the purposes of this Section, the term "expiration date" shall be defined as the latest time and date on which securities must be delivered or surrendered, up to and including the last day of the protect period, if any.
(4) If the above procedures are not utilized as provided under this rule, contracts may be "bought-in" without prior notice, after normal delivery hours established in the community where the buyer maintains his office, on the expiration date. Such buy-in execution shall be for the account and risk of the defaulting member.

Exhibit B

SAMPLE FORM

SAMPLE LIABILITY NOTICE - ON MEMBER'S LETTERHEAD

PDF TO BE INCLUDED

Exhibit C

(New Language Underscored)

SCOPE OF UNIFORM PRACTICE CODE

Section 1

(a) (no changes)
(b) (no changes)
(c) In trades between members, failure to deliver the securities sold, or failure to pay for securities as delivered, on or after the settlement date, does not effect a cancellation of the contract. The remedy for the buyer or seller is provided for by Sections 59 and 60, respectively, unless the parties mutually consent to cancel the trade. In every such case of non-delivery of securities, the party in default shall be liable for any damages which may accrue thereby. All claims for such damages shall be made promptly.

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