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83-69 Amendments to the Uniform Practice Code to Extend Applicability of the Code to Secondary Market Transactions in Unit investment Trust Securities

TO: All NASD Members

ATTN: Operations Principals, Cashiers and Buy-in Personnel

The Association's Board of Governors has adopted various amendments to the Uniform Practice Code which prescribes the manner in which over-the-counter securities transactions are compared, cleared and settled between NASD member firms. These amendments to the Code apply to all NASD members participating in secondary transactions in unit investment trust securities.

BACKGROUND AND EXPLANATION OF AMENDMENTS

The amendments to the Uniform Practice Code are designed to extend the applicability of the Code to secondary market transactions in unit investment trust securities. The amendments also specifically exempt from such coverage, transactions in other redeemable securities registered under the Investment Company Act of 1940 and direct participation program securities, both of which have in the past been treated as being exempt from coverage of the Code.

The original proposal to extend the scope of the Code was urged by member firms because of the increased popularity and trading activity in this investment product. In particular, it was perceived that a substantial "fail-to-deliver" problem existed in the secondary market for UITs. Historically, the Code has been applied only to corporate equity and debt securities and not to securities registered under the Investment Company Act of 1940. In this regard a special subcommittee of the Association's Uniform Practice Committee was formed to study the feasibility of adapting the Code to UITs and to develop the necessary amendments.

The subcommittee concluded that UPC coverage of UITs was feasible and desireable. The subcommittee then undertook a section-by-section analysis of the Code to determine what, if any, changes were appropriate to extend the coverage of the Code to UITs. The resulting amendments to the Code will provide industry-wide uniformity in trading and trade processing for unit investment trust securities.

The amendments to Section 1 of the Code, relating to the scope of coverage of the Code provide for the inclusion of UITs, the exclusion of DPP securities and a clarification of existing practice that the Code applies only to secondary market trades. The purpose of the amendments, with the exception of Section 59, is simply to extend application of the affected Sections to UITs. The amendments to Section 59 of the Code relating to buy-in procedures provide a number of options available to a purchaser wishing to "buy-in" contracts in unit investment trust securities. These options allow the purchaser either to buy-in identical securities, to accept UIT units comparable to those originally purchased, or if neither of the first two options are available, to require the seller to repurchase the unit investment trust securities. Such a repurchase is to be completed on terms which require the seller to bear the burden of any change in market price in the securities along with accrued interest. This option, which* is similar to that provided by MSRB Rule G-12, is made available because, as with municipal securities, only a limited number of identical or comparable trust units may be available thereby precluding a true buy-in on the part of the aggrieved purchaser.

The following is a brief description of the adopted amendments to the Code. The full text of the amendments is attached.

  • In Section I (a) of the Code, the term "secondary market" has been added to express more clearly the fact that only aftermarket transactions are covered by the Code and that its provisions are not applicable to the original distribution of a new issue.
  • A new Section 1(a)(iv) has been added which generally excludes redeemable securities from coverage under the Code. The exception is made, however, for all secondary market transactions in UITs except redemptions.
  • Old Section 6(b) defining "record date" has been redesignated Section 3(d) and amended to specifically include unit investment trust securities and principal payments on these securities.
  • Non-substantive language has been added in Section 5(b) (3) to clarify the process for declaration of ex-dividend dates on securities of open-end management investment companies.
  • Language has been added to Section 10 relating to descriptions of securities in confirmations and comparisons to include the payment option on unit investment trust securities.
(b)
(1) and (2) Unchanged
(b)
(3) Ex-dividend dates for investment company shares
Notwithstanding the above, the ex-dividend date on [stock] securities of an open-end management investment company shall be the date designated by the issuer or its principal underwriter.
(c) - Unchanged

Sec. 6 TRANSACTIONS "EX-INTEREST" IN BONDS WHICH ARE DEALT IN "FLAT"

[(a)] - Text of subsection unchanged
["Record Date"
(b) As used in this Section, the term "record date" means the date fixed by the trustee, registrar, paying agent or issuer for the purpose of determining the holders of bonds, or similar evidences of indebtedness entitled to receive interest payments.]

Sec. 7-9 Unchanged

Sec. 10 DESCRIPTION OF SECURITIES

Confirmations or comparisons shall include, in addition to an adequate description of the security [and] (which shall include payment options on a unit investment trust series), the price at which the transaction was made[,] and any other information deemed necessary to insure that the buyer and seller agree as to details of the transaction. Such "other information" should include, if applicable, but need not be limited to, such phrases as "ex-warrants," "ex-stock," "registered," "flat," "part-redeemed," "Canadian funds," "with proxy," etc.

Sec. 11-17 - Unchanged

Sec. 17A - Units of Delivery - Unit Investment Trust Securities

The minimum unit of delivery for Unit Investment Trust Securities shall be a single unit of the trust.

Sec. 18-45 - Unchanged

Sec. 46 COMPUTATION OF INTEREST

  • A new Section 17 (A) is being added to define the unit of delivery for unit investment trust securities as a single unit of the trust.
  • In Sections 46(a), (c) and (d), the term "bond" has been deleted and replaced with the word "security" in order to expand the application of those sections dealing with the computation of accrued interest for unit investment trust securities.
  • Sections 48(b) and (d) have been amended to specifically refer to unit investment trust securities in the definition of "due-bill checks."
  • In Section 49 (c), language has been added to specifically refer to unit investment trust securities in the procedure for claiming interest payments.
  • Language has been added in Section 56(a) to specifically refer to unit investment trust securities in the procedure for reclamations.
  • Old Section 59(c) has been redesignated Section 59(c) (i) and a new Section 59(c) (ii) has been added to provide a buy-in procedure for unit investment trust securities. In essence, these provisions allow a purchaser of securities which have not been delivered either to buy the securities in, to agree upon a substitution of securities or, if both of these options are unavailable, to effect a repurchase of the securities. These procedures are comparable to the buy-in provisions of Rule G-12 of the Municipal Securities Rulemaking Board.

The text of these amendments to the Association's Uniform Practice Code is attached. Questions regarding these amendments may be directed to Donald J. Catapano, Uniform Practice Department at (212) 839-6255.

Sincerely,

John T. Wall
Executive Vice President
Member and Market Services

Enclosures

(a) Interest to be added to the dollar price
In the settlement of contracts in interest - paying securities other than for "cash," there shall be added to the dollar price interest at the rate specified in the [bond] security, which shall be computed up to but not including the fifth business day following the date of the transaction. In transactions for "cash," interest shall be added to the dollar price at the rate specified in the [bond] security up to but not including the date of transaction.
(b) Unchanged
(c) [Registered bonds] Securities traded "and interest"
When a delivery of a [registered bond] security traded "and interest" is made between the record date fixed for the purpose of determining the holder entitled to receive interest and the interest payment date, a deduction equivalent to the full amount of the interest to be paid [by the obligor] shall be made on settlement.
(d) [Registered bonds] Securities traded "flat"
When delivery of a [registered bond] security traded "flat" is made after the record date fixed for the purpose of determining the holder entitled to receive interest, in the settlement of a contract made prior to the date on which the [issue of bonds] security was traded "ex-interest," a due-bill check for the full amount of the interest to be paid [by the obligor] shall accompany the delivery.
(e) and (f) - Unchanged

Sec. 47 Unchanged

Sec. 48 DUE-BILLS AND DUE-BILL CHECKS

(a) Unchanged
(b) Definition of due-bill checks
The term "due-bill checks" as used in this Section means a due-bill in the form of a check payable on the date of payment of a cash dividend [or]j_ interest on registered bonds or interest on unit investment trust securities, which prior to such date shall be considered as a due-bill, as defined in paragraph (a) above, for the amount of such dividend or interest [on registered bonds].
(c) Unchanged

TEXT OF AMENDMENTS TO UNIFORM PRACTICE CODE TO INCLUDE UNIT INVESTMENT TRUST SECURITIES

(New language is underlined, deleted language is bracketed)

UNIFORM PRACTICE CODE

Sec. 1 SCOPE OF UNIFORM PRACTICE CODE

(a) All over-the-counter secondary market transactions in securities between members shall be subject to the provisions of this Code except:
(i), (ii), (iii) - Unchanged
(iv) transactions in redeemable securities issued by companies registered under the Investment Company Act of 1940; provided however the the Code shall apply to secondary market transactions between members in any security issued by a registered investment company classified as a "unit investment trust" under Section 4 of the Investment Company Act. Redemption of securities directly by the trustee of the unit investment trust are not transactions between members for purposes of this subsection.
(v) transactions in Direct Participation Program securities as defined in Article III, Section 34 of the Association's Rules of Fair Practice.
(b) and (c) - Unchanged

Sec. 2 Unchanged

Sec. 3 DEFINITIONS

(a), (b), (c) - Unchanged

Record Date

(d) As used in this Code the term "record date" means the date fixed by the trustee, registrar, paying agent or issuer for the purpose of determining the holders of bonds, similar evidences of indebtedness or unit investment trust securities entitled to receive interest or principal payments.

Sec. 4 Unchanged

Sec. 5 TRANSACTIONS IN SECURITIES "EX-DIVIDEND," "EX-RIGHTS" OR "EX-WARRANTS"

(a) - Unchanged
(d) Due-bill checks for cash distribution and interest
Due bill checks for a cash distribution, [or] interest on registered bonds or interest on unit investment trust securities shall accompany securities delivered too late for transfer on or before the record date.
(e) and (f) - Unchanged

Sec. 49 CLAIMS FOR DIVIDENDS, RIGHTS, INTEREST, ETC.

(a) and (b) Unchanged
(c) Interest or rights [on registered bonds]
The provisions of subsections (a) and (b) of this section shall be equally applicable to interest or rights pertaining to registered bonds and unit investment trust securities.

Sec. 50-55 - Unchanged

Sec. 56 IRREGULAR DELIVERY - TRANSFER REFUSED - LOST OR STOLEN SECURITIES

(a) Irregular delivery
Reclamation, by reasons of the fact of an irregularity in the delivery of a security, shall be within 30 months after the settlement date of the contract. For purposes of this section, the term "irregular delivery" shall include, among other things, wrong, duplicate, misdirected [and] O£ over-[delivery] deliveries and delivery of unit investment trust securities having the incorrect payment option.

(b), (c), (d) - Unchanged

Sec. 57-58 - Unchanged

Sec. 59 "BUYING-IN"

(a) and (b) - Unchanged
(c)
(i) Seller's failure to deliver after receipt of notice
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 retransmitted 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 customer's 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)
(ii) Buy-in for unit investment trust securities
Buy-in execution options, in addition to those contained in (c)(i), may be available when the purchaser wishes to buy-in contracts made for unit investment trust securities.
The purchaser may,
(a) by mutual agreement, accept from the seller in lieu of the seller's obligation under the original contract (which shall be concurrently cancelled) the delivery of unit investment trust securities which are comparable to those originally bought in quantity, quality, yield or price and maturity, with any additional expenses or any additional cost of acquiring such substituted securities being borne by the seller.
(b) if the purchaser's option in (c)(i) is not available and the purchaser and seller cannot agree upon option (a), above, require the seller, for the account and liability of the seller, to repurchase the unit investment trust securities on terms which provide that the seller pay an amount which requires the seller to bear the burden of any change in the market price from the original contract price, with accrued interest.
Bearing the burden of any change in the market price from the original contract price means that if the current market price is higher than the original contract price, the purchaser may require the seller to repurchase the unit investment trust securities at the current market price and conversely means that if the current market price is lower than the original contract price, the purchaser may require the seller to repurchase the unit investment trust securities at the original contract price, with accrued interest.
(d) - (n) - Unchanged

Sec. 60-64 Unchanged


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