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88-83 Amendment to Article III, Section 21 of the NASD Rules of Fair Practice Re: Marking Customer Order Tickets - Effective Immediately
*These are suggested departments only. Others may be appropriate for your firm.
The Securities and Exchange Commission (SEC) recently approved an amendment to Article HI, Section 21 of the NASD Rules of Fair Practice to require the marking of customer order tickets for each transaction in a non-NASDAQ security to reflect the dealers contacted by members and the quotations received to determine the best inter-dealer market as required by an amendment to the NASD's "Best Execution Interpretation" (the Interpretation). The text of the amendment follows this notice.
On May 2, 1988, the SEC approved proposed rule changes providing for new Schedule H to the NASD By-Laws (Schedule H). The rule amendments establish an electronic system of mandatory price and volume reporting for over-the-counter (OTC ) securities that are not part of the National Association of Securities Dealers Automated Quotations (NASDAQ) System.1 In part, the rule changes also amend the Interpretation of the Board of Governors Execution of Retail Transactions in the Over-the-Counter Market (the Interpretation) by adding a new paragraph (D) that requires members to contact and obtain quotations from a minimum of three dealers (or all dealers in a security for which there are three or less) prior to executing any transaction on behalf of a customer in a non-NASDAQ OTC security.
On June 1, 1988, the NASD issued Notice to Members 88-40 to announce the adoption of Schedule H and to solicit a membership vote on a proposed amendment to Article III, Section 21 of the NASD Rules of Fair Practice on the "Marking of Customer Order Tickets." The membership approved the proposed rule amendment and the SEC approved the amendment on August 1, 1988.2
EXPLANATION OF AMENDMENT
The amendment to Article III, Section 21 added to the rule a new paragraph (b), which requires that a person associated with a member note on the order ticket for each transaction in a non-NASDAQ OTC security the identities of the dealers contacted and the quotations received to determine the best interdealer market. This change complements the amendment to the Interpretation and will enable the Association to determine compliance with that change.
The amendments to Article III, Section 21 and the Interpretation do not result in a change to the NASD's markup policy set forth in the NASD Manual as an Interpretation to Article III, Section 4 of the NASD Rules of Fair Practice (NASD Markup Policy) and compliance with the new amendments will not necessarily assure compliance with the NASD Markup Policy.3 Thus, under the new amendments, contacting three dealers that may quote prices substantially higher than the prevailing market price as determined by the standards established under the NASD Markup Policy will not permit the member to mark up a security based on those quotations.
In addition, both the amendment to the Interpretation and the new amendment to Article III, Section 21 requiring the marking of customer order tickets must be read in conjunction with the price- and volume-reporting provisions for non-NASDAQ OTC securities under Schedule H. Under these regulatory provisions, responsibility for reporting price and volume for trades in non-NASDAQ OTC securities rests with the executing broker-dealer.
Thus, where an introducing firm is executing trades in non-NASDAQ OTC securities, the introducing firm is responsible for reporting the price and volume of the transactions and marking the order tickets to reflect the dealers contacted. Where an introducing firm only passes an order on to another firm that executes the order, the executing firm, and not the introducing firm, is responsible for the reporting and marking of the order ticket.
Questions regarding this notice can be directed to Elizabeth Wollin, Assistant Director, Automated Reports, at (301) 728-6887, or Eneida Rosa, Assistant General Counsel, NASD Office of General Counsel, at (202) 728-8284.
AMENDMENT TO ARTICLE III, SECTION 21 OF THE NASD RULES OF FAIR PRACTICE
Books and Records
(Note: New language is underlined.)
1 Members' obligations under this new upgrading system are set forth in Notice to Members 88-54 (July 1988).
2 Securities Exchange Act Release No. 34-25952, August 1, 1988.
3 NASD Manual (CCH), pp. 2054-2058