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88-47 Proposed Amendment: Short Sales-Last Date for Comment: August 1, 1988
REQUEST FOR COMMENTS
The NASD is requesting comment on a proposed amendment to the Board of Governors' Interpretation on Prompt Receipt and Delivery of Securities (Interpretation). The amendment would require a member to make an affirmative determination, before effecting a short sale for its own account, that the security will be borrowed or delivered prior to the settlement date. The requirement would not apply to market-making or hedging transactions. The text of the proposed amendment follows this notice.
BACKGROUND AND ANALYSIS
Over the last several years, the NASD Board of Governors has adopted rules providing for additional regulation of short-sale practices in the over-the-counter market In addition, it has amended its Interpretation on Prompt Receipt and Delivery of Securities to establish requirements for accepting customer short-sale orders.
At its May 1988 meeting, the Board discussed the possible need for additional regulation of short-selling practices in the over-the-counter market, particularly with respect to broker-dealer proprietary transactions. The Board determined to publish for comment an amendment to its Interpretatioan
The Interpretation currently prohibits members from accepting a short-sale order from a customer unless the member makes an affirmative determination that it will receive delivery of the security from the customer or that it can borrow the security on behalf of the customer for delivery by settlement date. The term "customer," as defined in Article II, Section l(f) of the NASD Rules of Fair Practice, excludes brokers and dealers.
The Board is considering amending the Interpretation to impose a similar requirement upon members effecting short sales for their own accounts. Under the proposed amendment, a member would be prohibited from effecting a short sale for its own account in any security unless the member makes an affirmative determination that it can borrow the security or otherwise provide for delivery of the security by the settlement date. The proposed amendment would not apply to transactions in corporate debt securities, to transactions by a member in securities in which it is registered as a NASDAQ market maker, or to transactions which result in a fully hedged or arbitraged position.
The Board is also soliciting comment on whether the proposed amendment should be reformulated to impose upon members on affirmative obligation to borrow the securities by settlement date.
The NASD encourages all members and other interested persons to comment on the proposed amendment Comments should be received no later than August 1,1988.
Comments should be directed to:
Mr. Lynn Nellius, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006-1506
Questions concerning this notice can be directed to Therese M. Haberle, NASD Office of General Counsel, at 202-728-8287.
PROPOSED AMENDMENT TO THE INTERPRETATION OF THE BOARD OF GOVERNORS ON PROMPT RECEIPT AND DELIVERY OF SECURITIES
Note: New language is underlined.