SEC Approves Proposed Changes To NASD Rule 2860

INFORMATIONAL

Options Rule

Executive Summary

On December 13, 2000, the Securities and Exchange Commission (SEC) approved amendments to National Association of Securities Dealers, Inc. (NASD^®) Rule 2860.¹ The amendments:

The amendments become effective on February 15, 2001. The text of the amendments is provided in Attachment A.

Questions/Further Information

Questions concerning this Notice may be directed to the NASD Regulation, Inc. Office of General Counsel at (202) 728-8071, or Gary L. Goldsholle, Associate General Counsel, Office of General Counsel, NASD Regulation^SM, at (202) 728-8104.

Background And Summary

The NASD's options position limits, exercise limits, and reporting requirements, Rules 2860(b)(3), 2860(b)(4) and 2860(b)(5), respectively, apply to any account in which a member, or any partner, officer, director, or employee of the member has an interest, or for the account of any customer. However, because the NASD's definition of "customer"² excludes a broker or dealer, non-member brokers and non-member dealers have been outside the scope of these rules. As a result, conventional options transactions³ of a non-member broker or non-member dealer that are effected by an NASD member are not subject to any position and exercise limits or options reporting.⁴ The new amendments to Rule 2860 will remedy this gap. Under these amendments, options position and exercise limits and reporting requirements will apply to accounts of non-member brokers and non-member dealers.

The amendments also codify certain options position reporting requirements set forth in NASD Notice to Members 94-46. Specifically, the amendments state that the reporting requirements are "applicable to all standardized options positions established by ‘access’ firms or their customers and all conventional options positions established by members or their customers." Access firms are defined as NASD members that conduct a business in exchange-traded options but are not themselves members of the options exchange upon which such options are listed and traded. Limiting reporting of standardized options positions under NASD rules to access firms only avoids imposing duplicative reporting requirements on NASD members that are also members of an options exchange, inasmuch as members of an options exchange (i.e., dual members) are required to report positions on standardized options pursuant to the rules of the options exchange(s) of which they are a member.

Finally, the amendments clarify that, consistent with current practices, a member may report positions directly to the NASD or have such positions reported to the NASD by another firm, such as the member's clearing firm, on behalf of the member. Members should be aware, however, that the amendment does not eliminate a member's ultimate responsibility to ensure that the firm reporting the positions on the member's behalf makes the necessary filings with the NASD, and that such filings are true, accurate, and complete, and submitted on a timely basis.

Endnotes

¹See Exchange Act Release No. 43718 (File No. SR-NASD-00-36) (December 13, 2000), 65 Federal Register 80969 (December 22, 2000).

²Rule 0120(g) states that the term "customer" shall not include a broker or dealer.

³ A "conventional option" is any option contract not issued, or subject to issuance, by the Options Clearing Corporation. NASD Rule 2860(b)(2)(N).

⁴ Standardized options transactions of a non-member are subject to position and exercise limits and reporting requirements of the applicable options exchange(s) on which the member of such exchange(s) effects the transaction. A "standardized option" is any options contract issued, or subject to issuance by, the Options Clearing Corporation that is not a FLEX Equity Option. NASD Rule 2860(b)(2)(WW).

ATTACHMENT A

Below is the text of the proposed rule change. Proposed new language is underlined; proposed deletions are in brackets.

Rule 2860 Options.