Notice To Members 85-87

Request for Comments on Amendments Concerning Short Sales

Published Date:

TO: All NASD Members and Other Interested Persons

LAST DATE FOR COMMENT: JANUARY 30, 1986

The National Association of Securities Dealers, Inc. (NASD), is requesting comment on two proposed amendments to the NASD Rules of Fair Practice. The proposed amendments would require members to (a) mark all customer order tickets "long" or "short" and (b) make an affirmative determination, before accepting a customer's order to sell a security "short," that the security will be either delivered or borrowed prior to settlement date.

The text of the proposed amendments is attached.

Background

At its November 1985 meeting, the Board of Governors discussed the possible need for additional regulation of short selling practices in the over-the-counter market. In the first of a series of actions taken at the November meeting, the Board retained Irving M. Pollack, former SEC commissioner, to conduct a comprehensive study of current short selling practices in the over-the-counter market and to formulate findings and recommendations to serve as the basis for further policy decisions on this issue.

To provide supplemental data for the Pollack study, the Board adopted a new Article III, Section 41 of the NASD Rules of Fair Practice, which will require members to report aggregate "short" positions in NASDAQ securities in all customer and proprietary accounts to the NASD on a monthly basis commencing in early 1986.

The Board also determined to publish for comment amendments to two existing Rules of Fair Practice. The first proposal would amend Article III, Section 21 of the NASD Rules of Fair Practice to require customer order tickets to be marked "long" or "short." Under the proposal, an order may be marked "long" only if (1) the customer's account is "long" the security; or (2) the member is informed that the customer owns the security and will deliver it within five business days after execution of the order.

The marking of order tickets will assist in the effective surveillance of members' compliance with the second proposal to be published for comment. That proposal is an amendment to the Board of Governors' Interpretation on Prompt Receipt and Delivery of Securities (Interpretation).

The Interpretation currently prohibits members from accepting a customer's sell order, whether "long" or "short," unless (1) the member has possession of the security; (2) the customer's account with the member is "long" the security; (3) the member receives reasonable assurance from the customer that the security will be delivered to it in good deliverable form within five business days after execution of the order; or (4) the security is on deposit in good deliverable form with a member of the NASD, a member of a national securities exchange or any organization subject to state or federal banking regulations, and that instructions have been forwarded to the depository to deliver the securities against payment.

The Board is considering amending the Interpretation to distinguish between "long" and "short" customer sell orders and to adopt different requirements for members accepting "short" customer sell orders. Under the proposed amendment, a member would be prohibited 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.

All members and other interested persons are invited to submit comments on the proposed rule. Comments should be received no later than January 30, 1986, and should be directed to:

Mr. James M. Cangiano, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006

Questions concerning this notice may be directed to Mary S. Head, Office of General Counsel, at (202) 728-8284.

Sincerely,

Frank J. Wilson
Executive Vice President and General Counsel

Attachment

1. PROPOSED AMENDMENT TO ARTICLE III, SECTION 21 OF THE RULES OF FAIR PRACTICE

Add a new subsection (b) and renumber existing subsections:

Information on orders

(b) A person associated with each member shall indicate on the memorandum for each customer order for the sale of any security whether the order is "long" or "short." An order shall be marked "long" only if (1) the customer's account is "long" the security involved or (2) the member is informed that the customer owns the security and will deliver it within five (5) business days after execution of the order.

2. AMENDMENT TO THE BOARD OF GOVERNORS' INTERPRETATION ON PROMPT RECEIPT AND DELIVERY OF SECURITIES

(New language is underscored; language to be deleted is bracketed.)

It shall be deemed a violation of Article III, Section 1 of the Rules of Fair Practice of the Association for a member to violate the provisions of the following interpretation thereof:

(a) Purchases: No member may accept a customer's purchase order for any security unless it has first ascertained that the customer placing the order or its agent agrees to receive securities against payment in an amount equal to any execution, even though such an execution may represent the purchase of only a part of a larger order.
(b) Sales:
(1) Long Sales
No member or persons associated with a member shall accept [execute] a long sale [sell] order for any customer in any security unless:
(a) The member has possession of the security;
(b) The customer is long in his account with the member;
(c) Reasonable assurance is received by the member, or person associated with a member, from the customer that the security will be delivered to it in good deliverable form within five (5) business days of the execution of the order; or
(d) The security is on deposit in good deliverable form with a member of the Association, a member of a national securities exchange, a broker/dealer registered with the Securities and Exchange Commission, or any organization subject to state or federal banking regulations and that instructions have been forwarded to that depository to deliver the securities against payment.
(2) "Short" Sales
No member or person associated with a member shall accept a "short" sale order for any customer in any security 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.