New NASD Rule of Fair Practice Relating to Monthly Reporting of Aggregate "Short" Positions
TO: All NASD Members and Other Interested Persons
On December 19, 1985, the Securities and Exchange Commission approved a new Article III, Section 41 of the NASD Rules of Fair Practice (SEC Release No. 34-22731). The rule establishes a new requirement for members to maintain a record of their total "short" positions in NASDAQ securities in all customer and proprietary firm accounts and to report such information to the NASD on a monthly basis. Reports must be made as of the close of business on the settlement date falling on the 15th of each month, or, where the 15th is a non-settlement date, on the preceding settlement date. Reports must be received by the NASD no later than the second business day after the reporting settlement date.
The new rule became effective upon approval by the SEC. The text of the new rule as well as a copy of the reporting form is attached.
BACKGROUND
The adoption of new Article III, Section 41 of the NASD Rules of Fair Practice is the first in a series of actions taken by the NASD Board of Governors in consideration of the possible need for additional regulation of short-selling activity in the over-the-counter market. Data to be collected from members pursuant to Article III, Section 41 will be used in connection with a study of current short-selling practices in the over-the-counter market, which was commissioned by the Board of Governors and is now being conducted by former SEC Commissioner Irving M. Pollack, a recognized expert in the field of securities regulation. In view of the immediate need for data, Section 41 was adopted under procedures which permit its expedited effectiveness. In the absence of further Board action, the rule will expire after six months.
In Notice to Members 85-87, dated December 24, 1985, the NASD published for comment two additional proposals relating to possible short-sale regulation. Such proposals include the requirement to mark all customer order tickets "long" or "short" and the requirement for members to make an affirmative determination, prior to accepting a customer's "short" sell order, that the securities will be delivered or borrowed prior to settlement date.
REPORTING EFFECTIVE FEBRUARY 1986
The Board of Governors requested Mr. Pollack to present the results of his study at the Board's March 1986 meeting. Because data on members' short-selling practices will be important to the Pollack study, members will be required to commence their monthly reporting of aggregate "short" positions as of settlement date on February 15, 1986.
In establishing this date, the Board of Governors recognized that for many members it would be difficult to collect and report information regarding aggregate "short" positions as of January 15, 1986. However, for those members that can do so, the Board urges that aggregate "short" positions as of settlement date on January 15, 1986 be reported as well.
Members should utilize the enclosed reporting form to submit the required information to the NASD's Market Surveillance Department. The form requires the identification of each NASDAQ security in which the firm or its customers maintains a "short" position, the security's NASDAQ symbol and the aggregate number of shares held "short" in the security for both the current and immediately preceding month. Additional forms are available from the NASD District Offices.
Questions concerning the form may be directed to either Leon Bastien, Assistant Director, Market Surveillance, at (202) 782-8192 or Christopher R. Franke, Director, Market Surveillance, at (202) 728-8186.
Sincerely,
Frank J. Wilsoir
Executive Vice President and General Counsel
Attachments
NEW NASD RULE OF FAIR PRACTICE 1/
Section 41: Reporting of Aggregate "Short" Positions
Each member shall maintain a record of total "short" positions in all customer and proprietary firm accounts in securities included in the NASDAQ System and shall regularly report such information to the Corporation in such a manner as may be prescribed by the Corporation. Reports shall be made as of the close on the settlement date falling on the 15th of each month, or, where the 15th is a non-settlement date, on the preceding settlement date. Reports shall be submitted as soon as possible but not later than noon on the second day after the reporting settlement date. 2/
1/ All language is new. On December 19, 1985, the SEC approved new Article III, Section 41 on a temporary basis for 60 days pending the NASD's filing of a second rule change and a public comment period. The second filing was submitted to the SEC on December 30, 1985.
2/ The last sentence of the rule is shown as approved by the SEC on a temporary basis. In the second filing, the last sentence has been amended as follows: "Reports shall be received by the Corporation no later than the second business day after the reporting settlement date."