Proposed New Rule of Fair Practice Relating to Monthly Reporting of Aggregate "Short" Positions
IMPORTANT MAIL VOTE
OFFICERS, PARTNERS AND PROPRIETORS
TO: All NASD Members
LAST VOTING DATE IS OCTOBER 3, 1986.
EXECUTIVE SUMMARY
NASD members are invited to vote on a proposed new Rule of Fair Practice, which would require members to maintain a record of their total "short" positions in NASDAQ securities in all customer and proprietary firm accounts and report this information, aggregated by security, to the NASD on a monthly basis. The NASD will make data on short-interest positions available to the public via the financial press. This action is in response to a recommendation developed in a study prepared by Irving M. Pollack at the request of the NASD. The text of the proposed new rule is attached.
BACKGROUND
Article III, Section 41 of the NASD Rules of Fair Practice was adopted by the NASD Board of Governors in November 1985 as the first in a series of actions providing for additional regulation of short-selling activity in the over-the-counter market. The original purpose of the reporting requirement was to provide data for a study of current short-selling practices in the over-the-counter market, commissioned by the Board of Governors and conducted by former SEC Commissioner Irving M. Pollack.
Accordingly, the Board of Governors determined it appropriate" to adopt the new requirement pursuant to Article XII of the NASD By-Laws, which permits the adoption of new Rules of Fair Practice for periods of six months without recourse to the membership for approval. The new rule was filed with the Securities and Exchange Commission and approved on December 19, 1985 (SEC Release No. 34-22731).
In May 1986, the Board of Governors extended the effectiveness of the new rule for an additional six months. The extension was approved by the SEC on July 30, 1986 (SEC Release No. 34-23482).
At its July 1986 meeting, the Board of Governors reviewed the short-sale study conducted by Mr. Pollack and adopted the study's recommendations that the requirement for reporting short-interest positions in NASDAQ securities be made permanent and that short-interest data reported pursuant to the rule be made publicly available via the financial press.
Article III, Section 41 of the NASD Rules of Fair Practice is hereby submitted to the membership for vote. The Board of Governors believes that this new rule is necessary and appropriate and recommends that members vote their approval.
If the new rule is adopted, members should continue to utilize Form NS-1 to submit monthly short-interest information to the NASD's Market Surveillance Section. The form requires a member to identify each NASDAQ security in which it or its customers maintain a "short" position, the security's NASDAQ symbol, and the aggregate number of shares held "short" for both the current and the immediately preceding month. Additional forms are available from the NASD district offices.
Reports shall be made as of the close of business on the settlement date falling on the 15th of each month. If the 15th is a non-settlement date, reports shall be made on the preceding settlement date. Reports shall be received by the NASD no later than the second business day after the reporting settlement date.
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Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than October 3, 1986.
Questions concerning this notice may be directed to Mary S. Head, NASD Office of the General Counsel, at (202) 728-8284.
Sincerely,
Frank J. Wilson
Executive Vice President and General Counsel
Attachments
PROPOSED NEW NASD RULE OF FAIR PRACTICE
Article III, 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 received by the Corporation no later than the second business day after the reporting settlement date.