Notice To Members 88-3

Amendment to Section 64 of the NASD Uniform Practice Code Regarding Acceptance and Settlement of COD Orders, Effective February 11, 1988

Published Date:

TO: All NASD Members and Other Interested Persons

ATTN: Operations Principal, Cashier

EXECUTIVE SUMMARY

The Securities and Exchange Commission has approved an amendment to Section 64 of the NASD Uniform Practice Code, entitled "Acceptance and Settlement of COD Orders." Effective February 11, 1988, NASD members must settle all depository-eligible customer COD/POD domestic securities transactions through the confirmation and book-entry facilities of registered clearing agencies and/or depositories. If book-entry settlement of depository-eligible securities transactions is not used, the COD/POD privilege cannot be extended to the customer, and the transaction(s) must be settled "regular way," i.e., by the fifth business day following trade date.

The NASD Board of Governors found that transactions exempt from the provisions of Section 64, which do not require settlement on a book-entry basis and are physically settled, contributed to significant delays in securities processing and resulted in increased brokerage costs. The Board believes that the effects of eliminating the exemption would be negligible and would result in benefits to the industry.

The text of the amendment is attached.

Note: COD (Collect on Delivery) refers to a purchase by a customer and POD (Payment on Delivery) refers to a sale by a customer, wherein a broker-dealer receives or makes payment at the time the securities are delivered. COD/POD customers may be individual investors, but they are generally institutions, such as banks, insurance companies, registered investment companies, and pension funds that request that securities purchased on a COD/POD basis be delivered to a clearing agent (generally a bank) that will receive the securities and make payment.

BACKGROUND AND EXPLANATION OF AMENDED SECTION 64

On January 1, 1983, the NASD adopted Section 64 of the Uniform Practice Code, entitled "Acceptance and Settlement of COD Orders," which standardized the procedures for accepting and processing customer COD/POD orders. As originally adopted, Section 64 required that a customer or its agent (normally a bank) confirm, acknowledge, and settle all depository-eligible COD/POD transactions on a book-entry basis. NASD members were exempted from this provision when both the member and its agent, or the customer and its agent, were not depository participants.

However, eligible COD/POD domestic securities transactions that were exempt from Section 64 requirements and settled physically contributed to significant delays in securities processing. Physical settlement requires securities depositories to maintain surplus stock certificates in working denominations to accommodate deliveries by depository members to customers outside the depository network. This results in increased brokerage operational expenses and depository costs.

To resolve these problems, the ID Implementation Committee, a securities industry group, proposed that the NASD and the NYSE amend their respective rules to require that all depository-eligible COD/POD transactions executed by a broker-dealer for a domestic customer be processed through the confirmation and book-entry delivery facilities provided by registered clearing agencies and depositories.

The NASD Uniform Practice Committee considered the request along with reviewing a staff study of the application of Section 64. The NASD Committee concluded that the effects of removing the exemption would be negligible and would result in increased benefits to the industry. Some of these benefits are the reduction of DK rates, the lowering of processing costs, and timely settlement of transactions. In reaching its decision, the NASD Uniform Practice Committee and the NASD Board of Governors noted that it was not necessary for a broker-dealer to become a member of a securities depository or clearing agency directly, but only that it have access to a bank or broker that is a member of a depository.

To resolve problems inherent in the physical delivery of securities, the exemption pertaining to domestically transacted customer COD/POD transactions has been eliminated. The amendment to Section 64 requires that all COD/POD transactions that are eligible for book-entry settlement be settled through such systems or, as an alternative, be handled on a regular-way, five-business-day settlement basis.

Questions concerning this notice should be directed to Donald J. Catapano, Director, NASD Uniform Practice/TARS, at (212) 839-6255.

Sincerely,

John T. Wall
Executive Vice President
Member and Market Services

Attachment

AMENDMENT TO SECTION 64 OF THE NASD UNIFORM PRACTICE CODE*

Effective February 11, 1988

Acceptance and Settlement of COD Orders

Sec. 64.

(Subsections (a)(l) through (4) remain unchanged.)

(a)
(5) The facilities of a securities depository shall be utilized for the confirmation, acknowledgement, and book-entry settlement of all depository-eligible transactions covered by this rule except[:] transactions that are to be settled outside of the United States.
[(i) transactions that are to be settled outside of the United States;]
[(ii) transactions wherein both a member and its agent are not participants in a security depository, or where both the customer and its agent are not participants in a securities depository.]

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*New language is underlined; deleted language is in brackets.