Notice To Members 90-51

SEC Approval of Amendment to Board of Governors' Interpretation on Prompt Receipt and Delivery of Securities

Published Date:

SUGGESTED ROUTING*

Senior Management
Legal & Compliance
Operations
Trading

*These are suggested departments only. Others may be appropriate for your firm.

EXECUTIVE SUMMARY

The Securities and Exchange Commission has approved an amendment to the Board of Governors' Interpretation on Prompt Receipt and Delivery of Securities which provides, with certain exceptions, that no member shall effect a short sale for its own account in any security unless the member makes an affirmative determination that it can borrow the securities or otherwise provide for their delivery by settlement date. This requirement will become effective September 1, 1990. The text of the new rule follows this notice.

SUMMARY OF NEW PROVISIONS

On July 5, 1990, the Securities and Exchange Commission (SEC) approved NASD Rule Filing 89-5, which adds new Section 2(b) to the Board of Governors' Interpretation on Prompt Receipt and Delivery of Securities.

This provision will require that no NASD member effect a short sale for its own account in any security unless the member makes an affirmative determination that it can borrow the securities or otherwise provide for their delivery by settlement date.

The rule includes exemptions for transactions: (1) in corporate debt securities, (2) for bona fide market-making transactions by a member in NASDAQ securities for which it is a registered market maker and in non-NASDAQ securities for which it publishes a two-sided quotation in an independent quotation medium, and (3) for transactions that result in fully hedged or arbitraged positions.

The rule, as originally filed with the Commission, did not include the exception for market-making transactions in non-NASDAQ securities. As a result of comments received by the Commission when it published the rule proposal, the NASD Board reconsidered the issue and added the exclusion for non-NASDAQ securities for which a member publishes two-sided quotations.

In its order approving the rule change, the SEC expressed the expectation that the NASD will develop enforcement mechanisms to ensure compliance with the rule by member firms and, in particular, the expectation that the NASD will monitor closely the use of the exemption for bona fide market-making transactions as it applies to both NASDAQ and non-NASDAQ securities.

The Commission is requiring the NASD to report back in one year on the effectiveness of the new requirements.

TEXT OF PROPOSED RULE CHANGE

The National Association of Securities Dealers, Inc. (NASD) is amending SR-NASD-89-5 to revise the text of the proposed rule change and its statement of the purpose of, and statutory basis for, the proposed rule change. The following is the full text of the proposed amendment to the Interpretation, as revised.

(Note: New language is underlined.)

Article III, Section 1 of the NASD Rules of Fair Practice

INTERPRETATION OF THE BOARD OF GOVERNORS ON PROMPT RECEIPT AND DELIVERY OF SECURITIES

* * * * *

(2) "Short" Sales
(a) 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. This requirement shall not apply, however, to transactions in corporate debt securities.
(b) No member shall effect a "short" sale for its own account in any security unless the member makes an affirmative determination that it can borrow the securities or otherwise provide for delivery of the securities by the settlement date. This requirement will not apply to transactions in corporate debt securities, to bona fide market making transactions by a member in securities in which it is registered as a NASDAQ market maker, to bona fide market maker transactions in non-NASDAQ securities in which the market maker publishes a two-sided quotation to an independent quotation medium, or to transactions which result in fully hedged or arbitraged positions.