Notice To Members 92-51

SEC Approval of Amendments Relating to "When, as and if Issued" and "When, As and if Distributed" Contracts; Effective November 2, 1992

Published Date:
Effective November 2, 1992

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EXECUTIVE SUMMARY

On September 4, 1992, the Securities and Exchange Commission (SEC) approved amendments to Section 4 of the NASD® Uniform Practice Code. The amendments codify as new provisions of Section 4 of the UPC the Memorandum of the Committee relating to "When, as and if Issued" and "When, as and if Distributed" Contracts, and delete the Memorandum from the Code. The amendments take effect on November 2, 1992. The text of the new rule language follows the discussion below.

BACKGROUND AND DESCRIPTION OF THE AMENDMENTS

On September 4, 1992, the SEC approved amendments to Section 4 of the Uniform Practice Code (Code) codifying as new provisions of Section 4 the Memorandum of the NASD Operations Committee (Memorandum) relating to "When, as and if Issued" and "When, as and if Distributed" Contracts ("when issued" contracts or "when issued" securities). Currently, the Memorandum is published in the NASD Manual (Manual) immediately following Section 4. The rule change deletes the Memorandum in its entirety from the Code.

The amendments to Section 4 cover confirmations, accrued interest, marks to market, margin requirements, deposit requests, segregation of funds, contract settlement, and cancellation. Except for confirmations, all the changes incorporate the subjects covered in the Memorandum into Section 4. Further, except for the cancellation provision in Subsection 4(h), Section 4 and those portions incorporated from the Memorandum are substantively unchanged. However, in certain cases, procedures previously recommended are now mandatory, and the explanatory language of the Memorandum is deleted.

New Subsection 4(a) requires that parties to "when issued" transactions send confirmations containing certain minimum information. This information required to be sent is drawn from current Subsections 4(a) and 4(b), and ¶ 3504.10 of the Memorandum at page 3516 of the Manual. This information includes a description of the security and the plan under which it will be distributed, the designated authority for ruling on contract performance, and a provision for marking the contract to the market. New subparagraph 4(a)(3) states that the NASD Operations Committee (formerly, the Uniform Practice Committee)(the Committee) will provide a description of the security and any plan of issuance or distribution for inclusion in "when issued" contracts. This language is based on ¶ 3504.11 of the Memorandum at page 3516 of the Manual. New Subsection 4(b) specifies the treatment of accrued interest in "when issued" contracts and is based on ¶ 3504.12 of the Memorandum at page 3517 of the Manual.

New Subsection 4(c) provides that because of potentially significant delays in the issuance or distribution of "when issued" securities, such contracts should be marked to the market pursuant to the provisions of Section 58 of the Code to protect a party whose interest becomes partially unsecured as a result of market value changes to the securities under contract. This provision differs from ¶ 3504.13 of the Memorandum at page 3517 of the Manual. The NASD has determined that separate marks to market standards for "when issued" contracts are not necessary and, instead, members can rely on Section 58 requirements.

New Subsection 4(d) requires "when issued" contracts to comply with Sections 220.4 and 220.5 of Regulation T of the Board of Governors of the Federal Reserve System. This provision differs from ¶ 3504.20 of the Memorandum at page 3518 of the Manual, which is only precatory in nature. New Subsection 4(e) allows members to require deposits or collateral for "when issued" contracts even if not required by Regulation T. This provision is based on the last paragraph of ¶ 3504.13 of the Memorandum at page 3518 of the Manual. New Subsection 4(f) recommends the segregation of "when issued" contracts, and deposits made in connection with them, on the books of a member firm and is drawn from P504.30 of the Memorandum at page 3518 of the Manual. New Subsection 4(g) specifies the rules for settlement of such contracts and incorporates current Subsections 4(c) and4(d).1

Finally, new Subsection 4(h) provides for the cancellation of "when issued" contracts by the Committee. The Committee canceled "when issued" contracts under its authority to rule on issues related to such contracts specified in Section 2 of the Code. In addition, the Memorandum states that the date for settlement of "when issued" contracts must be determined after the date of issuance becomes known and that, if the securities eventually issued or distributed differ substantially from those contemplated in the contract, the contract cannot be settled and must be canceled. ¶ 3504.10 of the Memorandum at page 3516 of the Manual.

Subsection 4(h) is intended to codify the general authority of the Committee to cancel "when issued" contracts and to provide some specificity regarding the Committee's cancellation authority. The structure of Subsection 4(h) is intended to differentiate between situations where the contract will (1) always be canceled; (2) generally be canceled; and (3) generally not be canceled.

Subsection 4(h)(1) retains the original language from ¶ 3504.10 of the Memorandum at page 3516 of the Manual and Section 2 of the Code granting the committee broad discretionary power to cancel "when issued" contracts if circumstances change. This general authority to cancel contracts is retained in Subsection 4(h) to provide for situations which are not anticipated by the more specific provisions of Subsections 4(h)(3) and (4). Thus, notwithstanding the fact that the circumstances surrounding the performance of a contract may fit within Subsections 4(h)(3) and (4), the Committee retains the discretion to act inconsistently with those subparagraphs if, in its judgment, such action is necessary to effectuate the purposes of Section 2 of the Code.

Subsection 4(h)(2) states that the Committee will cancel contracts if the securities will not be issued or distributed. This provides for the situation where an announced merger, reorganization, or distribution plan fails or is terminated after "when issued" securities have begun trading. Because such securities cannot be delivered since they will not be issued or distributed, the NASD has determined to cancel any such contracts.

Subsection 4(h)(3) provides that contracts will generally be canceled if the "securities which are to be issued or distributed are not substantially the same as those contemplated in the contract." A nonexclusive list of the types of material changes that will generally result in cancellation includes changes to the redemption provision schedule, dividend payments, interest rate, maturity, yield, and exercise price. The NASD regards these as changes to the terms of the security and, therefore, material to the contract to purchase the security.

Subsection 4(h)(4) provides for certain changes that "shall not require cancellation of contracts . . . ." Because they change the terms underlying the plan of distribution and not the terms of the security, these terms are not material to the contract to purchase the security and include: (1) a change in the amount of equity or debt to be issued; (2) restructuring of the financing arrangements; and (3) settlement of a legal action directly related to the distribution plan which also affects the financial statement of the issuer.

The NASD believes that Subsections 4(h)(3) and (4) will clarify the NASD's standards for the cancellation of contracts under the enumerated situations. Such standards will assist risk/benefit analysis by participants in "when issued" transactions, thereby advancing the purposes of Section 2 of the Code.

The NASD's preference, as expressed in the two Subsections, is to cancel "when issued" contracts only if the security issued or distributed, not the plan for issuance or distribution, is substantially different. The NASD also believes, however, that the effect of changes to particular securities and plans of distribution are not predictable and, therefore, may not be appropriately resolved by rigidly adhering to the formula in Subsections 4(h)(3) and (4). It is for this reason that the NASD has retained its general authority to cancel "when issued" contacts as necessary.

The amendments take effect on November 2, 1992. Questions concerning this Notice should be directed to Elliott R. Curzon, Senior Attorney, Office of General Counsel at (202) 728-8451, or Dorothy Kennedy, Manager of Uniform Practice at (212)858-4340.

1 Current Subsections 4(c) and 4(d), previously numbered 4(e) and 4(f), were renumbered in SR-NASD-91-13, approved by the SEC in Rel. No. 34-29687 on September 13, 1991; 56 F.R. 47819 (September 20, 1991).

TEXT OF AMENDMENTS TO SECTION 4 OF THE UNIFORM PRACTICE CODE

(Note: New text is underlined; deleted text is in brackets)

[Delivery Dates]

When, As and If Issued/Distributed Contracts

Confirmations or comparisons

[(a) A confirmation covering a transaction in a security "when, as and if issued" shall adequately identify the security and the plan, if any, under which the security is proposed to be issued.
(b) A confirmation covering a transaction in a security "when, as and if distributed" shall adequately identify the security and the plan, if any, under which the security is proposed to be distributed.]
(a)(1) Each party to the transaction shall send a written "when, as, and if issued" or "when as and if distributed" confirmation or comparison in the same form as set forth as Exhibit A of this section and pursuant to the requirements of Sections 9(a), 10 and 64 of the Code.
(2) Each confirmation or comparison covering a contract in a "when, as and if issued" or "when, as and if distributed" security shall, at a minimum, contain:
(i) an adequate description of the security and the plan, if any, under which the security is proposed to be issued or distributed;
(ii) designation of the National Association of Securities Dealers, Inc., as the authority which shall rule upon the performance of the contract; and
(iii) provision for marking the contract to the market.
(3) The Committee will furnish, upon written request therefor, an adequate description of any particular issue of securities and of the plan under which the securities are proposed to be issued for the purpose of inclusion in all contracts or confirmations covering transactions on a "when, as and if issued" or "when, as and if distributed" basis in the particular securities.

Accrued interest

(b) Unless the parties agree otherwise, "when, as and if issued" or "when, as and if distributed" transactions between members in fixed obligations of new or reorganized companies shall be "and accrued interest" to date of settlement. Interest shall be computed on the basis of the expired portion of the coupon current at the time of settlement, and all due and past due coupons shall be detached.

"When, as and if issued" or "when, as and if distributed" transactions between members in in-come or contingent interest securities of such companies shall be traded "flat" and shall carry all payments that may be made or declared in connection with such new securities from the effective date of the plan; except that, if any payment is made or declared directly or indirectly in connection with such securities, prior to the settlement date, transactions made on and after the "ex" date for such payment shall carry only payments made or declared in connection with such securities from such "ex" date.

Securities of such companies which bear a fixed rate of interest, plus contingent additional payment, are to be traded "and accrued interest" at the rate of the fixed interest, and traded "flat" in respect to the contingent payments.

Marks to the market

(c) In case of "when, as and if issued" or "when, as and if distributed" contracts, the time of issuance or distribution of the securities is indefinite and may be long delayed. Therefore, such contracts should be marked to the market pursuant to the provisions of Section 58 of the Code.

Contracts on margin

(d) All "when, as and if issued" or "when, as and if distributed" contracts shall be in compliance with Sections 220.4 and 220.5 of Regulation T of the Board of Governors of the Federal Reserve System.

Request for deposits

(e) A member may require a customer to deposit cash or collateral to secure a "when, as and if issued" or "when, as and if distributed" contract even though Section 220.8(b)(1) of Regulation T of the Board of Governors of the Federal Reserve System may not require such deposit.

Segregation of funds

(f) Deposits against "when, as and if issued" or "when, as and if distributed" transactions should be segregated on the books of the firm in order to present a true picture of the firms' position and its commitment in transactions of this kind. It may be appropriate to segregate such deposits from the firm's general cash balances by depositing them in a bank other than those containing the general deposits, loans or other obligations of the firm. Whether or not such physical segregation is made, no member should permit any part of deposits against "when, as and if issued" or "when, as and if distributed" contracts to be used for any purpose whatsoever other than to secure such contracts.

At a minimum, every member doing business in "when, as and if issued " or "when, as and if distributed" securities shall ensure that the sum of the cash balances and any deposits with banks, clearing houses, or other brokers against "when, as and if issued" or "when, as and if distributed" contracts always exceeds the aggregates of all free credits and deposits against "when, as and if issued" or "when, as and if distributed" contracts by an amount fully ample to conduct his business with-out employing any part of such deposits.

Settlement of contracts

(g)
(1) A date for the settlement of "when, as and if issued" and "when, as and if distributed" contracts shall be determined by the Committee when a sufficient percentage of the issue is out-standing.

["When, as and if issued"

(c)](2) In connection with a transaction in a security "when, as and if issued," delivery shall be made at the office of the purchaser on the date declared by the Committee: except that if no delivery date shall be declared by the Committee, [(1)](a) delivery may be made by the seller on the business day following the day upon which the seller has delivered at the office of the purchaser written notice of intention to deliver, and [(2)](b) open market "when, as and if issued" contracts in securities currently being publicly offered through a syndicate or selling group shall be settled on the date such syndicate or selling group contracts are settled: provided, however, delivery of securities in accordance with this subsection shall be made during the normal delivery hours in the community where the buyer is located.

["When, as and if distributed"

(d)](3) In connection with a transaction in a security "when, as and if distributed," delivery shall be made at the office of the purchaser on the date declared by the Committee: except that if no delivery date shall be declared by the Committee, delivery may be made by the seller on the business day following the day upon which the seller has delivered at the office of the purchaser written notice of intention to deliver.

Cancellation of contracts

(h)(1) Pursuant to Section 2 of the Code the Committee may cancel or terminate "when, as and if issued" and "when, as and if distributed" contracts as necessary to resolve conflicts over the settlement of such contracts.
(2) Contracts will be cancelled if the securities are not to be issued or distributed.
(3) Contracts will generally be cancelled if the securities which are to be issued or distributed are not substantially the same as those contemplated in the contract. Material changes which will generally result in cancellation include, but are not limited to, changes to the redemption schedule, dividend payments, interest rates, maturity, yield, and exercise price.
(4) Notwithstanding paragraph (h)(3), contracts will not generally be cancelled as a result of changes that do not constitute material changes to the terms of the security called for under the contract. Changes which will not generally result in cancellation include, but are not limited to:
(i) changes in the dollar value of securities to be issued or distributed;
(ii) restructuring of financing arrangements previously announced by the issuer of the securities; or
(iii) settlement of any legal action or the occurrence of any other event which has or will have a material effect on the financial condition of the issuer of the securities.

Exhibit A

Standard Form of "When, As and If Issued" or "When, As and If Distributed" Contract

For use by dealers and brokers in confirming transactions with other dealers and brokers

"When, as and if Issued" or "When, as and if Distributed" Contract

__________________________________________________

(Firm Name)

Date__________________________________________________

(Sold to) (Purchased From)

Quantity

Description of Security

Price
       

If this contract was made on a national securities exchange, it shall be subject to and governed by the requirements of such exchange, its constitution, rules, practices and interpretations thereof, relating to contracts between members of such exchange, as the same may be amended or modified from time to time.

If this contract was made elsewhere than on a national securities exchange, it shall be subject to and governed by the requirements of the National Association of Securities Dealers, Inc., its By-Laws, Rules of Fair Practice, Uniform Practice Code, rulings and interpretations thereof as the same may be amended or modified from time to time.

This contract shall be settled and payment therefor made at such time and place, in such manner, and by the delivery of such securities and/or other property as the exchange or association to whose requirements this contract is subject in its sole discretion may determine, or shall be canceled and thereafter shall be null and void if such exchange or association determines in its sole discretion that the [plan or proposal to which the securities were to be issued or distributed has been abandoned or materially changed] securities which are to be issued or distributed are not substantially the same as those contemplated in the contract. During the pendency of this contract either party shall have the right to call for a mark to the market, and upon failure of the other party to comply therewith the party not in default may close this contract in accordance with the requirements of the exchange or association to whose requirements this contract is subject.

Standard Form of "When, As and If Issued" or "When, As and If Distributed" Contract

For use by a dealer (principal) and his customer covering transactions on a principal basis

________________________________________

Date

"When, as and if Issued" or "When, as and if Distributed" Contract

TO___________________________

I/we have sold to you/purchased from you___________________________shares/par value____________________________________at____________________________________.

These securities shall be payable and deliverable "when, as and if issued" or "when, as and if distributed", or this contract shall be cancellable in accordance with the requirements of the National Association of Securities Dealers, Inc., its By-Laws, Rules of Fair Practice, Uniform Practice Code, applicable rules and interpretations thereunder and amendments thereof.

I/we shall have the right to demand deposits according to such requirements. On your failure to comply therewith, we may close the contract in accordance with such requirements.

____________________________________

(Firm Signature)

Accepted:

____________________________________

(Signature of Customer)