[Federal Register: August 3, 2005 (Volume 70, Number 148)]
[Notices]
[Page 44707-44709]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03au05-222]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52131; File No. SR-NASD-2005-093]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Relating to Amendments to NASD Rule 3370
July 27, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 20, 2005, the National Association of Securities Dealers, Inc.
(``NASD'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by NASD. NASD has designated
the proposed rule change as constituting a ``non-controversial'' rule
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ which
renders the proposal effective upon receipt of this filing by the
Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD is proposing to amend Rule 3370 to clarify that members must
make certain affirmative determinations when effecting long sales and
document compliance with those affirmative determination requirements.
Below is the text of the proposed rule change. Proposed new language is
in italics; proposed deletions are in brackets.
* * * * *
3370. [Purchases]Prompt Receipt and Delivery of Securities
(a) Purchases
No member or person associated with a member may accept a
customer's purchase order for any security unless it has first
ascertained that the customer placing the order or its agent agrees to
receive securities against payment in an amount equal to any execution,
even though such an execution may represent the purchase of only a part
of a larger order.
(b) Long Sales
No member or person associated with a member shall accept a long
sale order from any customer in any equity security unless the order
meets the requirements applicable to long sales set forth in Regulation
SHO. To the extent a member or person associated with a member does not
have physical possession or control of the securities, the member or
person associated with a member must document, at the time the order is
taken, the communication with the customer as to the present location
of the securities in question, whether they are in good deliverable
form and the customer's ability to deliver them to the member by
settlement date. For purposes of this rule, the term ``customer''
includes a non-member broker-dealer.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. NASD has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On June 23, 2004, the SEC adopted certain provisions of a new short
sale regulation, designated Regulation SHO.\4\ Regulation SHO consists
of, among other provisions, SEC Rule 200(g), requirements for marking
sell order of equity securities, and SEC Rule 203(a), delivery
requirements for long sales.\5\ Specifically, SEC Rule 200(g) of
Regulation SHO requires that sell orders in all equity securities be
marked either ``long,'' ``short,'' or ``short exempt.''
[[Page 44708]]
Pursuant to SEC Rule 200(g), an order can be marked ``long'' only when
the seller owns the security being sold and the security either is in
the physical possession or control of the broker-dealer or it is
reasonably expected that the security will be in the physical
possession or control of the broker-dealer no later than settlement.
Subject to certain exceptions, SEC Rule 203(a) requires that a broker-
dealer selling an equity security marked long will be able to deliver
the security on settlement date without borrowing the security.
Regulation SHO's long sale delivery requirements, together with the
long sale order marking requirements, require broker-dealers, prior to
executing the order, to confirm the customer's ownership of the
security and its ability to deliver the security by settlement date.
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\4\ See Securities Exchange Act Release No. 50103 (July 28,
2004), 69 FR 48008 (August 6, 2004).
\5\ The compliance date for SEC Rule 200(g) and SEC Rule 203(a)
was January 3, 2005.
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As noted in the adopting release for Regulation SHO, the SEC has
indicated its expectation that self-regulatory organization (``SRO'')
rules that overlapped with the provisions of Regulation SHO would be
repealed. Accordingly, NASD repealed, among other rules, NASD Rule
3370(b) that, in part, required members to undertake the following
obligations in connection with a long sale: (1) To make an affirmative
determination as to the location of the securities, (2) to determine
whether the securities are in deliverable form and in fact can be
delivered within 3 business days; and (3) to document such information
in writing (collectively, the ``affirmative determination
requirements''). NASD staff has received inquiries as to whether the
affirmative determination requirements continue to apply, given that
these requirements are not explicitly provided in Regulation SHO.
As a result, NASD is proposing to amend Rule 3370 to re-adopt
expressly the affirmative determination requirements as they now relate
to member obligations with respect to long sales under Regulation
SHO.\6\ NASD believes that this proposed amendment will clarify a
member's obligations in connection with sale transactions that are
marked long. Specifically, the member must comply with the requirements
applicable to long sales in Regulation SHO and, to the extent the
member or person associated with the member does not have physical
possession or control of the securities, make and document, at the time
the order is taken, an affirmative determination as to the location of
the security, that they are in good deliverable form, and the
customer's ability to deliver such securities on settlement date. As
with Regulation SHO, absent countervailing circumstances, it may not be
reasonable to rely on the representation of a customer that an order is
``long'' if the customer has had prior failures to deliver in a
security.
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\6\ Note: The deletion of the affirmative determination
requirements in connection with the adoption of Regulation SHO was
unintentional.
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NASD proposes to make the proposed rule change operative on the
date of filing.
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) \7\ of the Act, which requires, among
other things, that NASD rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. NASD believes that the proposed rule change will more
clearly state a member's obligations in connection with sale
transactions that are marked long, and is consistent with the Act.
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\7\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASD does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The proposed rule change is filed pursuant to paragraph (A) of
Section 19(b)(3) \8\ and Rule 19b-4(f)(6).\9\ Because the foregoing
proposed rule change does not: (i) Significantly affect the protection
of investors or the public interest; (ii) impose any significant burden
on competition; and (iii) become operative for 30 days from the date on
which it was filed, or such shorter time as the Commission may
designate, it has become effective pursuant to Section 19(b)(3)(A) of
the Act and Rule 19b-4(f)(6) thereunder.
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\8\ 15 U.S.C. 78s(b)(3)(A).
\9\ 17 CFR 240.19b-4(f)(6).
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative prior to the thirty days after the date of filing.
However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may
designate a shorter time if such action is consistent with the
protection of investors and the public interest. NASD has requested
that the Commission waive the thirty day operative delay requirement to
re-adopt expressly the affirmative determination requirements as they
now relate to member obligations with respect to long sales under
Regulation SHO.
The Commission, consistent with the protection of investors and the
public interest, has determined to make the proposed rule change
effective as of the date of this order.\10\ The Commission notes that
the affirmative determination requirements with respect to member long
sales were unintentionally deleted when NASD repealed rules that
overlapped with the provisions of Regulation SHO.
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\10\ For purposes only of accelerating the operative date of
this proposal, the Commission has considered the proposed rule's
impact on efficiency, competition, and capital formation. 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NASD-2005-093 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
All submissions should refer to File Number SR-NASD-2005-093. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will
[[Page 44709]]
post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rule
change that are filed with the Commission, and all written
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying in the Commission's Public
Reference Room, 100 F Street, NE., Washington, DC 20549-9303. Copies of
such filing also will be available for inspection and copying at the
principal office of NASD.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to the File Number SR-NASD-2005-
093 and should be submitted on or before August 23, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4117 Filed 8-2-05; 8:45 am]
BILLING CODE 8010-01-P