Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to the use of Hard To Borrow Lists

[Federal Register Volume 65, Number 5 (Friday, January 7, 2000)]
[Notices]
[Pages 1208-1210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-390]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42306; File No. SR-NASD-99-37]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to the use of Hard To Borrow Lists

January 3, 2000.
    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 August 4, 1999, the National Association of Securities Dealers, Inc. 
(``NASD''), through its wholly owned subsidiary, NASD Regulation, Inc. 
(``NASD Regulation'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On 
November 1, 1999, the NASD filed Amendment No. 1 to the proposed rule 
change with the Commission.\3\ The Commission is publishing this notice 
to solicit comments on the proposed rule change as amended from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Alden Adkins, Senior Vice President and 
General Counsel, NASD Regulation, to Katherine England, Assistant 
Director, Division of Market Regulation, the Commission, dated 
October 26, 1999. The substance of Amendment No. 1 is incorporated 
into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to amend NASD Rule 3370 to permit the 
use of a ``Hard to Borrow'' list to comply with affirmative 
determination requirements for short sales. The text of the proposed 
rule change is set forth below. Additions are italicized and deletions 
are bracketed.
* * * * *
Rule 3370. Prompt Receipt and Delivery of Securities
    (a) No change
    (b) No change
    (1) No change
    (2) No change
    (3) No change
    (4) ``Affirmative Determination''
    (A) No change
    (B) No change
    (C) The manner by which a member or person associated with a member 
annotates compliance with the ``affirmative determination'' requirement 
contained in subsection (b)(2) above (e.g., marking the order ticket, 
recording inquiries in a log, etc.) is not specified by the Rule and, 
therefore, shall be decided by each member. Members may rely on 
``blanket'' or standing assurances (i.e., ``Easy to Borrow'' lists) 
that securities will be available for borrowing on settlement date to 
satisfy their affirmative determination requirements under this rule. 
[,] For any short sales executed in Nasdaq National Market (NNM) or 
national securities exchange-listed (listed) securities, members also 
may rely on ``Hard to Borrow'' lists indicating NNM or listed 
securities that are difficult to borrow or unavailable for borrowing on 
settlement date to satisfy their affirmative determination requirements 
under this Rule, provided that: (i) any securities restricted pursuant 
to UPC 11830 must be included in such a list; and (ii) the creator of 
the list attests in writing on the document or otherwise that any NNM 
or listed securities not included on the list are easy to borrow or are 
available for borrowing. Members are permitted to use Easy to Borrow or 
Hard to Borrow lists provided: (i) the information used to generate the 
list [``blanket'' or standing assurance] is less than 24 hours old; and 
(ii) the member delivers the security on settlement date. Should a 
member relying on an Easy to Borrow or Hard to Borrow list [blanket or 
standing assurance] fail to deliver the security on settlement date, 
the Association shall deem such conduct inconsistent with the terms of 
this Rule, absent mitigating circumstances adequately documented by the 
member.
    (5) No change
* * * * *

[[Page 1209]]

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 Regulation 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 Regulation 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
    Currently, NASD Rule 3370, which was designed to prevent abusive 
short selling and ensure that short sellers satisfied their settlement 
obligations, requiring members to make an affirmative determination 
prior to executing certain short sales and to maintain a written record 
of that affirmative determination. This Rule essentially requires that 
a member must make an affirmative determination that it will receive 
delivery of the subject security, or can borrow or otherwise provide 
delivery of the security, by settlement date. Although the Rule 
provides that a member firm must record the identity of both the 
individual and the firm contacted who offered assurances that the 
subject security would be delivered by settlement date or be available 
for borrowing by settlement date, the manner in which compliance with 
this Rule is to be evidenced is not specified by the Rule.
    The Rule does, however, in specified circumstances, permit member 
firms to rely on ``blanket'' or standing assurances that certain, 
specified securities will be available for borrowing on settlement date 
to satisfy their affirmative determination obligations.\4\ Such 
``blanket'' assurances are commonly referred to as ``Easy to Borrow'' 
lists. The use of ``Hard to Borrow'' lists (i.e., lists reflecting 
stocks that are difficult to borrow or unavailable for borrowing) is 
not specifically allowed by the Rule. It is the understanding of NASD 
Regulation staff that the New York Stock Exchange (NYSE) currently 
permits its members to rely on such lists.
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    \4\ See Release No. 34-36859 (February 20, 1996), 61 FR 7127 
(February 26, 1996) (File No. SR-NASD-95-62), approving reliance on 
``blanket'' assurances.
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    The proposed amendment will permit member firms to rely on a ``Hard 
to Borrow'' list for any short sales executed in The Nasdaq Stock 
Market (Nasdaq) National Market (NM) or national securities exchange-
listed securities, provided that any securities restricted pursuant to 
Uniform Practice Code (UPC) 11830 must be included on such a list \5\ 
and that the creator of the list attests in writing that any Nasdaq NM 
or national securities exchange-listed securities not included on the 
list are easy to borrow or are available for borrowing. Operationally, 
a member firm would refer to the ``Hard to Borrow'' list before 
executing a short sale in a given security. If the subject security is 
not on the list, the member firm would have conducted the requisite 
affirmative determination and can execute the short sale without taking 
any further steps to satisfy the affirmative determination rule. 
Conversely, if the security is on the list, then a member firm would 
not be able to execute the short sale without taking additional steps 
to ensure the security's availability. Member firms that rely on ``Hard 
to Borrow'' lists would be required, under the Rule, to maintain and 
keep such lists to satisfy the requirements of the Rule that such 
affirmative determinations be annotated. Lastly, the same requirements 
that apply to ``Easy to Borrow'' lists also will apply to ``Hard to 
Borrow'' lists.\6\
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    \5\ A security becomes restricted pursuant to UPC 11830 when the 
total number of shares that market participants have failed to 
deliver in that security exceeds 0.5% of the total shares 
outstanding. In practice, securities with large fail-to-deliver 
positions are difficult to borrow.
    \6\ A member firm is permitted to use an ``Easy to Borrow'' list 
if the information used to generate the ``blanket'' or standing 
assurance is less than 24 hours old and the member firm delivers the 
security on settlement date. If the member firm does not deliver the 
security on settlement date, disciplinary action could be initiated. 
As stated above, these same restrictions would apply to the use of a 
``Hard to Borrow'' list.
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    The use of ``Hard to Borrow'' lists will be permitted only for 
Nasdaq NM and national securities exchange-listed securities, and not 
for Nasdaq SmallCap and over-the-counter (OTC) equity securities, for 
two reasons. First, other short-sale rules apply to Nasdaq NM and 
national securities exchange-listed securities (NASD Rule 3350 and SEC 
Rule 10a-1, respectively) to which Nasdaq SmallCap and OTC equity 
securities are not subject. Second, Nasdaq NM and national securities 
exchange-listed securities are liquid and highly capitalized, and are 
less likely to be subject to short sale abuses than Nasdaq SmallCap and 
OTC equity securities, which generally are more thinly traded and 
illiquid and potentially more vulnerable to short sale abuses. 
Therefore, the use of ``Hard to Borrow'' lists will still not be 
permitted for Nasdaq SmallCap and OTC Equity securities, and member 
firms will continue to be required to take active steps to determine 
stock availability for these more illiquid securities, thus providing 
additional investor protection.
2. Statutory Basis
    NASD Regulation 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 the NASD's rules 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 Regulation believes that the 
proposed rule change is consistent with Section 15A(b)(6) of the Act 
because it will reduce the administrative burdens that are placed on 
member firms when they comply with the affirmative determination rule 
and will expedite the process of executing short sale transactions, 
thus providing faster and possibly better executions for public 
investors. The proposed rule change also will allow member firms to use 
the same affirmative determination procedures that NASD Regulation 
understands are used on the NYSE for both Nasdaq NM and national 
securities exchange-listed securities, thereby promoting uniformity and 
consistency in the application and interpretation of parallel NASD and 
NYSE rules and avoiding member firm confusion.
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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 Regulation 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

    Within 35 days of the date of publication of this notice in the 
Federal

[[Page 1210]]

Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which NASD Regulation consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-
0609. 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. Copies of the filing will also be 
available for inspection and copying at the principal offices of the 
NASD. All submissions should refer to File No. SR-NASD-99-37 and should 
be submitted by January 28, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-390 Filed 1-6-00; 8:45 am]
BILLING CODE 8010-01-M