Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to the Three Business Day Settlement of Securities Transactions

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34966; File No. SR-NASD-94-56]

Self-Regulatory Organizations; National Association of Securities

Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to the

Three Business Day Settlement of Securities Transactions

November 10, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on October 12, 1994, the

National Association of Securities Dealers, Inc. (``NASD'') 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 primarily by the NASD. On November 9, 1994, the NASD

filed with the Commission Amendment No. 1, which is incorporated in the

description of Items I, II, and II.\2\ 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. Sec. 78s(b)(1) (1988).

\2\Letter from Suzanne E. Rothwell, Associate General Counsel,

NASD, to Mark Barracca, Branch Chief, Division of Market Regulation,

Over-the-Counter Regulation, Commission (November 8, 1994).

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The NASD is proposing to amend Sections 5, 6, 12, 46, 64, and 65 of

the Uniform Practice Code (``UPC'') and Sections 1 and 26 of the Rules

of Fair Practice (``RFP'') to implement three business day (``T+3'')

settlement for securities transactions.

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the 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. The 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

The NASD has determined that the following amendments to the UPC

and the RFP are necessary in order to conform the NASD's rules to the

T+3 settlement cycle mandated by Rule 15c6-1.\3\

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\3\On October 6, 1993, the Commission adopted Rule 15c6-1 under

the Act, which establishes three business days after trade date

(``T+3'') instead of five business days (``T+5'') as the standard

settlement time frame for most broker-dealer transactions.

Securities Exchange Act Release No. 33023 (October 6, 1993), 58 FR

52891. By Commission order, the rule becomes effective June 7, 1995.

Securities Exchange Act Release No. 34952 (November 9, 1994).

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Uniform Practice Code

Sections 5 and 6

Sections 5 and 6 of the UPC prescribe the formula for establishing

ex-dates for securities following dividends or other distributions.\4\

The proposed rule change will shorten all the time frames contained in

these sections by two business days.

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\4\The ex-date indicates the interval between the announcement

and payment of a distribution during which time an investor who

purchases shares is not entitled to the distribution.

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Section 12

Seciton 12 prescribes delivery dates for various transaction

circumstances. Subsection 12(b) currently states that for a ``regular

way'' transaction delivery shall be made on, but not before, the fifth

business day following the trade date. The proposed rule change will

shorten the delivery requirement to on, but not before, the third

business day following the trade date. In addition, the proposed rule

change will provide that in ``seller's option'' transactions delivery

may be made by the seller on any business day after the third business

day, rather than the fifth business day, following the trade date.

Section 46

Seciton 46 currently requires that interest to be added to the

prices of interest-paying securities be calculated up to but not

including the fifth business day following the date of the transaction.

The proposed rule change will shorten the time to the third business

day.

Section 64

Subsection 64(a)(3) currently requires members accepting an order

whereby payment or delivery is to be made to or by an agent of the

customer to deliver a confirmation no later than one day after the

trade date (``T+1''). The proposed rule change will shorten this time

limit to trade date (``T+0''). The NASD believes that this change will

result in nearly universal utilization of interactive electronic

confirmation delivery systems.

Subsection 64(a)(4) currently requires that the customer in such a

transaction must agree to furnish instructions to the agent no later

than ``T+4'' if the customer is buying on a receipt versus payment

basis or T+3 if the customer is selling on a delivery versus payment

basis. The proposed rule change will shorten the time period for

furnishing such instructions to T+1 for both buying and selling

customers.

Section 65

The NASD also is proposing amendments to UPC Section 65 which sets

forth the procedures for the transfer of customer accounts from one

broker-dealer (``carrying member'') to another broker-dealer

(``receiving member''). The proposed rule changed for Section 65 was

developed in conjunction with the New York Stock Exchange, National

Securities Clearing Corporation (``NSCC''), and the SIA Customer

Account Division. Under the proposed language of Section 65, upon

receipt from the customer of a signed account transfer instructions a

receiving member must immediately submit the transfer instructions to

the carrying member. The proposal will reduce from five to three

business days the timeframe for the carrying member to either validate

or take exception to the transfer instructions for all accounts

including Retirement Plan Accounts for which the timeframe for

validating or taking exception to transfer instructions currently is

ten days. The proposal will require the completion of all transfers be

accomplished in four rather than five business days. The Proposal also

will (1) more clearly define the reasons why the carrying member may

take exception to account transfer instructions; (2) require the use of

an automated facility for the transfer of mutual fund positions and

residual credits when both the carrying and the receiving members are

participants in a registered clearing agency which automated facilities

for such transfers; (3) set forth timeframes for resolution of claims;

(4) require that partial transfers be processed through automated

facilities of a registered clearing agency; and (5) require that

members transfer residual credit balances within ten business days

after accrual for a six month period.

On September 2, 1994, the Commission approved the NYSE's proposed

rule change to implement corresponding changes to the NYSE's procedures

for transferring customer accounts.\5\ The NYSE amendments relating to

the automated transfer of mutual fund positions and residual credit

processing become effective 180 days from approval (i.e., on March 3,

1995) while all other provisions become effective 90 days from approval

(i.e., on December 2, 1994). The NASD believes that it is in the best

interests of the public for the NASD's amendments to it customer

account transfer procedures to become effective simultaneously with the

NYSE's amendments.\6\ The NASD therefore requests that Sections

65(m)(2) and 65(m)(3), relating to automated transfer of mutual fund

positions and residual credit processing, be effective on March 3,

1995, and that all other provisions of Section 65 be effective on

December 2, 1994.

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\5\Securities Exchange Act Release No. 34633 (September 2,

1994), 59 FR 46872.

\6\Supra note 2.

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Rules of Fair Practice

Article III, Section 1

The Prompt Receipt and Delivery Interpretation of the Board of

Governors currently requires a member to make an affirmative

determination that the customer owns the security and will deliver it

in good deliverable form within five business days of the execution of

an order in connection with a long sale. The interpretation also states

that to satisfy the requests for an ``affirmative determination,'' a

member must note on the order ticket at the time of the order the

customer's ability to delivery the securities within five business

days. The proposed rule change will change these time limits from five

business days to three business days.

Article III, Section 26(m)(1)

Article III, Section 26(m)(1) requires members to transmit payments

received from customers for the purchase of investment company shares

to the payees by the fifth business day after receipt of such

customers' purchase orders or one business day following receipt of

customers' payments, whichever is later. The proposed rule change will

shorten the five business day transmittal requirement to three business

days and will leave the one day alternative unchanged.

The NASD has agreed to an implementation plan for transition to a

T+3 settlement cycle proposed by the NSCC for early June 1995.\7\ The

NASD proposes that the proposed rule change (other than Section 65, as

discussed above) be effective on June 7, 1995, the day the NSCC

transitional settlement plan is scheduled to be completed.

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\7\The NSCC plan is to double up settlement for two trade dates

in order to move from T+5 to T+4 and then repeat the process to move

from T+4 to T+3. Thus, for trade date Friday, June 2, trades will

settle on the following Friday, June 9 (T+5), and for trade date

Monday, June 5, trades also will settle on Friday, June 9 (T+4). The

same doubled up settlement will be used for trade dates Tuesday,

June 6 and Wednesday, June 7, which will both have a settlement date

of Monday, June 12.

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The NASD believes that the proposed rule change is consistent with

the provisions of Section 15A(b)(6)\8\ of the Act which requires that

the rules of the NASD be designed to foster cooperation and

coordination with persons engaged in regulating, clearing, settling,

processing information with respect to, and facilitating transactions

in securities, to remove impediments to and perfect the mechanism of a

free and open market and a national market system, and, in general, to

protect investors and the public interest in that the proposed rule

change will implement the T+3 settlement cycle mandated by Rule 15c6-1.

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\8\15 U.S.C. Sec. 78o-3.

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(B) Self-Regulatory Organization's Statement on Burden on Competition

The proposed rule change is intended to implement the transition to

a three day settlement cycle specified in Rule 15c6-1, to be effective

June 7, 1995, which the Commission adopted in furtherance of the

purposes of the Act, as amended. Therefore, to the extent the basis for

the adoption of rule 15c6-1 remains unchanged, the 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

Within thirty-five days of the date of publication of this notice

in the Federal Register or within such longer period (i) as the

Commission may designate up to ninety 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 the self-regulatory organization 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. 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.

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. Sec. 552, will be available for inspection and copying in

the Commission's Public Reference Room. Copies of such filing will also

be available for inspection and copying at the principal office of the

NASD. All submissions should refer to the File No. SR-NASD-94-56 and

should be submitted by December 9, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority, 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-28494 Filed 11-17-94; 8:45 am]

BILLING CODE 8010-01-M