[Federal Register Volume 59, Number 8 (Wednesday, January 12, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-688] [[Page Unknown]] [Federal Register: January 12, 1994] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-33440; File No. SR-NASD-93-52] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change Relating to the Pricing of Open Orders January 6, 1994. On September 23, 1993, the National Association of Securities Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'')\1\ a proposed rule change pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 thereunder.\3\ The proposal amends the NASD Rules of Fair Practice by requiring members holding open orders of securities quoted ex-dividend, ex-rights, ex-distribution or ex-interest to adjust the price and, if necessary, the size of the order by the amount of any dividend, payment or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution or ex-interest. --------------------------------------------------------------------------- \1\On November 24, 1993, the NASD filed Amendment No. 1 with the Commission. Amendment No. 1 reports the result of an NASD member vote on the proposed rule change, which was published for member vote in NASD Notice to Members 93-61 (September 1993). The results of the member vote are as follows: 1,682 voting in favor, 232 opposed, and 11 not voting, out of 1,925 ballots received. \2\15 U.S.C. 78s(b)(1) (1988). \3\17 CFR 240.19b-4 (1993). --------------------------------------------------------------------------- Notice of the proposed rule change, together with the substance of the proposal, was provided by issuance of a Commission release (Securities Exchange Act Release No. 33000, October 1, 1993) and by publication in the Federal Register (58 FR 53600, October 15, 1993). No comment letters were received. This order approves the proposed rule change. The rule change approved herein amends Article III of the Rules of Fair Practice to require members holding open orders of securities quoted ex-dividend, ex-rights, ex-distribution or ex-interest to adjust the price and, if necessary, the size of the order by the amount of any dividend, payment or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution or ex-interest. The rule change exempts from its scope: (1) Open orders subject to the rules of a registered national securities exchange, (2) open stop orders to buy, and (3) open sell orders, as well as orders marked ``do not reduce'' or ``do not increase.'' The NASD does not currently require its members to adjust open orders of securities quoted ex-dividend, ex-rights, ex-distribution or ex-interest. An open order is an order to buy or sell which remains in effect until it is executed or cancelled, or expires. Such orders are also known as ``good 'til cancelled,'' ``limit,'' or ``stop limit.''\4\ The NASD believes it is important to adopt a standard for business practices and ethics in dealing with customer open orders. Because there is currently no NASD rule governing open orders, members adjust them according to their own procedures unless the rules of another self-regulatory organization apply to the transaction (e.g., New York Stock Exchange Rule 118). These procedures can vary from automatic adjustment, automatic withdrawal, reconfirmation of the order with the customer, or no action. Further, the procedures may vary among orders entered at the same firm because the orders are routed to different firms for execution. As a result, investors may find that their open orders are executed without adjustment after the ex-date at a higher cost per share than they intended based on their valuation of the security. For example, an investor entering a limit order for a security at $10 per share prior to the dividend date may have based his pricing judgment on the impending dividend declaration. If his order remains open after the ex-dividend date, he may find his order in the money and executed at the dividend-assuming price even though he would not be entitled to the dividend. --------------------------------------------------------------------------- \4\A ``good 'til cancelled'' order is an order to buy which remains in effect until it is either executed or cancelled. A ``limit order'' is an order to buy a stated amount of a security at a specified price, or at a better price, if obtainable after the order is given. A ``stop limit'' order to buy becomes a limit order executable at the limit price, or at a better price, if obtainable, when a transaction in the security occurs at or above the stop price after the order is given. --------------------------------------------------------------------------- Moreover, the NASD believes the fact that some members adjust open orders on ex-dates while others do not, creates confusion for customers. The NASD believes that the rule change sets forth a uniform and predictable method for adjusting open orders, eliminates the potential unfairness associated with the failure to adjust these orders, and provides consistency in the adjustment of open orders for NASD members that are also members of the New York Stock Exchange and American Stock Exchange. Subsection (a) of the new Rule of Fair Practice requires a member holding an open order from a customer or broker-dealer, prior to executing or permitting the order to be executed, to adjust the price of the order by the amount of any dividend, payment or other distribution on the ex-date. Subsection (b) requires the member to reconfirm an open order prior to execution if the value of the distribution cannot be determined. Subsection (c) requires open orders to be cancelled where the security is the subject of a reverse split. Subsection (d) defines the term ``open order'' as an order to buy which remains in effect for a definite or indefinite period of time until it is either executed, cancelled, or expires, including, but not limited to, orders marked ``good 'til cancelled,'' ``limit'' or ``stop limit.'' Finally, subsection (e) exempts: (1) Open orders subject to the rules of a registered national securities exchange, (2) open stop orders to buy, and (3) open sell orders, as well as orders marked ``do not reduce'' or ``do not increase.'' Open stop orders to buy and open sell orders are exempted because the assumptions underlying such an order may not include the value of an upcoming dividend; the combination of stop and limit prices in such an order makes the effect of repricing unpredictable. Orders marked ``do not reduce'' or ``do not increase'' are the method for the customer to state that he is aware of the implications of not adjusting the order on the ex-date. The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to the NASD and, in particular, the requirements of section 15A(b)(6) of the Act.\5\ Section 15A(b)(6) requires, inter alia, that the NASD's rules be designed to prevent fraudulent and manipulative acts, promote just and equitable principles of trade, and protect investors and the public interest. The Commission believes that the creation of a single method of handling the adjustment of open orders after the ex-date will serve the interest of investor protection. For this reason, and for the reasons stated above, the Commission believes that the proposed rule change satisfies the requirements of section 15A(b)(6) of the Act. --------------------------------------------------------------------------- \5\15 U.S.C.Sec. 78o-3. --------------------------------------------------------------------------- It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the instant rule change be, and hereby is, approved. 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. 94-688 Filed 1-11-94; 8:45 am] BILLING CODE 8010-01-M