Amended or new Effective date Substance of provisions Source Aug. 5,1965 This section picks up the new statutory 1964 act. do. Conforming amendments necessitated do Substantially revises the previous retains the qualifications of do................. Changes requirements as to when the .do....... Adds "fees" to other charges for do....... Technical conforming amendment .do....... Picks up statutory language permitting do. Conforming amendment picking up a member." do... Changes definition of "registered do Completely revised to establish stand- making clear that expelled or sus- Conforming amendment.... Imposes new restrictions upon and Special study. Do. 1964 act. Do. Do. Do. Do. Do. Do. Special study. 27. Art. XVI of bylaws..... New.......... Dec. 16, 1968 Establishes authorization for auto 28. Code of arbitration procedure. mated quotations system and charges ..........do........................... Nov. 1, 1968 Established a formal code of arbitra tion procedure which can be utilized INTERPRETATIONS AND OTHER POLICY STATEMENTS OF THE BOARD 1. Advertising interpreta- New................. Sept. 1, 1964 Imposes standards governing the tion (p. 2015 of association's manual). 2. Policy re fair dealing with customers (p. 2152 of manual). content of advertising, sales litera- ..do......................... Nov. 1, 1964 Outlines situations involving customers Source 1964 act. Do. Special study and 1964 act Special study. Special study. Do. Special study and 1964 act. 3. National procedures for over-the-counter quotations distributed in press, radio, or television as a public service (p. 2072 of manual). 4. Policy with respect to 5. Interpretation with re- 6. Interpretation re con- SUMMARY OF ACTIONS TAKEN BY THE ASSOCIATION TO ALLEVIATE THE "FAILS" PROBLEM IN THE SECURITIES INDUSTRY In addition to the items listed below the Association through its representatives has participated with other industry groups, and with the banking industry, in formulating programs to improve operations. Most of these actions are listed in Exhibit B to the statement of Mr. Robert W. Haack, President of the New York Stock Exchange, before the Subcommittee on Commerce and Finance on February 26, 1969. They will not, therefore, be repeated here. A. REDUCED TRADING HOURS 1. In August, 1967 and from January, 1969 through the present time trading hours of members were shortened with members being required to cease trading at 2:00 p.m. The purpose of such is to reduce input and to enable clerical personnel, traders and others to devote a greater percentage of their time to "backlog" and "fails" problems. 2. Required all members to close on Wednesdays during the period June 12, 1968 through December, 1968. The purpose of such was also to reduce input and to enable clerical personnel, traders and others to devote their entire time on Wednesdays to reducing "backlog" or working on "fails" problems. B. INSPECTION PROGRAM Since June, 1968 in excess of 1,500 examinations have been conducted of members as part of an accelerated program of surveillance. Initially, market makers were inspected and thereafter retail and integrated firms were examined. The primary purpose of the program was to evaluate the member's control over back office procedures and ascertain their condition from the standpoint of number, age and amount of "fails", currency of books and records and net capital position, and take disciplinary or other action where appropriate. Coordination has been effected with the SEC and New York Stock Exchange to obtain the broadest coverage with a minimum of duplication. C. FILING OF REPORTS 1. All members were required to file as of January 31, 1968, a statement of their financial condition indicating, among other things, the number, dollar amount and age of "fails". 2. Since May, 1968 all non-New York Stock Exchange members with "fails to deliver" in excess of one million dollars have been required to report their "fails" situation on a monthly basis. 3. Approximately 150 member firms have been directed to file periodic reports with various of the Association's District offices; 500 have been the subject of special mail questionnaires. 4. All members not belonging to a national securities exchange have been requested to report their capital condition in a recent mail survey. D. DISCIPLINARY PROCEEDINGS AND RESTRICTIONS ON MEMBERS Since June, 1968 approximately 100 disciplinary complaints have been authorized against members for violations related to currency of books and records, net capital or "fails" problems. More than 100 conferences have been held with members under surveillance and fifteen firms have been directed to and have agreed to suspend operations entirely until their situation has improved to the satisfaction of the Association's local District Committee. Also, over 300 of the Association's members have received letters of caution and restrictions or other requirements have been imposed on in excess of 50 firms. Examples of restrictions are as follows: 1. Limitations on number of transactions 2. Restrictions on market making activities and trading in new issues 3. Prohibition against solicited and unsolicited transactions with the public 4. Agreements to increase firm capital and employ additional personnel 5. Agreements to join the National Over-The-Counter Clearance Corp. 6. Requirement for customers' securities to be in hand before acceptance of sell orders (since the subject of a rule) 7. Prohibition against executing any orders in a security in which the firm has old "fails" (since the subject of a rule) E. NEW RULES OR RULE CHANGES INCLUDING EMERGENCY RULES 1. Prohibition against a member executing a customer's sell order unless he has possession of the securities, reasonable assurance that they will be delivered to him within five business days or unless certain other factors are present. This will remain a permanent standard of conduct for the Association's members. 2. An emergency rule preventing a member from selling for his own account or buying a given security as broker for a customer if his volume of aged “fails to deliver" in that security exceeds certain percentages of total "fails". This rule also calls for an automatic prohibition from a broker-dealer selling a security for his own account or acting as broker for a customer when he has a "fail" or "fails" in that security 120 days in age or more. Monthly reports are also required in respect to all "fails" in excess of 120 days in age. It is anticipated that the time and percentage limitations of this rule will be further tightened. 3. An emergency rule declaring that it would be an automatic violation of Article III, Section 1 of the Association's Rules of Fair Practice if a “fail” 120 days in age was not cleared up within 30 days thereafter. The time limitation in this rule is to be reduced to 90 days as of April 16, 1969. 4. A requirement prohibiting members from accepting a purchase order from a customer without first ascertaining that the customer is willing to receive partial delivery in any amount confirmed to him notwithstanding that that delivery may be less than the total amount of the transaction. This differs from the previous procedure whereby most purchasers of large orders would not accept delivery until the entire order was ready. 5. "Don't Know" (DK) Procedure a. As to old "fails"-A temporary procedure whereby a member could clear transactions carried as "fails" on its books which occurred perhaps several months previously but in respect to which the member may not have received a confirmation and is unable to get such, from the other broker/dealer. The procedure would require the other broker/dealer to confirm the trade or indicate he did not know it. In the latter event, or if he fails to respond to the written inquiry, the confirming member would have no further liability. b. New transactions-An amendment to the Uniform Practice Code adding Section 9(b) providing for a permanent "DK Procedure" in those cases where a broker does not receive a confirmation or comparison or a signed DK from the contra-broker within four business days following the trade date. Such will enable the immediate elimination of transactions in respect to which a broker has not received back a confirmation from the contrabroker rather than carrying them on his books in an uncertain status. 6. An amendment to the Uniform Practice Code designed to expedite delivery by permitting shares to be delivered in other than 100-share certificates as was the previous requirement, and to permit delivery of bonds in denominations of up to $25,000 from the previous $10,000. 7. Settlement period An amendment to the Uniform Practice Code to permit settlement in five business days rather than the previous four business days after a transaction. F. BUY-INS The Association has encouraged use of buy-ins by members though it is against a mandatory buy-in in over-the-counter securities. As a result of the Association's insistence as well as the emergency rules adopted, buy-ins have increased from approximately 25 per week early in 1968 to approximately 1,200 to 1,500 per week presently. The reasons for the Association's opposition to a mandatory buy-in rule were detailed in testimony before the Committee on February 27, 1969. G. NATIONAL OVER-THE-COUNTER CLEARANCE CORPORATION 1. Participated with NOTC in clearance program which resulted in clearances of the following percentages of "fails" of members participating : Items Percent 37 20 16 2. Encouraged members to join NOTC. As a result, many important market nakers have joined and are currently clearing through NOTC. Membership ncreased from 88 in summer of 1968 to approximately 220 presently. This increase is also the result of requirements by New York and American Stock Exchanges that their New York City members doing an over-the-counter business join. Daily volume of NOTC has increased from approximately 1.4 million shares daily last summer to approximately 2.2 million shares daily now. 3. Representative of the Association placed on Board of Directors of NOTC. H. NATIONAL AND REGIONAL CLEARANCE CENTERS Program undertaken to establish an integrated system of national and regional securities clearance centers. This program is considered the most significant step in the elimination of the "fails" problem and the prevention of its recurrence. It is expected to be fully operational in one year. A pilot program is presently underway at the Pacific Coast Stock Exchange and consultants are formulating the national and regional systems on an expedited basis. I. CUSIP The Association participated in developing the CUSIP identification system and has endorsed same. The publishing of a directory has been delegated to Standard & Poor's Corp. and is expected to be available forthwith. The Association has agreed to participate with the Association of Stock Exchange Firms in the training of back office personnel. (Exhibit 3 appears as an appendix to this hearing. See p. 323.) EXHIBIT 4 TABULATION OF FORMAL COMPLAINTS AND SUMMARY COMPLAINT PROCEEDINGS AND DISPOSITION, |