Document ID: SEC-2007-1773-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2007-12-28T05:00Z

[Federal Register: December 28, 2007 (Volume 72, Number 248)]
[Notices]               
[Page 73927-73928]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28de07-188]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56972; File No. SR-NASD-2007-035]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc. (n/k/a/ Financial Industry Regulatory Authority, Inc.); 
Order Granting Approval of a Proposed Rule Change Related to Mandated 
Use of an Automated Liability Notification System

December 14, 2007.

I. Introduction

    On May 25, 2007, the National Association of Securities Dealers, 
Inc. (``NASD'')\1\ filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'').\2\ Notice of the 
proposal was published in the Federal Register on October 17, 2007.\3\ 
For the reasons discussed below, the Commission is granting approval of 
the proposed rule change.
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    \1\ On July 26, 2007, the Commission approved a proposed rule 
change filed by NASD to amend NASD's Certificate of Incorporation to 
reflect its name change to Financial Industry Regulatory Authority, 
Inc. (``FINRA'') in connection with the consolidation of the member 
firm regulatory functions of NASD and NYSE Regulation, Inc. Exchange 
Act Release No. 56146 (July 26, 2007); 72 FR 42190 (Aug. 1, 2007).
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ Securities Exchange Act Release No. 56639 (October 11, 
2007), 72 FR 58918 (October 17, 2007) [File No. SR-NASD-2007-035].
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II. Description

    NASD Rule 11810(i) sets, forth the procedures that must be followed 
when a party is owed securities that have become the subject of a 
voluntary corporate action, such as a tender or exchange offer is 
seeking delivery of those securities. Under Rule 11810(i), the owed 
party delivers a liability notice to the owing or failing party. The 
liability notice sets a cut off date for the delivery of the securities 
by the owing party and provides notice to the owing party that it will 
be held liable for any damages caused by its failure to deliver the 
securities in time for the owed party to participate in the voluntary 
corporate action.
    If the owing party delivers the securities in response to the 
liability notice, it has met its delivery obligation. If the owing 
party fails to deliver the securities in sufficient time for the owed 
party to participate in the voluntary corporate action, it will be 
liable for any damages that may accrue thereby (i.e., the owing party 
must deliver proceeds equivalent to the proceeds that the owed party 
would have received if it had been able to participate in the offer). 
The owed party has the responsibility to communicate its intentions to 
the owing party and to prove, if necessary, that the owing party 
received the liability notice.
    Prior to this proposed rule change, Rule 11810(i) required broker-
dealers to send liability notices using ``electronic media having 
immediate receipt capabilities.'' Although there was no one acceptable 
means for sending and tracking liability notices, NASD members advised 
the NASD that it was industry practice to send liability notices by 
fax. However, sending liability notices by fax is a manual, paper-
intensive process that is subject to error. The financial risk to an 
owing firm that misses or incorrectly processes a liability notice 
relating to a voluntary corporate action can be considerable.
    In response to industry need for a reliable and uniform method of 
transmitting liability notices, The Depository Trust Company (``DTC'') 
developed the SMART/Track for Corporate Action Liability Notification 
Service (``SMART/Track''). SMART/Track is a web-based system for the 
communication of corporate action

[[Page 73928]]

liability notices that allows DTC participants and National Securities 
Clearing Corporation clearing members to create, send, process, and 
tract such notices. Transmitting liability notices through SMART/Track 
eliminates paper liability notices and provides firms with an 
electronic, centralized system for the distribution, management and 
control of liability notices. Use of SMART/Track helps reduce the 
risks, costs, and delays resulting from missing or inaccurate 
information associated with paper corporate action liability notices. 
Specifically, provides participants with (1) more timely receipt and 
distribution of corporation action liability notifications, (2) a 
centralized system to manage and control all liability notifications on 
all issues, (3) immediate identification of the security affected by a 
corporate action liability notification, (4) detailed disclosure and 
clearer explanation of the terms and conditions of the corporate 
action, and (5) an audit trail with a complete record of actions taken 
regarding a liability notice.
    As amended, NASD Rule 11810(i) mandates the use of the automated 
liability notification system of a registered clearing agency when the 
parties to a failed contract involving securities that have become the 
subject of a voluntary corporate action are both participant in a 
clearing agency that has an automated service for corporate action 
liability notices.\4\ When either or both parties to such a contract 
are not participants in a registered clearing agency that has an 
automated service for corporate action liability notices, Rule 11810(i) 
continues to require the liability notice to be issued using written or 
comparable electronic media having immediate receipt capabilities.
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    \4\ Currently DTC is the only registered clearing agency 
operating an automated corporate liability notification service.
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    NASD will announce the effective date of the proposed rule change 
in a ``Notice to Members'' that will be published no later than sixty 
days from the date of approval of this rule change. The NASD 
anticipates that the effective date of the rule change will be thirty 
days following publication of the Notice to Members announcing the 
Commission's approval.

III. Discussion

    Section 15A(b)(6) of the Act requires, among other things, that the 
rules of a securities association be designed to remove impediments to 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public 
interest.\5\ The proposed rule change is consistent with the provisions 
of the Act because by eliminating the use of paper corporate action 
liability notices and requiring the use of a registered clearing 
agency's automated service for corporate action liability notices where 
available, the proposed rule change should help reduce the risks, 
costs, and delays resulting from missing or inaccurate information 
associated with paper corporate action liability notices.
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    \5\ 15 U.S.C. 78o-3(b)(6).
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    Accordingly, for the reasons stated above the Commission finds that 
the rule change, is consistent with FINRA's obligation under Section 
15A(b)(6) of the Act 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 perfect the mechanism of a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of Section 15a(b)(6) of the Act and 
the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-NASD-2007-035) be and hereby 
is approved.

    For the Commission by the Division of Trading and Practices, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-25179 Filed 12-27-07; 8:45 am]

BILLING CODE 8011-01-P