An NASD rule that requires securities sold short to change hands by settlement date was expanded to include non-member brokers and dealers, the NASD announced Wednesday.
Previously, since the word "customer" did not apply to non-member brokers and dealers, the short-selling provision did not apply to them. Short selling is the practice of "betting" against a stock by purchasing it with borrowed money, rooting for its price to go down and then selling it back for a profit once it does.
In a statement announcing that the Securities and Exchange Commission had passed the proposal, the NASD said that not including the broker/dealers "affects the integrity of the marketplace by increasing the possibility of failures to deliver and also creates regulatory disparity by allowing certain firms to effect short sales outside the purview of NASD's affirmative determination requirements."
- Affirmative determination refers to the reasonable belief that the security in question will change hands. An exception for "proprietary" short sales of the non-member broker/dealers was also installed, though the dealer would have to meet certain criteria.