[Federal Register Volume 59, Number 52 (Thursday, March 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5928]


[[Page Unknown]]

[Federal Register: March 17, 1994]


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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240

[Release No. 34-33743, File No. S7-6-94]
RIN 3235-AF84; 3235-AG12

 

Confirmation of Transactions

AGENCY: Securities and Exchange Commission.

ACTION: Proposed amendments to Rule 10b-10 and proposed rulemaking.

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SUMMARY: The Securities and Exchange Commission is publishing for 
comment amendments to Rule 10b-10 and proposed Rule 15c2-13 under the 
Securities Exchange Act of 1934. The proposed amendments to Rule 10b-10 
are designed to clarify the operation of the Rule, particularly in 
light of changes in the securities markets and the development of new 
securities products. The amendments and new rule are designed to 
enhance the disclosure given to customers so that customers can better 
evaluate their securities transactions. The Commission is seeking 
comment on the function of the confirmation in the context of a three 
day settlement period, and the adequacy and readability of customer 
periodic statements.

DATES: Comments should be received on or before June 15, 1994.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Mail Stop 6-9, Washington, DC 20549. Comment letters should refer 
to File No. S7-6-94. All comment letters received will be available for 
public inspection and copying in the Commission's Public Reference 
Room, 450 Fifth Street, NW., Washington, DC 20549.

FOR FURTHER INFORMATION CONTACT: Robert Colby, Deputy Director, (202/
272-2790), Catherine McGuire, Chief Counsel, (202/272-2844), or C. Dirk 
Peterson, Attorney, (202/504-2418), Division of Market Regulation, 
Securities and Exchange Commission, 450 Fifth Street, NW., Mail Stop 5-
1, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``SEC'' or ``Commission'') proposes to amend the confirmation 
requirements under Rule 10b-101 of the Securities Exchange Act of 
1934 (``Exchange Act'')2 to strengthen its investor protection 
function. Generally, Rule 10b-10 requires a broker-dealer that effects 
transactions for customers in securities, other than U.S. Savings Bonds 
or municipal securities, to provide a written notification to the 
customer, at or before completion of the transaction, that discloses 
information about the transaction.3 Confirmation of a securities 
transaction provides basic customer protection, the importance of which 
was recognized by the Commission as early as 1937.4
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    \1\17 CFR 240.10b-10.
    \2\15 U.S.C. 78a et seq.
    \3\A broker-dealer has an obligation under Rule 10b-10 to send 
its customers an immediate confirmation with respect to each 
transaction the broker-dealer effects. In the case of a customer 
account managed by a fiduciary of the customer, it is important to 
note that the account is the customer, rather than the fiduciary. 
See generally Letter regarding Merrill Lynch, Broadcort Capital 
Corp. and Wagner Stott Clearing Corp. (March 25, 1991)[available on 
LEXIS]. Accordingly, under Rule 10b-10, a broker-dealer must send an 
immediate confirmation to the account holder, in addition to any 
confirmation it may send to an account fiduciary. The Commission 
believes, however, that an account that has given discretionary 
authority in writing to its fiduciary may agree in writing with the 
broker-dealer effecting its trades to waive the receipt of an 
immediate confirmation required by Rule 10b-10 if: (1) The broker-
dealer sends an immediate confirmation to the account's fiduciary, 
and (2) a broker-dealer sends the discretionary account a statement 
no less frequently than quarterly containing all the information 
required to be disclosed on the immediate confirmation. The customer 
may not waive this quarterly statement.
    \4\Rule 15c1-4, 17 CFR 240.15c1-4, an earlier confirmation rule, 
was adopted by the Commission in 1937. Securities Exchange Act 
Release No. 1330 (Aug. 4, 1937). This rule, which solely applied to 
transactions in securities in the over-the-counter market, was 
replaced in 1978 by Rule 10b-10, which extended the Commission's 
confirmation requirements to trades conducted on a securities 
exchange. Securities Exchange Act Release No. 15219 (Oct. 6, 1978), 
43 FR 47495. Rule 10b-10 initially was adopted in part in May 1977. 
Securities Exchange Act Release No. 13508 (May 5, 1977), 42 FR 25318 
(``Adopting Release'').
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    The proposed amendments to Rule 10b-10 would: (1) Require 
confirmation disclosure of mark-ups and mark-downs for riskless 
principal transactions in debt securities; (2) require disclosure of 
the fact that a debt security is not rated by a nationally recognized 
statistical rating organization; (3) require confirmation disclosure of 
mark-ups and mark-downs in Nasdaq and exchange-listed securities; (4) 
require disclosure regarding whether broker-dealers are not members of 
the Securities Investor Protection Corporation; (5) modify the 
disclosure requirements with respect to certain collateralized debt 
securities; (6) add a preliminary note to the Rule indicating that the 
Rule's disclosure requirements do not limit disclosures necessary under 
the antifraud provisions of the federal securities laws; and (7) 
restructure the Rule.
    Proposed Rule 15c2-13 would require brokers, dealers, and municipal 
securities dealers (1) to disclose mark-up information in riskless 
principal transactions in municipal securities; and (2) to disclose 
when a particular municipal security is not rated by a nationally 
recognized statistical rating organization.
    The confirmation serves several functions: it acts as a customer 
invoice; informs investors of the details of a transaction, allowing 
the investor to check for errors or misunderstandings; provides 
consumer information, allowing investors to evaluate the cost and 
quality of the services provided by broker-dealers; discloses to 
investors possible conflicts of interest between them and the broker-
dealer; and acts as a safeguard against fraud, by permitting the 
customer to detect problems associated with a transaction.
    Implementation of a settlement period of three days (``T+3'') may 
alter the confirmation's utility as a customer invoice because normal 
confirmation delivery and the transfer of customer funds and securities 
may not be possible within the three day settlement period. Under the 
previous settlement period of five days, confirmations generally 
reached customers in time for the customer to review them prior to 
transferring funds or securities to the transacting broker-dealer. 
Under T+3, the customer frequently will not receive the confirmation 
through the mails by day three;5 thus, shortening the settlement 
period may require broker-dealers either to demand funds or securities 
from the customer earlier than at present or to cover the cost of the 
transaction for a longer period of time.
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    \5\Broker-dealers may alleviate the concerns of mail delay, for 
example, by sending confirmations by facsimile.
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    Although implementation of T+3 does not create compliance problems 
with regard to Rule 10b-10,6 the Commission requests comment on 
its effect on the confirmation's investor protection functions. If the 
confirmation is used less frequently as an invoice, should some of the 
confirmation's content be shifted to periodic account statements?7
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    \6\Some commentators suggested that substantive changes to Rule 
10b-10 will be necessary as a result of the adoption of Rule 15c6-1 
of the Exchange Act, 17 CFR 240.15c6-1, which implemented T+3. 
Because Rule 10b-10 requires a broker-dealer to send a customer 
written confirmation ``at or before completion of the transaction,'' 
some have argued that a T+3 settlement period will make compliance 
with Rule 10b-10 impossible. The Commission notes, however, that 
broker-dealers can comply with Rule 10b-10 even under a T+3 
settlement period. Rule 10b-10 requires only that the broker-dealer 
send written confirmation by settlement date, not that the customer 
actually receive it by settlement. In the current five days 
settlement period, broker-dealers typically send customer 
confirmations the day after trade date, which will satisfy Rule 10b-
10 even under a T+3 settlement period.
    \7\Six of the exchanges and the National Association of 
Securities Dealers, Inc. (``NASD'') have rules requiring that such 
periodic statements be sent to customers. The Commission has 
proposed a rule requiring annual account statements in the payment 
for order flow context. See Securities Exchange Act Release No. 
33026 (Oct. 7, 1993), 58 FR 52934 (Oct. 13, 1993).
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    In this connection, the Commission solicits comment on the adequacy 
and readability of periodic statements of account generally and whether 
these account statements are read and relied upon by investors in 
monitoring their accounts.

1. Disclosure of Mark-Ups in Riskless Principal Transactions in Debt 
Securities

    Rule 10b-10 currently requires disclosures of broker-dealer 
compensation in agency and specified principal trades. In agency 
trades, the confirmation must disclose both the transaction price and 
the commission charged.8 In principal trades involving ``Reported 
Securities,''9 the confirmation must disclose the trade price 
reported by the broker-dealer for that transaction and the mark-up 
calculated from the reported price.10 In ``riskless'' principal 
trades in non-reported equity securities,11 Rule 10b-10 requires 
brokers and dealers, other than market makers, to disclose the amount 
of any mark-up received.12 The Commission is proposing to amend 
Rule 10b-10 to require the disclosure of mark-up information for 
riskless principal trades in debt securities, other than U.S. Savings 
Bonds and municipal securities. The Commission also is proposing Rule 
15c2-13 to require disclosure of mark-up information in riskless 
principal trades in municipal securities. Rule 10b-10 currently 
requires confirmations for transactions in debt securities to disclose 
to the customer the net dollar price and yield, but not separate 
disclosure of compensation information.13 The Commission believes 
that investors in debt securities, like investors in equity securities, 
should be informed of the costs in riskless principal trades because, 
despite the legal distinctions, these trades are the functional 
equivalent of transactions effected on an agency basis.
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    \8\17 CFR 240.10b-10(a)(2) and 17 CFR 240.10b-10(a)(7)(ii).
    \9\Rule 11Aa3-1(a)(4), 17 CFR 240.11Aa3-1(a)(4), defines 
``Reported Security'' as any exchange-listed equity security or 
Nasdaq security for which transaction reports are made available on 
a real-time basis pursuant to an effective transaction reporting 
plan. An ``effective transaction reporting plan'' refers to a 
transaction reporting plan that the Commission has approved pursuant 
to Rule 11Aa3-1. 17 CFR 240.11Aa3-1(a)(3).
    Reported Securities presently include:
    1. Nasdaq securities that meet standards set forth in the 
National Market System Securities Designation Plan (``Nasdaq/NMS 
securities'').
    2. Certain securities listed on a national securities exchange 
that meet standards of the transaction reporting plan known as the 
Restated Consolidated Tape Association Plan (``CTA Plan''). This 
would include securities that are registered or admitted to unlisted 
trading privileges on a national securities exchange, including 
securities listed on various regional exchanges, and that 
substantially meet New York Stock Exchange, Inc (``NYSE'') or 
American Stock Exchange, Inc. (``Amex'') original listing criteria.
    A number of securities that are quoted on Nasdaq and listed on 
certain regional stock exchanges, however, are not subject to an 
effective transaction reporting plan. Approximately 1,600 securities 
traded on Nasdaq do not satisfy the criteria for designation as a 
Nasdaq/NMS security, and thus are not part of an effective 
transaction reporting plan. Similarly, a limited number of regional-
exchange listed securities are not covered by the CTA Plan.
    \1\017 CFR 240.10b-10(a)(8)(i)(B).
    \1\1''Riskless'' principal trades are transactions in which, 
after receiving an order to buy or sell from a customer, the broker-
dealer purchases the security from another person to offset a 
contemporaneous purchase by the customer or sells the security to 
another person to offset a contemporaneous sale by the customer. 
Although these transactions are characterized as riskless, they 
still involve counterparty risk. See Exchange Act Rule 15c3-
1(a)(2)(vi), 17 CFR 240.15c3-1(a)(2)(vi), (relating to net capital 
requirements).
    Rule 10b-10 currently does not require that a broker-dealer 
acting as a principal, other than in a ``riskless'' principal 
capacity, disclose the amount of mark-up for transactions in non-
reported securities. But see, infra Section 3 for a discussion of 
mark-up disclosure requirements for non-reported securities that are 
subject to last-sale reporting.
    For purposes of clarity and to conform to Rule 15g-4, 17 CFR 
240.15g-4 (requiring riskless principal disclosure for trades 
involving penny stocks), the Commission proposes to replace the term 
``amount of any mark-up, mark-down, or similar remuneration 
received,'' currently used in Rule 10b-10, with ``difference between 
the price to the customer and such contemporaneous purchase or sale 
price.''
    \1\217 CFR 240.10b-10(a)(8)(i)(A). For purposes of this release, 
references to mark-ups are equally applicable to mark-downs or 
commission equivalents.
    In determining the broker-dealer's mark-ups for antifraud 
disclosure purposes, the Commission advises broker-dealers to note 
that the framework set forth in Alstead, Dempsey & Company, Inc., 47 
S.E.C. 1034 (1984), governs the appropriate method for determining 
the prevailing market price in active or dominated and controlled 
markets. See Securities Exchange Act Release No. 29093 (Apr. 17, 
1991), 56 FR 19165, for further discussion of Alstead in connection 
with proposed penny stock rules which are adopted in Securities 
Exchange Act Release No. 30608 (Apr. 20, 1992), 57 FR 18004. See 
also Meyer Blinder, Securities Exchange Act Release No. 31095, (Aug. 
26, 1992), 52 SEC Doc. 1436, appeal docketed sub. nom. Gorden v. 
SEC, No. 92-1554 (D.C. Cir.) appeal dismissed per stipulation 
(applying the Alstead framework to case involving excessive mark-ups 
in a dominated and controlled market). See Securities Exchange Act 
Release No. 33083 (Oct. 21, 1993).
    \1\317 CFR 240.10b-10(a)(5).
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    On three previous occasions, the Commission proposed amendments to 
Rule 10b-10 that would have required disclosure of mark-ups for 
riskless principal trades involving debt securities, including 
municipal securities.14 Commentators argued against adoption of 
mark-up disclosure for riskless principal debt trades saying that: (1) 
The amount of a mark-up was not material to investors; (2) adoption of 
the proposal would have a detrimental, disproportionate effect on small 
broker-dealers; and (3) the amendment would present compliance and 
enforcement difficulties because of differences between the debt and 
equity markets.15 The Commission withdrew the proposal in 
1982,16 and subsequently adopted amendments requiring that 
confirmations contain disclosures concerning the yield of debt 
securities.17
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    \1\4See Securities Exchange Act Release No. 15220 (Oct. 6, 
1978), 43 FR 47538 (proposing mark-up disclosure for riskless 
principal trades in municipal securities) (``1978 Release''); 
Securities Exchange Act Release No. 13661 (June 23, 1977), 42 FR 
33348 (proposing mark-up disclosure by non-market makers in riskless 
principal transactions involving equity and debt securities, but not 
municipal securities); and Securities Exchange Act Release No. 12806 
(Sept. 16, 1976), 41 FR 41432 (proposing mark-up disclosure by non-
market makers in riskless principal transactions involving equity 
and debt securities).
    \1\5One commentator noted that determining whether a particular 
firm was a market maker in the debt context was difficult because 
the market maker definition contemplates an equity environment and 
does not account for the differences in the debt environment. See 
Letter from Sullivan & Cromwell, to George A. Fitzsimmons, 
Secretary, SEC, dated January 15, 1979.
    \1\6Securities Exchange Act Release No. 18987 (Aug. 20, 1982), 
47 FR 37919.
    \1\7Securities Exchange Act Release No. 18988 (Aug. 20, 1982), 
47 FR 37920, adopted in Securities Exchange Act Release No. 19687 
(Apr. 18, 1983), 48 FR 17583.
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    In light of the increasing size of the debt market,18 together 
with experience with mark-up disclosure in riskless principal trades 
for equities, the Commission believes that mark-up disclosure for 
riskless principal trades in debt securities should be 
revisited.19 Confirmation disclosure of mark-ups in riskless 
principal transactions will aid investors by disclosing to them 
transaction costs. This will assist the client in monitoring brokerage 
expenses and detecting possible improper practices. For instance, the 
Commission understands that mark-ups charged in riskless principal 
trades in long-term securities are substantially greater than mark-ups 
charged in short-term securities, because the impact on disclosed yield 
is smaller in the long term trade. The Commission believes that 
customers should be given the ability to compare mark-ups in these 
trades.
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    \1\8The amount of outstanding debt in the U.S. is approximately 
$1.9 trillion in corporate debt, of which $298 billion is held by 
individual investors (households and mutual funds) in corporate and 
foreign debt securities (See Flow of Fund Accounts, First Quarter, 
1993), $4.9 trillion in U.S. government securities, and $1.2 
trillion in municipal bonds. Securities Industry Fact Book, 
Securities Industry Association (1993), at 21. The municipal 
securities market comprises approximately 50,000 state and local 
issuers with an outstanding principal amount of securities in excess 
of $1.2 trillion. See SEC Report on the Municipal Securities Market 
(Sept. 1993), at 1. There are approximately 1.3 million classes of 
municipal securities spread across 150,000 different issuances. 
Public Securities Association.
    \1\9Mark-up disclosure requirements are applicable at present to 
trades in debt securities convertible into equity securities. 
Section 3(a)(11), 15 U.S.C. 78c(a)(11), and Rule 3a11-1 of the 
Exchange Act, 17 CFR 240.3a11-1, define equity security to include 
any security convertible into an equity security. Debt security is 
defined to include a convertible security for purposes of certain 
paragraphs of Rule 10b-10, but not for purposes of mark-up 
disclosure in riskless principal trades.
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    In withdrawing the riskless principal mark-up disclosure proposal 
in the 1978 Release, the Commission stated that it would ``maintain 
close scrutiny to prevent excessive mark-ups and take enforcement 
action where appropriate.''20 Since 1982, the Commission and NASD 
have undertaken a number of enforcement actions against broker-dealers 
involving undisclosed, excessive mark-ups in debt securities.21 
Requiring disclosure of mark-ups in riskless principal trades in debt 
securities would supplement the Commission's and self-regulatory 
organizations' enforcement programs, by giving investors greater 
ability to review the mark-ups on their transactions. As a practical 
matter, the proposed amendment also may permit broker-dealers that 
consistently observe the highest standards of practice to compete more 
effectively against broker-dealers that charge excessive mark-
ups.22
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    \2\0Securities Exchange Release No. 18987 (Aug. 20, 1982), 47 FR 
37919, at 37920.
    \2\1See, e.g., F.B. Horner & Associates v. S.E.C., 994 F.2d 61 
(2d Cir. 1993) (mark-ups charged of 5% for collateralized mortgage 
obligations held to be excessive); First Honolulu Securities Corp., 
mark-ups of 5% for municipal and corporate bonds held to be 
excessive); Investment Planning, Inc., Securities Exchange Act 
Release No. 32687 (July 28, 1993) (upholding NASD finding that mark-
ups of 4% on certain corporate and municipal bonds were excessive); 
Lake Securities, Inc., (Securities Exchange Act Release No. 31283 
(Oct. 2, 1992) (mark-down of 7.4% on FNMA mortgage-backed securities 
held to be fraudulent); Hamilton Bohner, 44 S.E.C. Doc. 1297 (1989) 
(mark-downs ranging from 5.3% to 10.2% in excess of permissible 
levels and NASD's findings of violations upheld); Donald T. Sheldon, 
Admin. Proc. File No. 3-6626 (December 2, 1988)[available on 
LEXIS](undisclosed mark-ups of over 8% for municipal bonds and over 
5% for government securities found to be excessive), appeal 
docketed, No. 93-4405 (11th Cir.); Alan Charles Refkin, Securities 
Exchange Act Release No. 26311 (Nov. 25, 1988), 42 S.E.C. Doc. 490 
(consent decree included findings that certain registered 
representatives executed transactions involving mark-ups of between 
10% and 34% in zero coupon bonds); PaineWebber, Inc., Securities 
Exchange Act Release No. 25418 (Mar. 4, 1988), 40 S.E.C. Doc. 693 
(offer of settlement stated that registrant charged customers 
undisclosed, excessive mark-ups in transactions involving the sale 
and repurchase of stripped U.S. Treasury bond coupons); Nicholas A. 
Codispoti, 48 S.E.C. 842 (1987) (mark-ups of 6.1% to 32.7% on 
municipal bonds with inactive market found to be excessive); Sutro & 
Co., Securities Exchange Act Release No. 23663 (Sept. 30, 1986), 36 
S.E.C. Docket 1199 (offer of settlement included finding that 
transactions were executed with mark-ups and mark-downs of between 
10% and 34% on U.S. Treasury bonds); Hanauer, Stern & Co., 
Securities Exchange Act Release No. 21313 (Sept. 11, 1984), 31 
S.E.C. Doc. 483 (consent decree included findings of excessive mark-
ups on municipal securities transactions); S.E.C. v. MV Securities, 
Inc. (S.D.N.Y., No. Civ. 1164), Litigation Release No. 10289 (Feb. 
21, 1984), 29 S.E.C. Doc. 1591, (defendants enjoined from, inter 
alia, paying or charging unfair prices to customers in municipal 
bond transactions).
    The Commission brought an injunctive action against an 
unregistered broker-dealer for defrauding his customers by secretly 
interpositioning himself between customers and dealers in certain 
government and municipal securities, and appropriating for himself 
better market prices that should have been made available to his 
customers. SEC v. Ridenour, 913 F.2d 515 (8th Cir. 1990).
    In addition, the Commission has submitted amicus briefs in cases 
alleging excessive mark-ups in debt securities. See, e.g., Amicus 
Curiae Brief of the SEC and Elysian Federal Savings Bank v. First 
Interregional Equity Corp., 713 F. Supp. 737 (D. N.J. 1989)(brief 
arguing that mark-ups ranging from 17.4% to 21.27% for principal 
only trust certificates were excessive and mark-ups ranging between 
5.3% to 7.39% on collateral mortgage obligations were excessive).
    \2\2The Commission is aware of instances in which the customer, 
while being correctly informed that no ``commission'' is involved in 
a principal transaction in a debt security, has been given the 
impression that no transaction fee is being charged. See ``Firms 
Must Accurately Disclose Bond Trading Charges,'' NASD Regulatory & 
Compliance Alert (June 1990). Irrespective of current or future Rule 
10b-10 disclosure requirements, a misleading statement or a failure 
to disclose material facts about the compensation received by the 
broker-dealer constitutes an antifraud violation.
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    Because riskless principal transactions do not involve holding 
securities in inventory for any appreciable length of time,23 the 
broker-dealer's compensation easily can be calculated by comparing the 
order tickets for the purchase and sale involved. In addition, a 
broker-dealer must assess whether its mark-ups violate NASD or 
Commission mark-up policies. Accordingly, the Commission does not 
believe that the proposal would be overly burdensome for broker-
dealers.
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    \2\3The riskless principal disclosure requirements are intended 
to apply to offsetting transactions, regardless of the sequencing of 
the transaction. See Securities Exchange Act Release No. 15219 (Oct. 
6, 1978), at n. 20; and Letter regarding Buys-MacGregor, McNaughton-
Greenwalt & Co., (Feb. 1, 1980), [1980] Fed. Sec. L. Rep. (CCH) 
76,313.
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    Unlike current disclosure requirements for riskless principal 
transactions in equity securities, the proposed amendment and Rule 
15c2-13 do not include an exclusion for market makers. This exclusion 
is omitted because market makers have a much more limited function in 
the debt markets. Typically, dealers in these markets, especially the 
municipal market, do not display two-sided quotations nor carry 
inventories of debt securities, as is characteristic of a market maker 
in equity securities. Because of the tax implications, the lack of 
dealer inventory, and the relative illiquidity of the market for any 
particular municipal security, short positioning of municipal 
securities is difficult and imposes greater risk that a dealer will be 
unable to cover its short position.24
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    \2\4Short positioning municipal securities is rare because the 
Internal Revenue Service will not allow both a borrower and lender 
of a municipal security to claim a tax exemption. In effect, the 
lender of a municipal security would be trading tax exempt interest 
for taxable interest. In addition, to the extent that any short 
positioning occurs with respect to municipal securities, the IRS 
imposes additional reporting requirements on the participating 
parties. See Internal Revenue Code, Sec. 6045(d).
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    The Commission requests comment on the proposal to disclose mark-
ups in riskless principal transactions in debt securities. In 
particular, the Commission requests comment concerning whether 
proposals requiring mark-up disclosure in riskless principal 
transactions in municipal securities should be incorporated in one rule 
under the authority of the Municipal Securities Rulemaking Board 
(``MSRB''), rather than the Commission. In addition, comment is sought 
concerning the proposed definition of riskless principal contained in 
sub-paragraphs (e)(10) and (b)(3) of Rule 10b-10 and Rule 15c2-13, 
respectively.25 The Commission further requests comment concerning 
the extent to which broker-dealers act as market makers, as defined in 
Section 3(a)(38), in the debt market and the extent that broker-dealers 
currently calculate mark-ups in riskless principal debt transactions 
for business purposes, such as determining the compensation of sales 
personnel.26 In addition, the Commission requests comment on 
whether the proposed requirements for mark-up disclosure in debt 
securities should cover securities transactions occurring on the same 
day rather than limiting the disclosure solely to riskless principal 
transactions.
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    \2\5See, supra, note 10 for a discussion of riskless principal 
transactions.
    \2\6Salesperson compensation is often determined as a percentage 
of the gross mark-up charged on a principal transaction.
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2. Disclosure of Unrated Debt Securities

    As proposed, both Rule 10b-10 and Rule 15c2-13 will require broker-
dealers to disclose when a debt security, other than securities defined 
under Section 3(a)(42)(A) and (B) of the Exchange Act,27 is not 
rated by a nationally recognized statistical rating organization. The 
Commission is not requiring the disclosure of the specific rating of a 
debt security because that information most likely will be disclosed to 
a customer when a broker-dealer sells such a security. Brokers are less 
likely to inform customers that a security is not rated. While the 
Commission recognizes that an unrated bond may not necessarily be 
unsound or speculative, this information will benefit investors by 
alerting them that they may want to make further inquiry of the broker-
dealer. In the municipal securities market, this information is 
particularly useful because of the limited secondary market information 
in that market and the comparatively higher rates of issuer default for 
unrated municipal bonds.28 The Commission requests comment whether 
securities other than U.S. Treasury securities should be excluded from 
this requirement. In addition, the Commission requests comment on 
whether this requirement as it relates to municipal securities should 
be incorporated in one rule under the authority of the MSRB.
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    \2\715 U.S.C. 78(c)(a)(42)(A) and (B).
    \2\8Statistics have shown that unrated municipal bonds, which 
make up approximately one-third of the market, in the aggregate have 
a higher default rate than do rated bonds. See Municipal Bond 
Defaults--The 1980's a Decade in Review 1-2, at 1, J.J. Kenny Co., 
Inc. 1993). According to this study on default rates between January 
1, 1980 to December 31, 1991, 628 unrated issues defaulted compared 
with 98 rated issues. See also, Public Securities Association, An 
Examination of Non-Rated Municipal Defaults 1986-1991 4 (Jan. 8, 
1993).
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3. Disclosure of Mark-Ups and Mark-downs in Certain Nasdaq and 
Exchange-Listed Securities

    Since 1985, Rule 10b-10 has required broker-dealers acting as 
principals in transactions in Reported Securities29 to disclose on 
customer confirmations the reported trade price, the price to the 
customer, and the difference between the two prices.30 In response 
to the expansion of last sale reporting to additional securities, the 
Commission is now proposing to amend Rule 10b-10 to require similar 
disclosure in principal transactions in Nasdaq equity securities that 
are not Nasdaq/NMS securities (``Nasdaq Small Cap Securities'') and 
certain exchange-listed securities. These securities are subject to 
last sale reporting, but are not included in the definition of 
``Reported Security,'' as provided in Rule 11Aa3-1 of the Exchange Act.
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    \2\9See, supra note 8 for the definition of ``Reported 
Securities.''
    \3\017 CFR 240.10b-10(a)(8)(i)(B). The reported trade price is 
the price at which a broker-dealer reports a trade to NASDAQ or an 
exchange. Price to the customer means the ultimate price the 
customer pays or receives for a securities transaction, including 
any miscellaneous fees imposed by the broker-dealer. This would not 
include fees, such as taxes, SEC fees, or any other fees required by 
state or federal law. See, e.g., Letter regarding Cities Securities 
Corp. (Dec. 11, 1991) [available on LEXIS].
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    In April, 1992, the Commission approved a proposal by the 
NASD31 to require last sale and volume reporting for all 
securities traded on Nasdaq.32 Shortly afterwards, the NASD 
required its members to disclose to customers on written confirmations 
the reported trade price, the price to the customer, and the difference 
between the two prices in a particular Nasdaq Small Cap Securities 
transaction.33 The NASD's rule provides customers who trade Nasdaq 
Small Cap Securities with the same compensation disclosure required 
under Rule 10b-10 for Nasdaq/NMS securities.
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    \3\1Securities Exchange Act Release No. 30392 (Feb. 21, 1992), 
57 FR 6880.
    \3\2Securities Exchange Act Release No. 30569 (Apr. 10, 1992), 
57 FR 13396.
    \3\3NASD Schedule to By-Laws, Schedule D, pt. XI, Sec. 3, NASD 
Manual (CCH) 1867D, approved in Securities Exchange Act Release No. 
30871 (June 29, 1992), 57 FR 30281.
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    The proposed amendment would consolidate in Rule 10b-10 
compensation disclosure applicable to all Nasdaq stocks. It also would 
extend this compensation disclosure to principal transactions in 
regional-exchange listed securities subject to last sale 
reporting.34 Doing so would treat similar securities consistently 
and would provide benefits to customers with little additional burden 
on broker-dealers. Because securities traded through Nasdaq and 
regional exchanges are subject to last sale reporting requirements, and 
NASD members are required to disclose on confirmations the reported 
price, the customer's price, and the difference, capturing and 
disclosing the same information for purposes of complying with Rule 
10b-10 would not appear to require systems changes or additional 
personnel.
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    \3\4Typically, these are securities of smaller companies that 
are listed and traded exclusively on one regional exchange.
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4. Disclosure of Coverage by the Securities Investor Protection 
Corporation

    The Commission is proposing to require that the confirmation 
contain a disclosure concerning coverage under the Securities Investor 
Protection Act of 1970 (``SIPA'').35 Under SIPA, all brokers or 
dealers registered with the Commission under Section 15(b) of the 
Exchange Act, with certain exceptions,36 are members of the 
Securities Investor Protection Corporation (``SIPC''). In the event of 
the financial failure of a SIPC member broker-dealer, SIPC protects 
each customer up to $500,000 for claims for cash and securities, except 
that claims for cash are limited to $100,000.
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    \3\5Securities Investor Protection Act of 1970. Pub. L. 91-598, 
64 Stat. 1836, as amended (codified at 15 U.S.C. 78aaa et seq.).
    \3\6The following broker-dealers are excluded from SIPC 
membership: (1) Government securities broker-dealers registered 
under section 15C of the Exchange Act; (2) persons whose principal 
business in the determination of SIPC (and subject to Commission 
approval) is conducted outside the United States; and (3) persons 
whose business consists exclusively of (a) the distribution of 
shares of registered open-end investment companies or unit 
investment trusts, (b) the sale of variable annuities, (c) the 
business of insurance, or (d) the business of rendering investment 
advisory services to one or more registered investment companies or 
insurance company separate accounts. SIPA secs. 3(a)(2)(A) and 
16(12) 15 U.S.C. 78ccc(a)(2)(A) and 78lll(12).
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    A number of incidents involving the financial failure of registered 
broker-dealers, and their unregistered affiliates, have illustrated the 
potential for confusion about the application of SIPC coverage to 
customers' accounts. In one of these cases, a registered broker-dealer 
and its government securities affiliate were commonly owned, shared 
personnel and office facilities, and did not distinguish between the 
two entities in certain written and oral communications, leading to 
customer confusion concerning SIPC coverage.37 Because government 
securities brokers and dealers registered under section 15C of the 
Exchange Act are not members of SIPC, their customer accounts are not 
protected by SIPC.38
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    \3\7See generally, SEC v. Donald Sheldon Group, Inc. et al., 
Admin. Pro. File No. 3-6626 (Dec. 2, 1988).
    \3\8See, supra note 33.
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    In order to reduce the potential for confusion regarding whether 
SIPC coverage exists for accounts with government securities dealers, 
as well as other cases where an investor might mistakenly assume that 
SIPC coverage exists, the Commission is proposing to amend Rule 10b-10 
to require broker-dealers that are not SIPC members to affirmatively 
state in the customer confirmation that they are not SIPC members and 
to require disclosure if the account is carried by a broker or a dealer 
that is not a SIPC member. This disclosure requirement would be 
consistent with the authority granted to the Commission concerning SIPC 
disclosure under the Government Securities Acts Amendments of 
1993.39
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    \3\915 U.S.C. 78O-5(a)(4).
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5. Disclosure for Certain Asset-Backed Securities

    The Commission is proposing to amend the yield disclosure 
requirements with respect to asset-backed securities. The Rule 
currently requires broker-dealers that effect transactions in debt 
securities, other than U.S. Savings Bonds or municipal securities, to 
disclose: (1) The yield to maturity, if the transaction is effected on 
the basis of dollar price; (2) if the transaction is effected on a 
yield basis, then the dollar price calculated from that yield; and (3) 
if effected on a basis other than dollar price or yield to maturity, 
and the yield to maturity will be less than the represented yield, then 
both the yield to maturity and represented yield.
    When these amendments were adopted, the Commission noted the 
importance of yield data to an investor in transactions in debt 
securities.40 The yield, or dollar price, at which a transaction 
is effected in the secondary market will be directly related to the 
anticipated maturity. Thus, features that cause a debt security to pay 
sooner or later than expected will alter the actual yield that an 
investor receives.
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    \4\0Securities Exchange Act Release No. 19687 (April 18, 1983), 
49 FR 17583.
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    In recognition of this effect, the Commission excluded from the 
actual yield disclosure requirements securities that represent an 
interest in notes secured by liens upon real estate continuously 
subject to prepayment.\41\ The Commission noted that fluctuations in 
interest rates may cause mortgage notes underlying participation 
certificates to prepay at rates faster or slower than anticipated. At 
the time the Commission adopted the yield amendments, the primary 
application of the exception was to transactions in securities issued 
or guaranteed by the Government National Mortgage Association, Federal 
National Mortgage Association, and the Federal Home Loan Mortgage 
Corporation.
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    \41\For purposes of paragraphs (a)(3) and (a)(4), the term 
``debt security'' is defined in Rule 10b-10(e)(4), 17 CFR 240.10b-
10(e)(4), to include a fractional or participation interest in 
notes. The Commission also excepted securities with a maturity date 
that may be extended by the issuer.
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    Since 1983, when the yield disclosure provisions were added to the 
rule, the ``structured financing''\42\ market has been dramatically 
increased to include securities backed by mortgage notes, automobile 
loans, computer leases, consumer debt, and other receivables. Also, 
broker-dealers now offer a variety of derivative mortgage instruments 
and structured financing vehicles in which payment to investors is 
related directly to payments of principal and interest on underlying 
debt instruments. In many cases, these various asset-based securities 
subject the investor to the same prepayment risks that are present in 
mortgage participation certificates. To reduce prepayment exposure from 
asset backed securities for some investors, collateralized mortgage 
obligations (``CMOs'') have been developed.
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    \42\``Structured financing'' is a financing technique whereby a 
sponsor, which has originated or has purchased certain financial 
collateral, such as accounts receivable or mortgage loans, transfers 
such assets to a trust, a limited purpose entity organized solely 
for purposes of the offering. That entity then issues debt 
obligations or equity securities with debt-like characteristics. The 
process also has been termed ``securitization.''
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    CMOs are collateralized by pools of residential mortgage loans. 
Like other asset-backed securities, the rate of prepayment on the 
underlying collateral of CMOs is correlated inversely with interest 
rate changes in the general economy. The actual maturities of CMOs are 
dependent on these prepayment speeds. CMOs are priced on the basis of 
the estimated ``weighted average life'' (``WAL'') of individual CMO 
tranches. As interest rates decline, prepayments increase, with a 
corresponding shortening of WALs. Conversely, an increase in interest 
rates results in a lengthening of maturity. Estimated yields cannot be 
established without some prepayment assumption underlying the WAL; for 
this reason, disclosure of accurate prepayment assumptions, and an 
appreciation of their implications, is essential to making a sound 
investment decision.
    CMOs are offered in several tranches of varying maturity and yield 
that are intended to appeal to a broad spectrum of investors. One or 
more tranches typically are structured as a planned amortization class 
(``PAC''). PAC bonds, whose maturities are shielded from both WAL 
extension and contraction risk, have the maximum protection available 
in CMOs. Unlike PAC bonds, target amortization class (``TAC'') bonds 
only provide protection against rapid prepayments, i.e., against a 
shortening of maturity. In CMO offerings there also are ``support 
classes,'' or ``companion classes,'' of the PAC or TAC bond classes, 
which bear a disproportionate share of prepayment risk.\43\
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    \43\The PAC bond's cash flow stability is achieved by giving its 
principal payments a higher priority than those of the CMO 
``companion'' tranches. While PAC bonds generally yield about 50 to 
75 basis points above comparable Treasury bonds, companion tranches 
can yield as much as 150 to 175 basis points above comparable 
Treasury bonds, an attractive yield for investors seeking 
alternatives to money market funds and certificates of deposit. As a 
by-product of PAC or TAC bonds, however, ``companion'' bonds are 
more volatile than PAC or TAC bonds. According to Fitch Investors 
Service, Inc., ``companion'' bonds generally demonstrate ``moderate-
to-high volatility, with a very small percentage having low 
volatility.'' ``CMO Tranche Risk Revealed,'' Fitch Investors 
Service, Inc. 3 (April 6, 1992).
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    In view of the changes in the structured financing market described 
above, the Commission proposes to revise the yield disclosure 
requirements for asset backed securities. On the one hand, the 
Commission proposes to expand the range of debt securities where yield 
need not be disclosed to include any asset backed security subject to 
continuous prepayment.\44\ Broker-dealers must disclose yield 
information with respect to debt instruments that are insulated from 
prepayment risk, or where sufficient certainty exists to permit an 
accurate forecast of the yield that investors will receive.\45\
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    \44\This amendment would codify a no-action response issued by 
the staff in 1988 with respect to mortgage-backed securities, and 
apply it to asset-backed securities generally. Letter regarding 
Merrill Lynch Capital Markets (Oct. 19, 1988) [available on LEXIS].
    \45\For example, the Commission notes that mortgage loans on 
multi-family housing may contain substantial prepayment penalties, 
so that a security collateralized by or representing an interest in 
such notes would be expected to provide a predictable payment stream 
to investors. Similarly, automobile receivables may provide a 
predictable payment stream because automobile owners are less likely 
to prepay their automobile loans. By their nature, certain 
securities, such as most mortgage-backed bonds, also provide 
certainty of cash flow.
---------------------------------------------------------------------------

    On the other hand, the Commission proposes to treat CMOs 
differently from other debt instruments under the proposed amendments. 
A broker-dealer effecting transactions in CMOs would be required to 
disclose, with respect to the security, (1) estimated yield, (2) the 
weighted average life, and (3) the prepayment assumptions underlying 
the yield.
    The Commission emphasizes that the proposed amendments only would 
apply to yield disclosure on a confirmation and would not affect the 
broker-dealer's obligation under the general antifraud provisions of 
the federal securities laws to disclose material information, apart 
from that required by Rule 10b-10, regarding the composition of 
mortgage pools or other factors that will affect yield.
    In this connection, the Commission requests comments concerning the 
manner in which yields are represented to investors in mortgage-backed 
securities; the assumptions made by broker-dealers concerning 
prepayment speed for mortgage pools; and how interest rate risk and 
foreclosure risk are disclosed to investors in mortgage-backed 
securities.
    The Commission requests comment on the effect of the amendments on 
customer understanding of the return on their investments. In addition, 
the Commission requests comment on the advisability of requiring 
separate disclosure relating to the prepayment assumptions underlying a 
yield quotation in a CMO and on the written confirmation for a 
transaction in a CMO.

6. Preliminary Note to Rule 10b-10

    The Commission proposes to add a preliminary note to Rule 10b-10 to 
clarify the relationship between the Rule's disclosure requirements and 
additional disclosures that may be required to satisfy antifraud 
provisions of the federal securities laws. In several cases over the 
years, broker-dealer defendants have argued that because Rule 10b-10 
did not require disclosure of specific information on a confirmation, 
it was not material for purposes of the general antifraud provisions of 
the Exchange Act.46 Although courts have given short shrift to 
these arguments, the Commission wishes to reiterate that Rule 10b-10 is 
not a safe harbor from the general antifraud provisions of the federal 
securities laws.47 A broker-dealer has a duty established by 
federal common law theories48 independent of the requirements of 
Rule 10b-10 to disclose material facts to an investor at the time of 
the investor's investment decision.49
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    \4\6See, e.g., Shivangi v. Dean Witter Reynolds, Inc., 637 F. 
Supp. 1001 (S.D. Miss. 1986), aff'd, 825 F.2d 885 (5th Cir. 1987); 
Krome v. Merrill Lynch, Pierce, Fenner & Smith Inc., 637 F. Supp. 
910, 915-916 (S.D.N.Y. 1986); and Ettinger v. Merrill Lynch, Pierce, 
Fenner & Smith, Inc., Fed. Sec. L. Rep. (CCH) 93,102 (E.D. Pa. 
1986), rev'd, 835 F.2d 1031 (3d Cir. 1987).
    \4\7In the adopting release to Rule 10b-10, the Commission 
explained that:
    The rule does not attempt to set forth all possible categories 
of material information to be disclosed by broker-dealers in 
connection with a particular transaction in securities. Rule 10b-10 
only mandates the disclosure of information which can generally be 
expected to be material. Of course, in particular circumstances, 
additional information may be material and disclosure may be 
required.
    Securities Exchange Release No. 13508, (May 5, 1977), 42 FR 
25318, at 25320 n.28.
    See also Securities Exchange Act Release No. 22397 (Sept. 11, 
1985), 50 FR 37648, 37653 n.53 (indicating that disclosure of a 
``mark-up'' for national market system securities under Rule 10b-10 
would not control traditional determinations of, among other things, 
whether the mark-ups are excessive for purposes of the antifraud 
provisions of the federal securities laws).
    \4\8Two theories, the fiduciary and shingle theory, establish an 
obligation on the part of a broker-dealer to deal with customers 
fairly. In cases where a broker-dealer has established a customer 
relationship based upon trust and confidence, and the customer 
depends upon and follows the broker-dealer's advice, a fiduciary 
relationship is established between the broker-dealer and customer. 
As a fiduciary, the broker-dealer also is obligated to disclose all 
the material facts of a customer's transaction. See In re Arleen W. 
Hughes, 27 S.E.C. 627 (1948), aff'd, 174 F.2d 969 (D.C. Cir. 1949).
    Closely related to the fiduciary theory is a duty to the 
customer established by the ``shingle theory.'' According to the 
shingle theory, a broker-dealer impliedly represents at the outset 
of a securities transaction that it will deal with its customers 
fairly and in accordance with the standards of the industry. Duker & 
Duker, 6 S.E.C. 386, 388-89 (1939).
    \4\9The fact that a broker-dealer has met the requirements of 
Rule 10b-10 should begin the analysis, not end it. The confirmation 
is delivered after the contract is created. Thus, irrespective of 
the content of the confirmation, specific terms of the transaction 
that may affect the customer's investment decision should be 
disclosed at the time of a purchase or sale of a security. See, 
e.g., Norris & Hirshberg v. S.E.C., 177 F.2d 228 (D.C. Cir. 1949) 
(affirming a Commission decision holding that the failure of a 
broker-dealer to disclose its true capacity at the time of a 
transaction, as principal rather than as agent, was, among other 
things, a violation of Section 10(b) of the Exchange Act, 
notwithstanding the fact that the broker-dealer had disclosed that 
it was acting as principal in confirmations sent to investors).
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    In amending Rule 10b-10, the Commission must balance the increased 
cost to broker-dealers, and ultimately to investors, of compliance 
against the benefits that added disclosures will provide 
investors.50 In some instances, the Commission has declined to 
adopt proposed amendments to its confirmation requirements because they 
were considered too costly, or would have been too difficult to apply 
on a uniform basis.51 Even when the Commission has not required 
broker-dealers to disclose specific information to investors pursuant 
to Rule 10b-10, this information nonetheless may be material to an 
investor.52
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    \5\0For example, the Commission noted in the release proposing 
Rule 10b-10 that:
    Since the costs of regulation designed to promote investor 
protection are in the final analysis paid for in large part by the 
investor, the Commission is endeavoring to adjust regulatory 
requirements to eliminate those for which compliance costs appear to 
be disproportionate to the practical benefits of investor protection 
thereby obtained.
    Securities Exchange Act Release No. 12806 (Sept. 16, 1976), 41 
FR 41432.
    \5\1See Securities Exchange Act Release No. 18987 (Aug. 20, 
1982), 47 FR 37919.
    \5\2The Commission reiterated this point in a release concerning 
disclosure of mark-ups in zero-coupon instruments. Securities 
Exchange Act Release No. 24368 (Apr. 21, 1987), 52 FR 15575. See 
also Amicus Curiae Brief of the SEC and Ettinger v. Merrill Lynch, 
Pierce, Fenner & Smith, Inc., 835 F.2d 1031 (3d Cir. 1987).
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    Accordingly, the Commission is proposing to add a brief preliminary 
note to the Rule, expressing the long-standing position that Rule 10b-
10 was not intended to codify the universe of disclosure necessary in a 
transaction.

7. Restructuring of the Rule

    A variety of non-substantive changes have been made to the rule to 
enhance its clarity. Headings have been added to each paragraph. 
Paragraph (a) has been reordered to combine elements dependent on the 
capacity of the broker or dealer. Paragraphs (b) and (c) have been 
combined into a single paragraph (c), and one element of former 
paragraph (b) has been moved to the definition of ``investment company 
plan'' in paragraph (e). A definition of riskless principal transaction 
has been added, and references to broker or dealer have been made 
gender neutral.

8. Effects on Competition and Regulatory Flexibility Act Considerations

    Section 23(a)(2) of the Exchange Act53 requires that the 
Commission, in adopting rules under the Act, consider the anti-
competitive effects of such rules, if any, and balance any anti-
competitive impact against the regulatory benefits gained in terms of 
furthering the purposes of the Exchange Act. The Commission is 
preliminarily of the view that the proposed amendments to Rule 10b-10 
will not result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. The 
Commission requests comment, however, on any competitive burdens that 
might result from adoption of the amendments or the new rule.
---------------------------------------------------------------------------

    \5\315 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    In addition, the Commission has prepared an Initial Regulatory 
Flexibility Analysis (``IRFA''), pursuant to the requirements of the 
Regulatory Flexibility Act,54 regarding the proposed amendments to 
Rule 10b-10. The IRFA may be obtained from C. Dirk Peterson, in the 
Office of Chief Counsel, Division of Market Regulation, (202) 504-2418.
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    \5\45 U.S.C. 603.
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    In addition, the Commission has consulted with the Department of 
the Treasury pursuant to Section 15(c)(2) of the Exchange Act 
concerning the SIPC disclosure requirements.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, securities.

Text of Proposed Amendments

    For the reasons set forth in the preamble, title 17, chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 780-5, 
78p, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
    2.240.1b Section 240.10b-10 is amended by adding a preliminary note 
prior to paragraph (a), revising paragraphs (a) and (b), removing 
paragraph (c), redesignating paragraphs (d) through (f) as paragraphs 
(c) through (e), adding a heading to newly designated paragraph (d), 
revising the introductory text of paragraph (d) and the introductory 
text of paragraph (d)(6), and adding paragraphs (d)(9) and (d)(10) to 
read as follows:


Sec. 240.10b-10  Confirmation of transactions.

    Preliminary Note. This section requires broker-dealers to 
disclose specified information in writing to customers at or before 
the completion of a transaction. The requirements under this section 
that particular information be disclosed is not determinative of a 
broker-dealer's obligation under the general antifraud provisions of 
the federal securities laws to disclose additional information to a 
customer at the time of the customer's investment decision.

    (a) Disclosure requirement. It shall be unlawful for any broker or 
dealer to effect for or with the account of a customer any transaction 
in, or to induce the purchase or sale by such customer of, any security 
(other than U.S. Savings Bonds or municipal securities) unless such 
broker or dealer, at or before completion of such transaction, gives or 
sends to such customer written notification disclosing:
    (1) The date and time of the transaction (or the fact that the time 
of the transaction will be furnished upon written request of such 
customer) and the identity, price, and number of shares or units (or 
principal amount) of such security purchased or sold by such customer; 
and
    (2) Whether the broker or dealer is acting as agent for such 
customer, as agent for some other person, as agent for both such 
customer and some other person, or as principal for its own account; 
and if the broker or dealer is acting as principal, whether it is a 
market maker in the security (other than by reason of acting as a block 
positioner); and:
    (i) If the broker or dealer is acting as agent for such customer, 
for some other person, or for both such customer and some other person:
    (A) The name of the person from whom the security was purchased, or 
to whom it was sold, for such customer or the fact that such 
information will be furnished upon written request of such customer; 
and
    (B) The amount of any remuneration received or to be received by 
the broker from such customer in connection with the transaction unless 
remuneration paid by such customer is determined, pursuant to a written 
agreement with such customer, otherwise than on a transaction basis; 
and
    (C) The source and amount of any other remuneration received or to 
be received by the broker in connection with the transaction: Provided, 
however, That if, in the case of a purchase, the broker was not 
participating in a distribution, or in the case of a sale, was not 
participating in a tender offer, the written notification may state 
whether any other remuneration has been or will be received and that 
the source and amount of such other remuneration will be furnished upon 
written request of such customer; or
    (ii) If the broker or dealer is acting as principal for its own 
account:
    (A) In the case of a riskless principal transaction, except where 
the dealer is a market maker in an equity security, the difference 
between the price to the customer and the dealer's contemporaneous 
purchase (for customer purchases) or sale price (for customer sales); 
or
    (B) In the case of any other transaction in a reported security, or 
an equity security that is quoted on Nasdaq or traded on a national 
securities exchange, and that is subject to last sale reporting, the 
reported trade price, the price to the customer in the transaction, and 
the difference, if any, between the reported trade price and the price 
to the customer; and
    (3) Whether any odd-lot differential or equivalent fee has been 
paid by such customer in connection with the execution of an order for 
an odd-lot number of shares or units (or principal amount) of a 
security and that the amount of any such differential or fee will be 
furnished upon oral or written request: Provided, however, That such 
disclosure need not be made if the differential or fee is included in 
the remuneration disclosure, or exempted from disclosure, pursuant to 
paragraph (a)(2)(ii)(B) of this section; and
    (4) In the case of any transaction in a debt security subject to 
redemption before maturity, a statement to the effect that such debt 
security may be redeemed in whole or in part before maturity, that such 
a redemption could affect the yield represented and that additional 
information is available upon request; and
    (5) In the case of a transaction in a debt security effected 
exclusively on the basis of a dollar price:
    (i) The dollar price at which the transaction was effected; and
    (ii) The yield to maturity calculated from the dollar price; 
provided, however, that this paragraph (a)(5)(ii) shall not apply to a 
transaction in a debt security that either:
    (A) Has a maturity date that may be extended by the issuer thereof; 
or
    (B)(1) That represents an interest in, or is secured by, notes or 
other receivables continuously subject to prepayment, where payments to 
security holders are reasonably related to payments on such notes or 
receivables; and
    (2) The written statement prominently indicates that the actual 
yield received by the customer may vary according to the rate at which 
the underlying notes or receivables are prepaid; and
    (6) In the case of a transaction in a debt security effected on the 
basis of yield:
    (i) The yield at which the transaction was effected, including the 
percentage amount and its characterization (e.g., current yield, yield 
to maturity, or yield to call) and if effected at yield to call, the 
type of call, the call date and call price;
    (ii) The dollar price calculated from the yield at which the 
transaction was effected; and
    (iii) If effected on a basis other than yield to maturity and the 
yield to maturity is lower than the represented yield, the yield to 
maturity as well as the represented yield: Provided, however, that this 
paragraph (a)(6)(iii) shall not apply to a transaction in a debt 
security which either:
    (A) Has a maturity date that may be extended by the issuer thereof, 
with a variable interest rate payable thereon; or
    (B)(1) That represents an interest in, or is secured by notes or 
other receivables continuously subject to prepayment, where payments to 
security holders are reasonably related to payments on such notes or 
receivables; and
    (2) The written statement prominently indicates that the actual 
yield received by the customer may vary according to the rate at which 
underlying notes or receivables are prepaid; and
    (7) In the case of a debt security that is a collateralized 
mortgage obligation, the yield to maturity calculated on the basis of 
the ``weighted average life'' of the security; the weighted average 
life; and the prepayment assumption underlying this yield; and
    (8) In the case of a transaction in a debt security, other than a 
security defined under section 3(a)(42) (A) and (B) of this Act (15 
U.S.C. 78(c)(a)(42) (A) and (B)), that the security is unrated by a 
nationally recognized statistical rating organization, if such is the 
case; and
    (9) That the broker or dealer is not a member of the Securities 
Investor Protection Corporation, or that the broker or dealer clearing 
or carrying the customer account is not a member of the Securities 
Investor Protection Corporation, if such is the case.
    (b) Alternative periodic reporting. A broker or dealer may effect 
transactions for or with the account of a customer without giving or 
sending to such customer the written notification described in 
paragraph (a) of this section if:
    (1) Such transactions are effected pursuant to a periodic plan or 
an investment company plan, or are effected in shares of any no-load 
open-end investment company registered under the Investment Company Act 
of 1940 that attempts to maintain a constant net asset value per share 
and that holds itself out to be a ``money market'' fund or has an 
investment policy calling for investment of at least 80% of its assets 
in debt securities maturing in 13 months or less; and
    (2) Such broker or dealer gives or sends to such customer within 
five business days after the end of each quarterly period, for 
transactions involving investment company and periodic plans, and after 
the end of each monthly period, for other transactions described in 
paragraph (c)(1) of this section, a written statement disclosing each 
purchase or redemption, effected for or with, and each dividend or 
distribution credited to or reinvested for, the account of such 
customer during the month; the date of each such transaction; the 
identity, number, and price of any securities purchased or redeemed by 
such customer in each such transaction; the total number of shares of 
such securities in such customer's account; any remuneration received 
or to be received by the broker or dealer in connection therewith; and 
that any other information required by paragraph (a) of this section 
will be furnished upon written request: Provided, however, that the 
written statement may be delivered to some other person designated by 
the customer for distribution to the customer; and
    (3) Such customer is provided with prior notification in writing 
disclosing the intention to send the written information referred to in 
paragraph (c)(1) of this section in lieu of an immediate confirmation.
* * * * *
    (d) Definitions. For the purposes of this section:
* * * * *
    (6) Investment company plan means any plan under which securities 
issued by an open-end investment company or unit investment trust 
registered under the Investment Company Act of 1940 are purchased by a 
customer (the payments being made directly to, or made payable to, the 
registered investment company, or the principal underwriter, custodian, 
trustee, or other designated agent of the registered investment 
company), or sold by a customer pursuant to:
* * * * *
    (9) Collateralized mortgage obligation means any debt security with 
two or more classes that:
    (i) Requires payment to be made to holders of each class in 
accordance with a schedule specifying the relative priorities of 
payment to holders of all classes of the security;
    (ii) Is secured by one or more mortgage notes or certificates of 
interest or participations in such notes; and (iii) By its terms 
provides for payments in relation to payments, or reasonable 
projections of payments, on such mortgage notes or certificates of 
interest or participations in such notes.
    (10) Riskless principal transaction means a transaction in which a 
dealer, after having received a buy order from a customer, purchases 
the security as principal from another person to offset a 
contemporaneous sale to such customer, or after having received a sell 
order from a customer, sells the security as principal to another 
person to offset a contemporaneous purchase from such customer.
* * * * *
    3. By adding Sec. 240.15c2-13 to read as follows:


Sec. 240.15c2-13  Confirmation of municipal securities transaction.

    (a) It shall be unlawful for any broker, dealer, or municipal 
securities dealer, acting as principal for its own account, to effect 
with the account of a customer any transaction in any municipal 
security unless the broker, dealer, or municipal securities dealer, at 
or before completion of the transaction, gives or sends to the customer 
written notification disclosing:
    (1) In the case of a riskless principal transaction, the difference 
between the price to the customer and the dealer's contemporaneous 
purchase (for customer purchases) or sale price (for customer sales); 
and
    (2) Whether the municipal security is unrated by a nationally 
recognized statistical rating organization.
    (b) For purposes of this section:
    (1) Customer shall not include a broker, dealer, or municipal 
securities dealer.
    (2) Completion of the transaction shall have the meaning provided 
in Sec. 240.15c1-1 of this section.
    (3) Riskless principal transaction means a transaction in which a 
dealer, after having received a buy order from a customer, purchases 
the security as principal from another person to offset a 
contemporaneous sale to such customer, or after having received a sell 
order from a customer, sells the security as principal to another 
person to offset a contemporaneous purchase from such customer.

    By the Commission.

    Dated: March 9, 1994.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5928 Filed 3-16-94; 8:45 am]
BILLING CODE 8010-01-M