[Federal Register Volume 59, Number 221 (Thursday, November 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-28450]


[[Page Unknown]]

[Federal Register: November 17, 1994]


_______________________________________________________________________

Part VI





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Part 240




Confirmation of Transactions; Final Rule
SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-34962; File No. S7-6-94]
RIN 3235-AF84

 
Confirmation of Transactions

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Commission is adopting amendments to Rule 10b-10 under the 
Securities Exchange Act of 1934 that will require brokers and dealers 
to provide customers immediate written notification of information 
relevant to their securities transactions. Consistent with the 
Commission's investor protection mandate and in keeping with 
innovations in securities products and markets, the amendments will 
require brokers and dealers to provide information concerning customer 
transaction costs in specified NASDAQ and exchange-listed securities, 
the status of certain unrated debt securities, the status of certain 
non-SIPC member broker-dealers, and the availability of information 
regarding asset-backed securities.

EFFECTIVE DATE: April 3, 1995.

FOR FURTHER INFORMATION CONTACT: Catherine McGuire, Chief Counsel, C. 
Dirk Peterson, Senior Counsel, or Terry R. Young, Attorney (202/942-
0073), Division of Market Regulation, Securities and Exchange 
Commission, 450 Fifth Street, NW., Mail Stop 7-10, Washington, DC 
20549.

SUPPLEMENTARY INFORMATION:

I. Introduction and Summary

A. Price Transparency

    During the past year, the Commission has initiated efforts to 
further improve the efficiency of, and to protect investors in, the 
municipal securities and other debt markets. In September 1993, the 
Commission's Division of Market Regulation published the Staff Report 
on the Municipal Securities Market (``Staff Report''),1 which 
contained several recommendations to improve the municipal securities 
market. The Staff Report recommended, among other things, riskless 
principal mark-up disclosure as a means of providing greater 
information to investors purchasing municipal securities.2 The 
Staff Report noted that, unlike the equity markets where mark-ups and 
mark-downs3 are disclosed to investors in non-market maker 
riskless principal transactions and principal transactions in 
``reported securities,''4 mark-ups are not disclosed in any 
principal transaction in municipal securities.5 Thus, investors of 
municipal securities are constrained in their ability to compare 
transaction costs among broker-dealers and across markets. The Staff 
Report identified this ability as one of the benefits of mark-up 
disclosure.6
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    \1\Staff Report on the Municipal Securities Market (September 
1993).
    \2\Staff Report, at 16 and 18.
    \3\For purposes of this release, references to mark-ups also 
will apply to mark-downs or commission equivalents.
    \4\See infra note 71 for a discussion of ``reported 
securities.''
    \5\Staff Report, at 15-16.
    \6\Id. at 16.
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    In addition to enhanced confirmation disclosure, the Staff Report 
discussed the overall benefits of price transparency and the need for 
greater transparency in the municipal securities market.7 Notably, 
price transparency enhances market liquidity and depth, and fosters 
investor confidence,8 while a lack of price information impairs 
market pricing mechanisms, weakens competition, and prevents investors 
from monitoring the quality of their executions.9
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    \7\Staff Report, at 20 and 36.
    \8\Testimony of Arthur Levitt, Chairman, U.S. Securities and 
Exchange Commission, Concerning International Markets and 
Individuals Before the Committee on Banking, Housing, and Urban 
Affairs, U.S. Senate, September 28, 1994.
    \9\See Brandon Becker, Director, Division of Market Regulation, 
Address at 19th International Organization of Securities Commissions 
Annual Conference (1994).
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    To address some of the recommendations contained in the Staff 
Report, on March 9, 1994, the Commission issued for comment proposed 
Rule 15c2-13 under the Securities Exchange Act of 1934 (``Exchange 
Act'')10 to require disclosure of mark-ups in riskless principal 
transactions in municipal securities. Because the same benefits of 
mark-up disclosure apply to other debt transactions, the Commission 
proposed amendments to Rule 10b-10 (``Rule'') under the Exchange Act 
that would require riskless principal mark-up disclosure for debt 
securities other than municipal securities.11
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    \1\0Securities Exchange Act Release No. 33743 (March 9, 1994), 
59 FR 12767 (``Proposing Release'').
    \1\1The Commission previously proposed disclosure requirements 
of mark-ups in riskless principal transactions on three other 
occasions. See Securities Exchange Act Release No. 15220 (Oct. 6, 
1978), 43 FR 47538 (proposing mark-up disclosure for riskless 
principal transactions in municipal securities); Securities Exchange 
Act Release No. 13661 (June 23, 1977), 42 FR 33348 (proposing mark-
up disclosure by non-market makers in riskless principal 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).
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    Since the Proposing Release was issued for comment on March 9, 
1994, municipal market participants have proposed significant new ways 
of making pricing information more widely available to investors. The 
Municipal Securities Rulemaking Board (``MSRB'') has taken the first 
step toward a system that will make publicly available price 
information for municipal securities transactions on a next day basis. 
Recently, the MSRB stated that its ``ultimate goal for the 
[transparency] program is to collect and make available transaction 
information in a comprehensive and contemporaneous manner (footnote 
omitted) * * * [and] wishe[d] to reiterate to the Commission its 
commitment to these goals.''12 The Public Securities Association 
(``PSA'') also has proposed a system to publicize municipal securities 
price information. These proposals will create the infrastructure 
necessary to enhance transparency in the market, and when fully 
implemented, will provide last sale reporting for virtually all 
municipal securities transactions.
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    \1\2Letter from Robert H. Drysdale, Chairman, MSRB, to Arthur 
Levitt, Chairman, SEC (Nov. 3, 1994), at pp. 1-2. Available in 
Public Reference File No. S7-6-94.
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    The Commission is encouraged by these developments, and after 
careful consideration, has determined to defer the riskless principal 
mark-up proposal for six months13 in anticipation of meaningful 
progress by the industry toward enhanced price transparency in the 
municipal securities market. The riskless principal mark-up proposals 
would provide better information only to a certain segment of 
transactions in the debt markets. The industry's efforts to improve 
transparency, on the other hand, ultimately will result in enhanced 
price disclosure for all transactions. Moreover, better dissemination 
of price information will benefit investors by providing them with 
useful information at the time they are making their investment 
decision, rather than after-the-fact when the confirmation is received. 
If, at the end of the six-month period, industry initiatives to improve 
price transparency have not progressed to the Commission's 
satisfaction, however, the Commission may reconsider the riskless 
principal mark-up proposal in light of existing alternatives.
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    \1\3Recently, the MSRB set forth a tentative schedule for the 
completion of each of the four phases of its proposal: phase one 
(inter-dealer transactions, January 1, 1995); phase two (addition of 
time of trade and institutional customer transactions, December 
1995); phase three (addition of retail customer transactions, 
November 1996); and phase four (more contemporaneous trade 
reporting, April 1997). See Letter from Robert H. Drysdale, 
Chairman, MSRB, to Arthur Levitt, Chairman, SEC, (Nov. 3, 1994), at 
pp. 3-7. Available in Public Reference File No. S7-6-94.
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B. Other Disclosures

    In addition to the riskless principal mark-up proposals, the 
Commission proposed several other amendments designed to improve 
confirmation disclosure so that customers can better evaluate their 
securities transactions. Specifically, the Commission proposed 
amendments to Rule 10b-10 that would require broker-dealers to disclose 
(1) mark-ups in connection with transactions in certain NASDAQ and 
regional exchange-listed securities; (2) if they are not members of the 
Securities Investor Protection Corporation (``SIPC''); (3) information 
relevant to certain types of collateralized debt instruments; and (4) 
if a debt security has not been rated by a nationally recognized 
statistical rating organization (``NRSRO''). Proposed Rule 15c2-13 
contained a similar provision requiring broker-dealers to disclose the 
unrated status of a municipal security.
    The Commission also requested comment on the broader issue of 
whether the shortened settlement period of three days (``T+3 
Settlement'') will have an effect on the future utility of the 
confirmation and whether some information currently required in the 
confirmation could be shifted to an account statement.14 In 
addition, the Commission proposed adding a preliminary statement to 
Rule 10b-10 designed to clarify that the Rule is not intended as a safe 
harbor from the general antifraud provisions of the federal securities 
laws.15
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    \1\4See Proposing Release, supra note 10, at 59 FR 12767-68.
    \1\5Id. at 59 FR 12772.
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    In response to the request for comment, the Commission received 344 
comment letters, the majority of which addressed the mark-up disclosure 
proposals for riskless principal transactions. Commenters included 
regional and national broker-dealers, industry associations, financial 
institutions, law firms, insurance companies, and individual 
investors.16 The comments presented a range of views with respect 
to the proposals and the effects that the proposed disclosure 
requirements may have on broker-dealers, investors, and markets.
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    \1\6The comment letters and a summary of comments have been 
placed in Public Reference File No. S7-6-94, which is available for 
inspection in the Public Reference Room.
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    After a review of the comments, the Commission is adopting the 
proposed amendments to Rule 10b-10 that require disclosure if a debt 
security is not rated by an NRSRO, with a modification to exclude all 
government securities from the disclosure requirement; mark-up 
disclosure in connection with transactions in certain NASDAQ and 
regional exchange-listed securities; disclosure if a broker-dealer is 
not a member of SIPC, except for certain transactions in investment 
company shares by non-SIPC member firms that do not handle customer 
funds or securities; and disclosure with respect to the availability of 
information with respect to transactions in collateralized debt 
securities. The Commission also is adopting the preliminary note to 
Rule 10b-10. To allow firms the appropriate time to adapt their systems 
to accommodate these disclosure requirements, the proposals will become 
effective April 3, 1995.
    In addition, that portion of Rule 15c2-13 that would require 
disclosure if a municipal security was not rated by an NRSRO has been 
deferred and will be withdrawn if the MSRB acts to adopt similar 
amendments to its confirmation rule, Rule G-15.17 The MSRB 
recently reiterated its willingness to amend Rule G-15 to require 
disclosure if a municipal security is not rated by an NRSRO.18
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    \1\7MSRB Rule G-15, MSRB Manual (CCH)  3571.
    \1\8Letter from Robert H. Drysdale, Chairman, MSRB, to Arthur 
Levitt, Chairman, SEC (Nov. 3, 1994). Available in Public Reference 
File No. S7-6-94.
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II. Description of Amendments

A. Role of the Confirmation

    The Commission's confirmation rule, Rule 10b-1019 under the 
Exchange Act,20 generally requires a broker-dealer effecting a 
customer transaction in securities (other than U.S. Savings Bonds or 
municipal securities) to provide written notification to its customer, 
at or before completion of a transaction, that discloses information 
specific to the transaction. The confirmation requires, among other 
things, the disclosure of: The date, time, identity, and number of 
shares bought or sold;21 the capacity of the broker-dealer;22 
the net dollar price and yield of a debt security;23 and, under 
specified circumstances, the amount of compensation paid to the broker-
dealer and whether payment for order flow is received.24 For over 
50 years, the customer confirmation has served basic investor 
protection functions by conveying information allowing investors to 
verify the terms of their transactions; alerting investors to potential 
conflicts of interest with their broker-dealers; acting as a safeguard 
against fraud; and providing investors the means to evaluate the costs 
of their transactions and the quality of their broker-dealer's 
execution.
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    \1\917 CFR 240.10b-10.
    \2\015 U.S.C. 78a et seq.
    \2\117 CFR 240.10b-10(a)(2).
    \2\217 CFR 240.10b-10(a)(1).
    \2\317 CFR 240.10b-10(a)(4)(i); and 17 CFR 240.10b-10(a)(5).
    \2\417 CFR 240.10b-10(a)(7) (ii) and (iii); 17 CFR 240.10b-
10(a)(8)(i)(A); and 17 CFR 240.10b-10(a)(8)(i)(B).
    Recently, the Commission proposed for comment additional 
disclosures relevant to payment for order flow, which would include 
for monetary payment for order flow, the range of payments received 
on a per share basis and on an aggregate basis annually. For non-
monetary payment for order flow, the Commission proposed requiring 
disclosure of an estimate of the range of payment for order flow on 
a per share basis and on an aggregate basis annually. See Securities 
Exchange Act Release No. 34903 (Oct. 27, 1994), 59 FR 55014.
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1. T+3 Settlement
    In the Proposing Release, the Commission requested comment on the 
future utility of the confirmation once T+3 Settlement is implemented 
on June 7, 1995.25 Rule 10b-10 requires that a confirmation be 
sent at or before completion of a customer transaction.26 
Commenters noted that T+3 Settlement will diminish the confirmation's 
usefulness as a customer invoice and questioned the practicability of 
requiring the disclosure of additional information on a document that 
an investor will receive after already having made his or her 
investment decision and tendering funds or securities.27
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    \2\5T+3 Settlement was adopted in Securities Exchange Act 
Release No. 33023 (Oct. 6, 1993), 58 FR 52891.
    \2\6Rule 15c1-1 under the Exchange Act defines ``the completion 
of the transaction.'' 17 CFR 240.15c1-1(b).
    \2\7See, e.g., Letters from A. George Saks, Executive Vice 
President, Secretary, and General Counsel, Smith Barney (Aug. 1, 
1994); Robert M. Sweeney, Vice President/Assistant Comptroller, 
Gibraltar Securities Co. (June 14, 1994); William J. Jester, Jr., 
Chemical Banking Corp. (June 14, 1994); and Kurt D. Halvorson, Vice 
President & Controller, AmeriTrade (May 27, 1994), to Jonathan G. 
Katz, Secretary, SEC.
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    Notwithstanding the shortened settlement period of T+3 and the 
possibility that an investor may receive the confirmation after payment 
has been made, the Commission believes that the confirmation will 
continue to serve important investor protection functions. T+3 
Settlement's implementation merely may mean that the confirmation may 
take on a different role. Some firms may continue to use the 
confirmation as a customer invoice, while financing positions when 
customer payment is received after settlement date. For other firms, 
the confirmation may not continue to serve in all circumstances as an 
invoice of a transaction because ordinary confirmation delivery and 
transfer of customer funds and securities may not be feasible within a 
three-day settlement cycle.28 Rather, the confirmation may serve 
primarily as written evidence of the contract between the customer and 
broker-dealer.29 As a written record of the transaction, the 
confirmation will continue to provide investors the necessary 
information to assist them in evaluating the quality and accuracy of 
their trades while assisting them in correcting mistakes and verifying 
the terms of their transactions. Accordingly, while T+3 Settlement may 
affect the mechanics of settlement, it will not eliminate the 
confirmation's investor protection functions.
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    \2\8One commenter suggested that the Commission reevaluate the 
meaning of ``give or send'' under Rule 10b-10 in light of T+3 
Settlement and current technology, such as electronic messaging, E-
mail, direct computer links, telefax, and fax modems. See Letter 
from Sullivan & Cromwell, to Jonathan G. Katz, Secretary, SEC (July 
15, 1994).
    In the Proposing Release, the Commission recognized the use of a 
facsimile machine to send customer confirmations. See Proposing 
Release, supra note 10, at 59 FR 12767 n.5. To the extent that a 
customer has a facsimile machine, a broker-dealer would fulfill its 
confirmation delivery obligation if it sent the confirmation via 
facsimile transmission. The staff also has allowed, under specified 
conditions, confirmations to be sent by other electronic means. See 
Letter regarding Thomson Financial Services, Inc. (Oct. 8, 1993).
    The Commission agrees that T+3 Settlement may encourage 
alternatives to the mail system for sending confirmations and that a 
flexible approach may be necessary to accommodate T+3 Settlement 
with existing technology. The Commission, however, believes that 
each approach should be viewed on a case-by-case basis, as has been 
previous practice, to ensure the safety and reliability of the 
confirmation transmission.
    \2\9Under the current text of the Uniform Commercial Code, the 
confirmation serves as a written record of the transaction, thus 
satisfying the statute of frauds. Uniform Commercial Code Section 8-
319 states that a ``contract for the sale of securities is not 
enforceable by way of action or defense unless * * * there is some 
writing signed by the party against whom enforcement is sought or by 
his authorized agent or broker, sufficient to indicate that a 
contract has been made for sale of a stated quantity of described 
securities at a defined or stated price.'' A confirmation, bearing 
the broker-dealer's letterhead or some other identifying marking, 
generally fulfills that requirement. Revised Article 8 of the 
Uniform Commercial Code, which was endorsed recently by both the 
American Law Institute and the National Conference of Commissioners 
on Uniform State Laws, would omit current Section 8-319. Due to the 
prior difficulties in applying Section 8-319 to the sale of 
securities over the telephone and the more common use of electronic 
means for securities transactions, proposed Section 8-113 states 
that ``[a] contract or modification for the sale or purchase of a 
security is enforceable whether or not there is a writing signed or 
record authenticated by a party against whom enforcement is sought, 
even if the contract or modification is not capable of performance 
within one year of its making.''
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2. Periodic Account Statement
    The Commission also requested comment on the feasibility of 
transferring information currently disclosed on the confirmation to a 
periodic account statement.30 Many commenters addressing this 
issue opposed such a use of the periodic account statement and noted 
that it was not the appropriate document to convey particularized trade 
information.31 Rather, as one commenter indicated, account 
statements are intended to summarize the activity and status of an 
account; they are not intended to convey information regarding the 
features and risks of each individual securities transaction.32 
Other commenters, however, noted that, as investors increasingly rely 
upon periodic account statements, the confirmation will diminish as a 
primary disclosure device.33 At this time, the Commission has 
determined to retain the confirmation as the basic transaction 
disclosure document and use the account statement, the account opening 
document, or annual disclosure requirements as needed to supplement or 
summarize confirmation disclosures.
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    \3\0See Proposing Release, supra note 10, at 59 FR 12768.
    \3\1See, e.g., Letters from A. George Saks, Executive Vice 
President, Secretary, and General Counsel, Smith Barney (Aug. 1, 
1994); Barry H. Zucker, President & CEO, J.B. Hanauer & Co. (June 
20, 1994); and Jon S. Corzine, Goldman, Sachs & Co. (June 15, 1994), 
to Jonathan G. Katz, Secretary, SEC.
    \3\2See, e.g., Letter from Donald E. Walter, Compliance 
Director/Principal, Edward D. Jones & Co., to Jonathan G. Katz, 
Secretary, SEC (July 15, 1994). Another commenter noted that 
transferring confirmation information to an account statement may 
clutter the account statement and make it less readable. See Letter 
from Barry H. Zucker, President & CEO, J.B. Hanauer & Co., to 
Jonathan G. Katz, Secretary, SEC (June 20, 1994).
    \3\3See, e.g., Letters from Robert M. Sweeney, Vice President/
Assistant Comptroller, Gibraltar Securities Co. (June 14, 1994); 
William J. Jester, Jr., Chemical Banking Corp. (June 14, 1994); and 
Kurt Halvorson, Vice President & Comptroller, AmeriTrade (May 27, 
1994), to Jonathan G. Katz, Secretary, SEC.
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    The Commission noted in the Proposing Release, however, that a 
customer may waive the receipt of an immediate confirmation in the 
context where a fiduciary has discretion over the customer's 
account.\34\ The Commission noted that, in its view, the account, 
rather than the fiduciary, was the customer for purposes of Rule 10b-
10. To effect a valid waiver, the broker-dealer must (1) obtain from 
the customer a written agreement that the fiduciary receive the 
immediate confirmation; and (2) send to the customer a periodic report, 
not less frequently than quarterly, containing the same information 
that would have been contained in an immediate confirmation.\35\ The 
customer may not waive this periodic report.\36\
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    \34\See Proposing Release, supra note 10, at 59 FR 12767 n.3.
    \35\To satisfy this requirement, a broker-dealer may deliver, 
directly to its customer, duplicate confirmations representing each 
of the customer's transactions for the prior period, together with 
the customer's account statement. This procedure would allow 
investors to rely on the account statement to monitor their 
accounts, while referring to the confirmation for the details of 
each specific trade. Investors already look to old confirmations for 
details which are not present on the account statement, and this 
procedure would allow investors to continue to rely on their 
confirmations and their account statements in substantially the same 
way.
    \36\Some concerns have been raised with respect to the 
application of this policy and its relationship with Rule 409 of the 
New York Stock Exchange (``NYSE''). See, e.g., letter from Kevin J. 
Mackay, President/Compliance and Legal Division, Securities Industry 
Association (``SIA''), to Jonathan G. Katz, Secretary, SEC (July 22, 
1994). Specifically, Rule 409(b) permits NYSE member firms to send a 
confirmation to a non-member person holding power of attorney over a 
customer account if ``either (A) the customer has instructed the 
member organization in writing to send such confirmations, 
statements, or other communications in care of such person, or (B) 
duplicate copies are sent to the customer at some other address 
designated in writing by him.'' NYSE Rule 409, 2 NYSE Guide (CCH)  
2409.
    Under the Commission's position articulated above, a customer 
who waived receipt of the immediate confirmation would receive more 
information with his quarterly account statement than that currently 
required under NYSE Rule 409. To the extent the rules of the NYSE, 
or any self-regulatory organization, conflict with the Commission's 
stated policy, the more restrictive requirement would govern. Thus, 
a NYSE member wishing to take advantage of a waiver would be 
required to adhere to these Commission requirements in addition to 
any obligations imposed by Rule 409.
    The SIA argued that this position would (1) lead to duplicative 
efforts on the part of broker-dealers because broker-dealers already 
will have sent trade information to the fiduciary in an immediate 
confirmation; (2) depart from standard industry practice; and (3) 
require expensive system changes to comply with the position. The 
Commission emphasizes that this substitution of quarterly statements 
for the immediate confirmation is optional. No broker-dealer is 
required in the first instance to include all relevant trade 
information in a quarterly statement; however, if the broker-dealer, 
with the written authorization of the customer, wishes to omit 
sending the customer an immediate confirmation and instead send it 
to the account fiduciary, then the requirements of written 
instructions from the customer and a non-waiveable periodic report, 
as described above, must be satisfied in order to effect a valid 
waiver. These requirements are necessary to allow investors to 
monitor their accounts in the absence of a transaction-by-
transaction report in the confirmation.
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    The requirement to send a periodic report is intended to ensure 
that the beneficial owner of the account receives material information 
needed to verify the transaction in the account.\37\ As the Commission 
noted in the release originally adopting Rule 10b-10, the Rule is not 
intended to require a broker-dealer dealing with the trustee of a plan 
to deliver statements to plan participants where the trustee is the 
shareholder of record of the securities being purchased or sold. In 
those instances, the Rule would require the broker-dealer to deliver a 
confirmation, or upon written request, a periodic report, only to the 
trustee.38 A beneficiary of the trust would be required to receive 
an immediate confirmation, or upon written request, the periodic 
report, only if that beneficiary was a beneficial owner of the trust 
assets on the books of the broker-dealer, enjoying the rights and 
privileges of beneficial ownership.
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    \37\The requirement to send a periodic report to the customer, 
if the customer has requested in writing that the immediate 
confirmation be sent to the customer's fiduciary, applies only if 
the broker-dealer has an existing duty under Rule 10b-10 to send an 
immediate confirmation directly to the customer in the absence of 
such a written request. This requirement therefore would not apply 
to paragraph 10b-10(b), which governs purchases and sales of 
securities in a money market fund, as defined in newly amended 
paragraph 10b-10(b)(1), a periodic plan, as defined in paragraph 
10b-10(d)(5), and an investment company plan, as defined in 
paragraph 10b-10(d)(6). Paragraph (b) of Rule 10b-10 permits, upon 
written request of the customer, written statements containing the 
information specified in that paragraph to be sent not less 
frequently than quarterly, directly to the customer or some other 
person designated by the customer for distribution to the customer.
    Because there are circumstances, not enumerated specifically in 
Rule 10b-10, that would make compliance with the rule unduly 
burdensome, paragraph 10b-10(f) authorizes the Commission to exempt 
broker-dealers from the rule's requirements with regard to specific 
transactions or specific classes of transactions for which the 
broker or dealer will provide alternative procedures to effect the 
purposes of Rule 10b-10. This authority has been delegated to the 
Division of Market Regulation. 17 CFR 200.30-3(a)(32).
    \38\Securities Exchange Act Release No. 13508 (May 5, 1977), at 
n.24.
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    The Commission also believes that the broker-dealer can satisfy its 
obligation to send a confirmation to the customer if it sends the 
confirmation to a custodian of the customer authorized to receive 
securities and disburse funds for the customer.\39\ The custodian in 
question must not be affiliated with a broker-dealer or an investment 
adviser or have any role in choosing the broker-dealer or investment 
adviser used;\40\ and the customer must retain the right to request 
that the confirmation be sent directly to the customer, at no extra 
charge by the custodian or broker-dealer. Moreover, an account 
custodian may not choose to receive a periodic report in place of an 
immediate confirmation.
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    \39\The custodian must not hold itself out as a broker-dealer or 
an investment adviser. But see Investment Advisers Act Release No. 
1406 (March 16, 1994), 59 FR 13464 (proposing a rule to require 
investment advisers to ensure that custodians of investment adviser 
client accounts provide the client or its designee with account 
statements not less than quarterly).
    \40\Securities orders must be placed by the customer or the 
customer's investment adviser, not the custodian.
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3. Preliminary Note
    The Commission proposed adding a preliminary note to Rule 10b-10 
clarifying that the Rule is not intended as a safe harbor from 
disclosure obligations imposed by the general antifraud provisions of 
the federal securities laws.41 This note is intended to respond to 
claims made by litigants that Rule 10b-10 prescribes all the necessary 
disclosure relevant to a customer's securities transaction.42 A 
few commenters addressed the inclusion of the preliminary note to Rule 
10b-10, with equal support for43 and opposition to44 the 
note. One supporter suggested that the Commission could accomplish the 
same purpose of clarification in an interpretative release.45 One 
opponent of the preliminary note argued that its existence would lead 
to frivolous claims against broker-dealers.46
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    \4\1See Proposing Release, supra note 10, at 59 FR 12772.
    \4\2See, 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, 915-16 (S.D.N.Y. 1986); and Ettinger v. Merrill Lynch, Pierce, 
Fenner & Smith, Fed. Sec. L. Rep. (CCH) 93,102 (E.D. Pa. 1986), 
rev'd, 835 F.2d 1031 (3d Cir. 1987).
    \4\3See, e.g., Letters from Donald E. Walter, Compliance 
Director/Principal, Edward D. Jones & Co. (July 11, 1993); and 
Douglas L. Kelly, Director/Law & Compliance Division, A.G. Edwards & 
Sons, Inc. (June 13, 1994), to Jonathan G. Katz, Secretary, SEC.
    \4\4See, e.g., Letters from A.B. Krongard, Chief Executive 
Officer, Alex. Brown & Sons, Incorporated (July 14, 1994); and 
Jeffrey Rubin, President, InterCapital Assets, Inc. (June 13, 1994), 
to Jonathan G. Katz, Secretary, SEC.
    \4\5Letter from Douglas L. Kelly, Director/Law & Compliance 
Division, A.G. Edwards & Sons, Inc., to Jonathan G. Katz, Secretary, 
SEC (June 13, 1994). This commenter also suggested that if a note 
were added to Rule 10b-10, a similar note also should precede Rule 
15c2-13. At this time, the Commission is not adopting Rule 15c2-13.
    \4\6Letter from A.B. Krongard, Chief Executive Officer, Alex. 
Brown & Sons, Incorporated, to Jonathan G. Katz, Secretary, SEC 
(July 14, 1994).
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    After reviewing the comments, the Commission is adopting the 
preliminary note to Rule 10b-10. The Commission is not persuaded that 
the existence of the preliminary note would lead to any additional 
litigation against broker-dealers. The preliminary note is merely 
making explicit a longstanding position that the antifraud provisions 
of the federal securities laws may impose, given the circumstances, 
greater disclosure than what may be required by a specific rule or 
regulation.47
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    \4\7See supra note 42. One commenter argued that the preliminary 
note provides no useful guidance because the Commission has not 
articulated a set of guidelines concerning disclosure requirements 
in addition to those required in a prospectus and under the Exchange 
Act. See Letter from Sullivan & Cromwell, to Jonathan G. Katz, 
Secretary, SEC (July 15, 1994), at pp. 2-3.
    The Commission does not intend to specify key disclosure items 
under the antifraud provisions of the federal securities laws. Each 
circumstance is different and determining the materiality of any 
particular item of disclosure depends on the facts and circumstances 
of each case.
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B. Mark-Up and Mark-Downs in Riskless Principal Transactions in Debt 
Securities

    The majority of comment letters addressed the proposed amendments 
to Rule 10b-10 and the portion of proposed Rule 15c2-13 that would 
require mark-up disclosure of riskless principal trades in debt 
securities.48 Generally, most commenters opposed the proposals on 
the grounds that the requirements would have detrimental effects on 
competition and market liquidity; would cause compliance difficulties; 
would create customer confusion; and are not based upon findings of 
abusive practices in the debt market.
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    \4\8Of the 344 comment letters received, 313 addressed the mark-
up disclosure proposals.
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    It has been argued by some commenters that greater price 
transparency in the municipal market could achieve similar goals as 
riskless principal mark-up disclosure without the alleged negative 
effects purported to result from mark-up disclosure.49 Since the 
proposals were published for comment in March, progress has been made 
to develop price transparency in the debt markets. In particular, the 
MSRB has proposed a program that ultimately would provide same day 
price reporting of all transactions in municipal securities, including 
same day reporting of retail trades. This program is to be implemented 
in four phases. As proposed, the first phase of the MSRB program will 
collect reports of interdealer transactions and make available to the 
public daily high-low and average price figures for the most frequently 
traded issues (initially defined as those trading at least four times 
during the day).50 These requirements will be expanded in phase 
two to include institutional customer transactions. The third phase 
will expand the daily reporting requirements to include retail customer 
transactions, and phase four will advance reporting times closer in 
time to the transaction, such as by the end of day or within a 
specified time period following the trade. In the initial phases of the 
MSRB's proposal, information regarding the prices and volume of 
transactions in approximately 80 to 240 issues would be reported each 
day. As each phase is implemented, the MSRB will review closely this 
information and system operations, with a view toward reflecting a 
greater number of issues and transactions in the reports.
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    \4\9See, e.g., Letters from A.B. Krongard, Chief Executive 
Officer, Alex. Brown & Sons, Incorporated (July 14, 1994); James D. 
McKinney, Partner and Manager of Fixed Income Dept., William Blair & 
Company (July 13, 1994); Thomas W. Masterson, Chairman, Masterson 
Moreland Sauer Whisman, Inc. (July 13, 1994); G. Frederick Kasten, 
Jr., President and Chief Executive Officer, Robert W. Baird & Co., 
Incorporated (June 15, 1994); and Rauscher Pierce Refnes, Inc. (June 
14, 1994), to Jonathan G. Katz, Secretary, SEC.
    \5\0To implement phase one, the MSRB, pursuant to Rule 19b-4 of 
the Exchange Act, has filed with the Commission a proposed rule 
change to amend Rule G-14 of the MSRB Rules, which, once approved, 
will require the reporting of interdealer municipal securities 
transactions to a designee (e.g., the National Securities Clearing 
Corporation) for compilation in a daily report and for use by 
regulators.
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    In addition to the proposal by the MSRB, the PSA has proposed two 
initiatives to convey municipal securities pricing information to 
retail investors. First, the PSA proposes to develop a generic scale 
and yield curve for AAA-insured revenue bonds. This information, which 
will be made available to daily newspapers, is intended to provide 
customers with grade information on the price and yield of a 
representative range of bonds. Second, the PSA proposes to establish a 
900-number which investors could call to obtain price information 
regarding particular municipal securities.
    Although the MSRB's initiative is in a developmental stage, the 
Commission believes it ultimately could provide the public with 
improved information about the price of municipal securities. If widely 
published, this information would allow investors to better assess the 
prices provided by their broker-dealers in a municipal securities 
trade. In light of these proposals, the Commission has decided to defer 
for a period of six months adoption of that part of Rule 15c2-13 
requiring the disclosure of mark-ups for riskless principal 
transactions in municipal securities.
    The Commission has deferred adoption of the riskless principal 
mark-up disclosure proposal in order to ascertain whether the proposed 
price information systems can provide more meaningful benefits to 
investors in the long-term and to assess the progress of the industry 
in developing the proposed systems. Price transparency, if fully 
developed, will provide better market information to investors on a 
timely basis (e.g., before the transaction). Potentially, price 
transparency also could provide investors the ability to determine the 
value of their municipal securities purchased in principal 
transactions. The proposed mark-up disclosure, on the other hand, would 
have provided cost information to investors only in riskless principal 
transactions and would not have applied to other principal 
transactions, the majority of transactions in the debt market. Price 
transparency, if fully developed, meets investors' need for information 
without focusing on only one portion of the market, which commenters 
argued could lead to a deleterious restructuring of the market, thus 
reducing market liquidity and narrowing the available choices of 
securities sold to customers.51
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    \5\1See, e.g., Letters from Philip T. Colton, Maun & Simon (June 
14, 1994); Lawrence T. Lewis, III, Managing Director, Clark Melvin 
Securities Corporation (June 8, 1994); and Adam Crews, President/
Chief Executive Officer, Crews & Associates, Inc. (June 1, 1994), to 
Jonathan G. Katz, Secretary, SEC.
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    The Commission recognizes that these benefits depend on the sound 
design and successful implementation of transparency proposals. Their 
value to investors further depends on widespread availability of the 
information, and customer understanding of how it should be used. At 
the end of six months, the Commission will assess the need for further 
action based upon the prospects for the availability of meaningful 
pricing information to a broad range of investors about a full range of 
securities. If such information is not likely to be available, the 
Commission will explore alternatives to better provide information to 
fixed income investors. To this end, the Commission similarly is 
deferring the proposed amendment to Rule 10b-10 requiring mark-up 
disclosure for other debt securities. While the Commission believes it 
is appropriate to address transparency in municipal securities 
initially because of the presence of a large proportion of individual 
investors in that market, during the deferral, the Commission expects 
the industry to address the extent to which customer price information 
can be increased in debt markets other than the municipal securities 
market. The Commission recognizes that the government, corporate, and 
mortgage securities markets have different levels of price information 
publicly available. For example, GovPx, a joint venture of primary 
dealers and interdealer brokers formed in 1990, provides to investors 
real-time quotations, trade prices, and volume information for U.S. 
Treasury and other government securities via a worldwide network of 
12,000 terminals. In addition, the National Association of Securities 
Dealers, Inc. (``NASD'') developed the Fixed Income Pricing System 
(``FIPS''), which collects, processes, and disseminates real-time firm 
quotations for 30 to 50 of the most liquid, high yield bonds traded in 
the over-the-counter market.52 The Commission expects the industry 
to review the availability of information to investors in each of these 
markets and consider methods of increasing transparency as an 
alternative to riskless principal disclosure in these markets.
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    \5\2See Securities Exchange Act Release No. 32019 (March 19, 
1993), 58 FR 16428 for a discussion of the order approval allowing 
the NASD to implement FIPS.
---------------------------------------------------------------------------

    Even though the Commission is deferring the adoption of riskless 
principal mark-up disclosure, the Commission continues to believe that, 
absent transparency in the debt markets, the disclosure of the dealer's 
cost along with the mark-up would be of use to customers in assessing 
the value of their debt securities. In the absence of progress on 
transparency, the Commission will revisit its riskless principal 
proposal. The Commission also may consider whether to require the 
disclosure of all mark-ups in principal transactions based on the 
underlying inventory costs,53 or the prevailing market 
price54 or to mandate alternative price transparency systems.
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    \5\3To comply with this disclosure, broker-dealers would have to 
assign a value to a security bought into inventory on either a last 
in, first out or first in, first out accounting basis.
    \5\4See 17 CFR 240.15g-4 and Securities Exchange Act Release No. 
30608 (April 13, 1992), 57 FR 19022 for a discussion of compensation 
disclosure requirements for transactions in penny stocks.
---------------------------------------------------------------------------

    The Commission strongly believes that real progress is needed in a 
timely fashion to achieve the goal of better customer information for 
market prices in the debt market. Achievement of this goal will add 
strength to and confidence in the debt markets, to the benefit of both 
broker-dealers and investors.

C. Disclosure of Unrated Securities

    The Commission also published for comment a requirement to 
disclose, if applicable, that certain debt securities have not been 
rated by an NRSRO.55 The proposal excluded government securities 
defined under Section 3(a)(42) (A) and (B) of the Exchange Act,56 
but requested specific comment on whether other securities should be 
excluded from this disclosure.57 In addition, specific comment was 
requested whether the MSRB should implement the disclosure requirement 
with respect to municipal securities, rather than the 
Commission.58
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    \5\5See Proposing Release, supra note 10, at 59 FR 12770.
    \5\6Securities exempt from the proposed rating disclosure would 
include (1) securities that are direct obligations of the U.S., or 
in which the U.S. has guaranteed the principal or interest; or (2) 
securities which are issued or guaranteed by corporations in which 
the U.S. has a direct or indirect interest and which the Secretary 
of Treasury has designated for exemption. 15 U.S.C. 78c(a)(42)(A) 
and (B).
    \5\7Proposing Release, supra note 10, at 59 FR 12770.
    \5\8Id.
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    Of the 43 commenters that addressed this disclosure proposal, 24 
supported the proposal.59 Some commenters believed that the 
disclosure requirement did not go far enough and indicated that 
specific ratings also should be disclosed on the confirmation.60 
In particular, commenters believed that the confirmation should bear 
all ratings of securities, particularly those rated below investment 
grade.61
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    \5\9See, e.g., Letters from A.B. Krongard, Chief Executive 
Officer, Alex. Brown & Sons, Incorporated (July 14, 1994); David C, 
Clapp, Chairman, MSRB (June 15, 1994); and Douglas L. Kelly, 
Director, Law and Compliance, A.G. Edwards & Sons, Inc. (June 13, 
1994), to Jonathan G. Katz, Secretary, SEC.
    Alex. Brown & Sons, Incorporated sought clarification that a 
bond rated by a single NRSRO, but not necessarily other NRSROs, 
nonetheless would be excluded from the disclosure requirement. 
(Letter from A.B. Krongard, Chief Executive Officer, Alex. Brown, to 
Jonathan G. Katz, Secretary, SEC (July 14, 1994), at p.6). The rule 
language states that a broker-dealer would be required to disclose 
when a security was not rated by an NRSRO. Accordingly, if a single 
NRSRO has rated a security, then it follows that no disclosure would 
be required.
    \6\0See, e.g., Letters from Grant T. Callery, Vice President/
General Counsel, NASD (July 26, 1994); and Robert Reeves, Sr. Vice 
President, Ferris Baker Watts, Incorporated (June 14, 1994), to 
Jonathan G. Katz, Secretary, SEC.
    \6\1One commenter argued that disclosure of ratings, and in 
particular ratings below investment grade, would better assist 
investors in comparing an unrated security that may be of a high 
credit quality with one that, while rated, may be of lesser credit 
quality. See Letter from James H. Morgan, President/Chief Operating 
Officer, Interstate/Johnson Lane, to Jonathan G. Katz, Secretary, 
SEC (June 14, 1994). The Commission will revisit the issue of 
whether Rule 10b-10 should require the disclosure of ratings for 
corporate debt securities once commenters have responded to a recent 
Commission proposal addressing the feasibility of disclosing ratings 
in a prospectus. See Securities Act Release No. 7086, (Aug. 31, 
1994), 59 FR 46304.
---------------------------------------------------------------------------

    Ten commenters opposed the disclosure requirement on the grounds 
that requiring this disclosure may be unhelpful to investors. They 
argued that such disclosure may cause investors to believe that unrated 
securities are inferior to rated securities, when the unrated security 
may pose less risk than a rated security, particularly a security rated 
below investment grade.62 They noted that such disclosure does not 
explain the reasons why a security may not have a credit rating--
notably that smaller, but no less sound, issuers may not wish to bear 
the expense of obtaining a credit rating.63 Commenters also 
questioned why the Commission excluded from the disclosure requirement 
only government securities defined under Section 3(a)(42)(A) and (B) of 
the Exchange Act.64 In particular, Freddie Mac argued that 
securities issued by government sponsored enterprises (``GSEs''), 
including those issued by Freddie Mac, also should be excluded from the 
disclosure requirement. Freddie Mac argued that, because of the 
market's assessment of the creditworthiness of GSEs, it makes little 
economic sense for a GSE to bolster its creditworthiness with an 
independent rating.65 Finally, some commenters believed that the 
MSRB should adopt any rule affecting the municipal securities market; 
other commenters were neutral whether the Commission or the MSRB 
implemented rulemaking.
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    \6\2See, e.g., Letters from Sullivan & Cromwell (July 15, 1994); 
R. Fenn Putman, Chairman, PSA (June 20, 1994); and Jon S. Corzine, 
Goldman, Sachs & Co. (June 15, 1994), to Jonathan G. Katz, 
Secretary, SEC.
    \6\3One commenter noted that rural issuers would be harmed by 
the disclosure requirement because the size of a rural issue makes 
bearing the expense of obtaining a rating economically impractical. 
See Letter from Ian B. Davidson, Chairman, and Kreg A. Jones, Chief 
Operating Officer, D.A. Davidson & Co., to Jonathan G. Katz, 
Secretary, SEC (June 14, 1994).
    \6\4See, e.g., Letter from Mitchell Delk, Vice President/
Government and Industry Relations, Freddie Mac, to Jonathan G. Katz, 
Secretary, SEC (June 15, 1994).
    \6\5Freddie Mac also described the anomalous situation in which, 
on the one hand, GSE securities would be subject to the disclosure 
requirement, but on the other hand, rated private label asset-backed 
securities would not, even though the underlying securities were GSE 
securities and primarily responsible for the rating. See Letter from 
Mitchell Delk, Vice President/Government and Industry Relations, 
Freddie Mac, to Jonathan G. Katz, Secretary, SEC (June 15, 1994), at 
pp. 2-3.
---------------------------------------------------------------------------

    After considering the comments, the Commission is adopting the 
proposed amendments to Rule 10b-10 requiring disclosure if a debt 
security, other than a government security, has not been rated by an 
NRSRO. Such disclosure would be more meaningful to the investor if it 
is made together with the description of the security. As noted in the 
Proposing Release, this disclosure is not intended to suggest that an 
unrated security is inherently riskier than a rated security.66 
Rather, the disclosure is intended to alert customers that they may 
wish to obtain further information or clarification from their broker-
dealers. In most cases, this disclosure should verify information that 
was disclosed to the investor prior to the transaction. If a customer 
was not previously informed of the security's unrated status, then 
confirmation disclosure may prompt a dialogue between the customer and 
broker-dealer.
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    \6\6Nevertheless unrated municipal bonds, which make up 
approximately 33% of the market, in the aggregate have a higher 
default rate than do rated bonds. See Municipal Bond Defaults--The 
1980's 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. According to data provided by the Securities Data 
Company, unrated debt defaults make up approximately 75% of all 
defaults. See also Public Securities Association, An Examination of 
Non-Rated Municipal Defaults 1986-1991 4 (Jan. 8, 1993).
---------------------------------------------------------------------------

    The Commission agrees with commenters that all ``government 
securities'' should be excluded from the unrated debt disclosure 
requirement, not just those defined under Section 3(a)(42)(A) and (B) 
of the Exchange Act.67 Therefore, government securities meeting 
the definition under sub-paragraphs (C) and (D) of Section 3(a)(42), 
which includes securities issued by GSEs, will be exempt from the 
disclosure requirement. The Commission, however, does not intend to 
expand the class of securities subject to the exclusion beyond those 
defined as government securities in Section 3(a)(42).
---------------------------------------------------------------------------

    \6\715 U.S.C. 78c(a)(42).
---------------------------------------------------------------------------

    The non-rated debt proposal for municipal securities was contained 
in proposed Rule 15c2-13. In its comment letter, the MSRB stated that, 
``[t]he Board agrees with the Commission that, while the fact that a 
bond is unrated is not necessarily indicative of problems, disclosure 
of the fact would be helpful to investors.''68 The MSRB also noted 
that, if the Commission determined that such information was needed by 
investors in debt securities, it would amend its confirmation rule, 
Rule G-15, and require disclosure if a municipal security has not been 
rated by an NRSRO.69 Inasmuch as other confirmation requirements 
for municipal securities are currently set forth in Rule G-15 of the 
MSRB, the Commission is willing to defer this portion of the proposal 
to allow the MSRB to adopt the requirement as part of its rules, and 
will withdraw it after the MSRB has taken action.
---------------------------------------------------------------------------

    \6\8Letter from David C. Clapp, Chairman, MSRB, to Jonathan G. 
Katz, Secretary, SEC (June 15, 1994).
    \6\9Id.
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D. Disclosure of Mark-Ups and Mark-Downs in Certain NASDAQ and 
Exchange-Listed Securities

    As part of the amendments to Rule 10b-10, the Commission proposed 
requiring the disclosure of mark-up information for principal 
transactions in certain securities quoted on NASDAQ or listed on 
regional exchanges.70 This proposal covered securities that are 
subject to last sale reporting, but are not technically ``reported 
securities'' under Rule 11Aa3-1 of the Exchange Act.71 As noted in 
the Proposing Release, the NASD adopted amendments to its confirmation 
rule requiring the disclosure of mark-up information in principal 
transactions in securities that are not NASDAQ/NMS securities--i.e., 
NASDAQ Small Cap Securities.72 The purpose of the proposed 
amendment is to consolidate disclosures already required under NASD 
rules. Because last sale information is available for regional 
exchange-listed securities, the Commission proposed to extend the 
disclosure requirements to those securities, in addition to Small Cap 
Securities. By adopting this proposal, the confirmation rule will treat 
all equity securities subject to last sale reporting similarly, 
irrespective of their trading markets.
---------------------------------------------------------------------------

    \7\0See Proposing Release, supra note 10, 59 FR 12770.
    \7\117 CFR 240.11Aa3-1(a)(4). This provision 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 currently 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. 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 
NYSE or American Stock Exchange, Inc. original listing criteria.
    \7\2NASD Schedule to By-Laws, Schedule D, pt. XI, Section 3, 
NASD Manual (CCH)  1867D.
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    The two comments that addressed this requirement supported the 
proposal.73 Accordingly, under Rule 10b-10, broker-dealers 
effecting principal transactions in Small-Cap NASDAQ and regional 
exchange-listed securities that are subject to last-sale reporting will 
be required to disclose on the confirmation the reported trade price, 
price to the customer, and the difference, if any, between the two 
prices.
---------------------------------------------------------------------------

    \7\3See Letters from Robert F. Price, Chairman/Federal 
Regulation Committee, SIA (July 15, 1994); and Kurt D. Halvorson, 
Vice President/Controller, AmeriTrade (May 27, 1994), to Jonathan G. 
Katz, Secretary, SEC.
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E. Disclosure of Coverage by the Securities Investor Protection 
Corporation

    In order to reduce investor confusion concerning a firm's SIPC 
coverage,74 the Commission proposed to amend Rule 10b-10 to 
require affirmative disclosure, if applicable, when a broker-dealer is 
not a member of SIPC and when an account is carried by a non-SIPC-
member broker or dealer. Generally, the Securities Investor Protection 
Act of 1970 requires broker-dealers registered with the Commission 
under Section 15(b) of the Exchange Act to be members of SIPC. Certain 
types of broker-dealers registered under Section 15(b), as well as all 
broker-dealers registered as government securities brokers and dealers 
under Section 15C of the Exchange Act, are excluded from SIPC 
membership.75
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    \7\4SIPC, a non-profit, membership corporation, was established 
under the Securities Investor Protection Act of 1970. SIPC is funded 
by assessments on its members and interest earned on fund assets. 
The fund is used to protect securities customers of SIPC-member 
broker-dealers that fail financially. 15 U.S.C. 78aaa et seq. For 
example, in the event of the failure of a SIPC member firm, SIPC 
provides protection up to $500,000 for claims for cash and 
securities (although claims solely for cash are limited to $100,000) 
of each customer. 15 U.S.C. 78fff-3(a)(1).
    \7\5In addition to government securities brokers and dealers, 
the following broker-dealers are not required to be members of SIPC: 
(1) Persons whose principal business in the determination of SIPC 
(and with Commission approval) is conducted outside the U.S.; and 
(2) 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 registered investment companies or 
insurance company separate accounts. 15 U.S.C. 78ccc(a)(2)(A) and 
78lll(12).
---------------------------------------------------------------------------

    Many commenters addressing this issue supported the Commission's 
proposal to inform customers when their broker-dealers are not SIPC 
members.76 Other commenters generally agreed with requiring the 
disclosure, but disagreed that the confirmation was the appropriate 
disclosure medium and suggested that non-membership status in SIPC be 
disclosed in a periodic account statement or opening account 
document.77 Commenters opposing the disclosure initiative argued 
that the disclosure would be misleading to investors in that they would 
believe that they are at greater risk when dealing with a non-SIPC 
firm.78 The Investment Company Institute (``ICI'') argued that 
requiring ``negative disclosure'' concerning the lack of SIPC coverage 
is contrary to the reasons certain persons are exempted from the 
membership requirement in the first instance--namely, excluded broker-
dealers present limited risks to investors because they do not hold 
customer funds.79
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    \7\6See, e.g., Letters from Ronald S. Plaine, President, 
Comerica Securities (undated); David M. Beckius, Vice President/Sr. 
Attorney, Dean Witter Reynolds, Inc. (July 14, 1994); and William E. 
Kramer, Assistant Vice President, Nomura Securities International, 
Inc. (July 15, 1994), to Jonathan G. Katz, Secretary, SEC.
    \7\7See, e.g., Letters from William E. Kramer, Assistant Vice 
President, Nomura Securities International, Inc. (July 15, 1994); 
A.B. Krongard, Chief Executive Officer, Alex. Brown & Sons, 
Incorporated (July 14, 1994); and R. Fenn Putman, Chairman, PSA 
(June 21, 1994), to Jonathan G. Katz, Secretary, SEC.
    \7\8See, e.g., Letters from Lawrence J. Latto, Shea & Gardner 
(June 17, 1994); and Peter C. Clapman, Sr. Vice President/Chief 
Counsel, College Retirement Equities Fund (June 15, 1994); to 
Jonathan G. Katz, Secretary, SEC.
    \7\9See Letter from Paul Schott Stevens, General Counsel, ICI, 
to Jonathan G. Katz, Secretary, SEC (June 15, 1994). See also Letter 
from Fred J. Franklin, Vice President/Chief Compliance Officer, 
Aetna Life Insurance and Annuity Co., to Jonathan G. Katz, 
Secretary, SEC (June 14, 1994).
---------------------------------------------------------------------------

    The Commission, consistent with its authority under the Government 
Securities Act Amendments of 1993,80 is adopting the proposed 
amendment to ensure that customers are not led to believe that their 
accounts are subject to protection beyond what actually is the 
case.81 This disclosure is relevant and meaningful to investors. 
Further, the confirmation is the best vehicle to convey this 
information to customers on a transaction-specific basis, particularly 
in situations where a customer is dealing with affiliated broker-
dealers and one or more of the affiliates is not a SIPC member.
---------------------------------------------------------------------------

    \8\015 U.S.C. 78O-5(a)(4).
    \8\1The legislative history of the Government Securities Act 
Amendments of 1993 discussed SIPC coverage and the exemption from 
SIPC coverage afforded to government securities brokers and dealers. 
The Government Accounting Office noted that the gap in SIPC coverage 
could be confusing to investors and recommended, among other things, 
that the lack of SIPC coverage be disclosed. The amendments 
ultimately took a disclosure approach and authorized the Commission 
to require disclosure of non-SIPC status of government securities 
brokers and dealers. S. Rep. No. 422, 103rd Cong., 1st Sess. 16 
(1993). The same reasons to require this disclosure of government 
securities brokers and dealers applies to other broker-dealers that 
are exempt from SIPC coverage.
---------------------------------------------------------------------------

    The Commission agrees, however, that certain instances exist where 
this disclosure should not apply.82 For instance, the ICI stated 
that in some cases when a broker-dealer contracts with an investment 
company for the distribution of fund shares, customers purchasing such 
shares will send their purchase money directly to the fund's transfer 
agent.83 The transfer agent then will issue shares to the customer 
against receipt of the purchase money and send the money to the fund's 
custodian bank. In this situation, customer funds are not handled by 
the broker-dealer. In addition, the ICI argued that the transfer agent 
or fund underwriter, when sending the confirmation on behalf of the 
broker-dealer, may not know the SIPC status of a particular broker-
dealer. Accordingly, the disclosure provision contains an exclusion 
that is intended to apply only in cases where the non-SIPC broker-
dealer does not receive or handle in any form customer funds or 
securities in connection with a purchase or redemption of registered 
open-end investment company or unit investment trust shares and the 
customer sends its purchase money or securities to the fund, its 
transfer agent, its custodian, or its designated agent, none of whom 
are associated persons of the broker-dealer. Furthermore, checks may 
not be made payable to the broker-dealer, and the broker-dealer may not 
handle any customer checks in connection with the transaction. 
Otherwise, the broker-dealer would be required to disclose its non-SIPC 
status. Therefore, if a broker-dealer, including a fund underwriter, 
receives customer funds or securities and promptly forwards funds or 
securities to the investment company, transfer agent, custodian, or 
other designated agent, the confirmation would have to disclose the 
non-SIPC status of the broker-dealer.
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    \8\2Some commenters believed that the proposed disclosure was 
inconsistent with a letter, Letter regarding Benjamin M. Vandegrift 
(Dec. 21, 1993), issued by the Division of Investment Management. 
The disclosure requirement adopted today recognizes the position 
taken in the letter, reserving the right to revisit SIPC-related 
disclosure issues.
    \8\3See Letter from Paul Schott Stevens, General Counsel, ICI, 
to Jonathan G. Katz, Secretary, SEC (June 15, 1994), at 2, n.5.
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F. Disclosures Relating to Asset-Backed Securities

    In 1983, the Commission adopted amendments to Rule 10b-10 to 
require disclosure of yield information on a customer confirmation, 
recognizing that such information is important to investors when 
evaluating the merits of investing in various debt securities.84 
Currently, Rule 10b-10 requires the disclosure of (1) the yield to 
maturity, if the transaction is effected on the basis of dollar 
price;85 (2) the dollar price calculated from yield, if the 
transaction is effected on a yield basis;86 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 the represented yield.87
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    \8\4See Securities Exchange Act Release No. 19687 (Apr. 18, 
1983), 48 FR 17583.
    \8\517 CFR 240.10b-10(a)(4)(ii) and (5)(i).
    \8\617 CFR 240.10b-10(a)(5)(ii).
    \8\717 CFR 240.10b-10(a)(5)(iii).
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    Rule 10b-10 exempts from the yield disclosure requirements any 
instrument that is a ``participation interest in notes secured by liens 
upon real estate continuously subject to prepayment.''88 Since the 
adoption of the yield disclosure requirements, structured financings 
have expanded to include securities backed by mortgage notes, 
automobile loans, computer leases, consumer debt, and other 
receivables. These asset-backed securities raised similar problems of 
variable yield. Accordingly, the Commission proposed to expand the 
range of securities subject to the exemptions from yield disclosure to 
include asset-backed securities that are not insulated from prepayment 
risk or susceptible to an accurate forecast of yield.89
---------------------------------------------------------------------------

    \8\817 CFR 240.10b-10(a)(4)(ii) and (5)(iii). Essentially, this 
exemption was aimed at mortgage pass-through notes that were issued 
or guaranteed by the Government National Mortgage Association, 
Federal National Mortgage Association, and the Federal Home Loan 
Mortgage Corporation.
    \8\9See Proposing Release, supra note ------, at 59 FR 12771.
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    In addition, the Commission proposed to require particularized 
disclosures in connection with transactions in collateralized mortgage 
obligations (``CMOs'').90 Specifically, the Commission proposed 
amendments that would require broker-dealers to disclose on the 
confirmation the particular CMO's (1) estimated yield; (2) weighted 
average life; and (3) prepayment assumptions underlying the 
yield.91
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    \9\0CMOs are collateralized pools of residential mortgage loans 
that are divided into multiple tranches (sometimes as many as 15 to 
20) which can be tailored to a broad spectrum of investors or 
particularized to the cash flow needs of a single or discrete group 
of investors. Like other asset-backed securities, the rate of 
prepayment on the underlying collateral of CMOs is influenced by 
changes in interest rates and shifts in the general economy, which 
in turn may affect the actual maturities of CMOs as prepayment 
speeds accelerate or decrease. CMOs are priced on the basis of the 
estimated weighted average life of individual CMO tranches. As 
interest rates decline, prepayments increase, with a corresponding 
shortening of weighted average life. Conversely, an increase in 
interest rates results in a lengthening of maturity.
    \9\1Proposing Release, supra note ------, at 59 FR 12771.
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    Some commenters supported the Commission's proposal to require 
disclosure of CMO information and noted that such disclosures were 
provided to investors as a matter of course, either in a confirmation 
or other disclosure statements.92 Other commenters opposed 
confirmation disclosure of the estimated yield, weighted average life, 
and prepayment assumptions on the grounds that the confirmation is not 
an appropriate disclosure vehicle to convey the information.93 In 
addition, commenters opposed disclosing such complex information in a 
confirmation because it could not be accomplished in a meaningful way 
due to the document's limited size and space.94 Many commenters 
noted that detailed discussions concerning particular aspects of CMOs 
are contained in the prospectus or other offering documents that are 
sent to investors prior to the time in which they make their investment 
decisions.95
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    \9\2See, e.g., Letters from David M. Beckius, Vice President/Sr. 
Attorney, Dean Witter Reynolds, Inc. (July 14, 1994); Silas L. 
Matthies, Sr. Vice President, Norwest Securities, Inc. (June 14, 
1994); Rauscher Pierce Refsnes, Inc. (June 14, 1994); and Bill 
Duepree, Jr., President, Morgan Keegan & Co., Inc. (June 1, 1994), 
to Jonathan G. Katz, Secretary, SEC.
    \9\3Commenters noted that investors receive disclosure documents 
containing numerous models depicting different prepayment 
assumptions. These commenters questioned which of the multiple 
assumptions would be disclosed in the confirmation. See, e.g., 
Letters from Robert F. Price, Chairman/Federal Regulation Committee, 
SIA (July 15, 1994); and R. Fenn Putman, Chairman, PSA (June 21, 
1994), to Jonathan G. Katz, Secretary, SEC.
    \9\4See, e.g., Letters from Robert F. Price, Chairman, Federal 
Regulation Committee, SIA (July 15, 1994); R. Fenn Putman, Chairman, 
PSA (June 21, 1994); and Mitchell Delk, Vice President Government 
and Industry Relations, Freddie Mac, (June 15, 1994), to Jonathan G. 
Katz, Secretary, SEC.
    \9\5See, e.g., Letters from Kathryn S. Reimann, Sr. Vice 
President, Lehman Brothers, Inc. (July 14, 1994); R. Fenn Putman, 
Chairman, PSA (June 21, 1994); and Mitchell Delk, Vice President/
Government and Industry Relations, Freddie Mac (June 15, 1994), to 
Jonathan G. Katz, Secretary, SEC.
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    No comments were received regarding the proposal to expand the 
range of instruments that would be exempted from the yield disclosure 
requirements. Because some instruments are not subject to predictable 
forecasts of the yield, the Commission is adopting amendments exempting 
asset-backed instruments that are continuously subject to prepayment. 
The exemption would apply only to those instruments that are not 
insulated from prepayment risk or otherwise susceptible to an accurate 
forecast of yield.96
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    \9\6This position codifies a no-action position in Letter 
regarding Merrill Lynch, Pierce, Fenner & Smith (Oct. 19, 1988), 
granting no-action with respect to the yield disclosure requirements 
for those mortgage and asset-backed securities that are not subject 
to an accurate forecast of yield. The staff noted that if an 
accurate forecast of yield could be made, then the yield should be 
disclosed in the confirmation.
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    In addition, in light of the comments concerning the proposed CMO 
disclosure, the Commission is modifying the amendment requiring the 
disclosure of prepayment assumptions, weighted average life, and 
estimated yield of a CMO. The Commission recognizes that broker-dealers 
intend confirmations to be brief, and thus size limitations may affect 
the detail of disclosure that may be practically and meaningfully 
conveyed to the customer. Thus, while yield information is important to 
investors of CMOs, as well as all mortgage and asset-backed securities, 
the Commission agrees that these securities contain complexities that 
are difficult to explain using single figures in a confirmation. 
Accordingly, rather than require the disclosure in the confirmation of 
specific numbers identifying the estimated yield, weighted average 
life, and prepayment assumptions underlying the yield, the Commission 
is adopting a requirement that broker-dealers include on the 
confirmation a statement alerting investors that their yields are 
subject to fluctuation depending on the speed in which the underlying 
note or receivable prepays and that specific information is available 
upon written request of the customer.97
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    \9\7This approach builds upon an alternative suggested by one 
commenter that rather than the proposed disclosure, the Commission 
impose a requirement that a broker-dealer print a legend on the 
confirmation. See Letter from Mitchell Delk, Vice President/
Government and Industry Relations, Freddie Mac, to Jonathan G. Katz, 
Secretary, SEC (June 15, 1994).
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    While information concerning prepayment assumptions and pricing of 
CMOs and other asset-backed securities may be contained in disclosure 
documents at the offering stage, this type of detailed information has 
not been as readily available in the secondary market for some asset-
backed securities and to some investors.98 Under the Rule, as 
adopted, such information would be required to be sent to customers 
upon written request. In addition, if in fact a CMO or other asset-back 
security is sold solely on the basis of one yield amount, the yield and 
underlying assumptions should be disclosed on the confirmation, as well 
as the legend stating that these items may vary.99 This is 
consistent with those commenters that noted that they disclose yield 
information in CMO transactions as a matter of course.100 The 
antifraud provisions of the federal securities laws would require that 
any information provided upon request reflect changes or developments 
in the characteristics of the asset-backed security.
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    \9\8The Commission recognizes the positive efforts made to 
educate and provide information to investors in the CMO market. For 
example, the PSA developed a brochure entitled, ``Investors Guide to 
Real Estate Mortgage Investment Conduits (REMICs),'' which is 
approved by the NASD as an investor education tool. In addition, one 
commenter stated that prepayment information and interest rate 
information are available to dealers and investors in the secondary 
market through various vendors and proprietary services. This 
commenter also indicated that for those market participants that do 
not have access to this information, they should be able to obtain 
it from the selling broker-dealer. See Letter from Mitchell Delk, 
Vice President/Government and Industry Relations, Freddie Mac, to 
Jonathan G. Katz, Secretary, SEC (June 15, 1994).
    \9\917 CFR 240.10b-10(a)(5)(i). See also Securities Exchange Act 
Release No. 19687 (Apr. 18, 1983), 48 FR 17583. The Commission is 
concerned that in some cases asset-backed securities may be sold to 
retail investors on the basis of a single yield figure, without 
adequate disclosure that this yield can vary based upon prepayment 
speeds. This inadequate disclosure would potentially violate self-
regulatory organization and Commission antifraud rules. In addition, 
to make this disclosure complete, a broker-dealer would need to 
disclose that the single yield may vary.
    \1\00See supra note 92.
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III. Effects on Competition and Regulatory Flexibility Act 
Considerations

    Section 23(a)(2) of the Exchange Act101 requires that the 
Commission, when adopting rules under the Exchange Act, consider the 
anticompetitive effects of those rules, if any, and balance any 
anticompetitive impact against the regulatory benefits gained in terms 
of furthering the purposes of the Exchange Act. The Commission believes 
that adoption of the amendments to Rule 10b-10 will not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.
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    \1\0115 U.S.C. 78w(a)(2).
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    The Commission has prepared a Final Regulatory Flexibility Analysis 
(``FRFA'') regarding the amendments to Rule 10b-10, in accordance with 
5 U.S.C. 604. The FRFA notes the potential initial costs of operational 
and procedural changes that may be necessary to comply with the 
amendments. In addition, the FRFA notes the benefits to investors of 
increased disclosure that will result from these amendments. The 
Commission believes that the benefits of added disclosure outweigh the 
costs that will be incurred by industry participants in complying with 
these amendments.
    A copy of the FRFA will be available for inspection and copying in 
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Statutory Basis and Text of Amendments

    For the reasons set forth in the preamble, the Commission hereby 
amends Part 240 of Chapter II of Title 17 of the Code of Federal 
Regulations 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, 78p, 
78q, 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. 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 paragraph (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 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 an 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 to 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 the 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 written 
agreement with such customer, otherwise than on a transaction basis; 
and
    (C) For a transaction in any subject security as defined in 
Sec. 240.11Ac1-2 or a security authorized for quotation on an automated 
interdealer quotation system that has the characteristics set forth in 
Section 17B of this Act (15 U.S.C. 78q-2), a statement whether payment 
for order flow is received by the broker or dealer for transactions in 
such securities and the fact that the source and nature of the 
compensation received in connection with the particular transaction 
will be furnished upon written request of the customer; and
    (D) 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 the 
fact 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 where such broker or dealer is not a market maker 
in that security and, if, after having received an order to buy from a 
customer, the broker or dealer purchased the security from another 
person to offset a contemporaneous sale to such customer or, after 
having received an order to sell from a customer, the broker or dealer 
sold the security to another person to offset a contemporaneous 
purchase from such customer, 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.
    (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 the fact 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)(i)(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 the fact 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, with a variable interest 
payable thereon; or
    (B) Is an asset-backed security, that represents an interest in or 
is secured by a pool of receivables or other financial assets that are 
subject continuously to prepayment; 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; and
    (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 that either:
    (A) Has a maturity date that may be extended by the issuer thereof, 
with a variable interest rate payable thereon; or
    (B) Is an asset-backed security, that represents an interest in or 
is secured by a pool of receivables or other financial assets that are 
subject continuously to prepayment; and
    (7) In the case of a transaction in a debt security that is an 
asset-backed security, which represents an interest in or is secured by 
a pool of receivables or other financial assets that are subject 
continuously to prepayment, a statement indicating that the actual 
yield of such asset-backed security may vary according to the rate at 
which the underlying receivables or other financial assets are prepaid 
and a statement of the fact that information concerning the factors 
that affect yield (including at a minimum estimated yield, weighted 
average life, and the prepayment assumptions underlying yield) will be 
furnished upon written request of such customer; and
    (8) In the case of a transaction in a debt security, other than a 
government security, 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 (SIPC), or that the broker or dealer 
clearing or carrying the customer account is not a member of SIPC, if 
such is the case: Provided, however, that this paragraph (a)(9) shall 
not apply in the case of a transaction in shares of a registered open-
end investment company or unit investment trust if:
    (i) The customer sends funds or securities directly to, or receives 
funds or securities directly from, the registered open-end investment 
company or unit investment trust, its transfer agent, its custodian, or 
other designated agent, and such person is not an associated person of 
the broker or dealer required by paragraph (a) of this section to send 
written notification to the customer; and
    (ii) The written notification required by paragraph (a) of this 
section is sent on behalf of the broker or dealer to the customer by a 
person described in paragraph (a)(9)(i) of this section.
    (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 effected in shares of any open-end 
management investment company registered under the Investment Company 
Act of 1940 that holds itself out as a money market fund and attempts 
to maintain a stable net asset value per share: Provided, however, that 
no sales load is deducted upon the purchase or redemption of shares in 
the money market fund; 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 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:
* * * * *
    (10) Asset-backed security means a security that is primarily 
serviced by the cashflows of a discrete pool of receivables or other 
financial assets, either fixed or revolving, that by their terms 
convert into cash within a finite time period plus any rights or other 
assets designed to assure the servicing or timely distribution of 
proceeds to the security holders.
* * * * *
    By the Commission.

    Dated: November 10, 1994.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-28450 Filed 11-16-94; 8:45 am]
BILLING CODE 8010-01-P