[Federal Register Volume 60, Number 52 (Friday, March 17, 1995)]
[Rules and Regulations]
[Pages 14366-14367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6576]



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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 35473; File Nos. S7-29-93; S7-6-94]
RIN 3235-AG00; 3235-AF84


Payment for Order Flow, Confirmation of Transactions

AGENCY: Securities and Exchange Commission.

ACTION: Final rule; change of effective date.

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SUMMARY: The Commission is postponing the effective date of Rule 11Ac1-
3 and certain amendments to Rule 10b-10 under the Securities Exchange 
Act of 1934 from April 3, 1995 to October 2, 1995 in order to 
facilitate the orderly implementation of the enhanced disclosure 
requirements relating to payment for order flow and non-SIPC membership 
by broker-dealers.

EFFECTIVE DATES: The effective date of the final rule published on 
November 2, 1994 (59 FR 55006) is postponed until October 2, 1995. The 
effective date of Sec. 240.10b-10(a) (9), which was published on 
November 17, 1995 (59 FR 59612) and which applies to non-SIPC broker-
dealers other than government securities broker-dealers, is postponed 
until October 2, 1995. The effective date of the other amendments to 
Sec. 240.10b-10 that was published on November 17, 1995, remains April 
3, 1995.

FOR FURTHER INFORMATION CONTACT: Carlene Kim, Senior Counsel, at 202/
942-4180, Office of Trading Practices, Division of Market Regulation, 
Securities and Exchange Commission, 450 Fifth Street, N.W. Mail Stop 5-
1, Washington, D.C. 20549. For questions relating to compliance with 
new Rule 11Ac1-3 and amendments to Rule 10b-10 concerning payment for 
order flow, please contact Gail Marshall, Attorney, at 202/942-7129, 
Office of Market Supervision, Division of Market Regulation. For 
questions relating to compliance with the amendment to Rule 10b-10 
relating to disclosure of a broker-dealer's non-SIPC status, please 
contact C. Dirk Peterson, Senior Counsel, at 202/942-0073, Office of 
Chief Counsel, Division of Market Regulation.

SUPPLEMENTARY INFORMATION:

A. Payment for Order Flow

    On October 27, 1994, the Commission adopted Rule 11Ac1-3 [17 CFR 
240.11Ac1-3] and amendments to Rule 10b-10 [17 CFR 240.10b-10] under 
the Securities Exchange Act of 1934.1 Rule 11Ac1-3 requires 
broker-dealers to disclose, in annual account statements and new 
account forms, their policies regarding the receipt of payment for 
order flow and to provide a detailed description of the nature of the 
compensation received. Rule 11Ac1-3 also requires broker-dealers to 
provide information about order routing policies for orders subject to 
payment for order flow, including an explanation of the extent to which 
orders can be executed at prices superior to the best bid and offer. 
Rule 10b-10, as amended, requires broker-dealers to state on 
confirmations whether they receive payment for order flow, and that the 
source and nature of [[Page 14367]] the compensation will be provided 
upon written request. The effective date is April 3, 1995.

    \1\Securities Exchange Act Release No. 34902 (October 27, 1994), 
59 FR 55006.
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    On October 27, 1994, the Commission also proposed for comment 
amendments to Rules 11Ac1-3 and 10b-10.2 The proposed amendments 
would require broker-dealers to disclose on confirmations the range of 
payment for order flow received on a per share basis and to provide a 
statement that, upon written customer request, additional transaction-
specific information will be provided. In new customer and annual 
account statements, broker-dealers would be required to disclose the 
range of payment for order flow received on a per share basis, as well 
as the aggregate amount or estimated value of payment for order flow 
received on an annual basis. The proposals also would require parallel 
disclosure for orders subject to internalization/affiliate order 
routing. Finally, the proposals would require broker-dealers to 
describe their order-routing policies for all orders, including those 
that are subject of internalization/affiliate order routing, and 
describe the extent to which such orders may enjoy price improvement 
opportunities.

    \2\Securities Exchange Release No. 34903 (October 27, 1994), 59 
FR 55014.
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    The Division of Market Regulation (``Division'') is analyzing the 
issues raised by the 22 comment letters that were received. A majority 
of the commenters responding to the proposing release requested that 
the effective date of any further changes be delayed. Several broker-
dealers stated that it would be extremely burdensome for them to make 
the systems changes required by any additional amendments, given the 
time and resources demanded by requirements of the newly-adopted 
changes and the transition to three day settlement. The Division is 
receiving an increasing number of inquiries from broker-dealers 
regarding implementation of the adopted rules. Many broker-dealers 
indicate that systems changes must be made soon in order to be ready 
for the April 3 effective date. The Division believes that similar 
systems changes will be necessary to implement any additional 
requirements based upon the proposed amendments. 3 It would 
enhance efficiency and reduce costs if broker-dealers could make 
systems changes at one time rather than potentially be required to make 
changes twice to implement payment for order flow requirements. The 
Commission believes, however, that it is not feasible to have any 
additional changes take effect on April 3.

    \3\In the intervening period, the Commission may also consider 
further regulatory initiatives regarding payment for order flow in 
light of the comments received on the proposed amendments, and in 
light of the pending inquiries into the Nasdaq market by the 
Commission and the U.S. Department of Justice.
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    Accordingly, the Commission believes that an effective date of 
October 2, 1995 for Rule 11Ac1-3 and amendments to Rule 10b-10 relating 
to payment for order flow disclosures, adopted on October 27, 1994 and 
any additional amendments would promote an orderly adjustment to the 
enhanced disclosure regime.4 For the reasons discussed above, the 
Commission for good cause finds that notice and solicitation of comment 
regarding the effective date is impracticable, unnecessary, and 
contrary to the public interest.

    \4\The staff of the Division will not recommend that the 
Commission take enforcement action under Rule 10b-10, if broker-
dealers comply with the requirements of amended Rule 10b-10 as of 
April 3, 1995. With respect to new customer and annual account 
statements, broker-dealers may, of course, also elect to comply with 
the requirements of Rule 11Ac1-3 prior to October 2, 1995.
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B. SIPC Status Disclosure

    In addition, on November 10, 1994, the Commission adopted 
amendments to Rule 10b-10 which, among other things, require a broker 
or dealer that is not a member of the Securities Investor Protection 
Corporation (``SIPC'') to affirmatively disclose its non-SIPC status on 
customer confirmations.\5\ This requirement is consistent with the 
Commission's authority under the Government Securities Act Amendments 
of 1993 to require government securities broker-dealers, which are 
excluded from SIPC membership, to disclose that they are not SIPC 
members rather than require them to become members.\6\ Congress 
believed that disclosure was the appropriate approach to remedy the gap 
in SIPC coverage.

    \5\See Securities Exchange Act Release No. 34962 (Nov. 10, 
1994), 59 FR 59612. All broker-dealers registered as government 
securities brokers and dealers under Section 15C of the Exchange 
Act, 15 U.S.C. 78o-5, are excluded from SIPC membership. While most 
brokers and dealers registered with the Commission under Section 
15(b) of the Exchange Act, 15 U.S.C. 78o(b) are required to be SIPC 
members, some of these persons are excluded from SIPC membership, as 
well. 15 U.S.C. 78lll(12). Among those excluded from SIPC membership 
under the Securities Investor Protection Act of 1970 are broker-
dealers whose business consists exclusively of (a) the distribution 
of shares of registered investment open-end 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)(ii).
    \6\In a report to Congress, the GAO recommended that government 
securities brokers and dealers be required to become members of 
SIPC, or in the absence of membership, disclose that they are not 
SIPC members. See S. Rep. No. 422, 103rd Cong., 1st Sess. 16 (1993). 
Congress subsequently amended Section 15C of the Exchange Act to 
prohibit government securities brokers and dealers from effecting a 
transaction in any security in contravention of Commission rules 
requiring the timely disclosure that a customer's account is not 
protected by SIPC. See 15 U.S.C. 78o-5(a)(4).
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    When the Commission adopted this amendment, it stated that 
confirmation disclosure is necessary ``to ensure that customers are not 
led to believe that their accounts are subject to protection beyond 
what actually is the case * * *.''\7\ The Commission recognized that in 
some situations, however, the costs would exceed the benefits of 
disclosure, and thus, adopted an exclusion from the disclosure 
requirement for transactions in investment company shares where the 
investor sends purchase money directly to a non-affiliated transfer 
agent, custodian, or other designated agent of the issuing investment 
company.

    \7\Securities Exchange Act Release No. 34962 (November 10, 
1994), 59 FR 59612.
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    In a letter dated February 16, 1995, the Investment Company 
Institute (``ICI'') expressed concern about the operational 
consequences, as well as the policy and investor protection 
implications of non-SIPC status disclosure, and requested that the 
Commission consider further amending Rule 10b-10. In addition, the ICI 
requested that the Commission consider extending the effective date of 
the amendment to Rule 10b-10 requiring disclosure of non-SIPC status. 
In the ICI's view, it will be particularly burdensome for mutual fund 
groups to obtain information about the SIPC status of their 
underwriters. By letter dated December 19, 1994, the College Retirement 
Equities Fund raised similar concerns with respect to broker-dealers 
whose business consists exclusively of the sale of variable annuities.
    The Commission, therefore, is postponing the effective date from 
April 3, 1995 to October 2, 1995 of the Rule 10b-10 amendment 
pertaining to non-SIPC disclosure by broker-dealers that are excluded 
from SIPC membership pursuant to Section 3(a)(2)(A)(ii) of the 
Securities Investor Protection Act of 1970. \8\

    \8\15 U.S.C. 78ccc(a)(2)(A)(ii).
    The effective date of this provision remains April 3, 1995, 
however, for all other brokers and dealers.
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    Dated: March 10, 1995.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-6576 Filed 3-16-95; 8:45 am]
BILLING CODE 8010-01-M