Confirmation of Transactions

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-33743, File No. S7-6-94]

RIN 3235-AF84; 3235-AG12

Confirmation of Transactions

AGENCY: Securities and Exchange Commission.

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

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SUMMARY: The Securities and Exchange Commission is publishing for

comment amendments to Rule 10b-10 and proposed Rule 15c2-13 under the

Securities Exchange Act of 1934. The proposed amendments to Rule 10b-10

are designed to clarify the operation of the Rule, particularly in

light of changes in the securities markets and the development of new

securities products. The amendments and new rule are designed to

enhance the disclosure given to customers so that customers can better

evaluate their securities transactions. The Commission is seeking

comment on the function of the confirmation in the context of a three

day settlement period, and the adequacy and readability of customer

periodic statements.

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

ADDRESSES: Comments should be submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,

NW., Mail Stop 6-9, Washington, DC 20549. Comment letters should refer

to File No. S7-6-94. All comment letters received will be available for

public inspection and copying in the Commission's Public Reference

Room, 450 Fifth Street, NW., Washington, DC 20549.

FOR FURTHER INFORMATION CONTACT: Robert Colby, Deputy Director, (202/

272-2790), Catherine McGuire, Chief Counsel, (202/272-2844), or C. Dirk

Peterson, Attorney, (202/504-2418), Division of Market Regulation,

Securities and Exchange Commission, 450 Fifth Street, NW., Mail Stop 5-

1, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission

(``SEC'' or ``Commission'') proposes to amend the confirmation

requirements under Rule 10b-101 of the Securities Exchange Act of

1934 (``Exchange Act'')2 to strengthen its investor protection

function. Generally, Rule 10b-10 requires a broker-dealer that effects

transactions for customers in securities, other than U.S. Savings Bonds

or municipal securities, to provide a written notification to the

customer, at or before completion of the transaction, that discloses

information about the transaction.3 Confirmation of a securities

transaction provides basic customer protection, the importance of which

was recognized by the Commission as early as 1937.4

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\1\17 CFR 240.10b-10.

\2\15 U.S.C. 78a et seq.

\3\A broker-dealer has an obligation under Rule 10b-10 to send

its customers an immediate confirmation with respect to each

transaction the broker-dealer effects. In the case of a customer

account managed by a fiduciary of the customer, it is important to

note that the account is the customer, rather than the fiduciary.

See generally Letter regarding Merrill Lynch, Broadcort Capital

Corp. and Wagner Stott Clearing Corp. (March 25, 1991)[available on

LEXIS]. Accordingly, under Rule 10b-10, a broker-dealer must send an

immediate confirmation to the account holder, in addition to any

confirmation it may send to an account fiduciary. The Commission

believes, however, that an account that has given discretionary

authority in writing to its fiduciary may agree in writing with the

broker-dealer effecting its trades to waive the receipt of an

immediate confirmation required by Rule 10b-10 if: (1) The broker-

dealer sends an immediate confirmation to the account's fiduciary,

and (2) a broker-dealer sends the discretionary account a statement

no less frequently than quarterly containing all the information

required to be disclosed on the immediate confirmation. The customer

may not waive this quarterly statement.

\4\Rule 15c1-4, 17 CFR 240.15c1-4, an earlier confirmation rule,

was adopted by the Commission in 1937. Securities Exchange Act

Release No. 1330 (Aug. 4, 1937). This rule, which solely applied to

transactions in securities in the over-the-counter market, was

replaced in 1978 by Rule 10b-10, which extended the Commission's

confirmation requirements to trades conducted on a securities

exchange. Securities Exchange Act Release No. 15219 (Oct. 6, 1978),

43 FR 47495. Rule 10b-10 initially was adopted in part in May 1977.

Securities Exchange Act Release No. 13508 (May 5, 1977), 42 FR 25318

(``Adopting Release'').

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The proposed amendments to Rule 10b-10 would: (1) Require

confirmation disclosure of mark-ups and mark-downs for riskless

principal transactions in debt securities; (2) require disclosure of

the fact that a debt security is not rated by a nationally recognized

statistical rating organization; (3) require confirmation disclosure of

mark-ups and mark-downs in Nasdaq and exchange-listed securities; (4)

require disclosure regarding whether broker-dealers are not members of

the Securities Investor Protection Corporation; (5) modify the

disclosure requirements with respect to certain collateralized debt

securities; (6) add a preliminary note to the Rule indicating that the

Rule's disclosure requirements do not limit disclosures necessary under

the antifraud provisions of the federal securities laws; and (7)

restructure the Rule.

Proposed Rule 15c2-13 would require brokers, dealers, and municipal

securities dealers (1) to disclose mark-up information in riskless

principal transactions in municipal securities; and (2) to disclose

when a particular municipal security is not rated by a nationally

recognized statistical rating organization.

The confirmation serves several functions: it acts as a customer

invoice; informs investors of the details of a transaction, allowing

the investor to check for errors or misunderstandings; provides

consumer information, allowing investors to evaluate the cost and

quality of the services provided by broker-dealers; discloses to

investors possible conflicts of interest between them and the broker-

dealer; and acts as a safeguard against fraud, by permitting the

customer to detect problems associated with a transaction.

Implementation of a settlement period of three days (``T+3'') may

alter the confirmation's utility as a customer invoice because normal

confirmation delivery and the transfer of customer funds and securities

may not be possible within the three day settlement period. Under the

previous settlement period of five days, confirmations generally

reached customers in time for the customer to review them prior to

transferring funds or securities to the transacting broker-dealer.

Under T+3, the customer frequently will not receive the confirmation

through the mails by day three;5 thus, shortening the settlement

period may require broker-dealers either to demand funds or securities

from the customer earlier than at present or to cover the cost of the

transaction for a longer period of time.

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\5\Broker-dealers may alleviate the concerns of mail delay, for

example, by sending confirmations by facsimile.

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Although implementation of T+3 does not create compliance problems

with regard to Rule 10b-10,6 the Commission requests comment on

its effect on the confirmation's investor protection functions. If the

confirmation is used less frequently as an invoice, should some of the

confirmation's content be shifted to periodic account statements?7

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\6\Some commentators suggested that substantive changes to Rule

10b-10 will be necessary as a result of the adoption of Rule 15c6-1

of the Exchange Act, 17 CFR 240.15c6-1, which implemented T+3.

Because Rule 10b-10 requires a broker-dealer to send a customer

written confirmation ``at or before completion of the transaction,''

some have argued that a T+3 settlement period will make compliance

with Rule 10b-10 impossible. The Commission notes, however, that

broker-dealers can comply with Rule 10b-10 even under a T+3

settlement period. Rule 10b-10 requires only that the broker-dealer

send written confirmation by settlement date, not that the customer

actually receive it by settlement. In the current five days

settlement period, broker-dealers typically send customer

confirmations the day after trade date, which will satisfy Rule 10b-

10 even under a T+3 settlement period.

\7\Six of the exchanges and the National Association of

Securities Dealers, Inc. (``NASD'') have rules requiring that such

periodic statements be sent to customers. The Commission has

proposed a rule requiring annual account statements in the payment

for order flow context. See Securities Exchange Act Release No.

33026 (Oct. 7, 1993), 58 FR 52934 (Oct. 13, 1993).

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In this connection, the Commission solicits comment on the adequacy

and readability of periodic statements of account generally and whether

these account statements are read and relied upon by investors in

monitoring their accounts.

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

Securities

Rule 10b-10 currently requires disclosures of broker-dealer

compensation in agency and specified principal trades. In agency

trades, the confirmation must disclose both the transaction price and

the commission charged.8 In principal trades involving ``Reported

Securities,''9 the confirmation must disclose the trade price

reported by the broker-dealer for that transaction and the mark-up

calculated from the reported price.10 In ``riskless'' principal

trades in non-reported equity securities,11 Rule 10b-10 requires

brokers and dealers, other than market makers, to disclose the amount

of any mark-up received.12 The Commission is proposing to amend

Rule 10b-10 to require the disclosure of mark-up information for

riskless principal trades in debt securities, other than U.S. Savings

Bonds and municipal securities. The Commission also is proposing Rule

15c2-13 to require disclosure of mark-up information in riskless

principal trades in municipal securities. Rule 10b-10 currently

requires confirmations for transactions in debt securities to disclose

to the customer the net dollar price and yield, but not separate

disclosure of compensation information.13 The Commission believes

that investors in debt securities, like investors in equity securities,

should be informed of the costs in riskless principal trades because,

despite the legal distinctions, these trades are the functional

equivalent of transactions effected on an agency basis.

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\8\17 CFR 240.10b-10(a)(2) and 17 CFR 240.10b-10(a)(7)(ii).

\9\Rule 11Aa3-1(a)(4), 17 CFR 240.11Aa3-1(a)(4), defines

``Reported Security'' as any exchange-listed equity security or

Nasdaq security for which transaction reports are made available on

a real-time basis pursuant to an effective transaction reporting

plan. An ``effective transaction reporting plan'' refers to a

transaction reporting plan that the Commission has approved pursuant

to Rule 11Aa3-1. 17 CFR 240.11Aa3-1(a)(3).

Reported Securities presently include:

1. Nasdaq securities that meet standards set forth in the

National Market System Securities Designation Plan (``Nasdaq/NMS

securities'').

2. Certain securities listed on a national securities exchange

that meet standards of the transaction reporting plan known as the

Restated Consolidated Tape Association Plan (``CTA Plan''). This

would include securities that are registered or admitted to unlisted

trading privileges on a national securities exchange, including

securities listed on various regional exchanges, and that

substantially meet New York Stock Exchange, Inc (``NYSE'') or

American Stock Exchange, Inc. (``Amex'') original listing criteria.

A number of securities that are quoted on Nasdaq and listed on

certain regional stock exchanges, however, are not subject to an

effective transaction reporting plan. Approximately 1,600 securities

traded on Nasdaq do not satisfy the criteria for designation as a

Nasdaq/NMS security, and thus are not part of an effective

transaction reporting plan. Similarly, a limited number of regional-

exchange listed securities are not covered by the CTA Plan.

\1\017 CFR 240.10b-10(a)(8)(i)(B).

\1\1''Riskless'' principal trades are transactions in which,

after receiving an order to buy or sell from a customer, the broker-

dealer purchases the security from another person to offset a

contemporaneous purchase by the customer or sells the security to

another person to offset a contemporaneous sale by the customer.

Although these transactions are characterized as riskless, they

still involve counterparty risk. See Exchange Act Rule 15c3-

1(a)(2)(vi), 17 CFR 240.15c3-1(a)(2)(vi), (relating to net capital

requirements).

Rule 10b-10 currently does not require that a broker-dealer

acting as a principal, other than in a ``riskless'' principal

capacity, disclose the amount of mark-up for transactions in non-

reported securities. But see, infra Section 3 for a discussion of

mark-up disclosure requirements for non-reported securities that are

subject to last-sale reporting.

For purposes of clarity and to conform to Rule 15g-4, 17 CFR

240.15g-4 (requiring riskless principal disclosure for trades

involving penny stocks), the Commission proposes to replace the term

``amount of any mark-up, mark-down, or similar remuneration

received,'' currently used in Rule 10b-10, with ``difference between

the price to the customer and such contemporaneous purchase or sale

price.''

\1\217 CFR 240.10b-10(a)(8)(i)(A). For purposes of this release,

references to mark-ups are equally applicable to mark-downs or

commission equivalents.

In determining the broker-dealer's mark-ups for antifraud

disclosure purposes, the Commission advises broker-dealers to note

that the framework set forth in Alstead, Dempsey & Company, Inc., 47

S.E.C. 1034 (1984), governs the appropriate method for determining

the prevailing market price in active or dominated and controlled

markets. See Securities Exchange Act Release No. 29093 (Apr. 17,

1991), 56 FR 19165, for further discussion of Alstead in connection

with proposed penny stock rules which are adopted in Securities

Exchange Act Release No. 30608 (Apr. 20, 1992), 57 FR 18004. See

also Meyer Blinder, Securities Exchange Act Release No. 31095, (Aug.

26, 1992), 52 SEC Doc. 1436, appeal docketed sub. nom. Gorden v.

SEC, No. 92-1554 (D.C. Cir.) appeal dismissed per stipulation

(applying the Alstead framework to case involving excessive mark-ups

in a dominated and controlled market). See Securities Exchange Act

Release No. 33083 (Oct. 21, 1993).

\1\317 CFR 240.10b-10(a)(5).

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On three previous occasions, the Commission proposed amendments to

Rule 10b-10 that would have required disclosure of mark-ups for

riskless principal trades involving debt securities, including

municipal securities.14 Commentators argued against adoption of

mark-up disclosure for riskless principal debt trades saying that: (1)

The amount of a mark-up was not material to investors; (2) adoption of

the proposal would have a detrimental, disproportionate effect on small

broker-dealers; and (3) the amendment would present compliance and

enforcement difficulties because of differences between the debt and

equity markets.15 The Commission withdrew the proposal in

1982,16 and subsequently adopted amendments requiring that

confirmations contain disclosures concerning the yield of debt

securities.17

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\1\4See Securities Exchange Act Release No. 15220 (Oct. 6,

1978), 43 FR 47538 (proposing mark-up disclosure for riskless

principal trades in municipal securities) (``1978 Release'');

Securities Exchange Act Release No. 13661 (June 23, 1977), 42 FR

33348 (proposing mark-up disclosure by non-market makers in riskless

principal transactions involving equity and debt securities, but not

municipal securities); and Securities Exchange Act Release No. 12806

(Sept. 16, 1976), 41 FR 41432 (proposing mark-up disclosure by non-

market makers in riskless principal transactions involving equity

and debt securities).

\1\5One commentator noted that determining whether a particular

firm was a market maker in the debt context was difficult because

the market maker definition contemplates an equity environment and

does not account for the differences in the debt environment. See

Letter from Sullivan & Cromwell, to George A. Fitzsimmons,

Secretary, SEC, dated January 15, 1979.

\1\6Securities Exchange Act Release No. 18987 (Aug. 20, 1982),

47 FR 37919.

\1\7Securities Exchange Act Release No. 18988 (Aug. 20, 1982),

47 FR 37920, adopted in Securities Exchange Act Release No. 19687

(Apr. 18, 1983), 48 FR 17583.

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In light of the increasing size of the debt market,18 together

with experience with mark-up disclosure in riskless principal trades

for equities, the Commission believes that mark-up disclosure for

riskless principal trades in debt securities should be

revisited.19 Confirmation disclosure of mark-ups in riskless

principal transactions will aid investors by disclosing to them

transaction costs. This will assist the client in monitoring brokerage

expenses and detecting possible improper practices. For instance, the

Commission understands that mark-ups charged in riskless principal

trades in long-term securities are substantially greater than mark-ups

charged in short-term securities, because the impact on disclosed yield

is smaller in the long term trade. The Commission believes that

customers should be given the ability to compare mark-ups in these

trades.

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\1\8The amount of outstanding debt in the U.S. is approximately

$1.9 trillion in corporate debt, of which $298 billion is held by

individual investors (households and mutual funds) in corporate and

foreign debt securities (See Flow of Fund Accounts, First Quarter,

1993), $4.9 trillion in U.S. government securities, and $1.2

trillion in municipal bonds. Securities Industry Fact Book,

Securities Industry Association (1993), at 21. The municipal

securities market comprises approximately 50,000 state and local

issuers with an outstanding principal amount of securities in excess

of $1.2 trillion. See SEC Report on the Municipal Securities Market

(Sept. 1993), at 1. There are approximately 1.3 million classes of

municipal securities spread across 150,000 different issuances.

Public Securities Association.

\1\9Mark-up disclosure requirements are applicable at present to

trades in debt securities convertible into equity securities.

Section 3(a)(11), 15 U.S.C. 78c(a)(11), and Rule 3a11-1 of the

Exchange Act, 17 CFR 240.3a11-1, define equity security to include

any security convertible into an equity security. Debt security is

defined to include a convertible security for purposes of certain

paragraphs of Rule 10b-10, but not for purposes of mark-up

disclosure in riskless principal trades.

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In withdrawing the riskless principal mark-up disclosure proposal

in the 1978 Release, the Commission stated that it would ``maintain

close scrutiny to prevent excessive mark-ups and take enforcement

action where appropriate.''20 Since 1982, the Commission and NASD

have undertaken a number of enforcement actions against broker-dealers

involving undisclosed, excessive mark-ups in debt securities.21

Requiring disclosure of mark-ups in riskless principal trades in debt

securities would supplement the Commission's and self-regulatory

organizations' enforcement programs, by giving investors greater

ability to review the mark-ups on their transactions. As a practical

matter, the proposed amendment also may permit broker-dealers that

consistently observe the highest standards of practice to compete more

effectively against broker-dealers that charge excessive mark-

ups.22

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\2\0Securities Exchange Release No. 18987 (Aug. 20, 1982), 47 FR

37919, at 37920.

\2\1See, e.g., F.B. Horner & Associates v. S.E.C., 994 F.2d 61

(2d Cir. 1993) (mark-ups charged of 5% for collateralized mortgage

obligations held to be excessive); First Honolulu Securities Corp.,

mark-ups of 5% for municipal and corporate bonds held to be

excessive); Investment Planning, Inc., Securities Exchange Act

Release No. 32687 (July 28, 1993) (upholding NASD finding that mark-

ups of 4% on certain corporate and municipal bonds were excessive);

Lake Securities, Inc., (Securities Exchange Act Release No. 31283

(Oct. 2, 1992) (mark-down of 7.4% on FNMA mortgage-backed securities

held to be fraudulent); Hamilton Bohner, 44 S.E.C. Doc. 1297 (1989)

(mark-downs ranging from 5.3% to 10.2% in excess of permissible

levels and NASD's findings of violations upheld); Donald T. Sheldon,

Admin. Proc. File No. 3-6626 (December 2, 1988)[available on

LEXIS](undisclosed mark-ups of over 8% for municipal bonds and over

5% for government securities found to be excessive), appeal

docketed, No. 93-4405 (11th Cir.); Alan Charles Refkin, Securities

Exchange Act Release No. 26311 (Nov. 25, 1988), 42 S.E.C. Doc. 490

(consent decree included findings that certain registered

representatives executed transactions involving mark-ups of between

10% and 34% in zero coupon bonds); PaineWebber, Inc., Securities

Exchange Act Release No. 25418 (Mar. 4, 1988), 40 S.E.C. Doc. 693

(offer of settlement stated that registrant charged customers

undisclosed, excessive mark-ups in transactions involving the sale

and repurchase of stripped U.S. Treasury bond coupons); Nicholas A.

Codispoti, 48 S.E.C. 842 (1987) (mark-ups of 6.1% to 32.7% on

municipal bonds with inactive market found to be excessive); Sutro &

Co., Securities Exchange Act Release No. 23663 (Sept. 30, 1986), 36

S.E.C. Docket 1199 (offer of settlement included finding that

transactions were executed with mark-ups and mark-downs of between

10% and 34% on U.S. Treasury bonds); Hanauer, Stern & Co.,

Securities Exchange Act Release No. 21313 (Sept. 11, 1984), 31

S.E.C. Doc. 483 (consent decree included findings of excessive mark-

ups on municipal securities transactions); S.E.C. v. MV Securities,

Inc. (S.D.N.Y., No. Civ. 1164), Litigation Release No. 10289 (Feb.

21, 1984), 29 S.E.C. Doc. 1591, (defendants enjoined from, inter

alia, paying or charging unfair prices to customers in municipal

bond transactions).

The Commission brought an injunctive action against an

unregistered broker-dealer for defrauding his customers by secretly

interpositioning himself between customers and dealers in certain

government and municipal securities, and appropriating for himself

better market prices that should have been made available to his

customers. SEC v. Ridenour, 913 F.2d 515 (8th Cir. 1990).

In addition, the Commission has submitted amicus briefs in cases

alleging excessive mark-ups in debt securities. See, e.g., Amicus

Curiae Brief of the SEC and Elysian Federal Savings Bank v. First

Interregional Equity Corp., 713 F. Supp. 737 (D. N.J. 1989)(brief

arguing that mark-ups ranging from 17.4% to 21.27% for principal

only trust certificates were excessive and mark-ups ranging between

5.3% to 7.39% on collateral mortgage obligations were excessive).

\2\2The Commission is aware of instances in which the customer,

while being correctly informed that no ``commission'' is involved in

a principal transaction in a debt security, has been given the

impression that no transaction fee is being charged. See ``Firms

Must Accurately Disclose Bond Trading Charges,'' NASD Regulatory &

Compliance Alert (June 1990). Irrespective of current or future Rule

10b-10 disclosure requirements, a misleading statement or a failure

to disclose material facts about the compensation received by the

broker-dealer constitutes an antifraud violation.

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Because riskless principal transactions do not involve holding

securities in inventory for any appreciable length of time,23 the

broker-dealer's compensation easily can be calculated by comparing the

order tickets for the purchase and sale involved. In addition, a

broker-dealer must assess whether its mark-ups violate NASD or

Commission mark-up policies. Accordingly, the Commission does not

believe that the proposal would be overly burdensome for broker-

dealers.

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\2\3The riskless principal disclosure requirements are intended

to apply to offsetting transactions, regardless of the sequencing of

the transaction. See Securities Exchange Act Release No. 15219 (Oct.

6, 1978), at n. 20; and Letter regarding Buys-MacGregor, McNaughton-

Greenwalt & Co., (Feb. 1, 1980), [1980] Fed. Sec. L. Rep. (CCH)

76,313.

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Unlike current disclosure requirements for riskless principal

transactions in equity securities, the proposed amendment and Rule

15c2-13 do not include an exclusion for market makers. This exclusion

is omitted because market makers have a much more limited function in

the debt markets. Typically, dealers in these markets, especially the

municipal market, do not display two-sided quotations nor carry

inventories of debt securities, as is characteristic of a market maker

in equity securities. Because of the tax implications, the lack of

dealer inventory, and the relative illiquidity of the market for any

particular municipal security, short positioning of municipal

securities is difficult and imposes greater risk that a dealer will be

unable to cover its short position.24

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\2\4Short positioning municipal securities is rare because the

Internal Revenue Service will not allow both a borrower and lender

of a municipal security to claim a tax exemption. In effect, the

lender of a municipal security would be trading tax exempt interest

for taxable interest. In addition, to the extent that any short

positioning occurs with respect to municipal securities, the IRS

imposes additional reporting requirements on the participating

parties. See Internal Revenue Code, Sec. 6045(d).

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The Commission requests comment on the proposal to disclose mark-

ups in riskless principal transactions in debt securities. In

particular, the Commission requests comment concerning whether

proposals requiring mark-up disclosure in riskless principal

transactions in municipal securities should be incorporated in one rule

under the authority of the Municipal Securities Rulemaking Board

(``MSRB''), rather than the Commission. In addition, comment is sought

concerning the proposed definition of riskless principal contained in

sub-paragraphs (e)(10) and (b)(3) of Rule 10b-10 and Rule 15c2-13,

respectively.25 The Commission further requests comment concerning

the extent to which broker-dealers act as market makers, as defined in

Section 3(a)(38), in the debt market and the extent that broker-dealers

currently calculate mark-ups in riskless principal debt transactions

for business purposes, such as determining the compensation of sales

personnel.26 In addition, the Commission requests comment on

whether the proposed requirements for mark-up disclosure in debt

securities should cover securities transactions occurring on the same

day rather than limiting the disclosure solely to riskless principal

transactions.

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\2\5See, supra, note 10 for a discussion of riskless principal

transactions.

\2\6Salesperson compensation is often determined as a percentage

of the gross mark-up charged on a principal transaction.

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2. Disclosure of Unrated Debt Securities

As proposed, both Rule 10b-10 and Rule 15c2-13 will require broker-

dealers to disclose when a debt security, other than securities defined

under Section 3(a)(42)(A) and (B) of the Exchange Act,27 is not

rated by a nationally recognized statistical rating organization. The

Commission is not requiring the disclosure of the specific rating of a

debt security because that information most likely will be disclosed to

a customer when a broker-dealer sells such a security. Brokers are less

likely to inform customers that a security is not rated. While the

Commission recognizes that an unrated bond may not necessarily be

unsound or speculative, this information will benefit investors by

alerting them that they may want to make further inquiry of the broker-

dealer. In the municipal securities market, this information is

particularly useful because of the limited secondary market information

in that market and the comparatively higher rates of issuer default for

unrated municipal bonds.28 The Commission requests comment whether

securities other than U.S. Treasury securities should be excluded from

this requirement. In addition, the Commission requests comment on

whether this requirement as it relates to municipal securities should

be incorporated in one rule under the authority of the MSRB.

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\2\715 U.S.C. 78(c)(a)(42)(A) and (B).

\2\8Statistics have shown that unrated municipal bonds, which

make up approximately one-third of the market, in the aggregate have

a higher default rate than do rated bonds. See Municipal Bond

Defaults--The 1980's a Decade in Review 1-2, at 1, J.J. Kenny Co.,

Inc. 1993). According to this study on default rates between January

1, 1980 to December 31, 1991, 628 unrated issues defaulted compared

with 98 rated issues. See also, Public Securities Association, An

Examination of Non-Rated Municipal Defaults 1986-1991 4 (Jan. 8,

1993).

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3. Disclosure of Mark-Ups and Mark-downs in Certain Nasdaq and

Exchange-Listed Securities

Since 1985, Rule 10b-10 has required broker-dealers acting as

principals in transactions in Reported Securities29 to disclose on

customer confirmations the reported trade price, the price to the

customer, and the difference between the two prices.30 In response

to the expansion of last sale reporting to additional securities, the

Commission is now proposing to amend Rule 10b-10 to require similar

disclosure in principal transactions in Nasdaq equity securities that

are not Nasdaq/NMS securities (``Nasdaq Small Cap Securities'') and

certain exchange-listed securities. These securities are subject to

last sale reporting, but are not included in the definition of

``Reported Security,'' as provided in Rule 11Aa3-1 of the Exchange Act.

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\2\9See, supra note 8 for the definition of ``Reported

Securities.''

\3\017 CFR 240.10b-10(a)(8)(i)(B). The reported trade price is

the price at which a broker-dealer reports a trade to NASDAQ or an

exchange. Price to the customer means the ultimate price the

customer pays or receives for a securities transaction, including

any miscellaneous fees imposed by the broker-dealer. This would not

include fees, such as taxes, SEC fees, or any other fees required by

state or federal law. See, e.g., Letter regarding Cities Securities

Corp. (Dec. 11, 1991) [available on LEXIS].

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In April, 1992, the Commission approved a proposal by the

NASD31 to require last sale and volume reporting for all

securities traded on Nasdaq.32 Shortly afterwards, the NASD

required its members to disclose to customers on written confirmations

the reported trade price, the price to the customer, and the difference

between the two prices in a particular Nasdaq Small Cap Securities

transaction.33 The NASD's rule provides customers who trade Nasdaq

Small Cap Securities with the same compensation disclosure required

under Rule 10b-10 for Nasdaq/NMS securities.

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\3\1Securities Exchange Act Release No. 30392 (Feb. 21, 1992),

57 FR 6880.

\3\2Securities Exchange Act Release No. 30569 (Apr. 10, 1992),

57 FR 13396.

\3\3NASD Schedule to By-Laws, Schedule D, pt. XI, Sec. 3, NASD

Manual (CCH) 1867D, approved in Securities Exchange Act Release No.

30871 (June 29, 1992), 57 FR 30281.

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The proposed amendment would consolidate in Rule 10b-10

compensation disclosure applicable to all Nasdaq stocks. It also would

extend this compensation disclosure to principal transactions in

regional-exchange listed securities subject to last sale

reporting.34 Doing so would treat similar securities consistently

and would provide benefits to customers with little additional burden

on broker-dealers. Because securities traded through Nasdaq and

regional exchanges are subject to last sale reporting requirements, and

NASD members are required to disclose on confirmations the reported

price, the customer's price, and the difference, capturing and

disclosing the same information for purposes of complying with Rule

10b-10 would not appear to require systems changes or additional

personnel.

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\3\4Typically, these are securities of smaller companies that

are listed and traded exclusively on one regional exchange.

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4. Disclosure of Coverage by the Securities Investor Protection

Corporation

The Commission is proposing to require that the confirmation

contain a disclosure concerning coverage under the Securities Investor

Protection Act of 1970 (``SIPA'').35 Under SIPA, all brokers or

dealers registered with the Commission under Section 15(b) of the

Exchange Act, with certain exceptions,36 are members of the

Securities Investor Protection Corporation (``SIPC''). In the event of

the financial failure of a SIPC member broker-dealer, SIPC protects

each customer up to $500,000 for claims for cash and securities, except

that claims for cash are limited to $100,000.

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\3\5Securities Investor Protection Act of 1970. Pub. L. 91-598,

64 Stat. 1836, as amended (codified at 15 U.S.C. 78aaa et seq.).

\3\6The following broker-dealers are excluded from SIPC

membership: (1) Government securities broker-dealers registered

under section 15C of the Exchange Act; (2) persons whose principal

business in the determination of SIPC (and subject to Commission

approval) is conducted outside the United States; and (3) persons

whose business consists exclusively of (a) the distribution of

shares of registered open-end investment companies or unit

investment trusts, (b) the sale of variable annuities, (c) the

business of insurance, or (d) the business of rendering investment

advisory services to one or more registered investment companies or

insurance company separate accounts. SIPA secs. 3(a)(2)(A) and

16(12) 15 U.S.C. 78ccc(a)(2)(A) and 78lll(12).

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A number of incidents involving the financial failure of registered

broker-dealers, and their unregistered affiliates, have illustrated the

potential for confusion about the application of SIPC coverage to

customers' accounts. In one of these cases, a registered broker-dealer

and its government securities affiliate were commonly owned, shared

personnel and office facilities, and did not distinguish between the

two entities in certain written and oral communications, leading to

customer confusion concerning SIPC coverage.37 Because government

securities brokers and dealers registered under section 15C of the

Exchange Act are not members of SIPC, their customer accounts are not

protected by SIPC.38

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\3\7See generally, SEC v. Donald Sheldon Group, Inc. et al.,

Admin. Pro. File No. 3-6626 (Dec. 2, 1988).

\3\8See, supra note 33.

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In order to reduce the potential for confusion regarding whether

SIPC coverage exists for accounts with government securities dealers,

as well as other cases where an investor might mistakenly assume that

SIPC coverage exists, the Commission is proposing to amend Rule 10b-10

to require broker-dealers that are not SIPC members to affirmatively

state in the customer confirmation that they are not SIPC members and

to require disclosure if the account is carried by a broker or a dealer

that is not a SIPC member. This disclosure requirement would be

consistent with the authority granted to the Commission concerning SIPC

disclosure under the Government Securities Acts Amendments of

1993.39

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\3\915 U.S.C. 78O-5(a)(4).

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5. Disclosure for Certain Asset-Backed Securities

The Commission is proposing to amend the yield disclosure

requirements with respect to asset-backed securities. The Rule

currently requires broker-dealers that effect transactions in debt

securities, other than U.S. Savings Bonds or municipal securities, to

disclose: (1) The yield to maturity, if the transaction is effected on

the basis of dollar price; (2) if the transaction is effected on a

yield basis, then the dollar price calculated from that yield; and (3)

if effected on a basis other than dollar price or yield to maturity,

and the yield to maturity will be less than the represented yield, then

both the yield to maturity and represented yield.

When these amendments were adopted, the Commission noted the

importance of yield data to an investor in transactions in debt

securities.40 The yield, or dollar price, at which a transaction

is effected in the secondary market will be directly related to the

anticipated maturity. Thus, features that cause a debt security to pay

sooner or later than expected will alter the actual yield that an

investor receives.

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\4\0Securities Exchange Act Release No. 19687 (April 18, 1983),

49 FR 17583.

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In recognition of this effect, the Commission excluded from the

actual yield disclosure requirements securities that represent an

interest in notes secured by liens upon real estate continuously

subject to prepayment.\41\ The Commission noted that fluctuations in

interest rates may cause mortgage notes underlying participation

certificates to prepay at rates faster or slower than anticipated. At

the time the Commission adopted the yield amendments, the primary

application of the exception was to transactions in securities issued

or guaranteed by the Government National Mortgage Association, Federal

National Mortgage Association, and the Federal Home Loan Mortgage

Corporation.

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\41\For purposes of paragraphs (a)(3) and (a)(4), the term

``debt security'' is defined in Rule 10b-10(e)(4), 17 CFR 240.10b-

10(e)(4), to include a fractional or participation interest in

notes. The Commission also excepted securities with a maturity date

that may be extended by the issuer.

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Since 1983, when the yield disclosure provisions were added to the

rule, the ``structured financing''\42\ market has been dramatically

increased to include securities backed by mortgage notes, automobile

loans, computer leases, consumer debt, and other receivables. Also,

broker-dealers now offer a variety of derivative mortgage instruments

and structured financing vehicles in which payment to investors is

related directly to payments of principal and interest on underlying

debt instruments. In many cases, these various asset-based securities

subject the investor to the same prepayment risks that are present in

mortgage participation certificates. To reduce prepayment exposure from

asset backed securities for some investors, collateralized mortgage

obligations (``CMOs'') have been developed.

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\42\``Structured financing'' is a financing technique whereby a

sponsor, which has originated or has purchased certain financial

collateral, such as accounts receivable or mortgage loans, transfers

such assets to a trust, a limited purpose entity organized solely

for purposes of the offering. That entity then issues debt

obligations or equity securities with debt-like characteristics. The

process also has been termed ``securitization.''

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CMOs are collateralized by pools of residential mortgage loans.

Like other asset-backed securities, the rate of prepayment on the

underlying collateral of CMOs is correlated inversely with interest

rate changes in the general economy. The actual maturities of CMOs are

dependent on these prepayment speeds. CMOs are priced on the basis of

the estimated ``weighted average life'' (``WAL'') of individual CMO

tranches. As interest rates decline, prepayments increase, with a

corresponding shortening of WALs. Conversely, an increase in interest

rates results in a lengthening of maturity. Estimated yields cannot be

established without some prepayment assumption underlying the WAL; for

this reason, disclosure of accurate prepayment assumptions, and an

appreciation of their implications, is essential to making a sound

investment decision.

CMOs are offered in several tranches of varying maturity and yield

that are intended to appeal to a broad spectrum of investors. One or

more tranches typically are structured as a planned amortization class

(``PAC''). PAC bonds, whose maturities are shielded from both WAL

extension and contraction risk, have the maximum protection available

in CMOs. Unlike PAC bonds, target amortization class (``TAC'') bonds

only provide protection against rapid prepayments, i.e., against a

shortening of maturity. In CMO offerings there also are ``support

classes,'' or ``companion classes,'' of the PAC or TAC bond classes,

which bear a disproportionate share of prepayment risk.\43\

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\43\The PAC bond's cash flow stability is achieved by giving its

principal payments a higher priority than those of the CMO

``companion'' tranches. While PAC bonds generally yield about 50 to

75 basis points above comparable Treasury bonds, companion tranches

can yield as much as 150 to 175 basis points above comparable

Treasury bonds, an attractive yield for investors seeking

alternatives to money market funds and certificates of deposit. As a

by-product of PAC or TAC bonds, however, ``companion'' bonds are

more volatile than PAC or TAC bonds. According to Fitch Investors

Service, Inc., ``companion'' bonds generally demonstrate ``moderate-

to-high volatility, with a very small percentage having low

volatility.'' ``CMO Tranche Risk Revealed,'' Fitch Investors

Service, Inc. 3 (April 6, 1992).

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In view of the changes in the structured financing market described

above, the Commission proposes to revise the yield disclosure

requirements for asset backed securities. On the one hand, the

Commission proposes to expand the range of debt securities where yield

need not be disclosed to include any asset backed security subject to

continuous prepayment.\44\ Broker-dealers must disclose yield

information with respect to debt instruments that are insulated from

prepayment risk, or where sufficient certainty exists to permit an

accurate forecast of the yield that investors will receive.\45\

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\44\This amendment would codify a no-action response issued by

the staff in 1988 with respect to mortgage-backed securities, and

apply it to asset-backed securities generally. Letter regarding

Merrill Lynch Capital Markets (Oct. 19, 1988) [available on LEXIS].

\45\For example, the Commission notes that mortgage loans on

multi-family housing may contain substantial prepayment penalties,

so that a security collateralized by or representing an interest in

such notes would be expected to provide a predictable payment stream

to investors. Similarly, automobile receivables may provide a

predictable payment stream because automobile owners are less likely

to prepay their automobile loans. By their nature, certain

securities, such as most mortgage-backed bonds, also provide

certainty of cash flow.

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On the other hand, the Commission proposes to treat CMOs

differently from other debt instruments under the proposed amendments.

A broker-dealer effecting transactions in CMOs would be required to

disclose, with respect to the security, (1) estimated yield, (2) the

weighted average life, and (3) the prepayment assumptions underlying

the yield.

The Commission emphasizes that the proposed amendments only would

apply to yield disclosure on a confirmation and would not affect the

broker-dealer's obligation under the general antifraud provisions of

the federal securities laws to disclose material information, apart

from that required by Rule 10b-10, regarding the composition of

mortgage pools or other factors that will affect yield.

In this connection, the Commission requests comments concerning the

manner in which yields are represented to investors in mortgage-backed

securities; the assumptions made by broker-dealers concerning

prepayment speed for mortgage pools; and how interest rate risk and

foreclosure risk are disclosed to investors in mortgage-backed

securities.

The Commission requests comment on the effect of the amendments on

customer understanding of the return on their investments. In addition,

the Commission requests comment on the advisability of requiring

separate disclosure relating to the prepayment assumptions underlying a

yield quotation in a CMO and on the written confirmation for a

transaction in a CMO.

6. Preliminary Note to Rule 10b-10

The Commission proposes to add a preliminary note to Rule 10b-10 to

clarify the relationship between the Rule's disclosure requirements and

additional disclosures that may be required to satisfy antifraud

provisions of the federal securities laws. In several cases over the

years, broker-dealer defendants have argued that because Rule 10b-10

did not require disclosure of specific information on a confirmation,

it was not material for purposes of the general antifraud provisions of

the Exchange Act.46 Although courts have given short shrift to

these arguments, the Commission wishes to reiterate that Rule 10b-10 is

not a safe harbor from the general antifraud provisions of the federal

securities laws.47 A broker-dealer has a duty established by

federal common law theories48 independent of the requirements of

Rule 10b-10 to disclose material facts to an investor at the time of

the investor's investment decision.49

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\4\6See, e.g., Shivangi v. Dean Witter Reynolds, Inc., 637 F.

Supp. 1001 (S.D. Miss. 1986), aff'd, 825 F.2d 885 (5th Cir. 1987);

Krome v. Merrill Lynch, Pierce, Fenner & Smith Inc., 637 F. Supp.

910, 915-916 (S.D.N.Y. 1986); and Ettinger v. Merrill Lynch, Pierce,

Fenner & Smith, Inc., Fed. Sec. L. Rep. (CCH) 93,102 (E.D. Pa.

1986), rev'd, 835 F.2d 1031 (3d Cir. 1987).

\4\7In the adopting release to Rule 10b-10, the Commission

explained that:

The rule does not attempt to set forth all possible categories

of material information to be disclosed by broker-dealers in

connection with a particular transaction in securities. Rule 10b-10

only mandates the disclosure of information which can generally be

expected to be material. Of course, in particular circumstances,

additional information may be material and disclosure may be

required.

Securities Exchange Release No. 13508, (May 5, 1977), 42 FR

25318, at 25320 n.28.

See also Securities Exchange Act Release No. 22397 (Sept. 11,

1985), 50 FR 37648, 37653 n.53 (indicating that disclosure of a

``mark-up'' for national market system securities under Rule 10b-10

would not control traditional determinations of, among other things,

whether the mark-ups are excessive for purposes of the antifraud

provisions of the federal securities laws).

\4\8Two theories, the fiduciary and shingle theory, establish an

obligation on the part of a broker-dealer to deal with customers

fairly. In cases where a broker-dealer has established a customer

relationship based upon trust and confidence, and the customer

depends upon and follows the broker-dealer's advice, a fiduciary

relationship is established between the broker-dealer and customer.

As a fiduciary, the broker-dealer also is obligated to disclose all

the material facts of a customer's transaction. See In re Arleen W.

Hughes, 27 S.E.C. 627 (1948), aff'd, 174 F.2d 969 (D.C. Cir. 1949).

Closely related to the fiduciary theory is a duty to the

customer established by the ``shingle theory.'' According to the

shingle theory, a broker-dealer impliedly represents at the outset

of a securities transaction that it will deal with its customers

fairly and in accordance with the standards of the industry. Duker &

Duker, 6 S.E.C. 386, 388-89 (1939).

\4\9The fact that a broker-dealer has met the requirements of

Rule 10b-10 should begin the analysis, not end it. The confirmation

is delivered after the contract is created. Thus, irrespective of

the content of the confirmation, specific terms of the transaction

that may affect the customer's investment decision should be

disclosed at the time of a purchase or sale of a security. See,

e.g., Norris & Hirshberg v. S.E.C., 177 F.2d 228 (D.C. Cir. 1949)

(affirming a Commission decision holding that the failure of a

broker-dealer to disclose its true capacity at the time of a

transaction, as principal rather than as agent, was, among other

things, a violation of Section 10(b) of the Exchange Act,

notwithstanding the fact that the broker-dealer had disclosed that

it was acting as principal in confirmations sent to investors).

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In amending Rule 10b-10, the Commission must balance the increased

cost to broker-dealers, and ultimately to investors, of compliance

against the benefits that added disclosures will provide

investors.50 In some instances, the Commission has declined to

adopt proposed amendments to its confirmation requirements because they

were considered too costly, or would have been too difficult to apply

on a uniform basis.51 Even when the Commission has not required

broker-dealers to disclose specific information to investors pursuant

to Rule 10b-10, this information nonetheless may be material to an

investor.52

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\5\0For example, the Commission noted in the release proposing

Rule 10b-10 that:

Since the costs of regulation designed to promote investor

protection are in the final analysis paid for in large part by the

investor, the Commission is endeavoring to adjust regulatory

requirements to eliminate those for which compliance costs appear to

be disproportionate to the practical benefits of investor protection

thereby obtained.

Securities Exchange Act Release No. 12806 (Sept. 16, 1976), 41

FR 41432.

\5\1See Securities Exchange Act Release No. 18987 (Aug. 20,

1982), 47 FR 37919.

\5\2The Commission reiterated this point in a release concerning

disclosure of mark-ups in zero-coupon instruments. Securities

Exchange Act Release No. 24368 (Apr. 21, 1987), 52 FR 15575. See

also Amicus Curiae Brief of the SEC and Ettinger v. Merrill Lynch,

Pierce, Fenner & Smith, Inc., 835 F.2d 1031 (3d Cir. 1987).

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Accordingly, the Commission is proposing to add a brief preliminary

note to the Rule, expressing the long-standing position that Rule 10b-

10 was not intended to codify the universe of disclosure necessary in a

transaction.

7. Restructuring of the Rule

A variety of non-substantive changes have been made to the rule to

enhance its clarity. Headings have been added to each paragraph.

Paragraph (a) has been reordered to combine elements dependent on the

capacity of the broker or dealer. Paragraphs (b) and (c) have been

combined into a single paragraph (c), and one element of former

paragraph (b) has been moved to the definition of ``investment company

plan'' in paragraph (e). A definition of riskless principal transaction

has been added, and references to broker or dealer have been made

gender neutral.

8. Effects on Competition and Regulatory Flexibility Act Considerations

Section 23(a)(2) of the Exchange Act53 requires that the

Commission, in adopting rules under the Act, consider the anti-

competitive effects of such rules, if any, and balance any anti-

competitive impact against the regulatory benefits gained in terms of

furthering the purposes of the Exchange Act. The Commission is

preliminarily of the view that the proposed amendments to Rule 10b-10

will not result in any burden on competition that is not necessary or

appropriate in furtherance of the purposes of the Exchange Act. The

Commission requests comment, however, on any competitive burdens that

might result from adoption of the amendments or the new rule.

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

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In addition, the Commission has prepared an Initial Regulatory

Flexibility Analysis (``IRFA''), pursuant to the requirements of the

Regulatory Flexibility Act,54 regarding the proposed amendments to

Rule 10b-10. The IRFA may be obtained from C. Dirk Peterson, in the

Office of Chief Counsel, Division of Market Regulation, (202) 504-2418.

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\5\45 U.S.C. 603.

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In addition, the Commission has consulted with the Department of

the Treasury pursuant to Section 15(c)(2) of the Exchange Act

concerning the SIPC disclosure requirements.

List of Subjects in 17 CFR Part 240

Reporting and recordkeeping requirements, securities.

Text of Proposed Amendments

For the reasons set forth in the preamble, title 17, chapter II of

the Code of Federal Regulations is proposed to be amended as follows:

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

1934

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

follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,

77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 780-5,

78p, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-

37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.

* * * * *

2.240.1b Section 240.10b-10 is amended by adding a preliminary note

prior to paragraph (a), revising paragraphs (a) and (b), removing

paragraph (c), redesignating paragraphs (d) through (f) as paragraphs

(c) through (e), adding a heading to newly designated paragraph (d),

revising the introductory text of paragraph (d) and the introductory

text of paragraph (d)(6), and adding paragraphs (d)(9) and (d)(10) to

read as follows:

Sec. 240.10b-10 Confirmation of transactions.

Preliminary Note. This section requires broker-dealers to

disclose specified information in writing to customers at or before

the completion of a transaction. The requirements under this section

that particular information be disclosed is not determinative of a

broker-dealer's obligation under the general antifraud provisions of

the federal securities laws to disclose additional information to a

customer at the time of the customer's investment decision.

(a) Disclosure requirement. It shall be unlawful for any broker or

dealer to effect for or with the account of a customer any transaction

in, or to induce the purchase or sale by such customer of, any security

(other than U.S. Savings Bonds or municipal securities) unless such

broker or dealer, at or before completion of such transaction, gives or

sends to such customer written notification disclosing:

(1) The date and time of the transaction (or the fact that the time

of the transaction will be furnished upon written request of such

customer) and the identity, price, and number of shares or units (or

principal amount) of such security purchased or sold by such customer;

and

(2) Whether the broker or dealer is acting as agent for such

customer, as agent for some other person, as agent for both such

customer and some other person, or as principal for its own account;

and if the broker or dealer is acting as principal, whether it is a

market maker in the security (other than by reason of acting as a block

positioner); and:

(i) If the broker or dealer is acting as agent for such customer,

for some other person, or for both such customer and some other person:

(A) The name of the person from whom the security was purchased, or

to whom it was sold, for such customer or the fact that such

information will be furnished upon written request of such customer;

and

(B) The amount of any remuneration received or to be received by

the broker from such customer in connection with the transaction unless

remuneration paid by such customer is determined, pursuant to a written

agreement with such customer, otherwise than on a transaction basis;

and

(C) The source and amount of any other remuneration received or to

be received by the broker in connection with the transaction: Provided,

however, That if, in the case of a purchase, the broker was not

participating in a distribution, or in the case of a sale, was not

participating in a tender offer, the written notification may state

whether any other remuneration has been or will be received and that

the source and amount of such other remuneration will be furnished upon

written request of such customer; or

(ii) If the broker or dealer is acting as principal for its own

account:

(A) In the case of a riskless principal transaction, except where

the dealer is a market maker in an equity security, the difference

between the price to the customer and the dealer's contemporaneous

purchase (for customer purchases) or sale price (for customer sales);

or

(B) In the case of any other transaction in a reported security, or

an equity security that is quoted on Nasdaq or traded on a national

securities exchange, and that is subject to last sale reporting, the

reported trade price, the price to the customer in the transaction, and

the difference, if any, between the reported trade price and the price

to the customer; and

(3) Whether any odd-lot differential or equivalent fee has been

paid by such customer in connection with the execution of an order for

an odd-lot number of shares or units (or principal amount) of a

security and that the amount of any such differential or fee will be

furnished upon oral or written request: Provided, however, That such

disclosure need not be made if the differential or fee is included in

the remuneration disclosure, or exempted from disclosure, pursuant to

paragraph (a)(2)(ii)(B) of this section; and

(4) In the case of any transaction in a debt security subject to

redemption before maturity, a statement to the effect that such debt

security may be redeemed in whole or in part before maturity, that such

a redemption could affect the yield represented and that additional

information is available upon request; and

(5) In the case of a transaction in a debt security effected

exclusively on the basis of a dollar price:

(i) The dollar price at which the transaction was effected; and

(ii) The yield to maturity calculated from the dollar price;

provided, however, that this paragraph (a)(5)(ii) shall not apply to a

transaction in a debt security that either:

(A) Has a maturity date that may be extended by the issuer thereof;

or

(B)(1) That represents an interest in, or is secured by, notes or

other receivables continuously subject to prepayment, where payments to

security holders are reasonably related to payments on such notes or

receivables; and

(2) The written statement prominently indicates that the actual

yield received by the customer may vary according to the rate at which

the underlying notes or receivables are prepaid; and

(6) In the case of a transaction in a debt security effected on the

basis of yield:

(i) The yield at which the transaction was effected, including the

percentage amount and its characterization (e.g., current yield, yield

to maturity, or yield to call) and if effected at yield to call, the

type of call, the call date and call price;

(ii) The dollar price calculated from the yield at which the

transaction was effected; and

(iii) If effected on a basis other than yield to maturity and the

yield to maturity is lower than the represented yield, the yield to

maturity as well as the represented yield: Provided, however, that this

paragraph (a)(6)(iii) shall not apply to a transaction in a debt

security which either:

(A) Has a maturity date that may be extended by the issuer thereof,

with a variable interest rate payable thereon; or

(B)(1) That represents an interest in, or is secured by notes or

other receivables continuously subject to prepayment, where payments to

security holders are reasonably related to payments on such notes or

receivables; and

(2) The written statement prominently indicates that the actual

yield received by the customer may vary according to the rate at which

underlying notes or receivables are prepaid; and

(7) In the case of a debt security that is a collateralized

mortgage obligation, the yield to maturity calculated on the basis of

the ``weighted average life'' of the security; the weighted average

life; and the prepayment assumption underlying this yield; and

(8) In the case of a transaction in a debt security, other than a

security defined under section 3(a)(42) (A) and (B) of this Act (15

U.S.C. 78(c)(a)(42) (A) and (B)), that the security is unrated by a

nationally recognized statistical rating organization, if such is the

case; and

(9) That the broker or dealer is not a member of the Securities

Investor Protection Corporation, or that the broker or dealer clearing

or carrying the customer account is not a member of the Securities

Investor Protection Corporation, if such is the case.

(b) Alternative periodic reporting. A broker or dealer may effect

transactions for or with the account of a customer without giving or

sending to such customer the written notification described in

paragraph (a) of this section if:

(1) Such transactions are effected pursuant to a periodic plan or

an investment company plan, or are effected in shares of any no-load

open-end investment company registered under the Investment Company Act

of 1940 that attempts to maintain a constant net asset value per share

and that holds itself out to be a ``money market'' fund or has an

investment policy calling for investment of at least 80% of its assets

in debt securities maturing in 13 months or less; and

(2) Such broker or dealer gives or sends to such customer within

five business days after the end of each quarterly period, for

transactions involving investment company and periodic plans, and after

the end of each monthly period, for other transactions described in

paragraph (c)(1) of this section, a written statement disclosing each

purchase or redemption, effected for or with, and each dividend or

distribution credited to or reinvested for, the account of such

customer during the month; the date of each such transaction; the

identity, number, and price of any securities purchased or redeemed by

such customer in each such transaction; the total number of shares of

such securities in such customer's account; any remuneration received

or to be received by the broker or dealer in connection therewith; and

that any other information required by paragraph (a) of this section

will be furnished upon written request: Provided, however, that the

written statement may be delivered to some other person designated by

the customer for distribution to the customer; and

(3) Such customer is provided with prior notification in writing

disclosing the intention to send the written information referred to in

paragraph (c)(1) of this section in lieu of an immediate confirmation.

* * * * *

(d) Definitions. For the purposes of this section:

* * * * *

(6) Investment company plan means any plan under which securities

issued by an open-end investment company or unit investment trust

registered under the Investment Company Act of 1940 are purchased by a

customer (the payments being made directly to, or made payable to, the

registered investment company, or the principal underwriter, custodian,

trustee, or other designated agent of the registered investment

company), or sold by a customer pursuant to:

* * * * *

(9) Collateralized mortgage obligation means any debt security with

two or more classes that:

(i) Requires payment to be made to holders of each class in

accordance with a schedule specifying the relative priorities of

payment to holders of all classes of the security;

(ii) Is secured by one or more mortgage notes or certificates of

interest or participations in such notes; and (iii) By its terms

provides for payments in relation to payments, or reasonable

projections of payments, on such mortgage notes or certificates of

interest or participations in such notes.

(10) Riskless principal transaction means a transaction in which a

dealer, after having received a buy order from a customer, purchases

the security as principal from another person to offset a

contemporaneous sale to such customer, or after having received a sell

order from a customer, sells the security as principal to another

person to offset a contemporaneous purchase from such customer.

* * * * *

3. By adding Sec. 240.15c2-13 to read as follows:

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

(a) It shall be unlawful for any broker, dealer, or municipal

securities dealer, acting as principal for its own account, to effect

with the account of a customer any transaction in any municipal

security unless the broker, dealer, or municipal securities dealer, at

or before completion of the transaction, gives or sends to the customer

written notification disclosing:

(1) In the case of a riskless principal transaction, the difference

between the price to the customer and the dealer's contemporaneous

purchase (for customer purchases) or sale price (for customer sales);

and

(2) Whether the municipal security is unrated by a nationally

recognized statistical rating organization.

(b) For purposes of this section:

(1) Customer shall not include a broker, dealer, or municipal

securities dealer.

(2) Completion of the transaction shall have the meaning provided

in Sec. 240.15c1-1 of this section.

(3) Riskless principal transaction means a transaction in which a

dealer, after having received a buy order from a customer, purchases

the security as principal from another person to offset a

contemporaneous sale to such customer, or after having received a sell

order from a customer, sells the security as principal to another

person to offset a contemporaneous purchase from such customer.

By the Commission.

Dated: March 9, 1994.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-5928 Filed 3-16-94; 8:45 am]

BILLING CODE 8010-01-M