[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]
=======================================================================
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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
