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SECURITIES AND EXCHANGE COMMISSION
(17 CFR Part 240)
(Release No. 34-34902; File No. S7-29-93)
RIN 3235-AG00
Payment for Order Flow
AGENCY: Securities and Exchange Commission.
ACTION: Final Rule
SUMMARY: The Securities and Exchange Commission announces the
adoption of Rule 11Ac1-3 and amendments to Rule 10b-10 under the
Securities Exchange Act of 1934 which, together, require enhanced
disclosure of payment for order flow practices on customer
confirmations, and account statements, as well as upon opening
new accounts. The new Rule and amendments to Rule 10b-10 are
designed to provide relevant information to customers regarding
factors influencing the routing of their orders. The new Rule
and amendments to Rule 10b-10 also will serve to enhance investor
protection and further competition for retail orders by enabling
customers to evaluate more effectively the markets to which their
orders are routed.
EFFECTIVE DATE: April 3, 1995.
FOR FURTHER INFORMATION CONTACT: Jill W. Ostergaard, Attorney,
202/942-3197, Branch of the National Market System, Office of
Market Supervision, Division of Market Regulation, Securities and
Exchange Commission, 450 Fifth Street, N.W., Mail Stop 5-1,
Washington, D.C. 20549. For interpretation of Rule 10b-10 after
March 1, 1996, please contact the Office of the Chief Counsel,
202/942-0073, Division of Market Regulation, Securities and
Exchange Commission, 450 Fifth Street, N.W., Mail Stop 7-10,
Washington, D.C. 20549. For interpretation of Rule 11Ac1-3
please contact the Office of Market Supervision, Division of
Market Regulation, 202/942-3197.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
On October 6, 1993, the Securities and Exchange Commission
("SEC" or "Commission") proposed for comment amendments to Rule
10b-10 (17 CFR 240.10b-10) and new Rule 11Ac1-3 (17 CFR
240.11Ac1-3) under the Securities Exchange Act of 1934 ("Act")
concerning payment for order flow practices. -[1]- Taken
together, those proposals were designed to improve information
available to investors about their broker-dealer's order routing
practices, and whether the broker-dealer received market center
-[2]- inducements for routing unspecified order flow to them.
These disclosures would occur when the investor opened an
account, annually thereafter, and on the required trade
confirmations. In the Proposing Release, the Commission invited
commenters to address issues related to the proposals as well as
alternative approaches to payment for order flow, such as banning
the practice outright, mandatory pass-through of payments to
customers, and requiring exchanges, national securities
associations and broker-dealers to convert to decimal pricing.
The Commission received 53 comment letters concerning the
proposals. Of those commenters, 31 supported the disclosure
-[1]- Securities Exchange Act Release No. 33026 (Oct. 6,
1993), 58 FR 36262 (Oct. 13, 1993)("Proposing
Release").
-[2]- As used in this release, the term market center
includes exchanges and dealers acting as market makers.
See 17 CFR 240.11Ac1-2(a)(14)(defining "reporting
market center").
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approach and 17 opposed it. -[3]- Many of the commenters
supporting the approach offered suggestions to improve the
effectiveness of disclosure.
The Commission is adopting the proposed disclosure approach
as discussed below. The Commission believes this approach will
further the investor protection goals of the Act, and is
consistent with the general philosophy underlying disclosure that
"sunlight is the best disinfectant." -[4]- The Commission, in
response to commenters' suggestions, has modified the proposed
Rule and amendments to Rule 10b-10, as described below.
The Commission is modifying Rule 11Ac1-3 and amendments to
Rule 10b-10 as proposed, to include Nasdaq Small-Cap and Over-
The-Counter ("OTC") Bulletin Board securities. The Commission
also is modifying the proposed amendments to Rule 10b-10 to limit
the disclosure of payment for order flow on customer
confirmations to a statement that the broker or dealer receives
payment for order flow. In addition, the Commission is revising
proposed Rule 11Ac1-3 regarding customer account statements by
requiring disclosure of the broker-dealer's policies for
determining where to route customer orders that are the subject
of payment for order flow absent specific instructions from
customers, including a description of the extent to which orders
can be executed at prices superior to the national best bid or
best offer ("NBBO").
In a parallel action, the Commission is proposing for
comment amendments to Rule 10b-10 and Rule 11Ac1-3 that would
extend those Rules to the options market. -[5]- In addition, the
Commission is proposing for comment a requirement that broker-
dealers disclose in writing, on confirmations, upon opening new
accounts and on annual disclosure statements, ranges of payment
for order flow received on a per share basis; and include, in new
account documentation and on annual disclosure statements, an
estimate of the aggregate amount of payment for order flow
received on an annual basis. -[6]- The Commission also is
proposing for comment a requirement that broker-dealers disclose
whether they execute orders as principal ("internalize") or route
orders to an affiliated broker-dealer or exchange specialist for
execution and, a requirement that broker-dealers quantify and
-[3]- The Commission's staff has prepared a summary of the
comments, a copy of which has been placed in the
official file.
The Division of Market Regulation ("Division") also
solicited comment on payment for order flow in its study of
the equity markets. See Securities Exchange Act Release No.
30920 (July 14, 1992), 57 FR 32587 (July 22, 1992)("Market
2000 Concept Release"). See also Division of Market
Regulation, Securities and Exchange Commission, Market 2000:
An Examination of Current Equity Market Developments (Jan.
1994)("Market 2000"). Many of the same parties commenting
on this proposal commented on Market 2000. Id., Appendix IV
at 41-48.
-[4]- L. Brandeis, Other People's Money and How the Bankers
Use It, 92 (Frederick A. Stokes Co. ed. 1932).
-[5]- See Securities Exchange Act Release No. 34903 (October
27, 1994) ("Companion Release").
-[6]- Id.
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disclose information about internalized/affiliate practices.
-[7]- The Commission further is proposing for comment a
requirement that broker-dealers disclose their order routing
practices regardless of whether the broker-dealer received
payment for order flow or engaged in internalized/affiliate
practices. The Companion Release also solicits comment on
expanding the definition of payment for order flow. -[8]-
II. Basis and Purpose of the Rule
The practice of paying for order flow has generated much
debate and controversy -[9]- regarding the potential benefits and
harm to public investors and whether receipt and retention of
payment for order flow compromises a broker-dealer's duties to
its customer. -[10]- Congress has shown continuing interest in
the resolution of that controversy. -[11]- The history of that
debate and other background information can be found in the
Proposing Release. -[12]- In their response to the Proposing
Release, few commenters suggested that the Commission not act at
all regarding payment for order flow practices. -[13]- Most
commenters supported the disclosure approach, with modifications.
These commenters suggested that payment for order flow practices
are a mechanism for competition among market centers for order
flow. Many commenters argued that there is no harm in these
practices. Others argued that disclosure to the customer
adequately would address any perceived conflict of interest.
-[7]- Id.
-[8]- Id.
-[9]- For a detailed discussion of this controversy, see
Note, The Perils of Payment for Order Flow, 107 Harv.
L. Rev. 1675 (1994).
-[10]- Private litigation in several state courts currently is
pending regarding payment for order flow. See, e.g.,
Investors' State Actions Against Brokers Seek Return of
Cash Paid for Order Flow (BNA), Special Report, Vol.
26, pp. 590-94 (April 22, 1994). Two cases were
dismissed on grounds of federal preemption and are
currently on appeal. See Dahl v. Charles Schwab & Co.,
Inc. (MC 93-106272, District Court, Forth Judicial
District, Hennepin County, Minnesota); Orman v. Charles
Schwab & Co., Inc. (93 CH 7365, Circuit Court of Cook
County, Illinois).
-[11]- See letter from John D. Dingell, Chairman, House
Committee on Energy and Commerce, to Honorable Richard
C. Breeden, Chairman, SEC, dated March 6, 1992. On May
13, 1993, the Subcommittee on Telecommunications and
Finance of the House Committee on Energy and Commerce
held a hearing regarding the future of the stock market
and inducements for order flow. See National Market
System: Hearings Before the Subcomm. on
Telecommunications and Finance of the House Comm. on
Energy & Commerce, 103d Cong., 1st Sess.
(1993)("National Market System Hearings").
-[12]- See Proposing Release, supra note 1, 58 FR at 52935.
-[13]- Some commenters believe that current disclosure
requirements are adequate and additional disclosure is
unnecessary.
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As noted in the Proposing Release, payment for order flow
may result in lower execution costs, facilitate technological
advances in retail customer order handling practices and
facilitate competition among broker-dealers and securities
markets. At the same time, however, the practice raises concern
as to whether the customer is being treated fairly.
Specifically, payment for order flow raises concerns about
whether a firm is meeting its obligation of best execution to its
customer. Not all market centers expose market orders to other
order flow or attempt to improve the price at which market orders
are executed. Thus, the decision to route an unpriced order to a
market center offering immediate execution at the NBBO, could
mean that the customer has lost an opportunity for execution at a
superior price because of the lack of exposure to other order
flow. -[14]- For the reasons discussed below, the Commission
believes disclosure that payment for order flow has been received
and a description of whether the customer's order has an
opportunity for price improvement will enhance investor
protection and provide customers with information to evaluate
more effectively the markets to which their orders are routed.
III. Discussion
The Rules adopted today represent a tiered approach to
disclosure of payment for order flow practices in the broader
context of broker-dealer order handling practices and the special
relationship that already exists between a broker-dealer and its
customer. -[15]- The components of the Rules include disclosure
at the time an account is opened, annually thereafter, and on the
transaction confirmation.
First, the Rules adopted today require broker-dealers to
inform customers in writing, when a new account is opened, about
the dealer's policies regarding the receipt of payment for order
flow, including whether payment for order flow is received; and a
detailed description of the nature of the compensation received.
As discussed in greater detail below, the new Rule and Rule
amendments require that broker-dealers provide information in
account opening documents about order routing decisions in orders
subject to payment for order flow, including an explanation of
the extent to which unpriced orders can be executed at prices
superior to the displayed NBBO at the time the order is received.
Second, the Rules adopted today require dealers to update this
information and to provide such information annually to all
customers. Taken together, this information should assist
customers in assessing the quality of trade executions they
receive and encourage broker-dealers to consider the opportunity
for price improvement in establishing order routing arrangements.
Finally, the Rules adopted today require broker-dealers to
indicate on confirmations whether the broker or dealer receives
payment for order flow, and the availability of further
information on request. These are described in greater detail
below, beginning with the scope of securities subject to the
-[14]- See Market 2000, supra note 3, Study V at 3-4.
-[15]- A broker-dealer's duty to seek to obtain best execution
of customer orders derives, in part, from the common
law agency duty of loyalty, which obligates an agent to
act exclusively in the principal's best interest.
Restatement 2d Agency
387 (1958). Thus, when an agent acts on behalf of a
customer in a transaction, the agent is under a duty to
exercise reasonable care to obtain the most advantageous
terms for the customer. Restatement 2d Agency 424 (1958).
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Rules and the types of inducements covered by the Rules.
A. Securities Subject to Disclosure Obligations and
Definition of Payment for Order Flow
1. Securities Subject to Disclosure Obligations
As proposed, the obligations of both Rule 11Ac1-3 and the
amendments to Rule 10b-10 were limited to orders in national
market system securities. The Commission requested comment on
whether both Rules should be extended to Nasdaq Small-Cap and OTC
Bulletin Board Securities. -[16]- Commenters addressing this
issue supported the inclusion of both and, accordingly, the
Commission is expanding Rule 11Ac1-3 and amendments to Rule 10b-
10 to include these securities. As revised, both Rules would
include "any subject security as defined in Section 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 the Act . . . . " -[17]-
The Commission believes that inclusion of these securities
provides customers with the best picture of a broker-dealer's
policies regarding the routing of customer orders and the receipt
of payment for order flow. As discussed in the Proposing
Release, -[18]- the practice of payment for order flow originated
-[16]- See Proposing Release, supra note 1, 58 FR at 52940
n.44 and n.46. Two commenters support the inclusion of
Nasdaq Small-Cap and OTC Bulletin Board securities in
the Commission's proposal. One commenter states that
if the goal of disclosure is to provide customers with
as much information as possible to make an informed
decision regarding where to place their orders, it does
not make sense to limit the disclosure requirement to
national market system securities but rather the
requirement should extend to Nasdaq Small-Cap and OTC
Bulletin Board securities.
Two exchanges support the inclusion of options in the
confirmation disclosure requirements. One exchange suggests
that the Commission consider the ramifications that payment
for order flow may have on the options marketplace,
especially once multiple trading of options is taken into
consideration. See letter from Leopold Korins, Chairman and
Chief Executive Officer, Pacific Stock Exchange, Inc., to
Jonathan G. Katz, Secretary, SEC, dated December 9, 1993.
The Commission, therefore, is soliciting comment in a
parallel action today on whether amendments to Rule 10b-10
and Rule 11Ac1-3 should extend to the options markets. See
Companion Release, supra note 5.
-[17]- The OTC Bulletin Board is currently the only automated
quotation system that has the characteristics set forth
in Section 17B of the Act. See letter from Margaret H.
McFarland, Deputy Secretary, SEC, to Richard Ketchum,
Executive Vice President, National Association of
Securities Dealers, Inc. ("NASD"), dated Dec. 30, 1992.
The revision to Rule 11Ac1-3 is intended to cover
securities included in any other automated quotation
systems at such time as the Commission designates them
under Rule 15g-3(c)(5).
-[18]- See Proposing Release, supra note 1, 58 FR at 52935.
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in the OTC market, and since then has been routinely used as a
competitive tool in that market. Payments for Nasdaq and OTC
Bulletin Board stocks, moreover, are generally greater than for
exchange-listed national market system securities. -[19]-
Accordingly, the Commission believes that the disclosure
protections should be extended to the OTC market.
2. Definition of Payment for Order Flow
As proposed, Rule 10b-10(e)(9) defined payment for order
flow broadly, to include all forms or arrangements compensating
for directing order flow. The Commission received 23 comment
letters addressing the scope of the definition. The majority of
these commenters were supportive of the Commission's efforts and
agreed that non-cash inducements for order flow are economically
equivalent to, and have the same effect as, cash payments for
order flow. Opponents of the proposed definition, which include
most of the exchanges, argued that rebates and fee reductions are
structurally different from other cash payments and should be
excluded from "monetary" payment for order flow. -[20]- The
Commission has considered all the comments, and for the reasons
discussed below, believes that the items enumerated in Rule 10b-
10(e)(9) appropriately include arrangements involving payment for
order flow. -[21]-
Rule 10b-10(e)(9) defines payment for order flow to include
any monetary payment, service, property, or any other benefit
that results in remuneration, compensation or consideration to a
broker or dealer in return for the routing of customer orders.
Broker-dealers should examine order routing arrangements
carefully, with a view toward determining whether the firm has
received some form of remuneration as a result of routing orders
to that market. As noted, payment for order flow includes non-
monetary compensation, such as clearing services or reciprocal
order swapping arrangements. It is the Commission's view that
monetary and non-monetary inducements are alternative methods of
payment to attract order flow and are economically equivalent.
-[22]- As such, non-cash remuneration is as likely to influence
the broker's order routing decision as cash. In addition, as is
the case with monetary payments, the customer is unlikely to be
aware of many of these practices. Thus, the net effect of non-
monetary arrangements is not appreciably different than that of
monetary payment for order flow. Therefore, the Commission
-[19]- See id., 58 FR at 52936 n.16.
-[20]- Several exchanges argue that, unlike cash payments, all
exchange charges and fees are filed with the Commission
pursuant to Rule 19b-4 under the Act and are a matter
of public record. The New York Stock Exchange ("NYSE")
added that unlike exchange fee structures, dealers do
not charge fees to brokers for use of their services;
because there is no "fee" to discount, the NYSE argues
that it is disingenuous to suggest any similarity
between the two practices. See letter from James E.
Buck, Senior Vice President and Secretary, NYSE, to
Jonathan G. Katz, Secretary, SEC, dated December 9,
1993.
-[21]- In the Companion Release, the Commission is soliciting
comment on whether to expand the definition of payment
for order flow.
-[22]- See, e.g., "Inducements for Order Flow," A Report to
the Board of Governors, NASD, July 1991; see also
National Market System Hearings, supra note 11.
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concludes that non-monetary payment for order flow should be
included in the definition and should be subject to the
regulatory treatment set forth in the proposal.
Payment for order flow also includes any credit, rebate, or
discount against execution fees that exceeds the fee charged for
executing the order. -[23]- It is the Commission's view that
although SRO fee schedules are reviewed by the Commission under
Section 19(b) of the Act and appear in the Federal Register, the
connection between these fee arrangements and a member firm's
order routing practices may not be known or apparent to that
firm's customers. Moreover, it is possible for an exchange to
adjust its fee schedule for members routing orders to provide the
economic equivalent of payment for order flow. The existence of
such remuneration to the firm, whether in the form of monetary
payments or other benefits, should be disclosed directly to
customers. -[24]-
B. New Account and Annual Disclosure
The Commission is adopting Rule 11Ac1-3 to require broker-
dealers to provide to customers information regarding their
payment for order flow practices when a new account is opened and
to all customers annually. The Commission is modifying the Rule
to require a description of the broker-dealer's policies for
determining where to route customer orders that are subject to
payment for order flow absent specific instructions from
customers, including a description of the extent to which orders
can be executed at prices superior to the NBBO.
In sum, the revised Rule requires broker-dealers to disclose
whether they receive payment for order flow. If any type of
payment for order flow is received, the broker-dealer must
-[23]- Thus, payment for order flow would include a fee
arrangement in which an exchange charges 50 cents per
order but offers a $2.00 per order credit for agency
orders, which can be used to offset other fees incurred
on that exchange. See e.g., Securities Exchange Act
Release No. 32377 (May 27, 1993), 58 FR 31568
(Approving NYSE practice of offering a rebate on every
small order (100-2099 shares) delivered via SuperDot
and executed by the NYSE specialist). However, payment
for order flow would not include fee arrangements in
which the market's net charge for executing the order,
after any discount, rebate, or credit, is greater than
zero.
-[24]- As initially proposed, "payment for order flow" was
defined as "any compensation received from any broker-
dealer (including market makers), exchange members, or
exchanges to which a broker-dealer routes customers
orders for execution, including: monetary payments,
research, products or services . . . discounts and
rebates, or any other reduction of or credit against
any fee, expense or other financial obligation of the
broker or dealer routing a customer order."
In response to comments, the Commission has clarified that
the definition of payment for order flow includes discounts,
rebates, credits, or other fee arrangements only to the
extent that such discounts exceed the fee charged. In
addition, the Commission has clarified that payment for
order flow received from a registered securities association
is also subject to the disclosure rules. The Companion
Release solicits comment on whether the definition of
payment for order flow should be expanded.
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provide a detailed description of the nature of the compensation
received and, as discussed below, information about the routing
of unspecified orders and whether those orders can be executed at
prices better than the NBBO at the time the order is received.
1. Order Routing and Best Execution
To the extent that market center structures differ
materially in the opportunity for unpriced orders to be executed
at prices that are superior to the NBBO, the receipt of payment
for order flow could be viewed as improperly affecting a dealer's
determination regarding where to route customer orders and the
dealer's ability to satisfy its best execution obligation, if the
dealer does not provide as good an overall opportunity for best
execution as it would without the payment for order flow. -[25]-
In particular, this could happen when dealers decide to route
orders to a market center which does not provide an opportunity
for price improvement, although other factors such as the size of
the order, speed of execution, and the costs and difficulty
associated with achieving best execution in a particular market
may negate this conclusion. -[26]- The Commission noted in the
Proposing Release that broker-dealers are under a duty to seek
the "best execution" of their customer's orders. -[27]- Broker-
-[25]- See Market 2000, supra note 3, Study V at 4.
-[26]- As stated in the Second Report on Bank Securities
Activities,
[While] brokers have not been held by the
Commission, the self-regulatory organizations
or
the courts to an absolute requirement of
achieving
the most favorable price on each
order[,][w]hat
has been required is that the broker
endeavor,
using due diligence, to obtain the best
execution
possible given all the facts and
circumstances.
These factors include, among other things,
the
size of the order, the trading
characteristics of
the security involved, the availability of
accurate information affecting choices as to
the
most favorable market in which execution
might be
sought, the availability of technological
aids to
process such data, the availability of
economic
access to the various market centers and the
costs
and difficulty associated with achieving an
execution in a particular market center.
See Second Report on Bank Securities Activities:
Comparative Regulatory Framework Regarding
Brokerage-Type
Services 97-98, n.233 (Feb. 3, 1977), as reprinted
in H.R.
Rep. No. 145, 95th Cong., 1st Sess 2333 (Comm.
Print 1977).
Furthermore, the Commission has stated that "the
creation of
[other] explicit obligation[s] upon broker-dealers
would in
no way limit a broker's existing duty to seek to
obtain best
execution of his customers' orders." SEC, Status
Report on
the Development of a National Market System,
Securities
Exchange Act Release No. 15671 (Mar. 22, 1979), 44
FR 20360
(April 4, 1979)("Status Report") (citing
Restatement 2d
Agency 424 (1958)).
-[27]- See Proposing Release, supra note 1 at n.24.
As a general matter, the duty of "best execution" refers to
(continued...)
-------------------- BEGINNING OF PAGE #9 -------------------
dealers accepting remuneration from a market center for directing
order flow to that market center are still obligated to fulfill
their duty of best execution to their customers. -[28]- The
Commission understands that most firms that pay for order flow
guarantee, at a minimum, executions at the NBBO. As stated in
the Proposing Release, such so-called quote-derived executions in
many ways are not materially different from automated execution
systems operated by the regional exchanges for years. While
automated execution systems offer fast and assured executions to
customers, orders sent to an exchange for manual handling and
orders sent to an OTC dealer for manual (or in some cases
automated) handling may have a greater opportunity for an
execution between the spread than do orders that are routed to a
quote-based automated execution system. -[29]-
-[27]-(...continued)
the duty of the broker to seek to execute a customer's order
in the best available market. See Section 11A(a)(1)(C)(iv)
of the Act, 15 U.S.C. 78k-l(a)(1)(C)(iv)(1988); Securities
Exchange Act Release No. 26870 (May 26, 1989), 54 FR 23963,
23966 n.51 (June 5, 1989)("Multiple Trading of Standardized
Options Release"). See also Market 2000, supra note 3,
Study V.
In its purest form, best execution can be thought of as
executing a customer's order so that the customer's total
cost or proceeds are the most favorable under the
circumstances. See Market 2000 Concept Release, supra note
3, note 57 and accompanying text.
-[28]- A broker-dealer's duty to seek best execution of
customer orders derives from, among other sources, the
common law agency duty of loyalty, which obligates an
agent to act exclusively in the principal's best
interest. The Commission noted in the Proposing
Release its concern that the availability of payments
in return for order flow commitments may influence the
evaluation by a broker-dealer of the most advantageous
market or market maker to whom to route its customer
order. Indeed, some opponents of the practice of
payment for order flow believe that acceptance and
retention of payments by brokers from market makers
constitute a breach of duty not permitted under agency
common law. See Restatement 2d Agency 388 (1958).
While the Commission is concerned about a broker-
dealer's fiduciary duty to seek to obtain the best
execution for its customer, it believes that bulk order
routing based, in part, on the receipt of payment for
order flow is not, in and of itself, a violation of
those duties. Disclosure of payment for order flow,
moreover, could help inform customers and negate the
concern that customers are unable to evaluate whether
they receive inferior executions due to undisclosed
rebates. See Securities Exchange Act Release No. 19047
(Sept. 14, 1982), 47 FR 41896 (Sept. 21, 1982).
-[29]- See Proposing Release, supra note 1, 58 FR at 52941
n.59. The footnote cites several studies in this
regard: C. Lee, Purchase of Order Flow and Favorable
Executions: An Intermarket Comparison (1991); T.
McInish and R. Wood, Price Discovery, Volume and
Regional/Third Market Trading (Feb. 1992); M. Bloom and
(continued...)
-------------------- BEGINNING OF PAGE #10 -------------------
The Commission traditionally has concluded that a broker-
dealer routing customer orders for automated execution could
satisfy its best execution obligations so long as the broker-
dealer assesses periodically the quality of competing markets to
ensure that its order flow is directed to markets providing the
most advantageous terms for its customers' orders. -[30]-
Nevertheless, the Commission's staff recently has warned against
presuming that guaranteed executions at the best bid or offer
always will satisfy the broker-dealer's best execution duties for
small orders in listed securities. -[31]- For example, as a
general matter, trades in listed securities routed to an exchange
will be exposed to other public orders or interest in the trading
crowd, with the possibility that the order may receive a price
that is better than the existing quotations (so-called "price
improvement"). Most regional exchanges, for example, have
incorporated order exposure features into their small order
routing and execution systems with a view toward offering price
improvement. -[32]-
The Commission believes that the possibility for price
improvement, while not the exclusive factor, bears on the
question of whether a broker-dealer is fulfilling its duty to
seek best execution, especially when payment is received by the
broker-dealer in return for guaranteeing order flow. -[33]-
-[29]-(...continued)
M. Goldstein, Displayed and Effective Spreads by Market
(Dec. 1992).
-[30]- See Status Report, supra note 26. See also Market
2000, supra note 3, Study V at 1 n.8; Multiple Trading
of Standardized Options Release, supra note 27, 54 FR
at 23973 n.127; and Securities Exchange Release Act
Nos. 17583 (Feb. 27, 1981), 46 FR 15713, 15715 n.16
(Mar. 9, 1981); and 15926 (June 15, 1979), 44 FR 36912,
36923 n.118 (June 6, 1979).
-[31]- Market 2000, supra note 3, Study V at 4.
-[32]- Id. This feature by itself, however, rarely provides
an execution between the spread. Most regional
exchanges program their automatic execution systems to
ensure that customer orders receive a price at the NBBO
or better, and the specialist is provided an
opportunity to improve the price. The Philadelphia
Stock Exchange ("Phlx") does not have such a feature in
its automatic execution system, although the Commission
has recommended for years that it be included. See
Market 2000, supra note 3, Study V at 4 n.19; Proposing
Release, supra note 1, 58 FR at 52938 n.28; Market 2000
Concept Release, supra note 3, 57 FR at 32595 n.53;
Securities Exchange Act Release Nos. 27013 (July 7,
1989) 54 FR 30298 n.2 (July 19, 1989); 22750 (Dec. 31,
1985), 51 FR 799, 801 (Jan. 6, 1986); 20350 (Nov. 4,
1983), 48 FR 51722, 71723 n.10 (Nov. 10, 1983); 19858
(June 9, 1983), 48 FR 27872, 27873 (June 17, 1983); and
19372 (Dec. 23, 1982), 47 FR 58287, Technical Appendix,
n.12 (Dec. 30, 1982).
-[33]- Because executions of market orders for listed stocks
in an exchange market include the possibility for a
price between the quotes, the staff has concluded that
the existence of this possibility, even if the price is
(continued...)
-------------------- BEGINNING OF PAGE #11 -------------------
Although it may be impractical for a broker or dealer that
handles a heavy volume of orders to make an individual
determination regarding where to route each order it receives,
the broker or dealer must use due diligence to seek the best
execution possible given all facts and circumstances. The
Commission believes a broker or dealer must assess whether the
order flow in the aggregate, is receiving best execution and that
a broker-dealer must not allow a payment or an inducement for
order flow to interfere with its efforts to obtain best
execution. Accordingly, in light of a broker-dealer's obligation
to assess periodically the quality of the markets to which it
routes packaged order flow absent specific instructions from
customers, the Commission does not believe such a broker-dealer
violates its best execution obligation merely because it receives
payment for order flow.
In this connection, the Commission has taken several steps
recently to expand the opportunity for customer market orders to
be executed at prices better than the NBBO at the time of
receipt, including proposal of a Rule to require limit order
price protection in Nasdaq National Market securities. -[34]-
Nevertheless, considerable differences among market centers exist
today. Accordingly, consistent with these steps to help
customers understand payment for order flow practices, and to
facilitate fair competition among exchange and non-exchange
market centers, the Commission believes that it is appropriate to
require broker-dealers to disclose to customers their policies
regarding where they route unspecified orders that are subject to
payment for order flow. -[35]- This provision requires a
description of the extent to which orders so routed can be
executed at prices superior to the NBBO at the time the order is
received. Dealers should explain, in simple terms, whether the
market center to which they route unspecified orders executes
orders to purchase or sell at the NBBO and whether it provides an
opportunity for execution at prices superior to the NBBO. -[36]-
2. Annual Disclosure
Several commenters opposed annual disclosure because it
would duplicate the account opening disclosure and suggested that
the Commission require additional disclosure only upon a material
change in the firm's policies. The Commission is retaining the
annual disclosure requirement because it believes this will serve
to remind customers that evaluation of a dealer's services
involves more than a comparison of commission rates and to
-[33]-(...continued)
not actually improved, can be a factor in determining
whether best execution has been sought. Market 2000,
supra note 3, Study V.
-[34]- See Securities Exchange Act Release No. 34753 (Sept.
29, 1994), 59 FR 50866 (Oct. 6, 1994).
-[35]- As revised, paragraph (a)(2) of the Rule would require
broker-dealers to provide information concerning the
broker-dealer's policies for determining where to route
customer orders that are subject to payment for order
flow absent specific instructions from customers,
including a description of the extent to which orders
can be executed at prices superior to the NBBO.
-[36]- By the terms of the Rule, this disclosure would be
limited to orders that are subject to payment for order
flow.
-------------------- BEGINNING OF PAGE #12 -------------------
encourage broker-dealers to continue to evaluate the quality of
service they receive from market centers from which they receive
payment for order flow.
3. Quantification of Monetary Payment For Order Flow
Over 20 commenters addressed the proposed requirement that
broker-dealers inform customers annually about the aggregate
amount of monetary compensation received for routing order flow.
The majority oppose the inclusion of any aggregate value
requirement. -[37]- The Commission has determined to solicit
further comment on this issue in the Companion Release because it
believes that aggregate information provides useful information
to customers to evaluate the magnitude of payment for order flow
practices and whether such payments, taken as a whole, might
affect adversely order routing determinations. As discussed in
the Companion Release, the Commission has determined to solicit
further comment on this issue in conjunction with its proposal to
require valuation of all forms of payment for order flow because
disclosure of monetary payment for order flow without similar
disclosures regarding non-monetary payment for order flow and
internalization could mislead investors or foster non-monetary
payments or internalized/affiliate practices.
C. Customer Confirmation Statements
As proposed, amended Rule 10b-10(a)(7)(iii) -[38]- required
customer confirmations to disclose whether any payment for order
-[37]- Several broker-dealers argue that disclosure of
aggregate amounts of monetary order flow would be
misleading to customers. One commenter voiced concerns
that investors who transact business in mutual funds or
options would be misled by disclosure which only
derives from equity order flow. Others believe that
even equity customers are likely to be misled because
payment derives from large numbers of the broker's own
or other customer's orders directed to various
marketplaces which may be unrelated to that particular
customer's business with the broker-dealer. Still
others believe that such disclosure may lead to the
misperception that investors are being disadvantaged.
It should be noted that the same commenters opposing
aggregate disclosure of monetary compensation also oppose
the Commission's proposal regarding confirmation disclosure
of monetary compensation. See infra Section III.C.
(Customer Confirmation Statements). In contrast, some
commenters suggest quantification requirements extend to
non-monetary inducements for order flow and to
internalization.
-[38]- Currently, the Commission's confirmation disclosure
rule, Rule 10b-10 under the Act, requires that
confirmations sent to customers for agency transactions
disclose the "price" of the security purchased or sold
by the customer, as well as the remuneration paid to
the broker-dealer by the customer in the trade. Rule
10b-10 also requires broker-dealers to disclose the
source and amount of any other remuneration received in
connection with a transaction. In most transactions,
however, the Rule permits broker-dealers merely to
state "whether any other remuneration has been or will
be received," and to furnish the source and amount of
such other remuneration on written request.
-------------------- BEGINNING OF PAGE #13 -------------------
flow has been received for a national market system security and
the amount of any monetary payment, discount, rebate or reduction
of fee. More than 30 commenters expressed concern about the
proposed requirement that broker-dealers disclose on customer
order confirmations the amount of any monetary payment, discount,
rebate or reduction of fee received in connection with a
transaction in a national market system security. Most of these
commenters considered this unworkable. -[39]-
In response to commenters' concerns, the Commission has
modified the Rule to require a statement on order confirmations
that payment for order flow is received by the broker or dealer
and that the source and nature of the payment for order flow
received in connection with the particular transaction will be
furnished upon written request of the customer. -[40]- The
Commission has determined to allow broker-dealers to conform the
statement to the firm's practices, for instance, specifically
noting that it limits the receipt of payment for order flow to
market orders only, if applicable. Because the definition of
payment for order flow includes non-monetary forms of payment for
order flow, broker-dealers will be expected to include those
forms of compensation in preparing confirmations and to provide
the nature and source of the compensation upon written request.
The Commission believes that the Rule, as modified, retains
informative disclosures to investors. -[41]- The Commission
recognizes that information on the confirmation may not
communicate all information of interest to investors about
payment for order flow or the quality of order execution. The
-[39]- Several commenters argue that specific confirmation
disclosure is nearly impossible considering that
brokers have a variety of arrangements with firms which
often include conditions, such as requiring a minimum
amount of order flow per month before payments begin;
different rates for low-priced securities; and
graduated payments based on dollar volume per month.
Others argue that it would place an extreme burden on
recipient broker-dealers to determine the amount of
order flow received for each order in time for a
confirmation. Several commenters also argue that
specific disclosure would require broker-dealers to
reprogram computer systems, perform tracking and report
cash payments, and that such expenses are
disproportionately high in relation to the potential
benefits to customers. Some commenters recommend a
generic disclosure statement which would eliminate the
high cost of systems changes, yet still inform the
customer as to the receipt of payment for order flow.
Another concern raised by opponents of the Commission's
proposal is that payment is given for an aggregation of
orders directed to a particular market center and does
not attach to a particular order.
-[40]- In the Companion Release, the Commission solicits
comment on whether broker-dealers should be required to
provide ranges, on confirmations, of monetary and non-
monetary payment for order flow received and
quantification of internalization/affiliate practices
on a per share basis. See Companion Release, supra
note 5.
-[41]- The Commission, however, is proposing in a parallel
action, to require quantification of monetary and non-
monetary compensation and internalization. Id.
-------------------- BEGINNING OF PAGE #14 -------------------
role of the required disclosures on the confirmation is more
limited and is intended to inform customers about the existence
of payment for order flow practices and to confirm that which the
customer, if interested, already should know about the broker's
order handling practices as a result of the new account and
annual disclosure statements.
IV. Alternative Proposals
The Commission also solicited comment in the Proposing
Release on alternative approaches to regulating the practice of
payment for order flow. The Commission invited commenters to
address such alternatives as banning payment for order flow and
requiring the broker-dealers to pass payment for order flow
through to their customers, -[42]- and directing securities
markets to convert quotations to decimal-based pricing from the
current one-eighth fractions. The Commission, however, has
determined that these approaches are not the appropriate
regulatory response at this time.
A. Banning Payment for Order Flow
The Commission believes disclosure is the appropriate
response to the issues raised by payment for order flow. The
Commission does not believe that all payment for order flow
arrangements are against the customer's best interest and must be
banned per se as compromising a broker's duty to seek best
execution of the customer's order. -[43]- For example, it is
unclear what harm lurks in specialists' or market makers' payment
for order flow practices if unpriced orders are subject to a
meaningful opportunity for price improvement, or if other
benefits are provided to the customer due to the dealer's ability
to use the payments. Additionally, the disclosures required by
the new Rule and Rule amendments should mitigate concerns
opponents may have that investors are unaware of a broker-
dealer's order routing practices.
An outright ban at this time, moreover, would represent a
radical change to the industry where the payment of cash or its
-[42]- No commenters fully supported the alternative of
passing payments through to customers. Three
commenters, however, oppose the alternative and argue
that the economic advantages of order flow payments
already benefit customers of retail firms in the form
of lower commission rates. Moreover, some argue
compulsory remission of payments may be
administratively burdensome for brokers and difficult
to enforce due to the difficulty in allocating direct
payments for particular orders.
-[43]- See NASD Rules of Fair Practice, Art. III, 1,
Interpretation of the Board of Governors on Execution
of Retail Transactions in the Over-The-Counter Market;
and Section 11A(a)(1)(D) of the Act, 15 U.S.C. 78k-
1(a)(1)(D) (1988). Broker-dealers also have
obligations under the "shingle theory," which states
that a dealer who engages in business impliedly
represents that he will deal fairly with the public and
in accordance with the standards of the profession.
See SEC v. Great Lake Equities Co., 755 F. Supp. 211
(E.D. Mich. Sept. 4, 1990); and N. Wolfson, R. Phillips
& T. Russo, Regulation of Brokers, Dealers and
Securities Markets 2.10, at 2-51 (1977).
-------------------- BEGINNING OF PAGE #15 -------------------
monetary equivalent has become widespread. -[44]- In addition,
banning payment for order flow has associated workability
problems. -[45]- If the practice of cash payment for order flow
were banned, because it is only one of many forms of inducement
for order flow, the Commission has every reason to believe that
an attendant increase in related "soft" inducements for order
flow or internalization of order flow would follow. -[46]-
Moreover, it would be impractical to attempt to ban solely soft
practices (everything except monetary payment for order flow);
such practices are difficult to monitor and industry participants
would find alternative avenues for accomplishing the same result.
The Commission will continue to monitor developments and will
consider additional regulatory steps if necessary to ensure the
protection of investors.
B. Decimal Pricing
The Commission also solicited comment on adopting a decimal-
based system for the pricing and reporting of all securities for
which transactions are reported. Some commenters believe that
payment for order flow is, in effect, a reduction in the spread
that a market maker charges for executing a pre-determined
package of order flow. Under this view, if the NBBO is 20 bid
and 20 1/4 offered, these commenters view the payment of two
cents a share for order flow as little more than an indication
that, in effect, a market maker is willing to buy at 20.02 and
willing to sell at 20.23. Accordingly, these commenters believe
that if a decimal pricing system were adopted, market makers
could more easily compete by narrowing their displayed quotes,
resulting in reduced incentive to pay for order flow. Others
question whether the availability of decimals would, in fact
eliminate payment for order flow because market makers still only
may want to pay for certain types of orders (e.g., a diverse
group of small market orders) and, as a result, may not lower
their published quotes.
The Commission believes that decimal pricing is the logical
next step for the markets to pursue to improve the transparency
of the markets and provide opportunities for narrower spreads.
-[47]- Indeed, as an interim measure, the Commission's staff
called for the markets to move to pricing in 1/16ths in the near
future. -[48]- In this regard, the Commission understands the
markets have undertaken a study of the costs and benefits of
-[44]- Some commenters favor a complete ban on payment for
order flow; others favor a ban on cash payments only.
-[45]- Opponents of a ban argue that payment for order flow is
not illegal or unethical and that banning payment for
order flow would pose serious workability problems
regarding banning some, but not all, practices.
-[46]- The Commission recognizes that in urging a complete
ban, some commenters are looking to address a potential
conflict of interest that they believe affects a
dealer's ability to meet its fiduciary duties to
customers and provide a level playing field for
exchange and OTC markets in exchange listed stocks.
-[47]- See Market 2000, supra note 3, Study IV at 8-9.
-[48]- In January 1994, the Division recommended the adoption
of a 1/16th of a dollar increment as a transitional
step leading to decimal pricing. See id. at 9.
-------------------- BEGINNING OF PAGE #16 -------------------
changing the current display mechanisms. -[49]- The Commission
looks forward to the prompt completion of the SRO study and the
ultimate implementation of revised pricing procedures. While it
is currently unclear how decimalization would affect payment for
order flow practices, the Commission will monitor the progress of
such endeavors and is prepared to reconsider the Rules adopted
today, and even to rescind them if decimal pricing or other
reforms render payment for order flow obsolete.
V. Implementation Date
The Commission is setting April 3, 1995 as the
implementation date for both the amendments to Rule 10b-10 and
Rule 11Ac1-3. Thus, for orders received or trades effected on or
after April 3, 1995, all customer confirmation statements must
contain the new disclosures required by Rule 10b-10, as modified
today. For all new accounts opened on or after April 3, 1995,
the disclosures required by Rule 11Ac1-3 will be in effect. For
existing accounts, the disclosures required by Rule 11Ac1-3
should be made to customers beginning with the first commercially
reasonable date after April 3, 1995, but in no event, later than
April 3, 1996. For example, if a firm provides annual disclosure
statements in January of each year, the disclosures should be
made beginning with the January 1996 account statement. If the
firm provides quarterly statements, the disclosures should be
made beginning with the July 1995 account statement.
The April 3, 1995 date was selected to provide firms with
four months to make the necessary systems and forms changes to
prepare for the implementation.
VI. Competition Findings
Section 23(a)(2) of the Act -[50]- requires the Commission
in adopting rules under the Act, to consider the anti-competitive
effects of such rules, if any, and to balance any impact against
the regulatory benefits gained in terms of furthering the
purposes of the Act. The Commission believes the proposed Rules
-[49]- On June 22, 1994, the Subcommittee on
Telecommunications and Finance of the House Committee
on Energy and Commerce held a hearing regarding
decimal-based pricing and unlisted trading privileges.
Panelists included: Richard Ketchum, Executive Vice
President and Chief Operating Office, NASD; Edward
Kwalwasser, Executive Vice President for Regulation,
NYSE; Nicholas Giordano, President and Chief Executive
Officer, Phlx; and Brandon Becker, Director, Division
of Market Regulation, SEC. Congressman Markey and the
panelists discussed decimal pricing and moving to
sixteenths as an interim measure. Congressman Markey
asked the self-regulatory organizations ("SROs") to
undertake a joint study, to be completed by January
1995, of the implications of moving to sixteenths (as
well as decimal pricing) and the costs and benefits
associated with the move. All of the SRO panelists
agreed to participate in the study. The Unlisted
Trading Privileges Act of 1994 and Review of the SEC's
Market 2000 Study: Hearings Before the Subcomm. on
Telecommunications and Finance of the House Comm. on
Energy and Commerce, 103d Cong., 2d Sess. (1994).
-[50]- 15 U.S.C. 78w(a)(2).
-------------------- BEGINNING OF PAGE #17 -------------------
will enhance competition among brokers, dealers, and market
centers, consistent with the goals of Sections 11A and 23(a) of
the Act. Several commenters raised concerns that the Rules, as
proposed, would require substantial systems changes and
therefore, would increase the costs of doing business which would
be passed on to customers. The Commission has modified the
portion of proposed Rule 10b-10(a)(7)(iii)(B) requiring
individualized confirmation disclosure of and the amounts of
monetary payment for order flow received. The Rule, as adopted,
may eliminate the need for individualized disclosures and for the
quantification of payment for order flow. The Commission intends
to evaluate these issues further in connection with its Companion
Release soliciting comment on amendments to Rule 10b-10 and Rule
11Ac1-3(a)(2). -[51]- The Commission has considered Rule 11Ac1-
3 and amendments to Rule 10b-10 in light of the standard cited in
Section 23(a)(2) and believes that adoption of the Rules, as
modified, will not impose any burden on competition not necessary
or appropriate in furtherance of the purposes of the Act.
VII. Conclusion
The Commission believes that Rule 11Ac1-3 and amendments to
Rule 10b-10(a)(7)(iii) and 10b-10(e) will provide relevant,
uniform disclosure to customers regarding details of their order
executions. It is the Commission's view that the Rule and Rule
amendments will enhance investor protection and further
competition for retail orders by enabling customers to evaluate
better the markets to which their orders are routed. The
Commission further believes that broker-dealers can make the
necessary systems and forms changes to comply with the Rules, as
amended, with limited resource and systems changes. The
Commission recognizes, however, that the extent and nature of the
modifications depends upon the current capabilities of each firm.
Nevertheless, the Commission recommends that, as necessary,
broker-dealers that need to make systems changes evaluate their
progress as the implementation date approaches and make
adjustments as appropriate to ensure a smooth transition to the
enhanced disclosure of payment for order flow.
VIII. Summary of Final Regulatory Flexibility Analysis
The Commission has prepared a Final Regulatory Flexibility
Analysis ("FRFA") regarding Rules 10b-10 and 11Ac1-3, in
accordance with 5 U.S.C. 604. The FRFA notes the potential costs
of operational and procedural changes that may be necessary to
comply with the Rule. A copy of the FRFA may be obtained by
contacting Jill W. Ostergaard, Attorney, Branch of the National
Market System, Office of Market Supervision, Division of Market
Regulation, Securities and Exchange Commission, 450 Fifth Street,
N.W., Mail Stop 5-1, Washington, D.C. 20549.
List of Subjects
17 CFR Part 240
Brokers and dealers, Registration and regulation,
Securities.
Text of the Amendments
For the reasons set out in the preamble, the Commission
amends Part 240 of Chapter II of Title 17 of the Code of Federal
Regulations to read as follows:
PART 240 -- GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE
ACT OF 1934
-[51]- See Companion Release, supra note 5.
-------------------- BEGINNING OF PAGE #18 -------------------
1. The general authority citation for Part 240 is revised
to read 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. By amending 240.10b-10 by redesignating paragraph
(a)(7)(iii) as paragraph (a)(7)(iv), adding paragraphs
(a)(7)(iii) and (e)(9), and revising paragraph (a)(8) to read as
follows:
240.10b-10 Confirmation of transactions.
(a) * * *
(7) * * *
(iii) For a transaction in any subject security as defined
in 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 the 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 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
(8) If he is acting as principal for his own account.
(i)(A) If he is not a market maker in that security and, if,
after having received an order to buy from such customer, he
purchased the security from another person to offset a
contemporaneous sale to such customer or, after having received
and order to sell from such customer, he sold the security to
another person to offset a contemporaneous purchase from such a
customer, the amount of any mark-up, mark-down, or similar
remuneration received in an equity security; or
(B) In any other case of a transaction in a reported
security, the trade price reported in accordance with an
effective transaction reporting plan, the price to the customer
in the transaction, and the difference, if any, between the
reported trade price and the price to the customer.
(ii) In the case of a transaction in an equity security,
whether he is a market maker in that security (otherwise than by
reason of his acting as a block positioner in that security).
* * * * *
(e) * * *
(9) Payment for order flow shall mean any monetary payment,
service, property, or other benefit that results in remuneration,
compensation, or consideration to a broker or dealer from any
broker or dealer, national securities exchange, registered
securities association, or exchange member in return for the
routing of customer orders by such broker or dealer to any broker
or dealer, national securities exchange, registered securities
association, or exchange member for execution, including but not
limited to: research, clearance, custody, products or services;
reciprocal agreements for the provision of order flow; adjustment
of a broker or dealer's unfavorable trading errors; offers to
participate as underwriter in public offerings; stock loans or
shared interest accrued thereon; discounts, rebates, or any other
reductions of or credits against any fee to, or expense or other
financial obligation of, the broker or dealer routing a customer
order that exceeds that fee, expense or financial obligation.
* * * * *
-------------------- BEGINNING OF PAGE #19 -------------------
3. 240.11Ac1-3 is added to read as follows:
240.11Ac1-3 Customer account statements .
(a) No broker or dealer acting as agent for a customer may
effect any transaction in, induce or attempt to induce the
purchase or sale of, or direct orders for purchase or sale of,
any subject security as defined in 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
the Act (15 U.S.C. 78q-2), unless such broker or dealer informs
such customer, in writing, upon opening a new account and on an
annual basis thereafter, of the following:
(1) The broker's or dealer's policies regarding receipt of
payment for order flow as defined in 240.10b-10(e)(9), from any
broker or dealer, national securities exchange, registered
securities association, or exchange member to which it routes
customers' orders for execution, including a statement as to
whether any payment for order flow is received for routing
customer orders and a detailed description of the nature of the
compensation received; and
(2) The broker's or dealer's policies for determining
where to route customer orders that are the subject of payment
for order flow as defined in 240.10b-10(e)(9) absent specific
instructions from customers, including a description of the
extent to which orders can be executed at prices superior to the
best bid or best offer as defined in 240.11Ac1-2.
(b) Exemptions. The Commission, upon request or upon its
own motion, may exempt by rule or by order, any broker or dealer
or any class of brokers or dealers, security or class of
securities from the requirements of paragraph (a) of this section
with respect to any transaction or class of transactions, either
unconditionally or on specified terms and conditions, if the
Commission determines that such exemption is consistent with the
public interest and the protection of investors.
By the Commission.
Jonathan G. Katz
Secretary
Dated: October 27, 1994