-------------------- BEGINNING OF PAGE #1 -------------------

SECURITIES AND EXCHANGE COMMISSION
(17 CFR Part 240)
(Release No. 34-34903; File No. S7-30-94).
RIN 3235-AG00
Internalized/Affiliate Practices, Payment for Order Flow and
Order Routing Practices.
AGENCY:  Securities and Exchange Commission.

ACTION:  Proposed Rulemaking.

SUMMARY:  The Securities and Exchange Commission is proposing to
revise its rules governing disclosure to customers by broker-
dealers of practices related to the routing of order flow,
including payment for order flow, internalization of order flow,
and affiliate practices.  The proposed amendments are intended to
provide customers with more useful information in evaluating the
quality of executions.
DATES:  Comments should be submitted on or before December 15,
1994.

ADDRESSES:  Interested persons should submit three copies of
their written data, views and opinions to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, and should refer to File No. S7-
30-94.  All submissions will be made available for public
inspection and copying at the Commission's Public Reference Room,
Room 1024, 450 Fifth Street, N.W., Washington D.C. 20549.

FOR FURTHER INFORMATION CONTACT:  Jill W. Ostergaard, 202/942-
3197, Attorney, Office of Market Supervision, Division of Market
Regulation, Securities and Exchange Commission, (Mail Stop 5-1)
450 5th Street, N.W., Washington D.C.  20549.

SUPPLEMENTARY INFORMATION:
I.   Introduction and Background
     The Securities and Exchange Commission ("SEC" or
"Commission") is proposing to amend its rules governing
disclosure of broker-dealer payment for order flow and the
practice of executing orders as principal or routing orders to an
affiliated broker-dealer or exchange specialist
("internalized/affiliate practices"), Rule 10b-10 (17 CFR
240.10b-10) and Rule 11Ac1-3 (17 CFR 240.11Ac1-3) under the
Securities Exchange Act of 1934 ("Act").  As described below and
in a related release, both payment for order flow and
internalized/affiliate practices have been the subject of
extensive debate. -[1]-
     The proposed Rule amendments regarding payment for order
flow also are intended to enhance disclosure to customers of
compensation their broker-dealer may receive from market centers
-[2]-
in return for routing customer orders to them for execution.
-[3]-  The amendments would require broker-dealers receiving
payment for order flow to provide customers additional
information regarding the value of the compensation received. 
The proposed additional disclosures would include, for monetary
payment for order flow, the range of payments received on a per
share basis and on an aggregate basis annually, and for non-
                                                                 

-[1]-     See Securities  Exchange Act Release No. 34902 (October
          27, 1994) ("Adopting 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").

-[3]-     The  Commission  is  also  soliciting  comment  whether
          certain  inducements to  routing order  flow should  be
          included in the definition of payment for order flow.
 
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monetary payment for order flow, an estimate of the range of
payment for order flow on a per share basis and on an aggregate
basis annually.  These disclosures would be required when a
customer opens an account, on an annual basis thereafter, and in
abbreviated fashion on required confirmations.  The proposed
amendments would require similar disclosure with respect to the
value of order flow subject to internalized/affiliate practices.
     The Commission also is proposing that broker-dealers
disclose to their customers information regarding their order
routing practices generally, regardless of whether they receive
payment for order flow or engage in internalized/affiliate
practices.
     The proposed amendments regarding internalized/affiliate
practices are intended to address comments the Commission
received in connection with its consideration of payment for
order flow practices and to elicit further discussion regarding
their implications.  In connection with the Adopting Release, six
commenters indicated that the internalization of order flow by
broker-dealers presents issues similar to those commonly
associated with payment for order flow.  These commenters argued
that the opportunity to capture the spread through
internalized/affiliate practices encourages broker-dealers to
execute orders in house or to send orders to an affiliated
broker-dealer or exchange specialist.  At the most basic level,
under each practice the broker-dealer is influenced with respect
to where it will route customer orders.
     The proposed amendments would require broker-dealers to
inform customers on new account and annual disclosure statements
whether they execute orders as principal or route those orders to
affiliated firms.  These amendments are designed to provide
customers with more information about firms' order routing
decisions, especially in light of changes that might result from
requiring additional disclosure of payment for order flow
practices.
     Finally, the proposed rule amendments would extend
confirmation and account statement disclosure of payment for
order flow to transactions in standardized options.
     In the Adopting Release issued today, the Commission adopted
requirements for additional disclosure of payment for order flow
practices. -[4]-  Commenters are encouraged to review the
Adopting Release in considering the amendments proposed today. 
The discussion that follows describes the proposed amendments and
solicits views regarding those amendments.



II.  Discussion
     A.  Definition and Quantification of Payment for Order Flow
     The proposed amendments would require broker-dealers to
provide more detailed information to customers regarding payment
for order flow.  The proposed amendments would require broker-
dealers receiving monetary payment for order flow to disclose the
range of payments received on a per share basis and the aggregate
amount of payment for order flow received on an annual basis,
and, for non-monetary payment for order flow, to disclose an
estimate of the range of non-monetary payment for order flow
received by the broker-dealer on a per share basis and on an
aggregate basis annually.
     1.   Definition of Payment for Order Flow
     The Commission, in the Adopting Release, adopted a
definition of payment for order flow that includes monetary
                                                                 

-[4]-     See Adopting Release, supra note 1.
 
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payments, services, property or any other benefit offered for
order flow that results in remuneration to the firm in return for
the routing of customer orders for execution.  As discussed
below, the proposed amendments would establish definitions of
monetary and non-monetary payment for order flow, defining
monetary payment for order flow as any monetary payment,
discount, rebate or reduction of fee to the extent that the
payment, discount, rebate or reduction exceeds the fee charged. 
At the same time, however, the Commission is concerned that other
practices used by market centers are designed to induce broker-
dealers to direct order flow, and, therefore, may present issues
similar to those practices currently defined as payment for order
flow in the Adopting Release.  The Commission is soliciting
comment on whether to expand the definition of payment for order
flow.  Specifically, the Commission is considering expanding the
definition to include volume discounts, rebates, reductions or
other inducements for order flow, even if not in excess of the
execution fee charged by a market center. -[5]-  Commenters
should specifically indicate which practices should be included
in the definition to provide the maximum benefit to investors and
encourage equivalent regulatory treatment among competing market
centers consistent with the purposes of the Act.
     The Commission also requests the views of commenters as to
whether a differential in fees between competing market centers
should be considered as the economic equivalent of payment for
order flow for either or both general disclosure and
quantification purposes.  This differential might be viewed as
affecting the order routing determination of a broker-dealer in a
manner similar to payment for order flow.
     Commenters also are asked to address why payment for order
flow should exist in certain instances, but not others, when the
inducement for order flow to be routed to one market center or
another is identical in both instances.  For example, assume that
one market center currently pays $.02 per share for order flow,
while a competing market center charges a fee of $.05 per share
to handle customer orders, resulting in an overall differential
of $.07 per share.  Under the current definition, the first
market center would be deemed to be paying for order flow,
quantified as $.02 per share.  Why should payment for order flow
be deemed to no longer exist where, as a result of a $.02 per
share increase in costs uniformly incurred by all market centers,
the first market center simply ceased paying for order flow in
favor of handling customer orders without charge, while its
competitor proportionately increased the fees charged for
handling customer orders to $.07 per share?  In this instance,
the first market center maintains the identical differential in
terms of the inducement to broker-dealers to direct order flow to
the first market center, as opposed to the second.
     In a related manner, commenters are requested to indicate
whether the proposed quantification of payment for order flow
(discussed more fully in the next Section) accurately reflects
the inducement to a broker-dealer to route orders to a particular
market center.  For instance, in the example noted above, is the
amount of the inducement that should be disclosed in connection
with payment for order flow paid by the first market center $.02
per share, as would be the case under the current definition of
payment for order flow in Rule 11Ac1-3, or does the $.07 per

                                                                 

-[5]-     Some  commenters   have  suggested  that  there  is  no
          distinction between  cash  payment for  order flow  and
          these inducements.   See "Inducements for  Order Flow,"
          A Report to the Board of Governors, NASD, July 1991.
 
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share differential more accurately reflect the level of
inducement for order flow?

     2.  Quantification of Payment for Order Flow
     The proposed amendments would establish definitions of
"monetary payment for order flow" and "non-monetary payment for
order flow."  The term monetary payment for order flow would be
defined in Section 10b-10(e)(10) to mean "any monetary payment,
discount, rebate or reduction of fee to the extent that the
payment, discount, rebate or reduction exceeds the fee charged." 
The term non-monetary payment for order flow would be defined in
Section 10b-10(e)(11) to mean "any payment for order flow
received other than monetary payment for order flow."
     The Adopting Release, while requiring additional disclosure
of payment for order flow practices, does not require disclosure
of the amount of any payment for order flow.  Certain of the
proposed amendments to Rule 11Ac1-3 would focus on this
disclosure.  For monetary payment for order flow, the broker-
dealer would be required by Rule 11Ac1-3(a)(3) and (4) to
disclose the aggregate amount of monetary payment for order flow
received annually, and the range of monetary payment for order
flow received on a per share basis.  The proposed amendments to
Rule 11Ac1-3(a)(5) and (6) would require broker-dealers to
disclose to customers at account opening and annually thereafter,
an estimate of the aggregate value of non-monetary payment for
order flow received by the broker-dealer in return for directing
order flow on an annual basis, and an estimate of the range of
non-monetary payment for order flow received on a per share
basis.
     The proposal calls for an estimate of non-monetary payment
for order flow, recognizing that precision may not be possible.
To the extent that a broker-dealer finds it difficult to estimate
the per share value of non-monetary payment for order flow, the
Commission would envision permitting the broker-dealer to assume
the value of the non-monetary compensation was equal to the cash
per share payment for order flow received from the same source,
or, if none, similar sources.  The assumption would be that a
broker-dealer, in choosing the form of payment for order flow,
would demand a value that is commensurate with the amount of cash
that could be received from the same or competing market maker or
specialist.  Commenters are requested to identify alternative
methods by which firms might arrive at an estimate of the value
of non-monetary payment for order flow. -[6]-
     The proposed rule would require an estimate of the range of
non-monetary payment for order flow received by the broker-
dealer expressed on a per share basis.  To comply with this
requirement, broker-dealers would be expected to use the estimate
required by Rule 11Ac1-3(a)(5) in calculating the range of values
to be disclosed.  The proposed rule would recognize expressly
that the calculation of values represents an estimate. -[7]-
                                                                 

-[6]-     Commenters are also requested to indicate the extent to
          which valuations may vary depending on the form of non-
          monetary  compensation or  other  factors, and  whether
          this would pose problems  for estimating and disclosing
          the valuations.

-[7]-     One commenter  believes that  value  estimates of  non-
          monetary compensation  may be  based on  fair value  as
          determined  in  good  faith by  the  management  of the
          broker-dealer.    See  letter  from  Alan B.  Levenson,
          Fulbright & Jaworski  L.L.P. and Irving M.  Pollack (on
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #5 -------------------

     The Commission also is proposing to require broker-dealers
who receive payment for routing orders to include information on
the confirmation.  Proposed Rule 10b-10(a)(7)(B) would require,
for any monetary payment for order flow received, confirmation
disclosure of the range of payments received on a per share
basis.  Proposed Rule 10b-10(a)(7)(iii)(C) would require, for any
non-monetary payment for order flow received, an estimate by the
broker-dealer of the range in value of non-monetary compensation
on a per share basis.  Because it may not be possible to identify
immediately after execution which orders are subject to payment
for order flow arrangements or the pro rata value of a specific
order, the Commission is proposing to require disclosure of an
estimate of the range in value of compensation that may have been
received, stated on a per share basis.  Proposed Rule 10b-
10(a)(7)(iii)(B) and (C) also would require, for any non-monetary
payment for order flow received, a statement that the nature and
source of such compensation will be furnished upon written
request of the customer.
     In crafting the proposed amendments, the Commission is
mindful of the concern that requiring quantification of monetary
but not non-monetary payment for order flow could result in
broker-dealers moving toward potentially undisclosed compensatory
practices, such as non-monetary payment for order flow. -[8]- 
Thus, it has sought to require disclosure of non-monetary payment
for order flow similar to the disclosure requirements established
for monetary payment for order flow.  This is intended to provide
customers with equivalent information to evaluate a broker-
dealer's order routing arrangements, and to remove any regulatory
disparity between monetary and non-monetary payments.
     The Commission invites commenters to address whether the
proposed amendments would accomplish these goals, and whether
there are other ways to accomplish these goals.  The Commission
specifically requests comment on the ability of broker-dealers to
determine whether a non-monetary payment is in return for order
flow, and their ability to estimate the value of the various
forms of non-monetary payments.
     B.  Internalized/Affiliate Practices
     Rule 11Ac1-3, as adopted, requires broker-dealers who
receive payment for order flow to disclose their policies for
determining where to route orders that are subject to payment for
order flow absent specific instructions from customers.  That
Rule would not expressly require broker-dealers to provide
information about their order routing policies if instead of
receiving payment for order flow in return for routing orders,
they simply executed the orders for their own account. -[9]-
                                                                 

-[7]-(...continued)
          behalf of Herzog, Heine, Geduld,  Inc.), to Jonathan G.
          Katz, Secretary, SEC, dated December 9, 1993.

-[8]-     Some commenters argue  that treating monetary  and non-
          monetary payment for order flow  differently creates an
          incentive  for  dealers  to  restructure  cash  payment
          arrangements into payments in kind.



-[9]-     In recent years, multi-service broker-dealers, clearing
          firms, and others have acquired interests in specialist
          units,  particularly  on  regional exchanges,  although
          several specialists  on  the New  York  Stock  Exchange
          ("NYSE")  and  American  Stock  Exchange  ("Amex")  are
                                                   (continued...)
 
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     The Commission is concerned that internalized/affiliate
practices may raise questions similar to payment for order flow
practices regarding the obligations of brokers to their
customers, such as whether firms that internalize order flow are
providing best execution of customer orders. -[10]-  In proposing
Rule 11Ac1-3 in October 1993, the Commission invited comment on
the implications of these practices and whether additional
disclosure would be desirable. -[11]-  Seven commenters addressed
internalization/affiliate practices; six favored a regulatory
response -[12]- and one opposed it. -[13]-

                                                                 

-[9]-(...continued)
          affiliated with upstairs firms.  These firms then route
          small customer orders for execution to their affiliated
          specialist.    See   Division  of  Market   Regulation,
          Securities  and Exchange  Commission,  Market 2000:  An
          Examination of Current Equity Market Developments (Jan.
          1994) ("Market 2000"), Study II at 9 and Exhibit 29.

     The Commission recently discussed the potential implications
     of internalization for the structure  of the national market
     system  in  the   context  of  proposals  by   two  national
     securities  exchanges  to  establish or  extend  marketplace
     programs  that  might facilitate  internalization practices.
     See  Securities  Exchange Act  Release  Nos. 34078  (May 18,
     1994), 59 FR  27082 (May 25, 1994)  (File No. SR-BSE-93-12);
     34493 (August 5, 1994), 59 FR  41531 (August 12, 1994) (File
     No.  SR-CSE-94-06).   Internalized/affiliate  practices also
     were discussed in Congressional hearings on market structure
     a few months  ago and,  earlier this year,  the Division  of
     Market Regulation discussed  this topic  in its Market  2000
     Report.   See  Market 2000, Study  II at  9 and  Exhibit 29;
     Oversight Hearing on the Structure of the Marketplace with a
     Focus  on the  Market 2000  Report and the  Unlisted Trading
     Privileges   Act   of   1994    Before   the   Subcomm.   on
     Telecommunications and Finance of the  House Comm. on Energy
     and Commerce, 103d Cong., 2d Sess. (1994).

-[10]-    An  extensive  discussion   of  the  "best   execution"
          obligation appears in  the Adopting Release as  well as
          the release proposing  Rule 11Ac1-3  for comment.   See
          Adopting  Release,   supra  note  1  at   nn.26-36  and
          accompanying text;  Securities Exchange Act Release No.
          33026  (October  6,  1993)  58  FR  52934,  52937-52938
          (October 13, 1993)("October 1993 Proposing Release").

-[11]-    See Id. at n.38.

-[12]-    Letters  to Jonathan  G.  Katz,  Secretary, SEC,  from:
          Jules  L. Winters,  Chief  Operating Officer,  American
          Stock Exchange ("Amex"), dated December 21, 1993 ("Amex
          letter");  Robert F.  Price,  Managing Director,  Alex.
          Brown & Sons, Inc., dated  December 23, 1993; George A.
          Brown, Brown & Company, dated December 2, 1993; John N.
          Tognino, Executive Vice President, Capital Markets  and
          Trading, Charles Schwab  & Co. Inc., dated  December 8,
          1993; Chris A. Hynes, President, State Street Brokerage
          Services, Inc., dated  December 1, 1993 ("State  Street
          letter");  and Thomas  W. Clegg,  Sr.,  Vice President,
          Wheat First Securities, Inc., dated November 30, 1993.

                                                   (continued...)
 
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     The Commission is proposing to amend Rule 11Ac1-3 to require
broker-dealers who choose to internalize or route orders to
affiliated organizations to provide information about this policy
parallel to the information that Rule 11Ac1-3 requires them to
provide concerning the routing of orders in return for payment
for order flow.  As defined in proposed Rule 10b-10(e)(12),
internalized/affiliate order routing practices shall mean the
execution of an order by a broker-dealer as principal, or the
routing of an order by the broker-dealer to an affiliated broker-
dealer or exchange member.  Specifically, the amendment to Rule
11Ac1-3(a)(2) would require firms to disclose their policies for
determining where to route customers' orders, absent specific
instructions from customers, including whether orders are
executed as principal, orders are routed to an affiliated broker-
dealer, or to an unaffiliated broker-dealer or market center,
including a description of the extent to which orders can be
executed at prices superior to the NBBO.
     The Commission also is proposing to extend the confirmation
and account statement valuation requirements to
internalized/affiliate order flow practices.  The Commission
requests comment on this aspect of the proposed rule and the
ability of broker-dealers to estimate the value of
internalized/affiliate order flow.  The Commission realizes that,
as in the case of non-monetary payment for order flow, precision
in this area may not be possible.  Therefore, the Commission
seeks the views of commenters as to whether the value of
internalized order flow may be reasonably approximated by
reference to the monetary amount per share that a broker-dealer
could have received for such order flow from a competing market
center, or by other methods, such as by measuring the difference
between the spread received by a broker-dealer engaging in
internalized/affiliate practices and the amount that the broker-
dealer could have received for the order flow from another market
center. -[14]-

                                                                 

-[12]-(...continued)
     The Amex stated that internalization impedes price discovery
     and   makes  best   execution  less   likely,   and  because
     internalized order flow provides the executing  market maker
     with a dealer  spread on every internalized  trade, there is
     little incentive for the dealer to narrow the quoted spread.
     See Amex letter.
     One  brokerage  firm  argued that  the  failure  to regulate
     internalization  creates a  competitive advantage  for large
     integrated firms.  See State Street letter.

-[13]-    This commenter  noted that in an  exchange environment,
          "the  continuous  affirmative  obligations  imposed  on
          exchange  specialists  and  the   auction-type  trading
          process  inherent  in trading  on  exchanges limit  the
          extent to which  internalization can be  accomplished."
          See  letter  from  John I.  Fitzgerald,  Executive Vice
          President, Legal  Affairs and Trading  Services, Boston
          Stock Exchange,  Inc., to Jonathan G.  Katz, Secretary,
          SEC, dated December 10, 1993.

-[14]-    The Commission is concerned that to the extent that the
          value of monetary  and non-monetary  payment for  order
          flow are quantified but the value of  orders subject to
          internalized/affiliate  practices   are  not,   broker-
          dealers  may  be  encouraged to  engage  in  the latter
          practices to a greater degree.
 
-------------------- BEGINNING OF PAGE #8 -------------------

     The Commission invites commenters to address whether the
proposed amendment would provide customers with meaningful
information and would further the goals of Section 11A of the
Act.  To the extent that they believe payment for order flow and
internalized/affiliate practices should be treated differently
for regulatory purposes, commenters are requested to indicate why
concerns with respect to internalization are less compelling than
those frequently associated with payment for order flow
practices.  Similarly, the Commission recognizes that the unequal
regulatory treatment of internalized order flow may result in an
increase in the amount of customer orders that are executed
directly by a broker-dealer or its affiliates.
     C.   Order Routing Disclosure
     As proposed, Rule 11Ac1-3(a)(2) would require all broker-
dealers to disclose their policies for determining where to route
customer orders absent specific instructions from the customer,
as well as a description of the extent to which orders may
receive price improvement.  If adopted, this disclosure currently
required under Rule 11Ac1-2 would be required for all orders,
regardless of whether the broker-dealer received payment for
order flow or engaged in internalized/affiliate order routing
practices.
     The Commission believes that the proposed disclosure of
order routing practices is consistent with its goal of providing
customers with information to enhance their ability to evaluate
the quality of execution received, and to make informed decisions
with respect to the selection of broker-dealers.  Under Rule 10b-
10 of the Act, the Commission currently requires broker-dealers
to disclose their capacity as agent or principal with respect to
customer transactions, the agency commission received in
connection with a particular transaction, and the source and
amount of any additional remuneration to be received in
connection with a transaction, among other matters. -[15]-  As a
result of these disclosures, investors have a better
understanding of commissions and other costs associated with the
execution of a transaction.  The Commission believes that
proposed Rule 11Ac1-3(a)(2) will further facilitate the ability
of investors to understand order routing possibilities and the
decisions made by broker-dealers in this regard.  The Commission
believes that such information would be of significant benefit to
investors.
     For example, a broker-dealer's decision regarding the
routing of orders involving securities listed for trading on
national securities exchanges raises the issue of price
improvement.  Orders in such securities that are routed to
certain exchange facilities typically will receive an opportunity
for price improvement, -[16]- while similar orders routed to
other market centers -- and, currently, generally with respect to
all non-listed securities -- may forgo this possibility.
     In addition to enhancing the ability of customers to
evaluate the costs and benefits of a broker-dealer's order
routing determinations, the Commission believes that the proposed
amendment to Rule 11Ac1-3(a)(2) will help obviate some of the
difficulty in identifying those practices that involve conflicts
between the interests of broker-dealers and their customers.  In
light of the complexity and the perceived economic similarity
between payment for order flow and other market practices
designed to induce or influence order flow, or that present the
same concerns -- such as internalization practices -- the
                                                                 

-[15]-    17 C.F.R. 240.10b-10.

-[16]-    But see Adopting Release, supra note 1, at n.33.
 
-------------------- BEGINNING OF PAGE #9 -------------------

Commission believes that the requirement that all broker-dealers
disclose their order routing practices will help facilitate equal
regulation, reduce investor confusion, and further empower
investors to make informed decisions in their own best interests.
Broker-dealers making disclosure under the proposed rule are
encouraged to explain how their order routing determinations are
in the overall best interests of their customers.  
     Finally, the Commission also solicits the views of
commenters regarding whether the disclosure of broker and dealer
order routing policies should be set forth in a standardized
format on the confirmation involving, for example, general
categories of order routing practices such as
internalized/affiliate order flow, order flow subject to payment
for order flow, and order flow routed to unaffiliated market
centers, thereby facilitating customer understanding and ease
of comprehension.
     D.   Expanding the Scope of Covered Securities to Include
          Standardized Options  
     Rule 11Ac1-3 does not apply to exchange-traded options. 
Although the October 1993 Proposing Release did not request
comment on whether payment for order flow disclosures should be
extended to these securities, two exchanges expressed support for
such a change, but otherwise no comments were received on this
subject. -[17]-  In light of the favorable, albeit limited
comments, the Commission proposes to amend Rules 11Ac1-3 and 10b-
10 to include standardized options.  The Commission particularly
invites comment on whether the disclosure requirements would
result in unique problems for firms effecting transactions in
options.



III.  Request for Comment
     The Commission invites comment on all the issues raised in
this release including expanding the definition of payment for
order flow, the proposed amendments to Rule 10b-10, the
amendments to Rule 11Ac1-3 regarding disclosure of the value of
payment for order flow and internalization/affiliate practices,
inclusion of standardized options, and other approaches that
address internalization/affiliate practices and payment for order
flow, including a requirement that broker-dealers describe their
order routing practices for all orders.
     The Commission also requests commenters to address the
feasibility of adopting the proposed amendments to become
effective on April 3, 1995, the date newly adopted Rule 11Ac1-3
and amendments to Rule 10b-10 are to take effect.
     In addition to the specific requests for comment set forth
above, the Commission requests comment on whether the proposed
rule amendments, if adopted, would have an adverse effect on
competition or would impose a burden on competition that is
neither necessary nor appropriate in furthering the purposes of
the Exchange Act.  Comments on the inquiry will be considered by
the Commission in complying with its responsibilities under
Section 23(a)(2) of the Exchange Act.
                                                                 

-[17]-    One exchange suggested 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.
 
-------------------- BEGINNING OF PAGE #10 -------------------


IV.  Initial Regulatory Flexibility Analysis
     The Commission has prepared an Initial Regulatory
Flexibility Analysis ("IRFA") in accordance with 5 U.S.C. sec.
603 regarding the proposed rules.  The following summarizes the
conclusions of the IRFA.
     The IRFA uses certain definitions of "small entities"
adopted by the Commission for purposes of the Regulatory
Flexibility Act.  The Analysis notes that the proposed rule
amendments would require at the time an account is opened and on
an annual basis thereafter, broker-dealers to disclose their
policies for routing customer orders in exchange listed
securities, provide the range of monetary payment for order flow
received on a per share basis on the confirmation, the aggregate
value of monetary payment for order flow, an estimate of the
aggregate value of non-monetary payment for order flow and
internalized/affiliate orders, and an estimate of the range of
non-monetary payment for order flow and internalized/affiliate
orders received by the broker-dealer on a per share basis on the
confirmation.  The proposals could necessitate changes to broker-
dealer confirmation systems that generally do not provide that
specific information now.  Broker-dealers would need to keep
records of payment for order flow to fulfill the disclosure
requirements of the proposed rule amendments.  A copy of the
Initial Regulatory Flexibility Analysis may be obtained by
contacting Jill W. Ostergaard, Attorney, Office of Market
Supervision, Division of Market Regulation, Securities and
Exchange Commission, Washington, DC  20549, 202/942-3197.


V.   Text of the Amendments
List of Subjects in 17 CFR Part 240
     Brokers; Reporting and recordkeeping requirements;
Securities
     For the reasons set out in the preamble, the Commission
proposes to amend 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
     1.  The authority citation for Part 240 continues to read in
part as follows:
     Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29,
80a-37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
                          *  *  *  *  *
     2. By amending  240.10b-10 by revising paragraph
(a)(7)(iii), and adding paragraphs (e)(10), (e)(11), and (e)(12)
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, 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), or a standardized option as defined in   240.9b-1:
     (A)  A statement whether payment for order flow is received
by the broker or dealer for transactions in such securities;
     (B)  For monetary payment for order flow received, the range
of payments received for such securities on a per share basis and
a statement that the source and amount received in connection
with the particular transaction will be furnished upon written
request of the customer;
 
-------------------- BEGINNING OF PAGE #11 -------------------

     (C) For non-monetary payment for order flow received, an
estimate of the range of non-monetary payment for order flow
received by the broker or dealer on a per share basis and a
statement that the nature and source of such compensation will be
furnished upon written request of the customer; and
     (D) A statement whether transactions in such securities are
subject to internalized/affiliate order routing practices and an
estimate of the range in value of such order flow on a per share
basis, and that additional information will be furnished upon
written request of the customer; and
                            * * * * *
     (e)  * * *
     (10) Monetary payment for order flow shall mean any monetary
payment, discount, rebate or reduction of fee to the extent that
the payment, discount, rebate or reduction exceeds the fee
charged.
     (11) Non-monetary payment for order flow shall mean any
payment for order flow received other than monetary payment for
order flow.
     (12) Internalized/affiliate order routing practices shall
mean the execution of an order by the broker or dealer as
principal, or the routing of an order by the broker or dealer to
an affiliated broker, dealer, or exchange member.
                            * * * * *
     3. By amending  240.11Ac1-3 by revising the introductory
text of paragraph (a), paragraph (a)(2) and adding paragraphs
(a)(3) through (a)(8) to read as follows:
  240.11Ac1-3 Customer account statements.
     (a) No broker 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, 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), or a standardized option as defined in   240.9b-
1, 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) * * *
     (2)  The broker's or dealer's policies for determining where
to route customers' orders, absent specific instructions from
customers, including:
     (i) A statement whether the broker or dealer executes orders
as principal, routes orders to an affiliated broker, dealer, or
exchange member, or to another broker, dealer, exchange member,
or an exchange; and
     (ii) A description of the extent to which orders in such
securities can be executed at prices superior to the best bid or
offer as defined in  240.11Ac1-2(a)(15);
     (3)  The aggregate amount of monetary payment for order flow
as defined in   240.10b-10(e)(10) received by the broker or
dealer in return for directing order flow on an annual basis;
     (4)  The range of monetary payment for order flow received
by the broker or dealer on a per share basis;
     (5) An estimate of the aggregate value of non-monetary
payment for order flow, as defined in  240.10b-10(e)(11),
received by the broker or dealer in return for directing order
flow on an annual basis; 
     (6) An estimate of the range of non-monetary payment for
order flow, as defined in  240.10b-10(e)(11), received by the
broker or dealer on a per share basis;
 
-------------------- BEGINNING OF PAGE #12 -------------------



     (7) An estimate of the aggregate value of the order flow of
internalized/affiliate order routing practices, as defined in  
240.10b-10(e)(12), on an annual basis; and 
     (8) An estimate of the range in value of the order flow of
internalized/affiliate order routing practices, as defined in  
240.10b-10(e)(12) on a per share basis.
                            * * * * *
By the Commission.


                                   Jonathan G. Katz
                                   Secretary

Dated:  October 27, 1994