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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
Release No. 34-34962; File No. S7-6-94
RIN: 3235-AF84
Confirmation of Transactions
AGENCY: Securities and Exchange Commission
ACTION: Final Rule
SUMMARY: The Commission is adopting amendments to Rule 10b-10
under the Securities Exchange Act of 1934 that will require
brokers and dealers to provide customers immediate written
notification of information relevant to their securities
transactions. Consistent with the Commission's investor
protection mandate and in keeping with innovations in securities
products and markets, the amendments will require brokers and
dealers to provide information concerning customer transaction
costs in specified Nasdaq and exchange-listed securities, the
status of certain unrated debt securities, the status of certain
non-SIPC member broker-dealers, and the availability of
information regarding asset-backed securities.
EFFECTIVE DATE: April 3, 1995
FOR FURTHER INFORMATION CONTACT: Catherine McGuire, Chief
Counsel, C. Dirk Peterson, Senior Counsel, or Terry R. Young,
Attorney (202/942-0073), Division of Market Regulation,
Securities and Exchange Commission, 450 Fifth Street, N.W., Mail
Stop 7-10, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION:
I. INTRODUCTION AND SUMMARY
A. PRICE TRANSPARENCY
During the past year, the Commission has initiated efforts
to further improve the efficiency of, and to protect investors
in, the municipal securities and other debt markets. In
September 1993, the Commission's Division of Market Regulation
published the Staff Report on the Municipal Securities Market
("Staff Report"),-[1]- which contained several recommendations to
improve the municipal securities market. The Staff Report
recommended, among other things, riskless principal mark-up
disclosure as a means of providing greater information to
investors purchasing municipal securities.-[2]- The Staff Report
noted that, unlike the equity markets where mark-ups and mark-
downs-[3]- are disclosed to investors in non-market maker
riskless principal transactions and principal transactions in
"reported securities,"-[4]- mark-ups are not disclosed in any
-[1]- Staff Report on the Municipal Securities Market
(September 1993).
-[2]- Staff Report, at 16 and 18.
-[3]- For purposes of this release, references to mark-ups
also will apply to mark-downs or commission equivalents.
-[4]- See infra note 71 for a discussion of "reported
securities."
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principal transaction in municipal securities.-[5]- Thus,
investors of municipal securities are constrained in their
ability to compare transaction costs among broker-dealers and
across markets. The Staff Report identified this ability as one
of the benefits of mark-up disclosure.-[6]-
In addition to enhanced confirmation disclosure, the Staff
Report discussed the overall benefits of price transparency and
the need for greater transparency in the municipal securities
market.-[7]- Notably, price transparency enhances market
liquidity and depth, and fosters investor confidence,-[8]- while
a lack of price information impairs market pricing mechanisms,
weakens competition, and prevents investors from monitoring the
quality of their executions.-[9]-
To address some of the recommendations contained in the
Staff Report, on March 9, 1994, the Commission published for
comment proposed Rule 15c2-13 under the Securities Exchange Act
of 1934 ("Exchange Act")-[10]- to require disclosure of mark-ups
in riskless principal transactions in municipal securities.
Because the same benefits of mark-up disclosure apply to other
debt transactions, the Commission proposed amendments to Rule
10b-10 ("Rule") under the Exchange Act that would require
riskless principal mark-up disclosure for debt securities other
than municipal securities.-[11]-
Since the Proposing Release was published for comment on
March 9, 1994, municipal market participants have proposed
significant new ways of making pricing information more widely
available to investors. The Municipal Securities Rulemaking
Board ("MSRB") has taken the first step toward a system that will
make publicly available price information for municipal
securities transactions on a next day basis. Recently, the MSRB
stated that its "ultimate goal for the [transparency] program is
to collect and make available transaction information in a
-[5]- Staff Report, at 15-16.
-[6]- Id. at 16.
-[7]- Staff Report, at 20 and 36.
-[8]- Testimony of Arthur Levitt, Chairman, U.S. Securities
and Exchange Commission, Concerning International Markets and
Individuals Before the Committee on Banking, Housing, and Urban
Affairs, U.S. Senate, September 28, 1994.
-[9]- See Brandon Becker, Director, Division of Market
Regulation, Address at 19th International Organization of
Securities Commissions Annual Conference (1994).
-[10]- Securities Exchange Act Release No. 33743 (March 9,
1994), 59 FR 12767 ("Proposing Release").
-[11]- The Commission previously proposed disclosure
requirements of mark-ups in riskless principal transactions on
three other occasions. See Securities Exchange Act Release No.
15220 (Oct. 6, 1978), 43 FR 47538 (proposing mark-up disclosure
for riskless principal transactions in municipal securities);
Securities Exchange Act Release No. 13661 (June 23, 1977), 42 FR
33348 (proposing mark-up disclosure by non-market makers in
riskless principal equity and debt securities, but not municipal
securities); and Securities Exchange Act Release No. 12806 (Sept.
16, 1976), 41 FR 41432 (proposing mark-up disclosure by non-
market makers in riskless principal transactions involving equity
and debt securities).
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comprehensive and contemporaneous manner (footnote omitted) . . .
[and] wishe[d] to reiterate to the Commission its commitment to
these goals."-[12]- The Public Securities Association ("PSA")
also has proposed a system to publicize municipal securities
price information. These proposals will create the
infrastructure necessary to enhance transparency in the market,
and when fully implemented, will provide last sale reporting for
virtually all municipal securities transactions.
The Commission is encouraged by these developments, and
after careful consideration, has determined to defer the riskless
principal mark-up proposal for six months-[13]- in anticipation
of meaningful progress by the industry toward enhanced price
transparency in the municipal securities market. The riskless
principal mark-up proposals would provide better information only
to a certain segment of transactions in the debt markets. The
industry's efforts to improve transparency, on the other hand,
ultimately will result in enhanced price disclosure for all
transactions. Moreover, better dissemination of price
information will benefit investors by providing them with useful
information at the time they are making their investment
decision, rather than after-the-fact when the confirmation is
received. If, at the end of the six-month period, industry
initiatives to improve price transparency have not progressed to
the Commission's satisfaction, however, the Commission may
reconsider the riskless principal mark-up proposal in light of
existing alternatives.
B. OTHER DISCLOSURES
In addition to the riskless principal mark-up proposals, the
Commission proposed several other amendments designed to improve
confirmation disclosure so that customers can better evaluate
their securities transactions. Specifically, the Commission
proposed amendments to Rule 10b-10 that would require broker-
dealers to disclose (1) mark-ups in connection with transactions
in certain Nasdaq and regional exchange-listed securities; (2) if
they are not members of the Securities Investor Protection
Corporation ("SIPC"); (3) information relevant to certain types
of collateralized debt instruments; and (4) if a debt security
has not been rated by a nationally recognized statistical rating
organization ("NRSRO"). Proposed Rule 15c2-13 contained a
similar provision requiring broker-dealers to disclose the
unrated status of a municipal security.
The Commission also requested comment on the broader issue
of whether the shortened settlement period of three days ("T+3
Settlement") will have an effect on the future utility of the
confirmation and whether some information currently required in
-[12]- Letter from Robert H. Drysdale, Chairman, MSRB, to
Arthur Levitt, Chairman, SEC (Nov. 3, 1994), at pp. 1-2.
Available in Public Reference File No. S7-6-94.
-[13]- Recently, the MSRB set forth a tentative schedule for
the completion of each of the four phases of its proposal: phase
one (inter-dealer transactions, January 1, 1995); phase two
(addition of time of trade and institutional customer
transactions, December 1995); phase three (addition of retail
customer transactions, November 1996); and phase four (more
contemporaneous trade reporting, April 1997). See Letter from
Robert H. Drysdale, Chairman, MSRB, to Arthur Levitt, Chairman,
SEC, (Nov. 3, 1994), at pp. 3-7. Available in Public Reference
File No. S7-6-94.
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the confirmation could be shifted to an account statement.-[14]-
In addition, the Commission proposed adding a preliminary
statement to Rule 10b-10 designed to clarify that the Rule is not
intended as a safe harbor from the general antifraud provisions
of the federal securities laws.-[15]-
In response to the request for comment, the Commission
received 344 comment letters, the majority of which addressed the
mark-up disclosure proposals for riskless principal transactions.
Commenters included regional and national broker-dealers,
industry associations, financial institutions, law firms,
insurance companies, and individual investors.-[16]- The
comments presented a range of views with respect to the proposals
and the effects that the proposed disclosure requirements may
have on broker-dealers, investors, and markets.
After a review of the comments, the Commission is adopting
the proposed amendments to Rule 10b-10 that require disclosure if
a debt security is not rated by an NRSRO, with a modification to
exclude all government securities from the disclosure
requirement; mark-up disclosure in connection with transactions
in certain Nasdaq and regional exchange-listed securities;
disclosure if a broker-dealer is not a member of SIPC, except for
certain transactions in investment company shares by non-SIPC
member firms that do not handle customer funds or securities; and
disclosure with respect to the availability of information with
respect to transactions in collateralized debt securities. The
Commission also is adopting the preliminary note to Rule 10b-10.
To allow firms the appropriate time to adapt their systems to
accommodate these disclosure requirements, the proposals will
become effective April 3, 1995.
In addition, that portion of Rule 15c2-13 that would require
disclosure if a municipal security was not rated by an NRSRO has
been deferred and will be withdrawn if the MSRB acts to adopt
similar amendments to its confirmation rule, Rule G-15.-[17]-
The MSRB recently reiterated its willingness to amend Rule G-15
to require disclosure if a municipal security is not rated by an
NRSRO.-[18]-
II. DESCRIPTION OF AMENDMENTS
A. ROLE OF THE CONFIRMATION
The Commission's confirmation rule, Rule 10b-10-[19]- under
the Exchange Act,-[20]- generally requires a broker-dealer
effecting a customer transaction in securities (other than U.S.
Savings Bonds or municipal securities) to provide written
notification to its customer, at or before completion of a
transaction, that discloses information specific to the
-[14]- See Proposing Release, supra note 10, at 59 FR 12767-
68.
-[15]- Id. at 59 FR 12772.
-[16]- The comment letters and a summary of comments have been
placed in Public Reference File No. S7-6-94, which is available
for inspection in the Public Reference Room.
-[17]- MSRB Rule G-15, MSRB Manual (CCH) 3571.
-[18]- Letter from Robert H. Drysdale, Chairman, MSRB, to
Arthur Levitt, Chairman, SEC (Nov. 3, 1994). Available in Public
Reference File No. S7-6-94.
-[19]- 17 CFR 240.10b-10.
-[20]- 15 U.S.C. 78a et seq.
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transaction. The confirmation requires, among other things, the
disclosure of: the date, time, identity, and number of shares
bought or sold;-[21]- the capacity of the broker-dealer;-[22]-
the net dollar price and yield of a debt security;-[23]- and,
under specified circumstances, the amount of compensation paid to
the broker-dealer and whether payment for order flow is
received.-[24]- For over 50 years, the customer confirmation has
served basic investor protection functions by conveying
information allowing investors to verify the terms of their
transactions; alerting investors to potential conflicts of
interest with their broker-dealers; acting as a safeguard against
fraud; and providing investors the means to evaluate the costs of
their transactions and the quality of their broker-dealer's
execution.
1. T+3 Settlement.
In the Proposing Release, the Commission requested comment
on the future utility of the confirmation once T+3 Settlement is
implemented on June 7, 1995.-[25]- Rule 10b-10 requires that a
confirmation be sent at or before completion of a customer
transaction.-[26]- Commenters noted that T+3 Settlement will
diminish the confirmation's usefulness as a customer invoice and
questioned the practicability of requiring the disclosure of
additional information on a document that an investor will
receive after already having made his or her investment decision
and tendering funds or securities.-[27]-
Notwithstanding the shortened settlement period of T+3 and
the possibility that an investor may receive the confirmation
after payment has been made, the Commission believes that the
confirmation will continue to serve important investor protection
-[21]- 17 CFR 240.10b-10(a)(2).
-[22]- 17 CFR 240.10b-10(a)(1).
-[23]- 17 CFR 240.10b-10(a)(4)(i); and 17 CFR 240.10b-
10(a)(5).
-[24]- 17 CFR 240.10b-10(a)(7)(ii) and (iii); 17 CFR 240.10b-
10(a)(8)(i)(A); and 17 CFR 240.10b-10(a)(8)(i)(B).
Recently, the Commission proposed for comment additional
disclosures relevant to payment for order flow, which would
include for monetary payment for order flow, the range of
payments received on a per share basis and on an aggregate basis
annually. For non-monetary payment for order flow, the
Commission proposed requiring disclosure of an estimate of the
range of payment for order flow on a per share basis and on an
aggregate basis annually. See Securities Exchange Act Release
No. 34903 (Oct. 27, 1994), 59 FR 55014.
-[25]- T+3 Settlement was adopted in Securities Exchange Act
Release No. 33023 (Oct. 6, 1993), 58 FR 52891.
-[26]- Rule 15c1-1 under the Exchange Act defines "the
completion of the transaction." 17 CFR 240.15c1-1(b).
-[27]- See, e.g., Letters from A. George Saks, Executive Vice
President, Secretary, and General Counsel, Smith Barney (Aug. 1,
1994); Robert M. Sweeney, Vice President/ Assistant Comptroller,
Gibraltar Securities Co. (June 14, 1994); William J. Jester, Jr.,
Chemical Banking Corp. (June 14, 1994); and Kurt D. Halvorson,
Vice President & Controller, AmeriTrade (May 27, 1994), to
Jonathan G. Katz, Secretary, SEC.
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functions. T+3 Settlement's implementation merely may mean that
the confirmation may take on a different role. Some firms may
continue to use the confirmation as a customer invoice, while
financing positions when customer payment is received after
settlement date. For other firms, the confirmation may not
continue to serve in all circumstances as an invoice of a
transaction because ordinary confirmation delivery and transfer
of customer funds and securities may not be feasible within a
three-day settlement cycle.-[28]- Rather, the confirmation may
serve primarily as written evidence of the contract between the
customer and broker-dealer.-[29]- As a written record of the
transaction, the confirmation will continue to provide investors
the necessary information to assist them in evaluating the
quality and accuracy of their trades while assisting them in
-[28]- One commenter suggested that the Commission reevaluate
the meaning of "give or send" under Rule 10b-10 in light of T+3
Settlement and current technology, such as electronic messaging,
E-mail, direct computer links, telefax, and fax modems. See
Letter from Sullivan & Cromwell, to Jonathan G. Katz, Secretary,
SEC (July 15, 1994).
In the Proposing Release, the Commission recognized the use
of a facsimile machine to send customer confirmations. See
Proposing Release, supra note 10, at 59 FR 12767 n.5. To the
extent that a customer has a facsimile machine, a broker-dealer
would fulfill its confirmation delivery obligation if it sent the
confirmation via facsimile transmission. The staff also has
allowed, under specified conditions, confirmations to be sent by
other electronic means. See Letter regarding Thomson Financial
Services, Inc. (Oct. 8, 1993).
The Commission agrees that T+3 Settlement may encourage
alternatives to the mail system for sending confirmations and
that a flexible approach may be necessary to accommodate T+3
Settlement with existing technology. The Commission, however,
believes that each approach should be viewed on a case-by-case
basis, as has been previous practice, to ensure the safety and
reliability of the confirmation transmission.
-[29]- Under the current text of the Uniform Commercial Code,
the confirmation serves as a written record of the transaction,
thus satisfying the statute of frauds. Uniform Commercial Code
Section 8-319 states that a "contract for the sale of securities
is not enforceable by way of action or defense unless . . . there
is some writing signed by the party against whom enforcement is
sought or by his authorized agent or broker, sufficient to
indicate that a contract has been made for sale of a stated
quantity of described securities at a defined or stated price."
A confirmation, bearing the broker-dealer's letterhead or some
other identifying marking, generally fulfills that requirement.
Revised Article 8 of the Uniform Commercial Code, which was
endorsed recently by both the American Law Institute and the
National Conference of Commissioners on Uniform State Laws, would
omit current Section 8-319. Due to the prior difficulties in
applying Section 8-319 to the sale of securities over the
telephone and the more common use of electronic means for
securities transactions, proposed Section 8-113 states that "[a]
contract or modification for the sale or purchase of a security
is enforceable whether or not there is a writing signed or record
authenticated by a party against whom enforcement is sought, even
if the contract or modification is not capable of performance
within one year of its making."
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correcting mistakes and verifying the terms of their
transactions. Accordingly, while T+3 Settlement may affect the
mechanics of settlement, it will not eliminate the confirmation's
investor protection functions.
2. Periodic Account Statement.
The Commission also requested comment on the feasibility of
transferring information currently disclosed on the confirmation
to a periodic account statement.-[30]- Many commenters
addressing this issue opposed such a use of the periodic account
statement and noted that it was not the appropriate document to
convey particularized trade information.-[31]- Rather, as one
commenter indicated, account statements are intended to summarize
the activity and status of an account; they are not intended to
convey information regarding the features and risks of each
individual securities transaction.-[32]- Other commenters,
however, noted that, as investors increasingly rely upon periodic
account statements, the confirmation will diminish as a primary
disclosure device.-[33]- At this time, the Commission has
determined to retain the confirmation as the basic transaction
disclosure document and use the account statement, the account
opening document, or annual disclosure requirements as needed to
supplement or summarize confirmation disclosures.
The Commission noted in the Proposing Release, however, that
a customer may waive the receipt of an immediate confirmation in
the context where a fiduciary has discretion over the customer's
account.-[34]- The Commission noted that, in its view, the
account, rather than the fiduciary, was the customer for purposes
of Rule 10b-10. To effect a valid waiver, the broker-dealer must
(1) obtain from the customer a written agreement that the
fiduciary receive the immediate confirmation; and (2) send to the
customer a periodic report, not less frequently than quarterly,
containing the same information that would have been contained in
-[30]- See Proposing Release, supra note 10, at 59 FR 12768.
-[31]- See, e.g., Letters from A. George Saks, Executive Vice
President, Secretary, and General Counsel, Smith Barney (Aug. 1,
1994); Barry H. Zucker, President & CEO, J.B. Hanauer & Co. (June
20, 1994); and Jon S. Corzine, Goldman, Sachs & Co. (June 15,
1994), to Jonathan G. Katz, Secretary, SEC.
-[32]- See, e.g., Letter from Donald E. Walter, Compliance
Director/Principal, Edward D. Jones & Co., to Jonathan G. Katz,
Secretary, SEC (July 15, 1994). Another commenter noted that
transferring confirmation information to an account statement may
clutter the account statement and make it less readable. See
Letter from Barry H. Zucker, President & CEO, J.B. Hanauer & Co.,
to Jonathan G. Katz, Secretary, SEC (June 20, 1994).
-[33]- See, e.g., Letters from Robert M. Sweeney, Vice
President/Assistant Comptroller, Gibraltar Securities Co. (June
14, 1994); William J. Jester, Jr., Chemical Banking Corp. (June
14, 1994); and Kurt Halvorson, Vice President & Comptroller,
AmeriTrade (May 27, 1994), to Jonathan G. Katz, Secretary, SEC.
-[34]- See Proposing Release, supra note 10, at 59 FR 12767
n.3.
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an immediate confirmation.-[35]- The customer may not waive this
periodic report.-[36]-
The requirement to send a periodic report is intended to
ensure that the beneficial owner of the account receives material
-[35]- To satisfy this requirement, a broker-dealer may
deliver, directly to its customer, duplicate confirmations
representing each of the customer's transactions for the prior
period, together with the customer's account statement. This
procedure would allow investors to rely on the account statement
to monitor their accounts, while referring to the confirmation
for the details of each specific trade. Investors already look
to old confirmations for details which are not present on the
account statement, and this procedure would allow investors to
continue to rely on their confirmations and their account
statements in substantially the same way.
-[36]- Some concerns have been raised with respect to the
application of this policy and its relationship with Rule 409 of
the New York Stock Exchange ("NYSE"). See, e.g., letter from
Kevin J. Mackay, President/Compliance and Legal Division,
Securities Industry Association ("SIA"), to Jonathan G. Katz,
Secretary, SEC (July 22, 1994). Specifically, Rule 409(b)
permits NYSE member firms to send a confirmation to a non-member
person holding power of attorney over a customer account if
"either (A) the customer has instructed the member organization
in writing to send such confirmations, statements, or other
communications in care of such person, or (B) duplicate copies
are sent to the customer at some other address designated in
writing by him." NYSE Rule 409, 2 NYSE Guide (CCH) 2409.
Under the Commission's position articulated above, a
customer who waived receipt of the immediate confirmation would
receive more information with his quarterly account statement
than that currently required under NYSE Rule 409. To the extent
the rules of the NYSE, or any self-regulatory organization,
conflict with the Commission's stated policy, the more
restrictive requirement would govern. Thus, a NYSE member
wishing to take advantage of a waiver would be required to adhere
to these Commission requirements in addition to any obligations
imposed by Rule 409.
The SIA argued that this position would (1) lead to
duplicative efforts on the part of broker-dealers because broker-
dealers already will have sent trade information to the fiduciary
in an immediate confirmation; (2) depart from standard industry
practice; and (3) require expensive system changes to comply with
the position. The Commission emphasizes that this substitution
of quarterly statements for the immediate confirmation is
optional. No broker-dealer is required in the first instance to
include all relevant trade information in a quarterly statement;
however, if the broker-dealer, with the written authorization of
the customer, wishes to omit sending the customer an immediate
confirmation and instead send it to the account fiduciary, then
the requirements of written instructions from the customer and a
non-waiveable periodic report, as described above, must be
satisfied in order to effect a valid waiver. These requirements
are necessary to allow investors to monitor their accounts in the
absence of a transaction-by-transaction report in the
confirmation.
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information needed to verify the transaction in the
account.-[37]- As the Commission noted in the release originally
adopting Rule 10b-10, the Rule is not intended to require a
broker-dealer dealing with the trustee of a plan to deliver
statements to plan participants where the trustee is the
shareholder of record of the securities being purchased or sold.
In those instances, the Rule would require the broker-dealer to
deliver a confirmation, or upon written request, a periodic
report, only to the trustee.-[38]- A beneficiary of the trust
would be required to receive an immediate confirmation, or upon
written request, the periodic report, only if that beneficiary
was a beneficial owner of the trust assets on the books of the
broker-dealer, enjoying the rights and privileges of beneficial
ownership.
The Commission also believes that the broker-dealer can
satisfy its obligation to send a confirmation to the customer if
it sends the confirmation to a custodian of the customer
authorized to receive securities and disburse funds for the
customer.-[39]- The custodian in question must not be affiliated
with a broker-dealer or an investment adviser or have any role in
choosing the broker-dealer or investment adviser used;-[40]- and
the customer must retain the right to request that the
confirmation be sent directly to the customer, at no extra charge
-[37]- The requirement to send a periodic report to the
customer, if the customer has requested in writing that the
immediate confirmation be sent to the customer's fiduciary,
applies only if the broker-dealer has an existing duty under Rule
10b-10 to send an immediate confirmation directly to the customer
in the absence of such a written request. This requirement
therefore would not apply to paragraph 10b-10(b), which governs
purchases and sales of securities in a money market fund, as
defined in newly amended paragraph 10b-10(b)(1), a periodic plan,
as defined in paragraph 10b-10(d)(5), and an investment company
plan, as defined in paragraph 10b-10(d)(6). Paragraph (b) of
Rule 10b-10 permits, upon written request of the customer,
written statements containing the information specified in that
paragraph to be sent not less frequently than quarterly, directly
to the customer or some other person designated by the customer
for distribution to the customer.
Because there are circumstances, not enumerated specifically
in Rule 10b-10, that would make compliance with the rule unduly
burdensome, paragraph 10b-10(f) authorizes the Commission to
exempt broker-dealers from the rule's requirements with regard to
specific transactions or specific classes of transactions for
which the broker or dealer will provide alternative procedures to
effect the purposes of Rule 10b-10. This authority has been
delegated to the Division of Market Regulation. 17 CFR 200.30-
3(a)(32).
-[38]- Securities Exchange Act Release No. 13508 (May 5,
1977), at n.24.
-[39]- The custodian must not hold itself out as a broker-
dealer or an investment adviser. But see Investment Advisers Act
Release No. 1406 (March 16, 1994), 59 FR 13464 (proposing a rule
to require investment advisers to ensure that custodians of
investment adviser client accounts provide the client or its
designee with account statements not less than quarterly).
-[40]- Securities orders must be placed by the customer or the
customer's investment adviser, not the custodian.
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by the custodian or broker-dealer. Moreover, an account
custodian may not choose to receive a periodic report in place of
an immediate confirmation.
3. Preliminary Note.
The Commission proposed adding a preliminary note to Rule
10b-10 clarifying that the Rule is not intended as a safe harbor
from disclosure obligations imposed by the general antifraud
provisions of the federal securities laws.-[41]- This note is
intended to respond to claims made by litigants that Rule 10b-10
prescribes all the necessary disclosure relevant to a customer's
securities transaction.-[42]- A few commenters addressed the
inclusion of the preliminary note to Rule 10b-10, with equal
support for-[43]- and opposition to-[44]- the note. One
supporter suggested that the Commission could accomplish the same
purpose of clarification in an interpretative release.-[45]- One
opponent of the preliminary note argued that its existence would
lead to frivolous claims against broker-dealers.-[46]-
After reviewing the comments, the Commission is adopting the
preliminary note to Rule 10b-10. The Commission is not persuaded
that the existence of the preliminary note would lead to any
additional litigation against broker-dealers. The preliminary
note is merely making explicit a longstanding position that the
antifraud provisions of the federal securities laws may impose,
given the circumstances, greater disclosure than what may be
required by a specific rule or regulation.-[47]-
-[41]- See Proposing Release, supra note 10, at 59 FR 12772.
-[42]- See, e.g., Shivangi v. Dean Witter Reynolds, Inc., 637
F. Supp. 1001 (S.D. Miss. 1986), aff'd, 825 F.2d 885 (5th Cir.
1987); Krome v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 637
F. Supp. 910, 915-16 (S.D.N.Y. 1986); and Ettinger v. Merrill
Lynch, Pierce, Fenner & Smith, Fed. Sec. L. Rep. (CCH) 93,102
(E.D. Pa. 1986), rev'd, 835 F.2d 1031 (3d Cir. 1987).
-[43]- See, e.g., Letters from Donald E. Walter, Compliance
Director/Principal, Edward D. Jones & Co. (July 11, 1993); and
Douglas L. Kelly, Director/Law & Compliance Division, A.G.
Edwards & Sons, Inc. (June 13, 1994), to Jonathan G. Katz,
Secretary, SEC.
-[44]- See, e.g., Letters from A.B. Krongard, Chief Executive
Officer, Alex. Brown & Sons, Incorporated (July 14, 1994); and
Jeffrey Rubin, President, InterCapital Assets, Inc. (June 13,
1994), to Jonathan G. Katz, Secretary, SEC.
-[45]- Letter from Douglas L. Kelly, Director/Law & Compliance
Division, A.G. Edwards & Sons, Inc., to Jonathan G. Katz,
Secretary, SEC (June 13, 1994). This commenter also suggested
that if a note were added to Rule 10b-10, a similar note also
should precede Rule 15c2-13. At this time, the Commission is not
adopting Rule 15c2-13.
-[46]- Letter from A.B. Krongard, Chief Executive Officer,
Alex. Brown & Sons, Incorporated, to Jonathan G. Katz, Secretary,
SEC (July 14, 1994).
-[47]- See supra note 42. One commenter argued that the
preliminary note provides no useful guidance because the
Commission has not articulated a set of guidelines concerning
disclosure requirements in addition to those required in a
prospectus and under the Exchange Act. See Letter from Sullivan
(continued...)
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B. MARK-UP AND MARK-DOWNS IN RISKLESS PRINCIPAL
TRANSACTIONS IN DEBT SECURITIES
The majority of comment letters addressed the proposed
amendments to Rule 10b-10 and the portion of proposed Rule 15c2-
13 that would require mark-up disclosure of riskless principal
trades in debt securities.-[48]- Generally, most commenters
opposed the proposals on the grounds that the requirements would
have detrimental effects on competition and market liquidity;
would cause compliance difficulties; would create customer
confusion; and are not based upon findings of abusive practices
in the debt market.
It has been argued by some commenters that greater price
transparency in the municipal market could achieve similar goals
as riskless principal mark-up disclosure without the alleged
negative effects purported to result from mark-up
disclosure.-[49]- Since the proposals were published for comment
in March, progress has been made to develop price transparency in
the debt markets. In particular, the MSRB has proposed a program
that ultimately would provide same day price reporting of all
transactions in municipal securities, including same day
reporting of retail trades. This program is to be implemented in
four phases. As proposed, the first phase of the MSRB program
will collect reports of interdealer transactions and make
available to the public daily high-low and average price figures
for the most frequently traded issues (initially defined as those
trading at least four times during the day).-[50]- These
requirements will be expanded in phase two to include
institutional customer transactions. The third phase will expand
the daily reporting requirements to include retail customer
transactions, and phase four will advance reporting times closer
in time to the transaction, such as by the end of day or within a
specified time period following the trade. In the initial phases
-[47]-(...continued)
& Cromwell, to Jonathan G. Katz, Secretary, SEC (July 15, 1994),
at pp. 2-3.
The Commission does not intend to specify key disclosure
items under the antifraud provisions of the federal securities
laws. Each circumstance is different and determining the
materiality of any particular item of disclosure depends on the
facts and circumstances of each case.
-[48]- Of the 344 comment letters received, 313 addressed the
mark-up disclosure proposals.
-[49]- See, e.g., Letters from A.B. Krongard, Chief Executive
Officer, Alex. Brown & Sons, Incorporated (July 14, 1994); James
D. McKinney, Partner and Manager of Fixed Income Dept., William
Blair & Company (July 13, 1994); Thomas W. Masterson, Chairman,
Masterson Moreland Sauer Whisman, Inc. (July 13, 1994); G.
Frederick Kasten, Jr., President and Chief Executive Officer,
Robert W. Baird & Co., Incorporated (June 15, 1994); and Rauscher
Pierce Refnes, Inc. (June 14, 1994), to Jonathan G. Katz,
Secretary, SEC.
-[50]- To implement phase one, the MSRB, pursuant to Rule 19b-
4 of the Exchange Act, has filed with the Commission a proposed
rule change to amend Rule G-14 of the MSRB Rules, which, once
approved, will require the reporting of interdealer municipal
securities transactions to a designee (e.g., the National
Securities Clearing Corporation) for compilation in a daily
report and for use by regulators.
-------------------- BEGINNING OF PAGE #12 -------------------
of the MSRB's proposal, information regarding the prices and
volume of transactions in approximately 80 to 240 issues would be
reported each day. As each phase is implemented, the MSRB will
review closely this information and system operations, with a
view toward reflecting a greater number of issues and
transactions in the reports.
In addition to the proposal by the MSRB, the PSA has
proposed two initiatives to convey municipal securities pricing
information to retail investors. First, the PSA proposes to
develop a generic scale and yield curve for AAA-insured revenue
bonds. This information, which will be made available to daily
newspapers, is intended to provide customers with grade
information on the price and yield of a representative range of
bonds. Second, the PSA proposes to establish a 900-number which
investors could call to obtain price information regarding
particular municipal securities.
Although the MSRB's initiative is in a developmental stage,
the Commission believes it ultimately could provide the public
with improved information about the price of municipal
securities. If widely published, this information would allow
investors to better assess the prices provided by their broker-
dealers in a municipal securities trade. In light of these
proposals, the Commission has decided to defer for a period of
six months adoption of that part of Rule 15c2-13 requiring the
disclosure of mark-ups for riskless principal transactions in
municipal securities.
The Commission has deferred adoption of the riskless
principal mark-up disclosure proposal in order to ascertain
whether the proposed price information systems can provide more
meaningful benefits to investors in the long-term and to assess
the progress of the industry in developing the proposed systems.
Price transparency, if fully developed, will provide better
market information to investors on a timely basis (e.g., before
the transaction). Potentially, price transparency also could
provide investors the ability to determine the value of their
municipal securities purchased in principal transactions. The
proposed mark-up disclosure, on the other hand, would have
provided cost information to investors only in riskless principal
transactions and would not have applied to other principal
transactions, the majority of transactions in the debt market.
Price transparency, if fully developed, meets investors' need for
information without focusing on only one portion of the market,
which commenters argued could lead to a deleterious restructuring
of the market, thus reducing market liquidity and narrowing the
available choices of securities sold to customers.-[51]-
The Commission recognizes that these benefits depend on the
sound design and successful implementation of transparency
proposals. Their value to investors further depends on
widespread availability of the information, and customer
understanding of how it should be used. At the end of six
months, the Commission will assess the need for further action
based upon the prospects for the availability of meaningful
pricing information to a broad range of investors about a full
range of securities. If such information is not likely to be
available, the Commission will explore alternatives to better
provide information to fixed income investors. To this end, the
Commission similarly is deferring the proposed amendment to Rule
-[51]- See, e.g., Letters from Philip T. Colton, Maun & Simon
(June 14, 1994); Lawrence T. Lewis, III, Managing Director, Clark
Melvin Securities Corporation (June 8, 1994); and Adam Crews,
President/Chief Executive Officer, Crews & Associates, Inc. (June
1, 1994), to Jonathan G. Katz, Secretary, SEC.
-------------------- BEGINNING OF PAGE #13 -------------------
10b-10 requiring mark-up disclosure for other debt securities.
While the Commission believes it is appropriate to address
transparency in municipal securities initially because of the
presence of a large proportion of individual investors in that
market, during the deferral, the Commission expects the industry
to address the extent to which customer price information can be
increased in debt markets other than the municipal securities
market. The Commission recognizes that the government,
corporate, and mortgage securities markets have different levels
of price information publicly available. For example, GovPx, a
joint venture of primary dealers and interdealer brokers formed
in 1990, provides to investors real-time quotations, trade
prices, and volume information for U.S. Treasury and other
government securities via a worldwide network of 12,000
terminals. In addition, the National Association of Securities
Dealers, Inc. ("NASD") developed the Fixed Income Pricing System
("FIPS"), which collects, processes, and disseminates real-time
firm quotations for 30 to 50 of the most liquid, high yield bonds
traded in the over-the-counter market.-[52]- The Commission
expects the industry to review the availability of information to
investors in each of these markets and consider methods of
increasing transparency as an alternative to riskless principal
disclosure in these markets.
Even though the Commission is deferring the adoption of
riskless principal mark-up disclosure, the Commission continues
to believe that, absent transparency in the debt markets, the
disclosure of the dealer's cost along with the mark-up would be
of use to customers in assessing the value of their debt
securities. In the absence of progress on transparency, the
Commission will revisit its riskless principal proposal. The
Commission also may consider whether to require the disclosure of
all mark-ups in principal transactions based on the underlying
inventory costs,-[53]- or the prevailing market price-[54]- or to
mandate alternative price transparency systems.
The Commission strongly believes that real progress is
needed in a timely fashion to achieve the goal of better customer
information for market prices in the debt market. Achievement
of this goal will add strength to and confidence in the debt
markets, to the benefit of both broker-dealers and investors.
-[52]- See Securities Exchange Act Release No. 32019 (March
19, 1993), 58 FR 16428 for a discussion of the order approval
allowing the NASD to implement FIPS.
-[53]- To comply with this disclosure, broker-dealers would
have to assign a value to a security bought into inventory on
either a last in, first out or first in, first out accounting
basis.
-[54]- See 17 CFR 240.15g-4 and Securities Exchange Act
Release No. 30608 (April 13, 1992), 57 FR 19022 for a discussion
of compensation disclosure requirements for transactions in penny
stocks.
-------------------- BEGINNING OF PAGE #14 -------------------
C. DISCLOSURE OF UNRATED SECURITIES
The Commission also published for comment a requirement to
disclose, if applicable, that certain debt securities have not
been rated by an NRSRO.-[55]- The proposal excluded government
securities defined under Section 3(a)(42)(A) and (B) of the
Exchange Act,-[56]- but requested specific comment on whether
other securities should be excluded from this disclosure.-[57]-
In addition, specific comment was requested whether the MSRB
should implement the disclosure requirement with respect to
municipal securities, rather than the Commission.-[58]-
Of the 43 commenters that addressed this disclosure
proposal, 24 supported the proposal.-[59]- Some commenters
believed that the disclosure requirement did not go far enough
and indicated that specific ratings also should be disclosed on
the confirmation.-[60]- In particular, commenters believed that
the confirmation should bear all ratings of securities,
particularly those rated below investment grade.-[61]-
-[55]- See Proposing Release, supra note 10, at 59 FR 12770.
-[56]- Securities exempt from the proposed rating disclosure
would include (1) securities that are direct obligations of the
U.S., or in which the U.S. has guaranteed the principal or
interest; or (2) securities which are issued or guaranteed by
corporations in which the U.S. has a direct or indirect interest
and which the Secretary of Treasury has designated for exemption.
15 U.S.C. 78c(a)(42)(A) and (B).
-[57]- Proposing Release, supra note 10, at 59 FR 12770.
-[58]- Id.
-[59]- See, e.g., Letters from A.B. Krongard, Chief Executive
Officer, Alex. Brown & Sons, Incorporated (July 14, 1994); David
C, Clapp, Chairman, MSRB (June 15, 1994); and Douglas L. Kelly,
Director, Law and Compliance, A.G. Edwards & Sons, Inc. (June 13,
1994), to Jonathan G. Katz, Secretary, SEC.
Alex. Brown & Sons, Incorporated sought clarification that a
bond rated by a single NRSRO, but not necessarily other NRSROs,
nonetheless would be excluded from the disclosure requirement.
(Letter from A.B. Krongard, Chief Executive Officer, Alex. Brown,
to Jonathan G. Katz, Secretary, SEC (July 14, 1994), at p.6).
The rule language states that a broker-dealer would be required
to disclose when a security was not rated by an NRSRO.
Accordingly, if a single NRSRO has rated a security, then it
follows that no disclosure would be required.
-[60]- See, e.g., Letters from Grant T. Callery, Vice
President/General Counsel, NASD (July 26, 1994); and Robert
Reeves, Sr. Vice President, Ferris Baker Watts, Incorporated
(June 14, 1994), to Jonathan G. Katz, Secretary, SEC.
-[61]- One commenter argued that disclosure of ratings, and in
particular ratings below investment grade, would better assist
investors in comparing an unrated security that may be of a high
credit quality with one that, while rated, may be of lesser
credit quality. See Letter from James H. Morgan, President/Chief
Operating Officer, Interstate/Johnson Lane, to Jonathan G. Katz,
Secretary, SEC (June 14, 1994). The Commission will revisit the
issue of whether Rule 10b-10 should require the disclosure of
ratings for corporate debt securities once commenters have
(continued...)
-------------------- BEGINNING OF PAGE #15 -------------------
Ten commenters opposed the disclosure requirement on the
grounds that requiring this disclosure may be unhelpful to
investors. They argued that such disclosure may cause investors
to believe that unrated securities are inferior to rated
securities, when the unrated security may pose less risk than a
rated security, particularly a security rated below investment
grade.-[62]- They noted that such disclosure does not explain
the reasons why a security may not have a credit rating --
notably that smaller, but no less sound, issuers may not wish to
bear the expense of obtaining a credit rating.-[63]- Commenters
also questioned why the Commission excluded from the disclosure
requirement only government securities defined under Section
3(a)(42)(A) and (B) of the Exchange Act.-[64]- In particular,
Freddie Mac argued that securities issued by government sponsored
enterprises ("GSEs"), including those issued by Freddie Mac, also
should be excluded from the disclosure requirement. Freddie Mac
argued that, because of the market's assessment of the
creditworthiness of GSEs, it makes little economic sense for a
GSE to bolster its creditworthiness with an independent
rating.-[65]- Finally, some commenters believed that the MSRB
should adopt any rule affecting the municipal securities market;
other commenters were neutral whether the Commission or the MSRB
implemented rulemaking.
After considering the comments, the Commission is adopting
the proposed amendments to Rule 10b-10 requiring disclosure if a
debt security, other than a government security, has not been
rated by an NRSRO. Such disclosure would be more meaningful to
the investor if it is made together with the description of the
security. As noted in the Proposing Release, this disclosure is
not intended to suggest that an unrated security is inherently
-[61]-(...continued)
responded to a recent Commission proposal addressing the
feasibility of disclosing ratings in a prospectus. See Securities
Act Release No. 7086, (Aug. 31, 1994), 59 FR 46304.
-[62]- See, e.g., Letters from Sullivan & Cromwell (July 15,
1994); R. Fenn Putman, Chairman, PSA (June 20, 1994); and Jon S.
Corzine, Goldman, Sachs & Co. (June 15, 1994), to Jonathan G.
Katz, Secretary, SEC.
-[63]- One commenter noted that rural issuers would be harmed
by the disclosure requirement because the size of a rural issue
makes bearing the expense of obtaining a rating economically
impractical. See Letter from Ian B. Davidson, Chairman, and Kreg
A. Jones, Chief Operating Officer, D.A. Davidson & Co., to
Jonathan G. Katz, Secretary, SEC (June 14, 1994).
-[64]- See, e.g., Letter from Mitchell Delk, Vice
President/Government and Industry Relations, Freddie Mac, to
Jonathan G. Katz, Secretary, SEC (June 15, 1994).
-[65]- Freddie Mac also described the anomalous situation in
which, on the one hand, GSE securities would be subject to the
disclosure requirement, but on the other hand, rated private
label asset-backed securities would not, even though the
underlying securities were GSE securities and primarily
responsible for the rating. See Letter from Mitchell Delk, Vice
President/Government and Industry Relations, Freddie Mac, to
Jonathan G. Katz, Secretary, SEC (June 15, 1994), at pp. 2-3.
-------------------- BEGINNING OF PAGE #16 -------------------
riskier than a rated security.-[66]- Rather, the disclosure is
intended to alert customers that they may wish to obtain further
information or clarification from their broker-dealers. In most
cases, this disclosure should verify information that was
disclosed to the investor prior to the transaction. If a
customer was not previously informed of the security's unrated
status, then confirmation disclosure may prompt a dialogue
between the customer and broker-dealer.
The Commission agrees with commenters that all "government
securities" should be excluded from the unrated debt disclosure
requirement, not just those defined under Section 3(a)(42)(A) and
(B) of the Exchange Act.-[67]- Therefore, government securities
meeting the definition under sub-paragraphs (C) and (D) of
Section 3(a)(42), which includes securities issued by GSEs, will
be exempt from the disclosure requirement. The Commission,
however, does not intend to expand the class of securities
subject to the exclusion beyond those defined as government
securities in Section 3(a)(42).
The non-rated debt proposal for municipal securities was
contained in proposed Rule 15c2-13. In its comment letter, the
MSRB stated that, "[t]he Board agrees with the Commission that,
while the fact that a bond is unrated is not necessarily
indicative of problems, disclosure of the fact would be helpful
to investors."-[68]- The MSRB also noted that, if the Commission
determined that such information was needed by investors in debt
securities, it would amend its confirmation rule, Rule G-15, and
require disclosure if a municipal security has not been rated by
an NRSRO.-[69]- Inasmuch as other confirmation requirements for
municipal securities are currently set forth in Rule G-15 of the
MSRB, the Commission is willing to defer this portion of the
proposal to allow the MSRB to adopt the requirement as part of
its rules, and will withdraw it after the MSRB has taken action.
D. DISCLOSURE OF MARK-UPS AND MARK-DOWNS IN CERTAIN
NASDAQ AND EXCHANGE-LISTED SECURITIES
As part of the amendments to Rule 10b-10, the Commission
proposed requiring the disclosure of mark-up information for
principal transactions in certain securities quoted on Nasdaq or
listed on regional exchanges.-[70]- This proposal covered
securities that are subject to last sale reporting, but are not
technically "reported securities" under Rule 11Aa3-1 of the
-[66]- Nevertheless unrated municipal bonds, which make up
approximately 33% of the market, in the aggregate have a higher
default rate than do rated bonds. See Municipal Bond Defaults -
- The 1980's Decade in Review 1-2, at 1, J.J. Kenny Co., Inc.
(1993). According to this study on default rates between January
1, 1980 to December 31, 1991, 628 unrated issues defaulted
compared with 98 rated issues. According to data provided by the
Securities Data Company, unrated debt defaults make up
approximately 75% of all defaults. See also Public Securities
Association, An Examination of Non-Rated Municipal Defaults 1986-
1991 4 (Jan. 8, 1993).
-[67]- 15 U.S.C. 78c(a)(42).
-[68]- Letter from David C. Clapp, Chairman, MSRB, to Jonathan
G. Katz, Secretary, SEC (June 15, 1994).
-[69]- Id.
-[70]- See Proposing Release, supra note 10, 59 FR 12770.
-------------------- BEGINNING OF PAGE #17 -------------------
Exchange Act.-[71]- As noted in the Proposing Release, the NASD
adopted amendments to its confirmation rule requiring the
disclosure of mark-up information in principal transactions in
securities that are not Nasdaq/NMS securities -- i.e., Nasdaq
Small Cap Securities.-[72]- The purpose of the proposed
amendment is to consolidate disclosures already required under
NASD rules. Because last sale information is available for
regional exchange-listed securities, the Commission proposed to
extend the disclosure requirements to those securities, in
addition to Small Cap Securities. By adopting this proposal, the
confirmation rule will treat all equity securities subject to
last sale reporting similarly, irrespective of their trading
markets.
The two comments that addressed this requirement supported
the proposal.-[73]- Accordingly, under Rule 10b-10, broker-
dealers effecting principal transactions in Small-Cap Nasdaq and
regional exchange-listed securities that are subject to last-
sale reporting will be required to disclose on the confirmation
the reported trade price, price to the customer, and the
difference, if any, between the two prices.
E. DISCLOSURE OF COVERAGE BY THE SECURITIES INVESTOR
PROTECTION CORPORATION
In order to reduce investor confusion concerning a firm's
SIPC coverage,-[74]- the Commission proposed to amend Rule 10b-
-[71]- 17 CFR 240.11Aa3-1(a)(4). This provision defines
"reported security" as any exchange-listed equity security or
Nasdaq security for which transaction reports are made available
on a real-time basis pursuant to an effective transaction
reporting plan. An "effective transaction reporting plan" refers
to a transaction reporting plan that the Commission has approved
pursuant to Rule 11Aa3-1. 17 CFR 240.11Aa3-1(a)(3).
Reported securities currently include:
1. Nasdaq securities that meet standards set forth in the
National Market System Securities Designation Plan ("Nasdaq/NMS
securities).
2. Certain securities listed on a national securities
exchange that meet standards of the transaction reporting plan
known as the Restated Consolidated Tape Association Plan. This
would include securities that are registered or admitted to
unlisted trading privileges on a national securities exchange,
including securities listed on various regional exchanges, and
that substantially meet NYSE or American Stock Exchange, Inc.
original listing criteria.
-[72]- NASD Schedule to By-Laws, Schedule D, pt. XI, 3, NASD
Manual (CCH)
1867D.
-[73]- See Letters from Robert F. Price, Chairman/Federal
Regulation Committee, SIA (July 15, 1994); and Kurt D. Halvorson,
Vice President/Controller, AmeriTrade (May 27, 1994), to Jonathan
G. Katz, Secretary, SEC.
-[74]- SIPC, a non-profit, membership corporation, was
established under the Securities Investor Protection Act of 1970.
SIPC is funded by assessments on its members and interest earned
on fund assets. The fund is used to protect securities customers
of SIPC-member broker-dealers that fail financially. 15 U.S.C.
(continued...)
-------------------- BEGINNING OF PAGE #18 -------------------
10 to require affirmative disclosure, if applicable, when a
broker-dealer is not a member of SIPC and when an account is
carried by a non-SIPC-member broker or dealer. Generally, the
Securities Investor Protection Act of 1970 requires broker-
dealers registered with the Commission under Section 15(b) of the
Exchange Act to be members of SIPC. Certain types of broker-
dealers registered under Section 15(b), as well as all broker-
dealers registered as government securities brokers and dealers
under Section 15C of the Exchange Act, are excluded from SIPC
membership.-[75]-
Many commenters addressing this issue supported the
Commission's proposal to inform customers when their broker-
dealers are not SIPC members.-[76]- Other commenters generally
agreed with requiring the disclosure, but disagreed that the
confirmation was the appropriate disclosure medium and suggested
that non-membership status in SIPC be disclosed in a periodic
account statement or opening account document.-[77]- Commenters
opposing the disclosure initiative argued that the disclosure
would be misleading to investors in that they would believe that
they are at greater risk when dealing with a non-SIPC firm.-[78]-
The Investment Company Institute ("ICI") argued that requiring
"negative disclosure" concerning the lack of SIPC coverage is
contrary to the reasons certain persons are exempted from the
membership requirement in the first instance -- namely, excluded
broker-dealers present limited risks to investors because they do
-[74]-(...continued)
78aaa et seq. For example, in the event of the failure of a
SIPC member firm, SIPC provides protection up to $500,000 for
claims for cash and securities (although claims solely for cash
are limited to $100,000) of each customer. 15 U.S.C. 78fff-
3(a)(1).
-[75]- In addition to government securities brokers and
dealers, the following broker-dealers are not required to be
members of SIPC: (1) persons whose principal business in the
determination of SIPC (and with Commission approval) is conducted
outside the U.S.; and (2) persons whose business consists
exclusively of (a) the distribution of shares of registered open-
end investment companies or unit investment trusts, (b) the sale
of variable annuities, (c) the business of insurance, or (d) the
business of rendering investment advisory services to registered
investment companies or insurance company separate accounts. 15
U.S.C.
78ccc(a)(2)(A) and 78lll(12).
-[76]- See, e.g., Letters from Ronald S. Plaine, President,
Comerica Securities (undated); David M. Beckius, Vice
President/Sr. Attorney, Dean Witter Reynolds, Inc. (July 14,
1994); and William E. Kramer, Assistant Vice President, Nomura
Securities International, Inc. (July 15, 1994), to Jonathan G.
Katz, Secretary, SEC.
-[77]- See, e.g., Letters from William E. Kramer, Assistant
Vice President, Nomura Securities International, Inc. (July 15,
1994); A.B. Krongard, Chief Executive Officer, Alex. Brown &
Sons, Incorporated (July 14, 1994); and R. Fenn Putman, Chairman,
PSA (June 21, 1994), to Jonathan G. Katz, Secretary, SEC.
-[78]- See, e.g., Letters from Lawrence J. Latto, Shea &
Gardner (June 17, 1994); and Peter C. Clapman, Sr. Vice
President/Chief Counsel, College Retirement Equities Fund (June
15, 1994); to Jonathan G. Katz, Secretary, SEC.
-------------------- BEGINNING OF PAGE #19 -------------------
not hold customer funds.-[79]- The Commission, consistent
with its authority under the Government Securities Act Amendments
of 1993,-[80]- is adopting the proposed amendment to ensure that
customers are not led to believe that their accounts are subject
to protection beyond what actually is the case.-[81]- This
disclosure is relevant and meaningful to investors. Further, the
confirmation is the best vehicle to convey this information to
customers on a transaction-specific basis, particularly in
situations where a customer is dealing with affiliated broker-
dealers and one or more of the affiliates is not a SIPC member.
The Commission agrees, however, that certain instances exist
where this disclosure should not apply.-[82]- For instance, the
ICI stated that in some cases when a broker-dealer contracts with
an investment company for the distribution of fund shares,
customers purchasing such shares will send their purchase money
directly to the fund's transfer agent.-[83]- The transfer agent
then will issue shares to the customer against receipt of the
purchase money and send the money to the fund's custodian bank.
In this situation, customer funds are not handled by the broker-
dealer. In addition, the ICI argued that the transfer agent or
fund underwriter, when sending the confirmation on behalf of the
broker-dealer, may not know the SIPC status of a particular
broker-dealer. Accordingly, the disclosure provision contains an
exclusion that is intended to apply only in cases where the non-
SIPC broker-dealer does not receive or handle in any form
customer funds or securities in connection with a purchase or
redemption of registered open-end investment company or unit
investment trust shares and the customer sends its purchase money
or securities to the fund, its transfer agent, its custodian, or
-[79]- See Letter from Paul Schott Stevens, General Counsel,
ICI, to Jonathan G. Katz, Secretary, SEC (June 15, 1994). See
also Letter from Fred J. Franklin, Vice President/Chief
Compliance Officer, Aetna Life Insurance and Annuity Co., to
Jonathan G. Katz, Secretary, SEC (June 14, 1994).
-[80]- 15 U.S.C. 78O-5(a)(4).
-[81]- The legislative history of the Government Securities
Act Amendments of 1993 discussed SIPC coverage and the exemption
from SIPC coverage afforded to government securities brokers and
dealers. The Government Accounting Office noted that the gap in
SIPC coverage could be confusing to investors and recommended,
among other things, that the lack of SIPC coverage be disclosed.
The amendments ultimately took a disclosure approach and
authorized the Commission to require disclosure of non-SIPC
status of government securities brokers and dealers. S. Rep. No.
422, 103rd Cong., 1st Sess. 16 (1993). The same reasons to
require this disclosure of government securities brokers and
dealers applies to other broker-dealers that are exempt from SIPC
coverage.
-[82]- Some commenters believed that the proposed disclosure
was inconsistent with a letter, Letter regarding Benjamin M.
Vandegrift (Dec. 21, 1993), issued by the Division of Investment
Management. The disclosure requirement adopted today recognizes
the position taken in the letter, reserving the right to revisit
SIPC-related disclosure issues.
-[83]- See Letter from Paul Schott Stevens, General Counsel,
ICI, to Jonathan G. Katz, Secretary, SEC (June 15, 1994), at 2,
n.5.
-------------------- BEGINNING OF PAGE #20 -------------------
its designated agent, none of whom are associated persons of the
broker-dealer. Furthermore, checks may not be made payable to
the broker-dealer, and the broker-dealer may not handle any
customer checks in connection with the transaction. Otherwise,
the broker-dealer would be required to disclose its non-SIPC
status. Therefore, if a broker-dealer, including a fund
underwriter, receives customer funds or securities and promptly
forwards funds or securities to the investment company, transfer
agent, custodian, or other designated agent, the confirmation
would have to disclose the non-SIPC status of the broker-dealer.
F. DISCLOSURES RELATING TO ASSET-BACKED SECURITIES
In 1983, the Commission adopted amendments to Rule 10b-10 to
require disclosure of yield information on a customer
confirmation, recognizing that such information is important to
investors when evaluating the merits of investing in various debt
securities.-[84]- Currently, Rule 10b-10 requires the disclosure
of (1) the yield to maturity, if the transaction is effected on
the basis of dollar price;-[85]- (2) the dollar price calculated
from yield, if the transaction is effected on a yield
basis;-[86]- and (3) if effected on a basis other than dollar
price or yield to maturity, and the yield to maturity will be
less than the represented yield, then both the yield to maturity
and the represented yield.-[87]-
Rule 10b-10 exempts from the yield disclosure requirements
any instrument that is a "participation interest in notes secured
by liens upon real estate continuously subject to
prepayment."-[88]- Since the adoption of the yield disclosure
requirements, structured financings have expanded to include
securities backed by mortgage notes, automobile loans, computer
leases, consumer debt, and other receivables. These asset-
backed securities raised similar problems of variable yield.
Accordingly, the Commission proposed to expand the range of
securities subject to the exemptions from yield disclosure to
include asset-backed securities that are not insulated from
prepayment risk or susceptible to an accurate forecast of
yield.-[89]-
In addition, the Commission proposed to require
particularized disclosures in connection with transactions in
collateralized mortgage obligations ("CMOs").-[90]-
-[84]- See Securities Exchange Act Release No. 19687 (Apr. 18,
1983), 48 FR 17583.
-[85]- 17 CFR 240.10b-10(a)(4)(ii) and (5)(i).
-[86]- 17 CFR 240.10b-10(a)(5)(ii).
-[87]- 17 CFR 240.10b-10(a)(5)(iii).
-[88]- 17 CFR 240.10b-10(a)(4)(ii) and (5)(iii). Essentially,
this exemption was aimed at mortgage pass-through notes that were
issued or guaranteed by the Government National Mortgage
Association, Federal National Mortgage Association, and the
Federal Home Loan Mortgage Corporation.
-[89]- See Proposing Release, supra note ___, at 59 FR 12771.
-[90]- CMOs are collateralized pools of residential mortgage
loans that are divided into multiple tranches (sometimes as many
as 15 to 20) which can be tailored to a broad spectrum of
investors or particularized to the cash flow needs of a single or
(continued...)
-------------------- BEGINNING OF PAGE #21 -------------------
Specifically, the Commission proposed amendments that would
require broker-dealers to disclose on the confirmation the
particular CMO's (1) estimated yield; (2) weighted average life;
and (3) prepayment assumptions underlying the yield.-[91]-
Some commenters supported the Commission's proposal to
require disclosure of CMO information and noted that such
disclosures were provided to investors as a matter of course,
either in a confirmation or other disclosure statements.-[92]-
Other commenters opposed confirmation disclosure of the estimated
yield, weighted average life, and prepayment assumptions on the
grounds that the confirmation is not an appropriate disclosure
vehicle to convey the information.-[93]- In addition, commenters
opposed disclosing such complex information in a confirmation
because it could not be accomplished in a meaningful way due to
the document's limited size and space.-[94]- Many commenters
noted that detailed discussions concerning particular aspects of
CMOs are contained in the prospectus or other offering documents
that are sent to investors prior to the time in which they make
their investment decisions.-[95]-
No comments were received regarding the proposal to expand
the range of instruments that would be exempted from the yield
-[90]-(...continued)
discrete group of investors. Like other asset-backed securities,
the rate of prepayment on the underlying collateral of CMOs is
influenced by changes in interest rates and shifts in the general
economy, which in turn may affect the actual maturities of CMOs
as prepayment speeds accelerate or decrease. CMOs are priced on
the basis of the estimated weighted average life of individual
CMO tranches. As interest rates decline, prepayments increase,
with a corresponding shortening of weighted average life.
Conversely, an increase in interest rates results in a
lengthening of maturity.
-[91]- Proposing Release, supra note ___, at 59 FR 12771.
-[92]- See, e.g., Letters from David M. Beckius, Vice
President/Sr. Attorney, Dean Witter Reynolds, Inc. (July 14,
1994); Silas L. Matthies, Sr. Vice President, Norwest Securities,
Inc. (June 14, 1994); Rauscher Pierce Refsnes, Inc. (June 14,
1994); and Bill Duepree, Jr., President, Morgan Keegan & Co.,
Inc. (June 1, 1994), to Jonathan G. Katz, Secretary, SEC.
-[93]- Commenters noted that investors receive disclosure
documents containing numerous models depicting different
prepayment assumptions. These commenters questioned which of the
multiple assumptions would be disclosed in the confirmation.
See, e.g., Letters from Robert F. Price, Chairman/Federal
Regulation Committee, SIA (July 15, 1994); and R. Fenn Putman,
Chairman, PSA (June 21, 1994), to Jonathan G. Katz, Secretary,
SEC.
-[94]- See, e.g., Letters from Robert F. Price, Chairman,
Federal Regulation Committee, SIA (July 15, 1994); R. Fenn
Putman, Chairman, PSA (June 21, 1994); and Mitchell Delk, Vice
President Government and Industry Relations, Freddie Mac, (June
15, 1994), to Jonathan G. Katz, Secretary, SEC.
-[95]- See, e.g., Letters from Kathryn S. Reimann, Sr. Vice
President, Lehman Brothers, Inc. (July 14, 1994); R. Fenn Putman,
Chairman, PSA (June 21, 1994); and Mitchell Delk, Vice
President/Government and Industry Relations, Freddie Mac (June
15, 1994), to Jonathan G. Katz, Secretary, SEC.
-------------------- BEGINNING OF PAGE #22 -------------------
disclosure requirements. Because some instruments are not
subject to predictable forecasts of the yield, the Commission is
adopting amendments exempting asset-backed instruments that are
continuously subject to prepayment. The exemption would apply
only to those instruments that are not insulated from prepayment
risk or otherwise susceptible to an accurate forecast of
yield.-[96]-
In addition, in light of the comments concerning the
proposed CMO disclosure, the Commission is modifying the
amendment requiring the disclosure of prepayment assumptions,
weighted average life, and estimated yield of a CMO. The
Commission recognizes that broker-dealers intend confirmations to
be brief, and thus size limitations may affect the detail of
disclosure that may be practically and meaningfully conveyed to
the customer. Thus, while yield information is important to
investors of CMOs, as well as all mortgage and asset-backed
securities, the Commission agrees that these securities contain
complexities that are difficult to explain using single figures
in a confirmation. Accordingly, rather than require the
disclosure in the confirmation of specific numbers identifying
the estimated yield, weighted average life, and prepayment
assumptions underlying the yield, the Commission is adopting a
requirement that broker-dealers include on the confirmation a
statement alerting investors that their yields are subject to
fluctuation depending on the speed in which the underlying note
or receivable prepays and that specific information is available
upon written request of the customer.-[97]-
While information concerning prepayment assumptions and
pricing of CMOs and other asset-backed securities may be
contained in disclosure documents at the offering stage, this
type of detailed information has not been as readily available in
the secondary market for some asset-backed securities and to some
investors.-[98]- Under the Rule, as adopted, such information
-[96]- This position codifies a no-action position in Letter
regarding Merrill Lynch, Pierce, Fenner & Smith (Oct. 19, 1988),
granting no-action with respect to the yield disclosure
requirements for those mortgage and asset-backed securities that
are not subject to an accurate forecast of yield. The staff
noted that if an accurate forecast of yield could be made, then
the yield should be disclosed in the confirmation.
-[97]- This approach builds upon an alternative suggested by
one commenter that rather than the proposed disclosure, the
Commission impose a requirement that a broker-dealer print a
legend on the confirmation. See Letter from Mitchell Delk, Vice
President/Government and Industry Relations, Freddie Mac, to
Jonathan G. Katz, Secretary, SEC (June 15, 1994).
-[98]- The Commission recognizes the positive efforts made to
educate and provide information to investors in the CMO market.
For example, the PSA developed a brochure entitled, "Investors
Guide to Real Estate Mortgage Investment Conduits (REMICs),"
which is approved by the NASD as an investor education tool. In
addition, one commenter stated that prepayment information and
interest rate information are available to dealers and investors
in the secondary market through various vendors and proprietary
services. This commenter also indicated that for those market
participants that do not have access to this information, they
should be able to obtain it from the selling broker-dealer. See
Letter from Mitchell Delk, Vice President/Government and Industry
Relations, Freddie Mac, to Jonathan G. Katz, Secretary, SEC (June
15, 1994).
-------------------- BEGINNING OF PAGE #23 -------------------
would be required to be sent to customers upon written request.
In addition, if in fact a CMO or other asset-back security is
sold solely on the basis of one yield amount, the yield and
underlying assumptions should be disclosed on the confirmation,
as well as the legend stating that these items may vary.-[99]-
This is consistent with those commenters that noted that they
disclose yield information in CMO transactions as a matter of
course.-[100]- The antifraud provisions of the federal
securities laws would require that any information provided upon
request reflect changes or developments in the characteristics of
the asset-backed security.
III. EFFECTS ON COMPETITION AND REGULATORY FLEXIBILITY ACT
CONSIDERATIONS
Section 23(a)(2) of the Exchange Act-[101]- requires that
the Commission, when adopting rules under the Exchange Act,
consider the anticompetitive effects of those rules, if any, and
balance any anticompetitive impact against the regulatory
benefits gained in terms of furthering the purposes of the
Exchange Act. The Commission believes that adoption of the
amendments to Rule 10b-10 will not impose any burden on
competition not necessary or appropriate in furtherance of the
purposes of the Exchange Act.
The Commission has prepared a Final Regulatory Flexibility
Analysis ("FRFA") regarding the amendments to Rule 10b-10, in
accordance with 5 U.S.C. 604. The FRFA notes the potential
initial costs of operational and procedural changes that may be
necessary to comply with the amendments. In addition, the FRFA
notes the benefits to investors of increased disclosure that will
result from these amendments. The Commission believes that the
benefits of added disclosure outweigh the costs that will be
incurred by industry participants in complying with these
amendments.
A copy of the FRFA will be available for inspection and
copying in the Commission's Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Statutory Basis and Text of Amendments
For the reasons set forth in the preamble, the Commission
hereby amends Part 240 of Chapter II of Title 17 of the Code of
Federal Regulations 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,
-[99]- 17 CFR 240.10b-10(a)(5)(i). See also Securities
Exchange Act Release No. 19687 (Apr. 18, 1983), 48 FR 17583. The
Commission is concerned that in some cases asset-backed
securities may be sold to retail investors on the basis of a
single yield figure, without adequate disclosure that this yield
can vary based upon prepayment speeds. This inadequate
disclosure would potentially violate self-regulatory organization
and Commission antifraud rules. In addition, to make this
disclosure complete, a broker-dealer would need to disclose that
the single yield may vary.
-[100]- See supra note 92.
-[101]- 15 U.S.C. 78w(a)(2).
-------------------- BEGINNING OF PAGE #24 -------------------
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. Section 240.10b-10 is amended by adding a preliminary
note prior to paragraph (a), revising paragraphs (a) and (b),
removing paragraph (c), redesignating paragraphs (d) through (f)
as paragraphs (c) through (e), adding a heading to newly
designated paragraph (d), revising the introductory text of
paragraph (d)(6), and adding paragraph (d)(10) to read as
follows:
240.10b-10 Confirmation of transactions.
Preliminary Note. This section requires broker-dealers to
disclose specified information in writing to customers at or
before completion of a transaction. The requirements under this
section that particular information be disclosed is not
determinative of a broker-dealer's obligation under the general
antifraud provisions of the federal securities laws to disclose
additional information to a customer at the time of the
customer's investment decision.
(a) Disclosure Requirement. It shall be unlawful for any
broker or dealer to effect for or with an account of a customer
any transaction in, or to induce the purchase or sale by such
customer of, any security (other than U.S. Savings Bonds or
municipal securities) unless such broker or dealer, at or before
completion of such transaction, gives or sends to such customer
written notification disclosing:
(1) The date and time of the transaction (or the fact that
the time of the transaction will be furnished upon written
request to such customer) and the identity, price, and number of
shares or units (or principal amount) of such security purchased
or sold by such customer; and
(2) Whether the broker or dealer is acting as agent for such
customer, as agent for some other person, as agent for both such
customer and some other person, or as principal for its own
account; and if the broker or dealer is acting as principal,
whether it is a market maker in the security (other than by
reason of acting as a block positioner); and
(i) If the broker or dealer is acting as agent for such
customer, for some other person, or for both such customer and
some other person:
(A) The name of the person from whom the security was
purchased, or to whom it was sold, for such customer or the fact
that the information will be furnished upon written request of
such customer; and
(B) The amount of any remuneration received or to be
received by the broker from such customer in connection with the
transaction unless remuneration paid by such customer is
determined pursuant to written agreement with such customer,
otherwise than on a transaction basis; and
(C) 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 this 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 the
fact 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
(D) The source and amount of any other remuneration received
or to be received by the broker in connection with the
transaction: Provided, however, that if, in the case of a
purchase, the broker was not participating in a distribution, or
in the case of a sale, was not participating in a tender offer,
the written notification may state whether any other remuneration
-------------------- BEGINNING OF PAGE #25 -------------------
has been or will be received and the fact that the source and
amount of such other remuneration will be furnished upon written
request of such customer; or
(ii) If the broker or dealer is acting as principal for its
own account:
(A) In the case where such broker or dealer is not a market
maker in that security and, if, after having received an order to
buy from a customer, the broker or dealer purchased the security
from another person to offset a contemporaneous sale to such
customer or, after having received an order to sell from a
customer, the broker or dealer sold the security to another
person to offset a contemporaneous purchase from such customer,
the difference between the price to the customer and the dealer's
contemporaneous purchase (for customer purchases) or sale price
(for customer sales); or
(B) In the case of any other transaction in a reported
security, or an equity security that is quoted on Nasdaq or
traded on a national securities exchange and that is subject to
last sale reporting, the reported trade price, the price to the
customer in the transaction, and the difference, if any, between
the reported trade price and the price to the customer.
(3) Whether any odd-lot differential or equivalent fee has
been paid by such customer in connection with the execution of an
order for an odd-lot number of shares or units (or principal
amount) of a security and the fact that the amount of any such
differential or fee will be furnished upon oral or written
request: Provided, however, that such disclosure need not be made
if the differential or fee is included in the remuneration
disclosure, or exempted from disclosure, pursuant to paragraph
(a)(2)(i)(B) of this section; and
(4) In the case of any transaction in a debt security
subject to redemption before maturity, a statement to the effect
that such debt security may be redeemed in whole or in part
before maturity, that such a redemption could affect the yield
represented and the fact that additional information is available
upon request; and
(5) In the case of a transaction in a debt security
effected exclusively on the basis of a dollar price:
(i) The dollar price at which the transaction was effected,
and
(ii) The yield to maturity calculated from the dollar
price: Provided, however, that this paragraph (a)(5)(ii) shall
not apply to a transaction in a debt security that either:
(A) Has a maturity date that may be extended by the issuer
thereof, with a variable interest payable thereon; or
(B) Is an asset-backed security, that represents an
interest in or is secured by a pool of receivables or other
financial assets that are subject continuously to prepayment; and
(6) In the case of a transaction in a debt security
effected on the basis of yield:
(i) The yield at which the transaction was effected,
including the percentage amount and its characterization (e.g.,
current yield, yield to maturity, or yield to call) and if
effected at yield to call, the type of call, the call date and
call price; and
(ii) The dollar price calculated from the yield at which
the transaction was effected; and
(iii) If effected on a basis other than yield to maturity
and the yield to maturity is lower than the represented yield,
the yield to maturity as well as the represented yield; Provided,
however, that this paragraph (a)(6)(iii) shall not apply to a
transaction in a debt security that either:
-------------------- BEGINNING OF PAGE #26 -------------------
(A) Has a maturity date that may be extended by the issuer
thereof, with a variable interest rate payable thereon; or
(B) Is an asset-backed security, that represents an
interest in or is secured by a pool of receivables or other
financial assets that are subject continuously to prepayment; and
(7) In the case of a transaction in a debt security that is
an asset-backed security, which represents an interest in or is
secured by a pool of receivables or other financial assets that
are subject continuously to prepayment, a statement indicating
that the actual yield of such asset-backed security may vary
according to the rate at which the underlying receivables or
other financial assets are prepaid and a statement of the fact
that information concerning the factors that affect yield
(including at a minimum estimated yield, weighted average life,
and the prepayment assumptions underlying yield) will be
furnished upon written request of such customer; and
(8) In the case of a transaction in a debt security, other
than a government security, that the security is unrated by a
nationally recognized statistical rating organization, if such is
the case; and
(9) That the broker or dealer is not a member of the
Securities Investor Protection Corporation (SIPC), or that the
broker or dealer clearing or carrying the customer account is not
a member of SIPC, if such is the case: Provided, however, that
this paragraph (a)(9) shall not apply in the case of a
transaction in shares of a registered open-end investment company
or unit investment trust if:
(i) The customer sends funds or securities directly to, or
receives funds or securities directly from, the registered open-
end investment company or unit investment trust, its transfer
agent, its custodian, or other designated agent, and such person
is not an associated person of the broker or dealer required by
paragraph (a) of this section to send written notification to the
customer; and
(ii) The written notification required by paragraph (a) of
this section is sent on behalf of the broker or dealer to the
customer by a person described in paragraph (a)(9)(i) of this
section.
(b) Alternative Periodic Reporting. A broker or dealer may
effect transactions for or with the account of a customer without
giving or sending to such customer the written notification
described in paragraph (a) of this section if:
(1) Such transactions are effected pursuant to a periodic
plan or an investment company plan, or effected in shares of any
open-end management investment company registered under the
Investment Company Act of 1940 that holds itself out as a money
market fund and attempts to maintain a stable net asset value per
share: Provided, however, that no sales load is deducted upon the
purchase or redemption of shares in the money market fund; and
(2) Such broker or dealer gives or sends to such customer
within five business days after the end of each quarterly period,
for transactions involving investment company and periodic plans,
and after the end of each monthly period, for other transactions
described in paragraph (c)(1) of this section, a written
statement disclosing each purchase or redemption, effected for or
with, and each dividend or distribution credited to or reinvested
for, the account of such customer during the month; the date of
such transaction; the identity, number, and price of any
securities purchased or redeemed by such customer in each such
transaction; the total number of shares of such securities in
such customer's account; any remuneration received or to be
received by the broker or dealer in connection therewith; and
that any other information required by paragraph (a) of this
section will be furnished upon written request: Provided,
-------------------- BEGINNING OF PAGE #27 -------------------
however, that the written statement may be delivered to some
other person designated by the customer for distribution to the
customer; and
(3) Such customer is provided with prior notification in
writing disclosing the intention to send the written information
referred to in paragraph (c)(1) of this section in lieu of an
immediate confirmation.
* * * * *
(d) Definitions. For the purposes of this section:
* * * * *
(6) Investment company plan means any plan under which
securities issued by an open-end investment company or unit
investment trust registered under the Investment Company Act of
1940 are purchased by a customer (the payments being made
directly to, or made payable to, the registered investment
company, or the principal underwriter, custodian, trustee, or
other designated agent of the registered investment company), or
sold by a customer pursuant to:
* * * * *
(10) Asset-backed security means a security that is
primarily serviced by the cashflows of a discrete pool of
receivables or other financial assets, either fixed or revolving,
that by their terms convert into cash within a finite time period
plus any rights or other assets designed to assure the servicing
or timely distribution of proceeds to the security holders.
* * * * *
By the Commission.
Jonathan G. Katz
Secretary
November 10, 1994