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94-38 SEC Seeks Comment On Rule 10b-10 Changes And New Rule 15c2-13

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Executive Summary

The Securities and Exchange Commission (SEC) recently published for comment amendments to Rule 10b-10 and a proposed new rule, Rule 15c2-13, under the Securities Exchange Act of 1934. The proposed amendments to Rule 10b-10 specify additional information to be disclosed on customer confirmations. In particular, the changes affect transactions in debt securities. Rule 15c2-13 provides municipal securities customers with disclosure concerning markup/mark-down information in riskless principal transactions and whether the security is unrated by a nationally recognized statistical rating organization. Comments are due on or before June 15, 1994.

Background

SEC Rule 10b-10 requires a broker/dealer that effects transactions for customers in securities, other than U.S. savings bonds or municipal securities, to provide a written confirmation to the customer at or before completion of the transaction. The rule also requires disclosure of specified transaction details on the confirmation. Providing written confirmation of a securities transaction forms a basis for customer protection under the federal securities laws.

Description Of Proposals

The proposed amendments and rule would strengthen investor protection by providing customers with additional details about their securities transactions. The SEC took action due to changes in the securities markets and the development of new securities products. The principal amendments address the following:

Disclosure In Riskless Principal Transactions

The SEC would amend Rule 10b-10 to require the disclosure of markup/markdown information for riskless principal trades in debt securities, other than U.S. savings bonds and municipal securities.

Similarly, proposed Rule 15c2-13 would require disclosure of markup/markdown information in riskless principal trades in municipal securities. Unlike current disclosure requirements for riskless principal transactions in equity securities, the proposed amendment and new Rule 15c2-13 do not include an exclusion for market makers. The SEC notes that it omitted this exclusion because market makers have a much more limited function in the debt markets.

Unrated Status Disclosure

Both Rule 10b-10 and new Rule 15c2-13 would require broker/dealers to disclose on customer confirmations whenever a debt security, or a municipal security, has not been rated by a nationally recognized statistical rating organization. The proposal requires only that customers must be informed when the security is not rated. U.S. Treasury securities are excluded from this requirement.

Disclosure In Principal Transactions

Since 1985, Rule 10b-10 has required broker/dealers acting as principals in transactions in Reported Securities to disclose on customer confirmations the reported trade price, the price to the customer, and the difference between the two prices. With the extension of last-sale reporting to additional securities, the SEC now is proposing to require similar disclosure in principal transactions in Nasdaq SmallCap Market™ securities and regional exchange-listed securities. Members should note that the NASD already requires that customer confirmations for Nasdaq SmallCap Market securities contain the same disclosures as are required under Rule 10b-10 for Nasdaq/NMS securities.

Disclosure Of SIPC Coverage

The changes to Rule 10b-10 to require broker/dealers not belonging to the Securities Investor Protection Corporation (SIPC) to affirmatively state on the customer confirmation that they are not SIPC members. In addition, the amendment would require disclosure if the account is carried by a broker/dealer that is not a SIPC member.

The SEC notes that this change will reduce the potential for confusion, especially regarding whether SIPC coverage exists for accounts with government securities broker/dealers. This proposed requirement is consistent with the authority granted to the SEC under the Government Securities Act Amendments of 1993.

Asset-Backed Securities Disclosure

In another amendment to Rule 10b-10, the SEC would revise the yield disclosure requirements for asset-backed securities. This amendment would require broker/dealers to disclose yield information for debt instruments that are insulated from prepayment risk or that are subject to predictable yield forecasts.

However, the proposed amendments treat collateralized mortgage obligations (CMOs) differently. A broker/dealer effecting transactions in CMOs would be required to disclose the estimated yield, the weighted average life, and the prepayment assumptions underlying the yield.

Introductory Note

The SEC is proposing to add a brief preliminary note to Rule 10b-10, making explicit the SEC's longstanding position that the rule was not intended to codify all the disclosure that may be needed for a particular transaction. Additional disclosures may be required to satisfy anti-fraud provisions of the federal securities laws. Finally, the SEC is proposing a variety of non-substantive changes to Rule 10b-10 to improve its clarity.

* * * * *

In seeking comment on these changes, the SEC also requested comment on the impact of three-day settlement (T+3) on the confirmation process. Although T+3 does not create compliance problems with regard to Rule 10b-10, the SEC is concerned that accelerated settlement could diminish the confirmation's role as a safeguard against errors, misunderstandings, or other problems associated with a transaction. Should this happen, the SEC questions whether certain information should then be required on customers' periodic account statements.

The SEC request for comments appeared in the March 17, 1994, Federal Register. Members wishing to comment on these proposals have until June 15, 1994, to do so. Comment letters should refer to File No. S7-6-94 and should be sent, in triplicate, to:

Jonathan G. Katz
Secretary
SEC
450 Fifth Street, N.W.
Mail Stop 6-9
Washington, D.C. 20549

Members are requested to send copies of their comment letters to:

Joan Conley
Corporate Secretary
NASD
1735 K Street, N.W.
Washington, D.C. 20006-1500

Questions concerning this Notice may be directed to Janet Marsh, District Coordinator, Compliance Department, (202) 728-8228.


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