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92-39 Confirmation Disclosure Requirements for Transactions in Nasdaq Small-Cap Stocks


Internal Audit
Legal & Compliance
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On June 29; 1992. the SEC approved amendments to Schedule D of the NASD By-Laws regarding confirmation disclosure requirements for Nasdaq Small-Cap stocks. The new rules require members to furnish specific information related to markups and markdowns in connection with transactions in Nasdaq Small-Cap securities to their customers, identical to the disclosures already required by the SEC for Nasdaq National Market System (Nasdaq/NMS) securities. The amendments will become effective August 15, 1992. The text of the amendments follows the discussion below.


On June 15, 1992, members began reporting transactions in Nasdaq Small-Cap securities within 90 seconds after execution, replicating the reporting procedures for Nasdaq/NMS securities. The new section in Schedule D applies to the information contained in confirmations sent by members to customers buying or selling stocks in Nasdaq Small-Cap companies.

The new NASD rule mirrors the SEC's confirmation disclosure requirements, specifically the provisions dealing with disclosure of markups or markdowns on customer confirmations in SEC Rule 10b-10(a)(8), and extends the disclosure requirements to transactions in Nasdaq Small-Cap securities. The SEC rule requires broker/dealers that are not market makers to disclose markups and markdowns on riskless principal transactions and also requires market makers to disclose the difference, if any, between the price of a transaction as reported to the tape and the price to the customer. However, the SEC rule applies only to "reported" securities that are defined as "national market system" securities.

Although Nasdaq Small-Cap securities are now trade-reported at the point of sale like Nasdaq/NMS securities, they are not considered national market system stocks because of the different listing criteria, corporate governance requirements, margin treatment, and state merit review requirements applicable to these smaller companies. Accordingly, the SEC's confirmation disclosure requirements dealing with disclosure of markups or markdowns on customer confirmations do not apply to transactions in Nasdaq Small-Cap securities, and the NASD has adopted requirements identical to those of the SEC.

The NASD believes that it is in the best interests of investors to require members to disclose markups and markdowns taken from the reported price. Just as real-time trade reporting enhances the credibility and image of the Nasdaq Small-Cap Market, more informative disclosure to the public of the prices at which its securities transactions are effected improves the transparency of this market. The NASD also notes that some members have indicated that they have already made arrangements to begin supplying customers with this additional disclosure. Therefore, the rule changes codifying the requirements in this area do not appear to be burdensome to the membership.

Although the amendments will become effective on August 15, 1992, members are encouraged to comply with these new confirmation disclosures as soon as possible. Questions regarding this Notice may be directed to P. William Hotchkiss, Director, Surveillance Department, at (202) 728-8235.

TEXT OF NEW RULES (Note: Additions are in italics)



Section 3 Customer Confirmations

Members shall not effect transactions in regular Nasdaq securities unless such member shall, at or before completion of such transaction, give or send to its customer written notification disclosing if the member is acting as principal for its own account, (i)(A) if it is not a market maker in that security, and if, after having received an order to buy from such customer, it purchased the security from another person to offset a contemporaneous sale to such customer, or after having received an order to sell from such customer it sold the security to another person to offset a contemporaneous purchase from such a customer, the amount of any mark-up, mark-down, or similar remuneration received in an equity security; or (B) in any other case of a transaction in a regular Nasdaq equity security, the trade price reported in accordance with this Part, the price to the customer in the transaction, and the difference, if any, between the reported trade price and the price to the customer, and (ii) whether the member is a market maker in the security (otherwise than by reason of its acting as a block positioner in that security.) The terms used in this subsection shall have the same meaning as provided for in the Securities Exchange Act of 1934 and the rules adopted thereunder.

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