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83-38 SEC Adopts Amendments to Rule 10b-10; Confirmation Rule

I M P O R T A N T

OFFICERS, PARTNERS AND PROPRIETORS

TO: All NASD Members

BACKGROUND

On April 18, 1983, the Securities and Exchange Commission issued Release No. 34-19687 announcing the adoption of changes to Rule 10b-10 under the Securities Exchange Act of 1934 (17 CFR 240 lOb-10), the "securities confirmation rule," (the "Rule"). Rule 10b-10 requires broker-dealers to send customers a written confirmation on or before the completion of a transaction. It also prescribes the type of information required to be displayed on securities confirmations. This information varies with the circumstances of the transaction and the type of security.

The amendments to Rule 10b-10 fall into two categories; the first concerns the confirmation requirements for shares of certain no-load, open-end registered investment companies and the second a requirement for disclosure of yield and call information for transactions in debt securities similar to those currently in effect for municipal securities.

INVESTMENT COMPANY CONFIRMATIONS

Since 1977, the Commission has granted exemptions to the requirement for immediate delivery of confirmations to allow broker-dealers having account management plans* to send monthly confirmations of certain transactions in "money market" funds. In response to the comments of the Association and others to proposed changes in the Rule, the Commission determined to extend the confirmation exemption to all transactions in investment companies that attempt to maintain a constant net asset value per share, that hold themselves out to be "money market" funds, or have at least 80% of their assets in debt securities maturing in 13 months or less, and charge no sales load or redemption fee. This exemption will be available to all broker-dealers that effect transactions in such funds, whether or not the broker-dealer is affiliated with the fund.

Accordingly, for only this type of security, Rule 1Ob-10 will be amended to permit the use of monthly account statements where previously individual confirmations were required. The monthly account statements must be sent within 5 business days of the end of each monthly period and must include all information currently required in the quarterly confirmation requirements of Rule 10b-10 including:

(1) All purchases, sales, dividends or distributions during the period.
(2) The date of the transaction.
(3) The identity, number and price of any securities purchased or sold.
(4) The total number of shares of such securities in such customer's account.
(5) Any remuneration received or to be received in connection with the transaction.

This requirement becomes effective July 25, 1983.

CONFIRMATION OF DEBT SECURITIES

The second part of the amendments to Rule 10b-10 requires the disclosure on confirmations of yield and call information for transactions in debt securities. "Debt securities" are defined in the rule as any instrument which evidences a liability of an issuer and includes bonds, debentures, notes or fractional or participation interests therein. The rule is also applicable to transactions in government securities (except U.S. Savings Bonds) and certain other debt instruments described below. This new disclosure requirement is structured as follows:

(1) As to trades in debt securities effected exclusively on a dollar price basis, the dollar price of the trade and the yield to maturity based on that dollar price must be displayed.
(2) As to trades in debt securities effected on a yield basis:
(i) The dollar price calculated from the yield at which the transaction was effected must be displayed; and,
(ii) If the transaction is effected on a basis other than yield to maturity and yield to maturity is less than the represented yield, the confirmation should display yield to maturity as well as represented yield.

Transactions in debt securities having an interest rate or maturity date which is subject to change have been exempted from certain of the debt security confirmation requirements.* The Rule recognizes that under such circumstances, it is not possible to calculate a meaningful yield to maturity. If such transactions are effected on a yield basis, the confirmation must display that yield, including the dollar price calculated from the yield. The requirement to display yield to maturity is waived.

If the security may be called for redemption before maturity, a legend must be displayed to that effect. The legend must also disclose that redemption could affect the represented yield and that additional information is available on request.

The following chart summarizes the yield and call disclosure requirements.

Debt Securities

 

Required Disclosure

Dollar Price Basis

• Dollar price

• Yield to maturity based on dollar price

Yield Price Basis

• Yield

• Type of yield; (yield to maturity, yield to call, or current)

• Dollar price based on yield

Callable Security

• Call legend

The new yield and call confirmation requirements of Rule 10b-10 become effective on January 1, 1984. The text of the rule follows.

Please direct any questions concerning Rule 1Ob-10 to Elizabeth Wollin at (202) 728-8266.

Sincerely,

Gordon S. Macklin
President

Attachment

federal register

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Rel. No. 34-19887, File No. S7-942 ]

Securities Confirmations

AGENCY: Securities and Exchange Commission.

ACTION: Final rule amendments.

SUMMARY: The Commission is adopting amendments to Rule 10b-10 under the Securities Exchange Act of 1934 ("Act") which specifies disclosures to be made on confirmations delivered to customers by broker-dealers in connection with transactions in securities. The amendments provide an exception from the immediate delivery requirements of the rule for transactions in shares of certain investment companies that attempt to maintain a constant net asset value. The amendments also will require disclosure to investors of certain yield and call feature information in connection with transactions in debt securities other than municipal securities.

DATES: Paragraphs (c)(l)-(3), relating to the use of monthly confirmation statements, will become effective July 25, 1983. Paragraphs (a)(3)-(5) and (e)(4) of Rule 10b-10, requiring disclosure of yield and call feature information, will become effective January 1, 1984.

FOR FURTHER INFORMATION CONTACT:
Susan J. Walters, Esq., (202) 272-7494,
Division of Market Regulation,
Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

The Commission today announced the adoption of amendments to its securities confirmation rule, Rule lOb-10 (17 CFR 240.10b-10) under the Act1 the amendments were published for comment in August 1982.2 As proposed, the amendments would have provided a limited exception to the immediate delivery requirements of the confirmation rule for pre-authorized or "automatic" transactions in shares of money market funds, tax-exempt bond funds or U.S. government funds in connection with certain plans defined as "account management plans." Upon its review of the proposals and consideration of the comments received, the Commission has determined to expand the exception to the immediate confirmation delivery requirements of Rule lOb-10 to allow the use of monthly statements in confirmations of all redemptions and purchases of shares of certain investment companies that attempt to maintain a constant net asset value.

The proposed amendments requiring disclosure of yield and call provisions have been adopted substantially as proposed. These amendments will require any broker or dealer that effects a transaction for or with a customer in any debt security, with certain exceptions, to include in the customer's written confirmation information on the yield and call provisions of the security.

II. Discussion

1. Use of Monthly Statements
Rule 10b-10 generally requires that broker-dealers send to customers a written confirmation of securities transactions on or before completion of the transaction. Since 1977, however, the Commission has granted exemptions from this immediate delivery, requirement to allow broker-dealers, in connection with account management plans,3 to send monthly confirmations of certain transactions in shares of money market funds. The proposed amendments would have codified these exemptions. The amendments would have drawn a distinction between pre-authorized ("automatic") and individually directed ("manual") transactions and between transactions in money market funds pursuant to account management plans and other fund transactions. Only automatic transactions in account management plans would have qualified for the exception as proposed.
The commentators unanimously supported the amendments as a deregulatory initiative that would result in substantial cost savings to the industry and the public without adversely affecting investors. Some commentators noted, however, that extension of the proposed exception to all transactions in investment companies that seek to maintain constant net asset value would provide even greater cost reduction without materially decreasing customer protection. Commentators suggested that where funds maintain a constant net asset value per share and no load is charged, monthly statements would be adequate to ensure investor protection. One commentator also noted that alternative means to immediate confirmations are frequently available to money market fund shareholders to determine whether a transaction has been effected correctly. For example, a number of funds provide shareholders with a toll free telephone number that they may use to obtain account information. A customer's account executive may also be able to provide account information.
The confirmation is designed to provide customers with information necessary for investment decisions. Where fund shares are priced at a constant net asset value per share and no load is charged, the need for investors to receive immediate confirmations does not appear to outweigh the cost to broker-dealers of providing the confirmation. Accordingly, the Commission has determined to extend the proposed exception to the confirmation delivery requirements of the rule to all transactions in investment companies that attempt to maintain a constant net asset value per share where no sales load or redemption fee is charged. The amendment will become effective July 25, 1983, in order to provide broker-dealers and transfer agents with sufficient time to review their internal controls and develop adequate systems to use the exception.
As adopted, the exception will permit broker-dealers to use monthly account statements in lieu of individual, immediate confirmations for all purchases and redemptions of shares of any no-load open-end investment company registered under the Investment Company Act of 1940 that attempts to maintain a constant net asset value per share and that holds, itself out to be a "money market" fund or has an investment policy calling for at least 80% of its assets in debt securities maturing in 13 months or less. The exception will be available to all broker-dealers that effect transactions in such funds, regardless of whether the broker-dealer is affiliated with the fund.
The monthly account statement is required to be given or sent within five business days of the end of each monthly period and must include substantially all the information currently required in the quarterly confirmation provisions of paragraph (h) of Rule lOb-10.4 This information will include, among other things, purchases and redemptions of fund shares and the total number of fund shares held by the customer.
2. Disclosure of Yield and Call Information
The Commission believes that disclosure of yield and call feature information for transactions in debt securities will significantly benefit investors without unduly increasing industry costs. Yield has been characterized as the single most important piece of information to an investor in the context of a transaction in debt securities, and the securities industry has suggested that broker-dealers should be required to provide that information to customers.5 The confirmation rule of the Municipal Securities Rulemaking Board ("MSRB") currently requires disclosure of yield information for transactions in municipal securities.6
As adopted, the amendments will require broker-dealers to include in the written confirmation of transactions in debt securities with customers 7 several additional items of information. Broker-dealers must disclose, in the case of a transaction in a debt security effected exclusively on a dollar price basis,8 the dollar price at which the transaction was effected and the yield to maturity calculated from the dollar price.
In the case of a transaction in a debt security effected on the basis of yield, the confirmation must disclose (1) the yield at which the transaction was effected, including the percentage amount and the characterization of the yield as, for example, yield to maturity or call or current yield, and, if effected at yield to call, the type of call (e.g., whole or part-issue call), the call date and call price; (2) the dollar price calculated from the yield at which the transaction was effected; and (3) if the transaction is effected on a basis other than yield to maturity and yield to maturity is less than the represented yield, the yield to maturity as well as the represented yield.
In response to the commentators' concerns, the Commission has exempted from the yield to maturity disclosure requirements transactions in debt securities where the interest rate or maturity date is subject to change. The Commission understands that under these circumstances it is not possible to calculate a meaningful yield to maturity. Therefore, in those instances where such securities trade on a dollar basis, the yield to maturity need not be disclosed. However, if the broker-dealer effects transactions in such securities on a yield basis, the confirmation must contain that yield, including the percentage amount and the characterization of the yield. The yield to maturity, however, is not required to be disclosed for such yield basis transactions.
Transactions in participation interests in notes secured by liens upon real estate continuously subject to prepayment, such as Government National Mortgage Association securities ("GNMA"), similarly are exempt from the yield to maturity disclosure requirements. Depending upon the level of the interest rates on the mortgages that comprise the pool, the mortgages may be prepaid within varying periods of time. The Commission understands that broker-dealers often quote investors the yield to twelve year average life for purposes of comparing different GNMAs, although that figure may be significantly different from the actual yield to investors. Where the GNMA or similar security is sold on a yield basis, as, for example, the yield to twelve year average life, that yield and the dollar price calculated from the yield must be disclosed. In addition, since some investors may not adequately understand the significance of the yield to twelve year average life, the broker-dealer should clearly explain the significance of that figure to their customers.
If the securities may be called for redemption before maturity, a legend must be included disclosing that fact, that redemption could affect the represented yield and that additional information is available upon request.9 As discussed in the Proposing Release, the Commission is concerned that investors often" do not adequately understand the nature and effect of call provisions on debt securities.10 The rule does not set forth the particular language of the legend in order to afford flexibility to broker-dealers, particularly those that have devised a similar legend to comply with MSRB Rule G-15.11

III. Certain Findings, Effective Date and Statutory Basis

Section 23(a)(2) of the Act12 requires the Commission, in adopting rules under the Act, to consider the anti-competitive effect of such rules, if any, and to balance any impact against the regulatory benefits gained in terms of furthering the purposes of the Act. The Commission has considered the amendments to Rule 10b-10 in light of the standards cited in Section 23(a)(2) and believes that adoption of the amendments will not impose any burden on competition not necessary or appropriate in furtherance of the Act

Pursuant to the Administrative Procedure Act, 5 U.S.C. 553(b), interested persons were given an opportunity to submit written views on the proposed amendments to Rule 10b-10. After consideration of the relevant matters presented, the proposed amendments concerning yield and price disclosures are adopted substantially as proposed with some technical changes for clarity. In response to commentators' suggestions, the proposed amendments dealing with the exception from the immediate confirmation delivery requirements for certain transactions in I shares of investment companies are extended to transactions in shares of investment companies that seek to maintain a constant net asset value. The issues with respect to the extension have been thoroughly considered during the comment period. Extended delay in adopting the amendments would be costly to investors and broker-dealers. Therefore, the Commission, for good cause, pursuant to 5 U.S.C. 553(b)(3)(B), finds that further notice and public procedure with respect to the amendments would be unnecessary, impracticable, and contrary to the public interest.

The amendments to Rule lOb-10 with respect to the use of monthly confirmations in lieu of immediate confirmations have been modified in response to commentators' suggestions. These amendments will become effective July 25, 1983.13 The amendments to Rule lOb-10 with respect to disclosure of yield and call information will become effective January 1, 1984.

Regulatory Flexibility Act Certification

Pursuant to 5 U.S.C. 605(b), the Chairman has certified that the amendments as adopted will not have a significant economic impact on a substantial number of small entities. This certification, including the reasons therefor, is attached to the release.

Statutory Basis

The Securities and Exchange Commission hereby amends § 240.10b-10 in Chapter II, Title 17 of the Code of Federal Regulations, pursuant to its authority under the Act, and particularly Sections 3,10,11, 15, 17, and 23 thereof (15 U.S.C. 78c, 78j, 78k, 78o, 78q, and 78w).

List of Subjects in 17 CFR Part 240

Reporting requirements, Securities.

Text of Amendments to Rule 10b-10

Chapter II, Title 17 of the Code of Federal Regulations is amended as follows:

PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

By amending § 240.10b-10 by adding new paragraphs (a)(3), (a)(4), and (a)(5); by adding new paragraphs (c), (c)(l). (c)(2) and (c)(3); by adding new paragraph (e)(4); by revising the reference to paragraph (a)(4)(ii) in paragraph (a)(3) to read "paragraph (a)(7)(ii)"; by revising the reference to five days in paragraph (b)(2) to read "five business days"; by redesignating existing paragraphs (a)(3), (a)(4), and (a)(5) to be paragraphs (a)(6), (a)(7), and (a)(8), respectively; by redesignating existing paragraph (c) to be paragraph (d); by redesignating existing paragraphs (d), (d)(l). (d)(2). (d)(3), (d)(4), and (d)(5) to be paragraphs (e), (e)(l), (e)(2). (e)(3). (e)(5), and (e)(6), respectively; and by redesignating existing paragraph (e) to be paragraph (f), to read as follows: § 240.10b-10 Confirmation of Transactions.

§240.10b-10 [Amended]

(a) * * *
(3) 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 that additional information is available upon request; and
(4) 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 (ii) shall not apply to a transaction in a debt security with a maturity date that may be extended by the issuer thereof, with a variable interest rate payable thereon, or a participation interest in notes secured by liens upon real estate continuously subject to prepayment; and
(5) 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 to call, the call date and call price;
(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 (iii) shall not apply to a transaction in a debt security with a maturity date that may be extended by the issuer thereof, with a variable interest rate payable thereon, or a participation interest in notes secured by liens upon real estate continuously subject to prepayment; and

* * * * *

(c) 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 in shares of any no-load open-end investment company registered under the Investment Company Act of 1940 that attempts to maintain a constant net asset value per share and that holds itself out to be a "money market" fund or has an investment policy calling for investment of at least 80% of its assets in debt securities maturing in thirteen months or less; and
(2) Such broker or dealer gives or sends to such customer within five business days after the end of each monthly period 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 each 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; and remuneration received or to be received by the broker or dealer in connection therewith; and that any other information required by paragraph (a) will be furnished upon written request; 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) on a monthly basis in lieu of an immediate confirmation.

* * * * *

(e) * * *
(4) "Debt security" as used in paragraphs (a)(3), (a)(4), and (a)(5) only, means any security, such as a bond, debenture, note, or any other similar instrument which evidences a liability of the issuer (including any such security that is convertible into stock or a similar security) and fractional or participation interests in one or more of any of the foregoing: Provided, however, that securities issued by an investment company registered under the Investment Company Act of 1940 shall not be included in this definition;

* * * * *

By the Commission.
Dated: April 18, 1983

George A. Fitzsimmons,
Secretary

Regulatory Flexibility Act Certification

I, John Shad, Chairman of the Securities and Exchange Commission, hereby certify pursuant to 5 U.S.C. 605(b) that the proposed amendments to Rule 10b-10 set forth in Securities Exchange Act Release No. 18988, if promulgated, will not have a significant economic impact on a substantial number of small broker-dealers. The Commission received thirteen comment letters which were generally supportive. The amendments requiring yield and call disclosures have been revised to clarify technical questions raised by commentators. In addition, the limited number of small broker-dealers that trade corporate debt securities frequently clear through larger broker-dealers that process the confirmation. Finally, the extension of the exception to permit broker-dealers to use monthly account statements in connection with transactions in shares of certain investment companies will reduce confirmation costs to all broker-dealers engaged in such transactions.

John S. R. Shad,
Chairman.

[FR Doc. 83-10845 Filed 4-22-83; 8:45 am]

BILLING CODE 8010-01-M


* Plans in which the customer may purchase shares of money market mutual funds as specified in the plan, with funds drawn from the customer's securities account, and redeem such shares also in accordance with the terms specified in the plan (e.g., to satisfy a debit balance created by the purchase of securities or by the exercise of a check, credit or debit card or similar withdrawal option provided in the plan).

* For example, transactions in participation interests secured by liens upon real estate, continuously subject to prepayment, such as Government National Mortgage Association (GMNA) securities, are exempt from the yield to maturity disclosure requirements. Where the GNMA or similar security is sold on a special yield basis (e.g., yield to twelve year average life), that yield and related dollar price must be disclosed, and the significance of that special yield must be explained to the customer.

1 15 U.S.C 78 et seq.

2 Securities Exchange Act Release No. 18988 (Aug. 20, 1982), 47 FR 37920 (Aug 27, 1982) ("Proposing Release").

3 The term "account management plan" was defined in the proposed amendments to include plans in which the customer may purchase shares of money market mutual funds as specified in the plan with funds drawn from the customer's account and redeem such shares also in accordance with the terms specified in the plan (e.g., to satisfy a debit balance created by the purchase of securities or by the exercise of a check, credit or debit card or similar withdrawal option provided in the plan). These transactions were considered to be "automatic" (pre-authorized by the customer) as opposed to "manual" (individually directed transactions).

4 The amendment would not, of course, change the availability of other confirmation alternatives such as the use of quarterly statements now permitted by certain provisions of Rule 10b-10.

5 See, e.g.. letter from the Corporate Bond Committee of the Securities Industry Association to Roger D. Blanc. Chief Counsel, Division of Market Regulation (July 2, 1979).

6 MSRB Rule G-15.

7 As defined in Rule 10b-10(d)(1), the term "customer" does Hot include a broker or dealer.

8 One commentator questioned the use of the term "basis" as used in the Rule. For purposes of the Rule, a transaction will be considered to have been effected on a dollar price basis only if a yield figure is not provided either orally or in writing to the customer before preparation of the confirmation. If transactions are in fact effected on a dollar price basis, the confirmations must show the yield to maturity calculated from the dollar price discussed with the customer.

9 Some commentators requested that the Commission clarify the kind of additional information that would be required to be supplied upon a customer request. Broker-dealers generally will satisfy this requirement by describing the call feature printed on the instrument.

10 See Proposing Release, 47 FR at 37922.

11 While the rule requires use of the legend where debt securities are subject to call, it does not prohibit inclusion of the legend on confirmations of debt securities not subject to early redemption. Therefore, the rule permits the use of pre-printed confirmation forms.

12 15 U.S.C. 78w(a)(2).

13 In the Proposing Release, the Commission stated that the staff would not recommend enforcement action under Rule 10b-10 if broker-dealers conformed their customer confirmation delivery procedures for account management plans. as defined in the release, to the proposed amendments. Broker-dealers may continue to rely on this position in connection with these account management plans pending the effective date of the amendments with respect to monthly confirmations.



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