Notice To Members 86-16

Amendments to SEC Rule l0b-10

Published Date:

March 04, 1986

TO: All NASD Members and Other Interested Persons

On March 17, 1986, several amendments to SEC Rule 10b-10, the customer confirmation rule, will become effective. The amendments will require broker-dealers to report on customer confirmations trade prices and mark-ups and mark-downs in principal transactions in reported securities. "Reported securities" include NASDAQ National Market System (NASDAQ/NMS) securities and listed securities meeting New York or American Stock Exchange listing requirements.

PREVIOUS REQUIREMENTS

Rule 10b-l0 presently requires a broker-dealer executing a transaction with a customer to provide to the customer a written confirmation at or before completion of the transaction disclosing information concerning the transaction. For transactions in which the broker-dealer acts as agent, the confirmation must disclose the transaction price and the commission. For transactions in which the broker-dealer acts as principal. Rule 10b-10 currently requires the broker-dealer to confirm only the "net" price to the customer. However, in the case of "risk less principal" transactions in which the broker-dealer is not a market maker, the confirmation must disclose the transaction price and the "amount of any mark-up, mark-down or similar remuneration."

AMENDED REQUIREMENTS

Under the recent amendments to Rule lOb-10, a broker-dealer executing customer transactions as principal in reported securities will be required to disclose on the confirmation to its customer three items of information:

(1) "the trade price reported";

(2) "the price to the customer in the transaction"; and

(3) the "difference, if any, between the reported trade price and the price to the customer in the transaction."

These requirements will also apply to "risk less principal" transactions in reported securities in which the broker-dealer is a market maker in the security. If the broker-dealer is not a market maker in a "risk less principal" transaction, the existing requirements continue to apply, i.e., the confirmation must disclose the transaction price and the "amount of any mark-up, mark-down or similar remuneration."

For NASDAQ/NMS securities and listed securities traded off-board, the reported trade price is the price required to be reported under the NASD's real-time, last sale reporting requirements contained in Part X of Schedule D of the NASD By-Laws.

EXAMPLES

The following examples may be helpful in assisting members to comply with the new disclosure requirements under Rule 10b-10:

1. Buy as principal 100 shares from a customer at 39 7/8, which includes a 1/8 mark-down.

Report: Buy of 100 shares at 40.
Disclosure to customer:	Reported price of 40;
	Net price to customer of 39 7/8;
	Commission equivalent of 1/8.

2. Buy as principal 100 shares from a customer at 40 with no mark-down.

Report: Buy of 100 shares at 40.
Disclosure to customer:	Reported price of 40;
	Net price to customer of 40;
	Commission equivalent — none.

3. Sell as principal 10,000 shares to an institution at 39 7/8 with no mark-up

Report: Sale of 10,000 shares at 39 7/8.
Disclosure to customer:	Reported price of 39 7/8;
	Net price to customer of 39 7/8;
	Commission equivalent — none.

4. Sell as principal 500 shares to a customer at 40 1/8, which includes a 1/8 mark-up.

Report: Sale of 500 shares at 40.
Disclosure to customer:	Reported price of 40;
	Net price to customer of 40 1/8;
	Commission equivalent of 1/8.

Questions concerning the new reporting requirements under amended SEC Rule 10b-10 may be directed to Bill Hotchkiss, NASD Surveillance Department, at (202) 728-8235.

Sincerely,

Frank J. Wilson
Executive Vice President and General Counsel