(1) The broker-dealer will average the execution prices of each execution and report the average price per share on the confirmation as the unit price, and note that the confirmed price is an average price and that details of the actual prices are available upon request.

(2) The confirmation must identify each of the capacities in which the broker-dealer acted in executing the order (e.g., “principal” or “agent”), and note that details regarding the capacity in which the broker acted in relation to each execution are available upon request.

(3) The commission, markup, markdown, service fee, and any other remuneration to the broker-dealer will not be detailed separately, but will be stated on the confirmation as a single amount, with a note that more details are available upon request.

(4) The confirmation must include all other information required by Rule 10b-10.

(5) Each individual transaction must be reported separately under applicable trade reporting rules.

(6) The broker must create and maintain all records required under Exchange Act Rules 17a-3 and 17a-4 reflecting the processing and confirmation of these orders and the details of each underlying execution.

Letter from Brian A. Bussey, SEC Division of Market Regulation to Michael Rufino, New York Stock Exchange, Inc., March 3, 2005, available at http://www.sec.gov/divisions/marketreg/mr-noaction/ap030305.htm

• since penalty bids do not currently have to be disclosed, they can serve as an “undisclosed form of stabilization” by deterring immediate sales of IPO shares that would otherwise lower the shares’ market price;
  
• a sales representative’s fear of losing sales commissions may result in an improper interference with a customer’s right to sell its shares at its discretion; and
  
• penalty bids have the effect of discriminating against retail customers of syndicate members as evidence suggests that institutional salespersons are often not penalized when institutional customers flip their shares.

Contrary to the SEC’s understanding that “penalty bids are rarely assessed,” the ICI asserted in its comment letter that the practice of imposing penalty bids is widely used by closed-end funds in order to stabilize the market price of fund shares by curbing the practice of flipping closed-end fund shares. The ICI explained that closed-end funds have unique attributes that do not raise the same concerns as operating companies, and warrant disparate treatment. Some of these unique attributes include the following:

• Closed-end fund shares often trade at a discount to the net asset value of the fund shortly after the IPO. Penalty bids protect long-term shareholders by discouraging the practice of flipping and thereby reducing the chance that shares would be traded at a market discount.
  
• Closed-end funds offer an unlimited amount of shares and do not have any operating histories prior to their IPOs. Therefore, shares of closed-end funds do not significantly appreciate in value in the aftermarket, and thus do not involve the same risks as are associated with “hot IPOs” of operating companies.
  
• Closed-end fund shares are primarily issued to retail investors, thereby reducing the concern that retail investors would be unfairly discriminated against in favor of institutional investors.

Ari Bernstein, Associate Counsel, ICI Comment Letter to Proposed Rule: Amendments to Regulation M: Anti-Manipulation Rules Concerning Securities Offerings (Feb. 15, 2005); SEC Release Nos.33-8511; 34-50831; IC-26691; File No. S7-41-04 (Dec. 2004).

On March 1, 2005, the SEC reopened the comment period on a new rule and rule amendments originally proposed on January 29, 2004. The proposed rule and amendments would require broker-dealers to provide customers with mandated disclosure at the point of sale and in transaction confirmations for sales of mutual fund shares as well as unit investment trust interests (including insurance securities), and interests in 529 plans (collectively, “covered securities”). The required disclosure is intended to provide investors with information regarding the costs and conflicts of interest that arise from the distribution of covered securities. The supplemental request for comments is being made in response to comments received on the proposed rules and from feedback received from investors about the revised forms containing disclosures at the point of sale.

Point of Sale Proposal

Point of Sale Forms. Among other things, the SEC revised the proposed point of sale disclosure forms that would be required by proposed rule 15c2-3 under the Securities Exchange Act of 1934 (the “Exchange Act”). Under the proposed rule, these point of sale disclosure forms would have to be delivered at the point of sale before the purchase of a covered security. As re-proposed, broker-dealers would still have to disclose certain specified categories of information in a particular format to the extent applicable, but broker-dealers would be permitted to omit categories of information that are not applicable to a particular purchase (e.g., deferred sales fees for a purchase of Class A shares). In the release reopening the comment period (the “Release”), the SEC expressed hope that broker-dealers would embrace this targeted approach and provide different forms tailored to each share class where applicable.

In the Release, the SEC proposed new model point of sale disclosure forms for a hypothetical mutual fund with differences among the forms to reflect differences in share classes and other pricing attributes, and model forms for a hypothetical 529 savings plan that reflect differences in pricing. The proposed forms would have to be delivered in the same format (i.e., font and layout) as prescribed by the SEC, but would not use a “one size fits all” format. Instead broker-dealers would be required to include only those categories of required disclosure that are applicable and could omit those categories that are not. Some of the key aspects of the new forms include:

• increased clarity due to the use of plain English rather than industry jargon;
• specific identification of the security subject to disclosure (e.g., a mutual fund’s ticker symbol if applicable);
• disclosure of costs associated with an investment in covered securities using standardized payment or investment amounts (i.e., $1,000, $50,000 and $100,000) and, if requested by a customer, the transaction-specific cost disclosure of the customer’s anticipated payment amount;
• presentation of sales fee disclosure;
• comprehensive annual cost disclosure including investment company costs such as management fees and “other expenses” that are disclosed in the fund’s prospectus in both dollar terms and as a percentage of investment value;
• disclosures tailored to share class and pricing structure applicable to the contemplated purchase;
• disclosures of all share classes under consideration, including classes other than typical A, B, and C share classes;
• conflict of interest disclosure of revenue sharing payments received for promoting covered securities, and the Internet website and toll-free telephone number where customers can find more detailed information about these payments including the amounts and their source;
• disclosure of special incentives to broker-dealer personnel (e.g., differential compensation depending on the security sold);
• reference to the fund prospectus as the primary source of information about the fund.

 Oral Disclosure of Point of Sale Information. The original proposal required that point of sale information be disclosed orally when the point of sale occurs through an oral communication rather than an in-person meeting (e.g., telephone conversation). Although the SEC received numerous comments on oral point of sale disclosure, the SEC expressed concern in the Release that written disclosure prior to acceptance of an order or after-the-fact disclosure would be ineffective or cause undue delay. Therefore, the SEC proposed three possible methods of providing oral point of sale disclosure:

• Under one option, broker-dealers would be required to provide oral point of sale disclosure that is either: (1) quantified to reflect the anticipated amount of the purchase; or (2) quantified to reflect a standardized purchase amount that is appropriate based on the customer’s anticipated payment and fee schedule of the covered security, coupled with transaction-specific quantification upon request.
• Under a second option, in addition to the quantitative information above, broker-dealers would be required to provide summary qualitative information about whether they receive revenue sharing payments or engage in differential compensation practices.
• A third option would permit a broker-dealer using an automated telephone system to receive purchase orders to provide the required point of sale disclosures and allow customers to opt out of listening to such information (other than disclosures relating to sales fees) that would otherwise have to be disclosed in a written disclosure document.

The SEC is requesting comments on oral point of sale disclosure and whether one or a combination of the above options would be effective, or whether some combination of oral and supplemental written disclosure should be required.

Timing of Point of Sale Disclosure. The SEC is requesting comment on the timing of point of sale disclosure. The proposed rule would have required that disclosure be made immediately prior to the acceptance of an order, or upon initial communication with a customer if the broker-dealer could solicit transactions and receive compensation without opening customer accounts or handling customer orders.

Exceptions. The SEC is requesting comments about proposed exceptions for: 

• purchases by institutional investors
• transactions in which the broker-dealer exercises investment discretion; and
• orders received from a customer via mail or delivery service.

Variable Insurance Products. The SEC is soliciting comment on whether it is appropriate or necessary to require written point of sale disclosure for variable annuity and variable life insurance products. The original proposal imposed a single set of disclosure requirements to apply to all covered securities.

Confirmation Proposal

As originally proposed, rule 15c2-2 would have required confirmation disclosure of the amount of dealer concessions earned by the broker-dealer in connection with the transaction, as well as estimates about the amounts of revenue sharing and portfolio brokerage commissions that a broker-dealer or its affiliates would receive from persons within the fund complex. It also would have required disclosure about whether the broker-dealer engaged in certain differential compensation practices. In light of comments received to its proposed rule 15c2-2 confirmation requirements, the SEC is seeking additional comments on the confirmation disclosure proposal. Specifically, the SEC is soliciting comments on: