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Example of Format for Rule 11AC1-5
Example of Format for Rule 11AC1-6
RND’s Pricing for Best Execution Reports
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Division of Market Regulation:
Staff Legal Bulletin No. 13A

Frequently Asked Questions About Rule 11Ac1-6

Action: Publication of Division of Market Regulation Staff Legal
Bulletin

Date: October 16, 2001 (revised)

Summary: This staff legal bulletin sets forth the views of the
Division of Market Regulation in response to frequently asked questions
concerning Rule 11Ac1-6 under the Securities Exchange Act of 1934.

Supplementary Information: The statements in this legal bulletin
represent the views of the staff of the Division of Market Regulation.
This legal bulletin is not a rule, regulation, or statement of the
Securities and Exchange Commission (“Commission”). Further, the Commission
has neither approved nor disapproved its content.

Contact Person: For further information, please contact Stephen
L. Williams, Senior Special Advisor, at (202) 942-0071, or Susie Cho,
Special Counsel, at (202) 942-0748, Division of Market Regulation,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington
D.C. 20549-1001.

I. Introduction

In November 2000, the Commission adopted Exchange Act Rule 11Ac1-6
(“Rule”).1 The Rule requires all broker-dealers that route
orders in equity and option securities to make available quarterly reports
that present a general overview of their routing practices. The reports
must identify the significant venues to which customer orders were routed
for execution during the applicable quarter and disclose the material
aspects of the broker-dealer’s relationship with such venues. In addition,
the Rule requires broker-dealers to disclose, on customer request, the
venues to which the customer’s individual orders were routed. The
compliance date for the Rule was July 2, 2001. The first quarterly reports
(for the third quarter of 2001) must be made available to the public by
the end of November 2001.2 In addition, broker-dealers must begin
responding to customer requests for individual information on orders that
were routed on July 2, 2001 and after.

Since adoption of the Rule, the Division has received a number of
inquiries concerning the implementation and operation of the Rule, some of
which indicate that interpretive guidance would be helpful. The Division
is issuing this staff legal bulletin to address a variety of frequently
asked questions.

The following questions and answers do not necessarily contain a
discussion of all the material considerations necessary to reach the
conclusions stated. Consequently, these questions and answers are intended
to provide general guidance, but the facts and circumstances relating to
particular broker-dealers may differ, and the staff notes that even slight
variations may require different responses. The Commission is not bound by
these statements and may interpret the Rule as it deems necessary or
appropriate in the public interest or for the protection of investors.

In addition, these questions and answers are premised on several
important assumptions. First, the discussions assume close familiarity
with the text of the Rule and the Adopting Release, and we urge you to
read carefully the Rule and Adopting Release. The responses are a
complement to, and not a substitute for, these sources. Second, the terms
used in this staff legal bulletin have the meanings set forth in the
definitions of paragraph (a) of the Rule.

The Division may update these questions and answers periodically by
issuing an updated staff legal bulletin. In each updated staff legal
bulletin, the questions and answers with modified or new material since
the last update will be marked as “modified” or “new.”

The interpretive questions addressed in this bulletin are as
follows:

Question
1:
Format of
Quarterly Reports (modified)
Question
2:
Identifying
Significant Execution Venues
Question
3:
Materiality
of Order Percentage Figures
Question
4:
Introducing
Broker/Clearing Firm – Reporting Responsibility
(modified)
Question
5:
Multiple
Reports by a Broker-Dealer
Question
6:
Definition
of Customer Orders – Large Order Exclusion
(modified)
Question
7:
Definition
of Customer Orders – Orders Received from Other Broker-Dealers or
Foreign Banks Acting as Broker-Dealers
Question
8:
Definition
of Directed Order – Default Routing Instructions
(modified)
Question
9:
Classifying
Market, Limit, and Other Orders
Question
10:
Orders
Executed at Multiple Venues
Question
11:
Execution
Venue for Riskless Principal Orders
Question
12:
Nasdaq
Execution Venues
Question
13:
Disclosing
Payment for Order Flow
Question
14:
Disclosing
Internalized Order Flow
Question
15:
Procedures
for Making Quarterly Reports Publicly Available
Question
16:
Responding
to Requests from Customers for Individual Information
Question
17:
Written
Notice to Customers Concerning Availability of Quarterly Reports and
Individual Information
Question
18:
Orders That
Are Cancelled and Replaced (new)
Question
19:
Products
Traded in Multiple Markets (new)
Question
20:
Exemption
from Public Posting Requirement for Firms with a De Minimus Number
of Orders (new)
Question
21:
Definition
of Customer Orders-After-hours Trading (new)
Question
22:
Orders in
Foreign Securities (new)

II. Questions and Answers

Question 1: Format of Quarterly Reports
(modified)

Q: Are broker-dealers required to follow any particular
format in preparing their quarterly reports?

A: Yes. The Rule requires that a quarterly report be divided
into four sections, one each for (1) covered securities listed on the New
York Stock Exchange, Inc. (“NYSE”) and reported as a Network A eligible
security;3 (2) covered securities listed on The Nasdaq
Stock Market, Inc.; (3) covered securities listed on the American Stock
Exchange LLC (“Amex”) or any of the regional stock exchanges and reported
as a Network B eligible security;4 and (4) exchange-listed options. The Rule also
specifies items of information that should be included in the quarterly
reports in a clear format that will be understandable by customers and the
public.

Attached as Exhibit A is an example of a quarterly report that is
intended to offer guidance on a format that the Division would consider to
be clear and understandable. The example report includes an introduction
and a section with sample statistics. The section first sets forth summary
statistics for the category of securities covered by the section. It next
identifies the significant execution venues in descending order of the
percentage of total non-directed orders routed to the venues. Finally, the
section sets forth information relating to individual venues, including
the percentages of different types of orders routed to each venue and the
material aspects of the broker-dealer’s relationship with each venue.

The report in Exhibit A is intended only as an example. Broker-dealers
also are free to include additional information that they believe would be
useful for customers and the public.

Question 2: Identifying Significant Execution
Venues

Q: If a broker-dealer routes the great majority of non-directed
orders to a few execution venues, but also routes a small number of orders
to several other venues, is the broker-dealer still required to identify
and disclose its relationships with these other venues?

A: No. Broker-dealers need only identify and prepare disclosures
for their most significant execution venues, as explained further below.
The Commission noted in the Adopting Release that “the quarterly reports
on order routing are intended to provide a general overview of a
broker-dealer’s practices that is accessible and useful to individual
investors.”5 To this end, the Rule requires broker-dealers to
disclose only those execution venues to which they routed the most orders
for a section of a report – the top ten and any others to which they
routed five percent or more of orders.

Where, however, a broker-dealer routes the great majority of its orders
for a section of the report to only a few venues, it also might route
orders to other venues that fall within the top ten, but actually receive
only a small number of orders. The inclusion of these venues in quarterly
reports would not provide materially more useful information to investors,
yet could impose a significantly higher compliance burden. Consequently,
the Commission has exempted broker-dealers from the disclosure
requirements of paragraph (b)(1)(ii) of the Rule with respect to execution
venues that receive only a small percentage of the non-directed
orders.6 Under the exemption, a broker-dealer is not
required to identify execution venues that received less than 5% of
non-directed orders for a section of the broker-dealer’s quarterly report,
as long as it has identified the top execution venues that in the
aggregate received at least 90% of the broker-dealer’s total non-directed
orders for the relevant section.

Question 3: Materiality of Order Percentage
Figures

Q: Is a broker-dealer required to capture, on an order-by-order
basis, all information necessary to generate quarterly reports that
precisely set forth the percentages of orders routed to different
execution venues, or may it use reasonable procedures to estimate the
percentages so long as they generate materially accurate overviews of the
broker-dealer’s routing practices?

A: Unlike the monthly execution quality statistics required of
market centers under Rule 11Ac1-5, where precise information must be
captured on an order-by-order basis, the order routing percentages in
quarterly reports are intended to provide a general overview of a
broker-dealer’s routing practices. If interested, individual customers are
entitled to request specific information on their own orders.
Consequently, a broker-dealer need only generate quarterly reports that
provide a materially accurate overview of its routing practices.

A broker-dealer should develop reasonable procedures to estimate order
percentages within a range that is materially accurate. For example, a
firm could adopt procedures that are based on a variety of available
sources, such as clearing records and the firm’s order routing algorithms.
In preparing its quarterly report (as opposed to responding to customer
requests for individual information), a firm is not required to account
precisely for every individual order, particularly those categories of
“niche” orders that represent a de minimus percentage of the firm’s total
non-directed orders.7 The cost of this administrative task could
outweigh the limited additional benefit of more precise order routing
percentages. The end result, however, must be a quarterly report that the
broker-dealer has a reasonable basis to believe sets forth a materially
accurate overview of its routing practices.

Question 4: Introducing Broker/Clearing Firm –
Reporting Responsibility (modified)

Q: Do introducing brokers who transmit all customer orders to
their clearing firms for execution have a reporting responsibility under
the Rule? If so, to what extent can clearing firms assist their
introducing brokers in meeting the Rule’s requirements?

A: Introducing brokers have the reporting responsibility under
the Rule. Introducing brokers may contract with their clearing firms for
assistance in meeting their reporting responsibilities (analogous to the
assistance provided by clearing firms to some introducing brokers in
meeting the duty of best execution), but the responsibility remains the
introducing brokers’. This is true even when orders are transmitted
directly from customers to clearing and execution firms without being
handled by employees or systems of the introducing brokers. Given the many
functions that a clearing firm may perform on behalf of its introducing
brokers, however, the clearing firm often will play a substantial role in
generating the quarterly reports of its introducing brokers.

For example, if an introducing broker transmits all customer orders to
its clearing firm, and the clearing firm in fact makes the routing
decision concerning those customer orders without regard to the identity
of the particular introducing broker, the clearing firm may be in the best
position to prepare a quarterly report that reflects the clearing firm’s
routing practices on behalf of the introducing broker. Introducing brokers
could disclose the existence of the clearing relationship (including
payment for order flow, if any, received by the introducing broker) and
adopt by reference the clearing firm’s report to comply with the Rule,
provided that they have examined the report and do not have reason to
believe it materially misrepresents the order routing practices. Such a
report would identify significant execution venues, as well as the
percentages of non-directed orders routed to the venues, from the
standpoint of the clearing firm. In addition, the report’s discussion of
relationships with execution venues should reflect the standpoint of the
clearing broker – the entity that is actually making the order routing
decision. If, for example, the clearing broker internalized orders or
received payment for order flow from other execution venues, these facts
would need to be disclosed in the quarterly report.

Similarly, an introducing broker that has clearing and execution
relationships with more than one clearing firm could disclose the
existence of each such relationship (including any payment for order flow)
and the amount of order flow directed to each of its clearing firms, and
adopt by reference each of its clearing firms’ reports to comply with the
Rule. All of the conditions that apply to a single clearing firm
relationship as described above, would apply to each of multiple clearing
agents separately. In particular, the clearing agent in each such
relationship must in fact make the routing decisions for the customer
orders that it handles, and it must prepare a report reflecting its
standpoint.

Given the many different relationships that can exist between
introducing brokers and their clearing firms, those brokers with reporting
responsibility will need to evaluate their specific situation and produce
quarterly reports that are appropriate to their circumstances. An
introducing broker may meet its responsibilities under the Rule in several
ways. As noted above, an introducing broker may rely on a “generic” report
prepared by its clearing firm on behalf of all the clearing firm’s clients
for whom the clearing firm makes all routing decisions. If an introducing
broker makes a material number of routing decisions itself, it must
produce, or arrange for the production of, an individual report covering
its activities under the Rule. In such cases, a clearing firm may prepare
individual reports on behalf of its correspondents, or make the required
information that it possesses available to its correspondents. In all
cases, the responsibility for complying with the Rule remains with the
introducing brokers.

Question 5: Multiple Reports by a
Broker-Dealer

Q: Is it permissible for a broker-dealer to prepare two or more
reports that correspond to functional differences in the firm’s order
routing practices?

A: A single firm may prepare two or more reports that correspond
to functional differences in the firm’s order routing practices, but only
if the separate reports will provide a clearer picture of the firm’s
practices and the basis for the separate reports is fully disclosed to
customers and the public. Each report should clearly explain the orders to
which it applies, as well as identify the other reports for the firm and
the orders to which they apply. Customers must be able to determine which
report applies to their type of orders.

For example, a broker-dealer with two divisions, each with its own
customers and order routing practices, may generate a separate report for
each division. Each report should explain that it applies only to orders
submitted by customers of that division, and that another report has been
issued that applies to orders submitted by customers of the other
division.

Similarly, an introducing broker whose customer accounts are carried by
two different clearing firms, with customers assigned to only one of the
two firms, may generate a separate report for each clearing firm. Each
report should explain that it applies only to orders submitted by
customers whose accounts are carried by the particular clearing firm, and
that a separate report has been issued that applies to orders submitted by
customers whose accounts are carried by the other clearing firm.

Question 6: Definition of Customer Orders – Large
Order Exclusion (modified)

Q: The definition of “customer order” in paragraph (a)(2) of the
Rule excludes any order for a quantity of a security having a market value
of at least $200,000 for equity orders and $50,000 for options orders. How
should a broker-dealer determine the market value of an order? Can orders
linked together for execution by the customers (such as program and
arbitrage orders), or a single order submitted on behalf of more than one
account, be considered a single order when calculating market value? Does
it matter if an order is executed in more than one transaction?

A: Broker-dealers may adopt any reasonable procedure to
determine the market value of an order.8 For example, firms could use the previous
day’s closing price for the security or the inside quotes at the time the
order was placed. Orders linked together for execution by the customer, or
single orders submitted for more than one account, may be considered a
single order when calculating their market value. The fact that an order
ultimately is executed in more than one transaction does not affect its
status as an excluded order.

Question 7: Definition of Customer Orders – Orders
Received from Other Broker-Dealers or Foreign Banks Acting as
Broker-Dealers

Q: Firm A is a U.S. registered broker-dealer that receives
orders from other broker-dealers and foreign banks acting as
broker-dealers and routes them to U.S. execution venues. Are these orders
properly excluded from the Rule, even if they are submitted on behalf of
customers of the other broker-dealers and foreign banks?

A: Yes. The orders received from other broker-dealers and
foreign banks acting as broker-dealers may properly be excluded from the
Rule. The definition of “customer order” in paragraph (a)(2) of the Rule
excludes an order that is for the account of a broker or dealer. The other
broker-dealers and foreign banks should evaluate the applicability of the
Rule with respect to their customers’ orders. Orders routed by a clearing
firm on behalf of an introducing broker are addressed in Question 4
above.

Question 8: Definition of Directed Order – Default
Routing Instructions (modified)

Q: Firm BD is a broker-dealer that provides on-line services to
its customers. It offers customers an order routing program that has a
specific execution venue installed as a default routing instruction. Firm
BD clearly discloses that the customer is free to set a different default
at any time and provides a reasonable list of alternative default venues
from which to choose. Firm BD does not provide any inducements for
customers to retain the initial default setting (such as a lower
commission rate). Should Firm BD classify orders routed pursuant to the
default setting as directed orders under the Rule?

A: Yes. The orders routed pursuant to the initial default
setting are directed orders and therefore should not be included in the
quarterly reports of Firm BD. Paragraph (a)(3) of the Rule defines a
“directed order” as an order that “the customer specifically instructed
the broker or dealer to route to a particular venue for execution.”
Paragraph (b)(1) of the Rule requires broker-dealers to report on their
routing of “non-directed orders,” which is defined in paragraph (a)(5) of
the Rule as “any customer order other than a directed order.” Because
customers of Firm BD can readily choose a different default venue from a
reasonable list of execution venues other than the initial default
setting, and the broker-dealer does not charge a higher commission if the
customer chooses another venue, orders routed pursuant to the initial
default setting are appropriately classified as directed orders.

In addition, once an order is properly classified as a directed order,
it need not subsequently be reclassified as a non-directed order if the
venue to which the customer directed the order is unable to execute the
order (for example, due to a systems problem) and the broker-dealer then
routes the order elsewhere for execution. The initial classification under
the Rule, of course, would not relieve the broker-dealer of its duty of
best execution with respect to the re-routed order.

However, if customers are not offered a reasonable choice of execution
venues their orders must be considered non-directed even if they have
accepted the default venue offered by the broker-dealer. In the example
above, if firm BD does not offer a reasonable list of alternatives to the
default venue, then orders routed to the default venue may not be
classified as directed orders under the Rule.

Question 9: Classifying Market, Limit, and Other
Orders

Q: How should orders be divided into the three classes (market,
limit, other) specified by the Rule?

A: The three classes of orders are intended to correspond
generally to the division of orders in Rule 11Ac1-5, thereby facilitating
use of the monthly execution quality reports of market centers in
conjunction with the quarterly order routing reports of broker-dealers.
Rule 11Ac1-5 requires market centers to report on their executions of
standard market orders and limit orders, but excludes a wide variety of
orders for which the customer requests special handling. These exclusions
include market opening and closing orders, orders submitted with stop
prices, all-or-none orders, orders that must be executed on a particular
tick or bid (such as non-exempt short sale orders), and “not held” orders.
All of these special handling orders would fall within the “other order”
category for purposes of the quarterly order routing reports required by
the Rule. Marketable limit orders are appropriately classified as limit
orders under the Rule.

Question 10: Orders Executed at Multiple
Venues

Q: What should be considered the execution venue for an order
when it is executed in two or more transactions at different venues?

A: Broker-dealers may adopt any reasonable, consistent approach
for assigning an execution venue to orders that are executed in multiple
venues. For example, the venue that handled the largest partial execution
or the venue that handled the first partial execution would both be
reasonable approaches.

Question 11: Execution Venue for Riskless Principal
Orders

Q: When a broker-dealer receives a non-directed order from a
customer, and then executes the order as riskless principal based on a
contemporaneous order execution at another venue, who should be identified
as the execution venue under the Rule – the broker-dealer or the other
venue?

A: The appropriate disclosure for riskless principal orders
depends on the nature of the broker-dealer’s activity in the relevant
security. If the broker-dealer acts as a market center in the security for
purposes of Exchange Act Rule 11Ac1-5, the broker-dealer should identify
itself as the execution venue for riskless principal orders. If the
broker-dealer does not act as a market center in the security, it should
identify the venue at which it obtained the contemporaneous order
execution.

Question 12: Nasdaq Execution Venues

Q: The Adopting Release provides that, to assure meaningful
disclosure of significant execution venues, all orders routed to a
particular exchange for execution should be aggregated when calculating a
broker-dealer’s top ten venues and those with 5% of orders. How should a
firm make this calculation in the context of Nasdaq systems?

A: Nasdaq should be identified as the execution venue for orders
that are routed directly to Nasdaq’s order execution systems, such as SOES
(or its upcoming replacement, SuperSOES). SelectNet, in contrast, is an
order delivery system, not an order execution system, and therefore should
not be identified as an execution venue. For orders transmitted directly
(whether through SelectNet or otherwise) to an individual market center,
such as a market maker or ECN, that market center, rather than Nasdaq,
should be identified as the execution venue.

Question 13: Disclosing Payment for Order
Flow

Q: What is considered payment for order flow and how should
payment for order flow arrangements be disclosed in the quarterly
reports?

A: Payment for order flow is broadly defined in Exchange Act
Rule 10b-10(d)(9), which is cross-referenced in paragraph (a)(8) of the
Rule. It provides, among other things, that “any monetary payment,
service, property, or other benefit that results in remuneration,
compensation, or consideration” to a broker-dealer in return for the
routing of orders is payment for order flow. This definition would
include, for example, both direct monetary payments for orders (such as a
market maker’s payments for marketable orders and an ECN’s payments for
non-marketable limit orders) and in-kind goods and services (such as T1
lines, clearing services, and reciprocal agreements for the provision of
order flow). The wide-ranging forms that payment for order flow can assume
precludes any definitive list of specific instances of payment for order
flow.

In its quarterly reports, a broker-dealer must disclose the “material
aspects” of its relationship with its significant execution venues,
including a description of any payment for order flow arrangement. In this
context, “materiality” should be interpreted as those aspects of the
payment for order flow arrangement that would be important to a reasonable
investor in evaluating a broker-dealer’s routing practices. As noted in
the Adopting Release, broker-dealers are not required to estimate or
calculate the aggregate dollar amounts of payment for order flow. They
are, however, required to describe the material terms of the arrangement,
such as any amounts per share or per order that the broker-dealer
receives.

Given the intensively fact-based nature of payment for order flow
arrangements, definitive guidance on their disclosure is not possible.
Firms should be aware, however, that the new disclosure requirements were
adopted to provide investors with a clearer understanding of broker-dealer
order routing practices than is provided under current rules. Firms should
not merely assume that their past disclosures will satisfy the new
requirements of the Rule.

Question 14: Disclosing Internalized Order
Flow

Q: Firm A is an integrated broker-dealer that receives
non-directed orders as agent from its brokerage customers and routes to
its market making desk those orders in securities for which it acts as
market maker. Such orders represent a significant portion of the total
non-directed orders of Firm A. What must Firm A disclose concerning this
internalized order flow?

A: Firm A would identify itself as a significant execution venue
on its quarterly reports and set forth the percentage of orders that it
routes to itself for execution. In discussing the material aspects of this
order routing relationship, Firm A should disclose that it stands to share
in 100% of whatever profits it generates by trading as principal with its
customers’ orders. If Firm A executes a material percentage of
internalized orders during a quarter as agent by crossing them with other
customer orders, it would be appropriate for Firm A to disclose a
reasonable estimate of this percentage to clarify further the extent to
which it stands to share in profits from principal trading.

Question 15: Procedures for Making Quarterly Reports
Publicly Available

Q: What procedures must a broker-dealer follow in making its
quarterly reports publicly available? Must it have its own web site on
which to post its report, or would it be permissible for the broker-dealer
to post its report on another web site? For how long must a report be
posted on the web site?

A: The phrase “make publicly available” is defined in paragraph
(a)(4) of the Rule as “posting on an Internet site that is free and
readily accessible to the public, furnishing a written copy to customers
on request without charge, and notifying customers at least annually in
writing that a written copy will be furnished on request.”

Although a broker-dealer is not required to post its report on its own
Internet site, the site on which it does choose to post its report must be
readily accessible to the public. Consequently, a broker-dealer that has
an Internet site, but chooses to post its report on another site, must
include a hyperlink on its Internet site to the report’s Internet site. A
broker-dealer that does not have its own Internet site must take
reasonable steps to assure that its report is readily accessible to the
public. These could include, for example, making arrangements to provide
the location of the report’s Internet site to any caller at the
broker-dealer’s main telephone number.

A quarterly report should remain posted on an Internet site until it is
replaced by the next report for the succeeding quarter.

Question 16: Responding to Requests from Customers
for Individual Information

Q: How frequently must a broker-dealer respond to requests from
customers for their individual order routing information?

A: Broker-dealers must establish reasonable procedures for
responding to customer requests in a useful manner. The Rule does not,
however, require order-by-order responses analogous to those that are
required for confirmation of transactions under Exchange Act Rule 10b-10.
For example, the Division would view as reasonable a procedure pursuant to
which all customers who requested individual information were issued
reports on a standardized monthly basis that covered orders submitted up
to the preceding six months (a broker-dealer need not duplicate
information on previous months’ orders that already was provided to the
customer).

Question 17: Written Notice to Customers Concerning
Availability of Quarterly Reports and Individual Information

Q: When must broker-dealers provide the first written notice to
customers under the Rule relating to the availability of written quarterly
reports and of individual order information?

A: A broker-dealer must provide the written notice required by
the Rule no later than in its first annual communication in compliance
with Exchange Act Rule 11Ac1-3 that is transmitted to customers after its
first quarterly report is made available in October 2001.

Question 18: Orders That Are Cancelled and Replaced
(new)

Q: How should orders that are cancelled and later replaced be
treated under the Rule? Does it matter whether the replacement order goes
to the same venue as the order that was cancelled?

A: A replacement order would be considered a new order,
regardless of whether it goes to the same venue or to another venue. In a
partial cancellation, when the only change is a reduction in the number of
shares covered by an order, the remainder need not be reported as a new
order. In the case of an increase in the number of shares, or any other
change in an order, the event should be treated as a cancellation with
replacement creating a new order.

Question 19: Products Traded in Multiple Markets
(new)

Q: How should certain new securities products that are traded on
both the NYSE and the Amex be categorized on the Rule 11Ac1-6 report? The
Nasdaq 100 Trust (“QQQ”), for example, is traded on both the NYSE and the
Amex.

A: Broker-dealers should refer to the security’s classification
for trade reporting purposes (as a Network A eligible security, Network B
eligible security, or Nasdaq-listed security) when categorizing new
securities products. Generally, Network A eligible securities are
NYSE-listed securities, and Network B eligible securities are listed on
the Amex and regional exchanges. Orders in QQQ, which is a Network B
eligible security, would be disclosed in the section describing the
routing of non-directed customer orders in Amex/Regional securities.

Question 20: Exemption from the Public Posting
Requirement for Broker-Dealers With De Minimus Level of Orders
(new)

Q: Is there an exemption from the public posting requirement of
the Rule for broker-dealers who would otherwise report the routing of a de
minimus level of customer orders in covered securities?

A: The Commission has exempted from the quarterly reporting
requirement of Rule 11Ac1-6(b) those firms that have routed, on average,
500 or fewer customer orders in covered securities per month during the
preceding calendar quarter.9 Thus, for example, a firm that routed 500 or
fewer customer orders per month during the second calendar quarter (April,
May, June) would not file a report covering its routing practices during
the third quarter, regardless of how many customer orders the firm routed
during the third quarter. The number of customer orders routed during the
third quarter would be relevant, however, to the question of whether the
firm is exempt from the quarterly reporting requirement for the fourth
quarter.

In determining eligibility for this exemption, the number of customer
orders may be calculated after any exclusions permitted by the Rule have
been applied. In permitting the exemption, the Commission emphasized,
however, that firms eligible for this limited exemption would remain
responsible to comply with Rule 11Ac1-6(c), which requires them to provide
interested customers with routing information about specific orders and to
notify customers annually that such information is available.

Question 21: Definition of Customer
Orders-After-hours Trading (new)

Q: Does Rule 11Ac1-6 require the disclosure only of non-directed
customer orders routed during regular trading hours?

A: No. The Rule requires the disclosure of all non-directed
customer orders in covered securities routed by a broker-dealer. This
includes orders routed before or after regular trading hours.

Question 22: Orders in Foreign Securities
(new)

Q: Would a foreign security be a “covered security” under Rule
11Ac1-6?

A: A “covered security” is defined under Rule 11Ac1-6(a)(1)(i)
as any national market system security and any other security for which a
transaction report, last sale data or quotation information is
disseminated through an automated quotation system as defined in Section
3(a)(51)(A)(ii) of the Securities Exchange Act of 1934. This definition
incorporates all Consolidated Tape Association (“CTA”) eligible securities
of both Network A and Network B, as well as all Nasdaq-listed securities.
Therefore, a foreign security whose ordinary shares are listed and traded
in one of these groups is a covered security. This is true even if an
order in the covered security is executed in a foreign country. Many
foreign securities that trade in the United States, however, are traded as
American Depository Receipts (“ADRs”). In such cases, the ADRs may be a
covered security under the Rule, but the underlying ordinary shares are
not unless the ordinary shares separately meet the definition. For
example, an order for the ordinary shares of Foreign Security A may not be
an order in a covered security, even though the ADRs for Foreign Security
A are listed on a national securities exchange and are CTA eligible
securities (and would be covered securities).

Attachment:
Exhibit A (Example of Quarterly Report)
(modified)


Endnotes

1 Securities Exchange Act Release No. 43590
(November 17, 2000), 65 FR 75414 (“Adopting Release”).

2 The Rule requires the broker or dealer to make
the report publicly available within one month after the end of the
quarter addressed in the report. Under a temporary exemption granted by
the Commission, however, the public reporting for the third calendar
quarter of 2001 was delayed by one month. Letter to Stuart J. Kaswell,
Senior Vice President and General Counsel, Securities Industry
Association, from Annette L. Nazareth, Director, Division of Market
Regulation (“Division”), dated September 21, 2001.

3 Network A is operated pursuant to the
Consolidated Tape Association Plan (“CTA Plan”) and the Consolidated
Quotation Plan (“CQ Plan”). It disseminates market information for any
common stock, long-term warrant, or preferred stock admitted to dealings
on the NYSE. CTA Plan, Sections I(p) and VII(a)(i).

4 Network B is also operated pursuant to the CTA
Plan and the CQ Plan. It disseminates market information for any common
stock, long-term warrant, or preferred stock admitted to dealings on the
Amex or the regional exchanges, but not also admitted to dealings on the
NYSE or included in the Nasdaq market. CTA Plan, Section I(q) and VII
(a).

5 Adopting Release, note 1 above, Section
VI.B.

6 Letter to Neal E. Sullivan & Gail
Marshall-Smith, Bingham Dana LLP (on behalf of First Union Securities,
Inc.), from Annette L. Nazareth, Director, Division, dated June 22, 2001
(“First Union Letter”).

7 See First Union Letter, note 3 above.

8 The market value of an option shall be
determined by its premium, not the value of the underlying security.

9 Letter to William C. Alsolver, Jr. and A.
Louis Denton, NASD Small Firm Advisory Board, from Annette L. Nazareth,
Director, Division, dated September 21, 2001.

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