SEC Division of Trading and Markets no-action letter: NASD Small Firm Advisory Board

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September 21, 2001 William C. Alsolver, Jr. A. Louis Denton NASD Small Firm Advisory Board 1735 K Street, N.W. Washington, D.C. 20006-1500 Re: Request for Exemption from Rule 11Ac1-6 Dear Mr. Alsolver and Mr. Denton: In your letter dated September 20, 2001 ("Letter") on behalf of the NASD Small Firm Advisory Board, you requested that the Commission issue a limited exemption from Rule 11Ac1-6 ("Rule") under the Securities Exchange Act of 1934 ("Exchange Act") for broker-dealer firms that route a de minimis number of customer orders in covered securities for execution. This letter responds to your request. I. Background

Adopted in November 2000, 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 is July 2, 2001. In addition to the quarterly reports, broker-dealers must begin responding to customer requests for individual information on orders that are routed on July 2, 2001 and after. In the Letter, you request a limited exemption from the Rule for certain small broker-dealer firms that route a de minimis number of customer orders in covered securities for execution. You assert that the costs of compliance with the Rule may unduly burden many small firms. Based on information provided by your members, you have found that some clearing firms and third-party service providers are charging small firms as much as $4000 per year to prepare on their behalf the quarterly reports required by Rule 11Ac1-6(b). Additionally, many of the small firms will incur additional costs to create and maintain a website for the sole purpose of complying with the Rule's requirement that firms make the quarterly reports available on a free internet site. You believe that under these circumstances, some small firms could spend in excess of $5000 per year to comply with the Rule. You further assert that in contrast to the significant cost and recordkeeping burden imposed by the Rule on small firms, the benefit to the customers of these firms of a quarterly report on these firms' order routing practices is minimal. Since firms that would qualify for the requested exemption would still be required to comply with Rule 11Ac1-6(c), customers would still be able to learn how their own orders were routed. As a result, the transparency sought by the Rule would not be substantially reduced. II. Exemption

On the basis of your representations and the facts presented, the Commission, by the Division pursuant to delegated authority, 2 is granting a limited exemption from the Rule for broker-dealers that route a de minimus number of customer orders in covered securities for execution. Specifically, the Commission is exempting 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. Thus, for example, firms that routed fewer than 1500 customer orders during the second calendar quarter are exempted from the quarterly reporting requirement for the third quarter. The Commission emphasizes, however, that firms eligible for this limited exemption must still 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. The Commission finds that the limited exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors. The cost for small firms with minimal order flow to comply with the reporting requirements of the Rule outweighs the benefit those quarterly reports will provide to investors. Since firms that would qualify for this limited exemption would still be required to provide information about a customer's orders upon request pursuant to Rule 11Ac1-6(c), customers would still be able to obtain information similar to that which would be disclosed in a quarterly web-posted report. As a result, the transparency sought by the Rule would not be substantially affected. The Commission therefore believes that such a de minimis exemption would strike an appropriate balance between the purposes of the Rule and the financial burdens on the smallest of firms whose order routing comprises only a negligible total of the industry aggregate. The exemption granted in this letter is subject to modification or revocation at any time if the Commission determines that such action is necessary or appropriate in the public interest or otherwise in furtherance of the purposes of the Exchange Act. If you have questions, please do not hesitate to contact me. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. Annette L. Nazareth Director

Footnotes

1 Securities Exchange Act Release No. 43590 (November 17, 2000), 65 FR 75414 ("Adopting Release"). 2 17 CFR 200.30-3(a)(69).

http://www.sec.gov/rules/exorders/smfirm092101.htm

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Modified: 09/21/2001