[Federal Register: September 13, 2002 (Volume 67, Number 178)]
[Rules and Regulations]
[Page 58283-58300]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13se02-19]
[[Page 58283]]
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Part IV
Commodity Futures Trading Commission
17 CFR Parts 1, 41, and 190
Securities and Exchange Commission
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17 CFR Part 240
Applicability of CFTC and SEC Customer Protection, Recordkeeping,
Reporting, and Bankruptcy Rules and the Securities Investor Protection
Act of 1970 to Accounts Holding Security Futures Products; Joint Final
Rules
[[Page 58284]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 41 and 190
RIN 3038-AB76
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-46473; File No. S7-17-01]
RIN 3235-AI32
Applicability of CFTC and SEC Customer Protection, Recordkeeping,
Reporting, and Bankruptcy Rules and the Securities Investor Protection
Act of 1970 to Accounts Holding Security Futures Products
AGENCIES: Commodity Futures Trading Commission and Securities and
Exchange Commission.
ACTION: Joint final rules.
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SUMMARY: The Commodity Futures Trading Commission ("CFTC") and the
Securities and Exchange Commission ("SEC") (collectively the
"Commissions") have adopted rules under the Commodity Exchange Act
("CEA") and the Securities Exchange Act of 1934 ("Exchange Act") as
part of the joint regulatory framework under which futures commission
merchants ("FCMs") and brokers or dealers ("broker-dealers" or
"BDs") may effect transactions in security futures products for
customers. The rules require all firms conducting business in security
futures products to make disclosures to customers that transact
business in security futures products concerning the protections
provided by both the CEA and Exchange Act regulatory schemes, the
regulatory scheme that will be applicable to their accounts, and the
alternative regulatory scheme that will not be applicable to their
accounts. In addition, the rules require that every firm engaged in
this business that is fully-registered both as an FCM and as a broker-
dealer establish written procedures regarding how customer security
futures products will be held. The rules also specify how CEA and
Exchange Act recordkeeping, reporting, and certain other rules will
apply to security futures product transactions and accounts in which
security futures products are held. These rules are adopted pursuant to
the provisions of the Commodity Futures Modernization Act of 2000
("CFMA") that direct the Commissions to address certain duplicative
or conflicting regulations applicable to any firm fully-registered both
as an FCM and as a broker-dealer. These rules also are intended to
address certain other differences between the CEA and Exchange Act
requirements, and reduce duplicative regulations applicable to firms
that are notice-registered with either the CFTC or SEC.
EFFECTIVE DATE: September 13, 2002, except Sec. 240.17a-4(l) and (m)
will be effective May 2, 2003.
FOR FURTHER INFORMATION CONTACT:
CFTC: Lawrence B. Patent, Deputy Director, Robert B. Wasserman,
Associate Director, or Helene D. Schroeder, Special Counsel, Division
of Clearing and Intermediary Oversight, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581. Telephone: (202) 418-5430. E-mail: ([email protected]);
([email protected]) or ([email protected]).
SEC: Michael A. Macchiaroli, Associate Director, at (202) 942-0132;
Thomas K. McGowan, Assistant Director, at (202) 942-4886; Bonnie L.
Gauch, Attorney, at (202) 942-0765; or Matthew B. Comstock, Attorney,
at (202) 942-0156, Division of Market Regulation, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-1001.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Background
A. Security Futures Products
B. Regulation of FCMs and Broker-Dealers That Effect
Transactions in Security Futures Products
III. The Proposed Rules
IV. Overview of the Comments Received
V. Final Rules and Rule Amendments
A. General
B. Amendments to CFTC Rule 1.55--Distribution of Risk Disclosure
Statements by FCMs
C. Rule 41.41 and Paragraph (o) of Rule 15c3-3
1. Where SFPs May Be Held
2. Requirements for Accepting Customer SFP Orders
a. Disclosure Document Requirements
b. Customer Acknowledgments
3. Changes in Account Type
D. Recordkeeping Requirements
E. Customer Account Statements
F. Confirmations
G. CFTC Bankruptcy Treatment: Amendments to Part 190
H. Arbitration
I. Rule 15c3-3 Definitions
J. Amendments to Reserve Formula Item 13 and Note F
K. Exchange Act Recordkeeping Rules
1. Amendment to Paragraph 17a-4(b)(9)
2. New Paragraph 17a-4(k)
L. Redesignation of Present Paragraphs (k) and (l) of Exchange
Act Rule 17a-4
M. Exchange Act Reporting, Notification, and Quarterly Count
Requirements
VI. Administrative Procedures Act
VII. Paperwork Reduction Act
CFTC
SEC
VIII. Costs and Benefits of the Rules
CFTC
SEC
A. Benefits
1. Elimination of Conflicting and Duplicative Regulation
2. Customer Understanding
3. Examination Efficiencies
B. Costs
1. Addition of Paragraph 15c3-3(o)
a. Establishment of a Written Policy
b. Furnishing a Disclosure Document to Customers
c. Changes of Account Type
i. Record of Change of Account Type
ii. Customer Notification of Effective Date of Change of Account
Type
2. Amendments to Rule 17a-4
3. Systems Changes
IX. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
X. Summary of Regulatory Flexibility Act Certification
CFTC
SEC
Text of Final Rules
I. Introduction
The CFMA,\1\ which became law on December 21, 2000, amended the CEA
and the Exchange Act to permit the trading of single stock and narrow-
based stock index \2\ futures ("security futures") \3\ and to
establish a framework for the joint regulation by the CFTC and the SEC
of security futures products ("SFPs").\4\ In addition, the CFMA
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amended the CEA and the Exchange Act to require that the CFTC and SEC
consult with each other and issue such rules, regulations, or orders as
are necessary to avoid duplicative or conflicting rules applicable to
firms that are "fully-registered" with both the CFTC \5\ and the SEC
\6\ ("Full FCM/Full BDs") with respect to the treatment of customer
funds, securities, or property, maintenance of books and records,
financial reporting, or other financial responsibility rules, involving
SFPs.\7\
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\1\ Pub. L. No. 106-554, 114 Stat. 2763 (2000).
\2\ CEA section 1a(25)(A) (7 U.S.C. 1a(25)(A)) and Exchange Act
section 3(a)(55)(B) and (C) (15 U.S.C. 78c(a)(55)(B) and (C)). See
also 66 FR 44489 (August 23, 2001), Exchange Act Release No. 44724
(August 20, 2001).
\3\ The term "security future" means a contract of sale for
future delivery of a single security or of a narrow-based security
index, including any interest therein or base on the value thereof,
except an exempted security under Section 3(a)(12) of the Exchange
Act as in effect on the date of enactment of the Futures Trading Act
of 1982 (other than any municipal security as defined in Section
3(a)(29) of the Exchange Act as in effect on the date of enactment
of the Futures Trading Act of 1982). The term "security future"
does not include any agreement, contract, or transaction excluded
from the CEA under Sections 2(c), (d), (f), or (g) of the CEA (as in
effect on the date of enactment of the CFMA) or Title IV of the
CFMA. CEA section 1a(31) (7 U.S.C. 1a(31)) and Exchange Act section
3(a)(55) (15 U.S.C. 78c(a(55)).
\4\ The term "security futures product" includes both a
security future and any option on a security future. CEA section
1a(32) (7 U.S.C. 1a(32)) and Exchange Act section 3(a)(56) (15
U.S.C. 78c(a)(56)). Section 6(g)(5)(A) of the Exchange Act provides
that it is unlawful for any person to execute or trade a security
futures product until the later of: "(i) 1 year after the date of
enactment of the Commodity Futures Modernization Act of 2000; or
(ii) such date that a futures association registered under Section
17 of the Commodity Exchange Act has met the requirements set forth
in section 15A(k)(2) of this title." 15 U.S.C. 78f(g)(5)(A). There
is an exception to this provision, however, for principal-to-
principal transactions between eligible contract participants.
Exchange Act section 6(g)(5)(B) (15 U.S.C. 78f(g)(5)(B)). The term
"eligible contract participant" is defined at CEA section 1a(12)
(7 U.S.C. 1a(12)).
\5\ FCMs that are registered pursuant to CEA section 4f(a)(1) (7
U.S.C. 6f(a)(1)).
\6\ Broker-dealers that are registered pursuant to Exchange Act
section 15(b)(1) (15 U.S.C. 78 o(b)(1)).
\7\ CEA section 4d(c) (7 U.S.C. 6d(c)) and Exchange Act section
15(c)(3)(B)(15 U.S.C. 78o(C)(3)(B)).
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The Commissions published for comment in the Federal Register
proposed rules on October 4, 2001 (the "Proposal").\8\ The proposed
rules were designed to reduce conflicting and duplicative regulations
applicable to both Full FCM/Full BDs and firms notice registered \9\
with either the CFTC or the SEC, and to address certain differences
between the CEA and Exchange Act rules.\10\
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\8\ 66 FR 50785 (Oct. 4, 2001), Exchange Act Release No. 44854
(Sept. 26, 2001).
\9\ See infra notes 15 and 17.
\10\ On October 29, 2001, the Commissions extended the comment
period on the Proposal to December 5, 2001. 66 FR 55608 (November 2,
2001), Exchange Act Release No. 44996 (Oct. 9, 2001).
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II. Background
A. Security Futures Products
The CFMA amended the Exchange Act definitions of "security" and
"equity security" to include "security future" and "any security
future on any [stock or similar security]," respectively.\11\ In
addition, definitions of the terms "security future" \12\ and
"security futures product" \13\ were added to the CEA and the
Exchange Act. Pursuant to these statutory changes, a security futures
product is both a security and a futures contract and, therefore, is
subject to the jurisdiction of both the CFTC and the SEC.
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\11\ Exchange Act sections 3(a)(10) and (11), respectively (15
U.S.C 78c(a)(10) and 15 U.S.C. 78c(a)(11)).
\12\ See note 3.
\13\ See note 4.
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B. Regulation of FCMs and Broker-Dealers that Effect Transactions in
Security Futures Products
As an SFP is both a security and a futures contract, a person must
be registered both as an FCM or as an introducing broker ("IB") with
the CFTC and as a broker-dealer with the SEC to effect SFP
transactions. The CFMA amended the CEA and the Exchange Act to require
that the CFTC and SEC provide notice registration procedures for
certain persons that may be required to register with the CFTC or the
SEC solely because they are effecting SFP transactions.\14\ Further,
the CFMA amended the CEA and the Exchange Act to exempt Notice FCMs
\15\ from certain provisions of the CEA \16\ (including CFTC
segregation requirements), and Notice BDs \17\ from certain provisions
and rules of the Exchange Act \18\ (including Exchange Act Rule 15c3-3
("Rule 15c3-3")), to avoid conflicting or duplicative regulation.
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\14\ The CFTC implemented notice registration procedures on
August 17, 2001 by adopting rules pursuant to Section 4f(a)(2) of
the CEA (7 U.S.C. 6f(a)(2) (see 66 FR 43080 (August 17, 2001)). The
SEC implemented notice registration procedures on August 21, 2001 by
adopting rules pursuant to Section 15(b)(11) of the Exchange Act (15
U.S.C. 78o(b)(11)(A)(i) (see 66 FR 45137 (August 27, 2001), Exchange
Act Release No. 44730 (August 21, 2001)).
\15\ A Notice FCM is a broker-dealer that registers with the
CFTC as an FCM pursuant to section 4f(a)(2) of the CEA (7 U.S.C.
6f(a)(2)) and rules adopted by the CFTC (see 66 FR 43080 (August 17,
2001)).
\16\ CEA section 4f(a)(4)(A) (7 U.S.C. 6f(a)(4)(A)).
\17\ A Notice BD is an FCM or IB that registers with the SEC as
a broker-dealer pursuant to section 15(b)(11) of the Exchange Act
(15 U.S.C. 78o(b)(11)(A)(i)) and the rules adopted by the SEC (see
66 FR 45137 (August 27, 2001), Exchange Act Release No. 44730
(August 21, 2001)).
\18\ Exchange Act section 15(b)(11(B) (15 U.S.C. 78o(b)(11)(B)).
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Instead of providing similar exemptions for firms that are fully-
registered with both the CFTC and the SEC, the CFMA amended the CEA and
the Exchange Act to require that the CFTC and SEC consult with each
other and issue such rules, regulations, or orders as are necessary to
avoid certain duplicative or conflicting regulations applicable to Full
FCM/Full BDs. CFTC segregation rules and Rule 15c3-3 are examples of
duplicative regulations referred to in the CFMA because these
provisions provide similar protections for customers, but, when applied
to SFPs, could cause a Full FCM/Full BD to maintain two separate and
redundant reserves to satisfy both sets of requirements. In addition,
the CFMA does not exempt notice registrants from certain CFTC and SEC
recordkeeping, reporting, early-warning, and quarterly-count rules;
thus, absent relief, both Full FCM/Full BDs and notice registrants are
subject to both sets of rules in connection with SFPs.
III. The Proposed Rules
The proposed rules would have required that all firms engaged in an
SFP business make certain disclosures to every customer that places an
order for an SFP regarding the nature and applicability of the
protections that may be available to the customer pursuant to the
segregation requirements of the CEA, or the provisions of Rule 15c3-3
and the Securities Investor Protection Act of 1970 ("SIPA").\19\ The
Commissions also proposed new rules that would have: (1) Permitted a
Full FCM/Full BD to choose (or let its customers choose) whether an
account in which SFPs are held would be treated as a futures account
subject to the segregation requirements of the CEA, or as a securities
account subject to Rule 15c3-3 and SIPA; (2) required a Full FCM/Full
BD that engages in an SFP business to establish written policies
stating how customer SFP positions would be held; and (3) required a
Full FCM/Full BD to obtain a signed acknowledgment from each SFP
customer stating that the customer understands that the account will
not be protected under the alternative regulatory scheme.
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\19\ 15 U.S.C. 78aaa et seq.
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The CFTC also proposed amendments to CFTC Rule 1.55 and the CFTC's
Part 190 bankruptcy rules, and the SEC proposed amendments to SEC Rules
15c3-3, 17a-3, 17a-4, 17a-5, 17a-7, 17a-11, and 17a-13 \20\ that were
designed to eliminate duplicative regulation that may have been
applicable to Full FCM/Full BDs and notice-registrants.
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\20\ 17 CFR 240.15c3-3(a)(1), 240.17a-3, 240.17a-4, 240.17a-5,
240.17a-7, 240.17a-11, and 240.17a-13, respectively.
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IV. Overview of the Comments Received
In the Proposal, the Commissions not only requested comments
generally, but also specifically solicited comment about a number of
issues, including the disclosure document requirements, the
acknowledgment requirement, the records requirements, whether the
differences in the CEA and Exchange Act customer protection rules would
cause any interested party to be placed at a disadvantage, and whether
firms should be allowed to change the type of account in which customer
SFPs are held.
The Commissions each received three comment letters on the
Proposal:\21\ one from the National Futures Association ("NFA"), a
registered futures
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association; one letter submitted jointly by the Futures Industry
Association ("FIA"), which is a trade association that represents
FCMs, and the Securities Industry Association ("SIA"), which is a
trade association that represents broker-dealers; and one letter
submitted jointly by the Chicago Mercantile Exchange ("CME") and the
Chicago Board of Trade ("CBOT"), which are both designated contract
markets. All of the commenters supported the overall approach of the
rules in providing Full FCM/Full BDs with flexibility in choosing
whether customer SFPs will be held in a securities account or in a
futures account.\22\ In support of the Proposal, commenters stated,
among other things, that the proposed approach would be protection
scheme neutral and would allow firms to utilize the most cost-effective
solutions when determining how to support SFPs.
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\21\ Each commenter sent substantially the same letter to the
CFTC and the SEC.
\22\ However, one commenter stated that although the proposed
rule amendments appeared to be flexible, Full FCM/Full BDs would
likely be compelled to carry SFPs in securities accounts due to
operational difficulties that would be created if the proposed
customer margin rules published for comment on October 4, 2001 were
adopted by the Commissions. See Customer Margin Rules Relating to
Security Futures, 66 FR 50719 (October 4, 2001), Exchange Act
Release No. 44853 (September 26, 2001).
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On the other hand, the commenters uniformly opposed the requirement
in the proposed rules that Full FCM/Full BDs obtain signed
acknowledgments from customers stating that customers understand that
account protections under the alternative regulatory scheme would not
be available with respect to their accounts. The commenters questioned
the need for such a requirement and expressed concerns about the costs
and burdens of complying with this requirement.
V. Final Rules and Rule Amendments
A. General
The Commissions have carefully reviewed the comments received, and
have determined generally to adopt the rules as they were proposed,
except that the proposed requirement that Full FCM/Full BDs obtain a
signed acknowledgment from each SFP customer has not been adopted. In
addition, the Commissions have made certain technical and clarifying
changes to the proposed rules based upon the specific comments that
have been received. Each of these changes from the rules as proposed
are discussed below.\23\
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\23\ The first five pages of NFA's comment letter provide
further background and historical perspective upon the customer fund
protection frameworks of the futures and securities industries. This
letter may be accessed through the CFTC's Web site at http://www.cfc.gov/files/foia/comment01/foicf0119c002.pdf.
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The new rules and amendments are intended to prevent conflicting or
duplicative regulation with relation to certain customer protection,
recordkeeping, and other rules. They were designed to satisfy
requirements of the CEA and the Exchange Act that the CFTC and SEC
consult with each other and issue such rules, regulations, or orders as
are necessary to avoid duplicative or conflicting rules applicable to
Full FCM/Full BDs with respect to the treatment of customer funds,
securities, or property, maintenance of books and records, financial
reporting, or other financial responsibility rules, involving SFPs.\24\
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\24\ See note 7.
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B. Amendments to CFTC Rule 1.55--Distribution of Risk Disclosure
Statements by FCMs
CFTC Rule 1.55 sets forth the general risk disclosure obligations
of FCMs and IBs. New paragraph (h) requires FCMs to comply with the new
disclosure obligations relating to SFPs that are set forth in new CFTC
Rule 41.41.\25\ The CFTC received no comments concerning new paragraph
(h) of CFTC Rule 1.55 and has adopted this paragraph as it was
proposed.
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\25\ The Proposal designated the CFTC's security futures
products accounts rule as Rule 41.42. However, because the CFTC is
adopting this rule and the rules pertaining to customer margin as
Subpart E of Part 41, the CFTC has redesignated Rule 41.41 as Rule
41.3 and adopted the SFP accounts rule as Rule 41.41.
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In its comment letter, NFA recommended that CFTC Rule 1.55 be
further amended to clarify that the existing basic risk disclosure
obligations that apply to FCMs and IBs do not apply with respect to
customers who trade only SFPs and whose positions are being held in
securities accounts. According to NFA, these customers will be required
by its rules and the rules of the National Association of Securities
Dealers ("NASD") to be provided with a "uniform disclosure
statement" that "will contain all of the disclosures that are
currently required [under CFTC] Rule 1.55." \26\
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\26\ See NFA Letter, pps. 6-7.
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The CFTC fully supports the adoption of a model disclosure document
that will contain all of the disclosures set forth under existing CFTC
Rule 1.55 and commends the efforts of NFA and NASD in developing such a
document. Because a customer whose only futures trading involves SFPs
will receive a model disclosure document in accordance with NFA and
NASD rules, and such document will include the basic risk disclosures
required by CFTC Rule 1.55, the CFTC agrees that it is not necessary
for this type of customer to be given a separate risk disclosure
statement including the language set forth in CFTC Rule 1.55(b).
Because CFTC Rule 1.55(a)(1) states that the basic risk disclosure
obligations set forth therein apply to an FCM or IB only with respect
to a commodity futures account for a customer, however, the CFTC does
not believe that further amendment of the text of CFTC Rule 1.55 is
necessary to achieve the result recommended by NFA. Customers of an FCM
or IB whose only futures trading activity involves SFPs that are held
in a securities account are not required under existing rules to
receive the basic risk disclosure statement for futures under CFTC Rule
1.55.\27\
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\27\ As stated in the Proposal, 66 FR 50785 at 50795, the CFTC
reiterates that if the model disclosure document incorporates a
discussion of the segregation requirements and SIPA as required
under Rule 41.41, the CFTC will not require the discussion to be set
forth in a separate risk disclosure document. NFA supported this
aspect of the proposal.
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C. Rule 41.41 and Paragraph (o) of Rule 15c3-3
1. Where SFPs May Be Held
Paragraph (a) of new CFTC Rule 41.41 and corresponding paragraph
(o)(1) of Rule 15c3-3 allow a Full FCM/Full BD to hold customer SFPs in
either a futures account or a securities account.\28\ Under the final
rules, a Full FCM/Full BD may choose either to maintain all customer
SFPs in futures accounts, all customer SFPs in securities accounts, or
some customers' SFP positions in futures accounts and other customers'
SFP positions in securities accounts. One commenter suggested that the
Commissions clarify whether a Full FCM/Full BD may allow a customer to
hold certain SFPs in a securities account and other SFPs in a futures
account. The commenter contended that a customer that is employing
various trading strategies may want this type of flexibility.
Accordingly, the CFTC has revised Rule 41.41(a)(1) to specifically
provide that a Full FCM/Full BD may hold all of a customer's SFPs in a
futures account or
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in a securities account, or may hold some of the customer's SFPs in a
securities account and other of the same customer's SFPs in a futures
account. Paragraph (o) of Rule 15c3-3 also permits a Full FCM/Full BD
to hold a customer's SFPs in a futures account and, at the same time,
hold other SFPs for the same customer in a securities account. However,
the firm's records must clearly indicate the type of account in which
each position is held.
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\28\ The terms "futures account" and "securities account"
are defined in new paragraphs (vv) and (ww) of CFTC Rule 1.3, and
corresponding paragraphs (a)(15) and (a)(14) of Rule 15c3-3. The
Commissions did not receive any comments concerning these
definitions in response to the Proposal.
Separately, CFTC Rule 41.4(f) clarifies that money, securities,
or property held to margin, guarantee or secure SFPs held in a
futures account are subject to the segregation requirements of
Section 4d of the CEA (7 U.S.C. 6d). No comments were received
regarding this provision, and it has been adopted as proposed.
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One commenter stated that "customers who are given a choice [as to
account type] should make that election in writing." As discussed
below, the Commissions have determined not to require a written
customer acknowledgment stating that the customer understands that the
account will not be protected under the alternative regulatory scheme.
The Commissions believe that a Full FCM/Full BD that provides its
customers with a choice of account type should have discretion as to
the manner in which a customer may elect the type of account in which
SFPs will be held and how that election will be evidenced.
As proposed, paragraph (a)(2) of CFTC Rule 41.41 and corresponding
paragraph (o)(1)(ii) of Rule 15c3-3 would have required a Full FCM/Full
BD to establish written policies describing whether customer SFPs and
any customer assets used to margin them will be held in a futures
account or a securities account.\29\ One commenter objected to the use
of the term "policy," suggesting that this term implies objective
standards that may not be realistic in practice, and that firms might
wish to exercise discretion with respect to the type of account in
which SFPs will be held based on relevant considerations specific to
each customer. Use of the term "policy" was not intended to limit a
firm's discretion. Instead, this requirement was intended to compel
firms to focus on establishing and documenting policies, procedures and
processes to be applied when customers seek to open accounts for
trading SFPs or to add SFPs to their existing portfolio. Accordingly,
CFTC Rule 41.41(a)(2) and Rule 15c3-3(o)(1)(ii), as adopted, require
Full FCM/Full BDs \30\ to establish written policies or procedures for
determining whether customer SFPs (together with any associated
customer margin) will be held in a futures account and/or a securities
account. If a firm permits only certain customers to make an election
as to account type, the firm's written policies or procedures must
clearly explain which customers may or may not make an election.
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\29\ To the extent that a Full FCM/Full BD allows a customer to
choose the account type, this includes policies regarding the
process by which a customer may elect the type or types of
account(s) in which SFPs will be held (including the procedure to be
followed if a customer fails to make an election of account type).
\30\ NFA suggested a technical change to CFTC Rule 41.41(a)(2)
to make clear that the reference therein to "FCM" that is fully
registered with the CFTC pursuant to CEA Section 4(a)(1). The CFTC
notes that the other type of FCM, i.e., a Notice FCM, does not have
any discretion in determining where SFPs may be held. A Notice FCM
may hold SFPs only in a securities account. See CFTC Rule
41.41(a)(1). Accordingly, CFTC Rule 41.41(a)(2), which requires FCMs
to establish policies or procedures for determining where SFPs can
be held applies only to FCMs that are fully registered under CEA
Section 4f(a)(1). Nevertheless, in the interest of providing clarity
in the rules, the CFTC has incorporated the change suggested by NFA
and, thus, CFTC Rule 41.41(a)(2), as adopted, provides that the
requirement for establishing written policies or procedures applies
only to Full FCM/Full BDs. No corresponding change has been made to
Rule 15c3-3(o)(1)(ii), which was organized differently, and makes
clear that the requirement for establishing written policies or
procedures applies only to Full FCM/Full BDs.
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2. Requirements for Accepting Customer SFP Orders
Paragraph (b) of Rule 41.41 and corresponding paragraph (o)(2) of
Rule 15c3-3 set forth a number of requirements that a firm must meet
before it accepts the first order for an SFP from or on behalf of a
customer.\31\ Firms that do not engage in an SFP business with or for
customers will not be affected by these requirements.
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\31\ The Proposal referred to requirements that a firm would be
required to meet before accepting an SFP order from a customer. The
Commissions have adopted language that makes clear that these
requirements are to be met before accepting the first SFP order from
a customer and need not be repeated for each SFP order.
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a. Disclosure Document Requirements
The disclosure obligations set forth in CFTC Rule 41.41(b) and Rule
15c3-3(o)(2) have been adopted as proposed. Paragraph (b) of CFTC Rule
41.41 and corresponding paragraph (o)(2) of Rule 15c3-3 establish
certain disclosure requirements that apply to a firm that accepts
customer SFP orders. The Commissions view these disclosure requirements
as essential to address potential customer confusion regarding the
nature of SFPs and the protections afforded to customers trading such
products pursuant to the different rules of the Commissions.
Specifically, these paragraphs require any firm that accepts customer
SFP orders, including any Notice FCM or Notice BD, to provide each SFP
customer with: (1) A description of the protections afforded futures
accounts under section 4d of the CEA and securities accounts under Rule
15c3-3 and SIPA; (2) a statement indicating whether a customer's SFPs
will be held in a futures account or in a securities account and
whether customers will be permitted to make or change an election
concerning account type; and (3) a statement that the protections
provided by the alternative regulatory framework will not be available
in connection with that account.
Firms are not required to furnish a disclosure document to every
customer. The disclosure document is required to be provided only to
customers that place orders for SFPs. This disclosure document may be
provided to a customer either when an account is opened or at some
later date when the customer expresses an interest in engaging in SFP
transactions, but it must be provided before the customer's first order
to buy or sell an SFP is accepted by the firm.
The new rules do not prescribe specific language for the required
disclosures.\32\ A firm may prepare its own disclosure statement or it
could use a model disclosure statement.\33\ Further, these disclosures
may be provided to customers in one or more documents.
---------------------------------------------------------------------------
\32\ The Commissions requested comment on whether the rules
should mandate specific language to be included in the disclosure
document. None of the commenters suggested that any specific
disclosure language be required.
\33\ A group of industry participants, including the NFA and the
NASD, is developing a uniform disclosure statement, See note 26 and
accompanying text.
---------------------------------------------------------------------------
New paragraphs (b)(2) of CFTC Rule 41.41 and (o)(2)(ii) of Rule
15c3-3 allow a transferee firm that receives a transferred customer
account with an open SFP position to accept an order from the customer
as long as the firm provides the customer, no later than ten business
days after the account is transferred, with the following statements:
(1) A statement indicating whether a customer's SFPs will be held in a
futures account and/or a securities account and whether the firm
permits customers to make or change an election of account type; and
(2) a statement that, with respect to the customer's SFPs that are held
in a securities account or a futures account, the alternative
regulatory scheme is not available to the customer in connection with
that account.\34\ This exception will allow customers with open
positions to close out those positions, if necessary, by allowing firms
to accept an order from that customer even if the receiving firm
[[Page 58288]]
has not yet provided the disclosure statements to the customer.
---------------------------------------------------------------------------
\34\ Firms may provide these statements to the customer prior to
the transfer (e.g., in the case of a transfer initiated by the
customer, the required disclosures may be provided to the customer
when the customer initiates the transfer request).
---------------------------------------------------------------------------
However, as discussed more fully in section V.C.3. below titled
"Changes in Account Type," where a customer's account type changes as
a result of the transfer, new paragraphs (c)(2) of CFTC Rule 41.41 and
(o)(3)(ii) of Rule 15c3-3 require that the firm provide the disclosures
described above regarding paragraphs (b)(2) of CFTC Rule 41.41 and
(o)(2)(ii) of Rule 15c3-3, plus additional disclosures describing the
protections afforded to futures accounts under section 4d of the CEA
and the protections afforded to securities accounts under Rule 15c3-3
and SIPA, at least ten days prior to the effective date of the
transfer. This prior notification and disclosure will provide the
customer with information necessary to make an informed decision
regarding account type and an opportunity to transfer the account to
another firm that provides the type of account with the regulatory
protections the customer would prefer. If the customer's account type
will not change as a result of the transfer, this prior notice is
unnecessary and, pursuant to paragraphs (b)(2) of CFTC Rule 41.41 and
(o)(2)(ii) of Rule 15c3-3, the firm may provide the disclosures to the
customer subsequent to the transfer.
b. Customer Acknowledgments
Proposed paragraph (b)(2) of CFTC Rule 41.41 and corresponding
proposed paragraph (o)(2)(ii) of Rule 15c3-3 would have required that a
Full FCM/Full BD obtain a signed acknowledgment from a customer before
the firm could accept an order for an SFP from that customer, whereby
the customer would affirm his or her understanding that the account
would not be protected under the alternative regulatory scheme. The
proposed rules would not have required that notice registrants obtain
this acknowledgment from customers because they are subject to only one
customer protection regulatory scheme.\35\
---------------------------------------------------------------------------
\35\ See notes through and accompanying text.
---------------------------------------------------------------------------
All three comment letters received in response to the Proposal
opposed the requirement to obtain a signed acknowledgment from
customers. Generally, the commenters opposed the requirement to obtain
a signed acknowledgment because they believe it to be an unnecessary
and overly burdensome method of ensuring that the customer received and
understood the required disclosures. Further, one commenter contended
that Full FCM/Full BDs are not presently required to provide
disclosures to their customers to identify the protections afforded by
different regulatory regimes, nor are they required to obtained signed
acknowledgments from their customers.\36\ This commenter also stated
that requiring Full FCM/Full BDs to obtain signed acknowledgments from
customers, while not imposing the same requirement on notice-registered
firms, "has the effect of penalizing Full FCM/Full BDs vis a vis
notice registrants because the cost and staff time required to
administer and enforce the acknowledgment policy would be overly
burdensome." \37\ The Commissions have reconsidered the customer
acknowledgment requirement in light of the comments received and have
determined not to adopt such a requirement.\38\ The requirements that
firms provide each customer with disclosures before effecting any
transactions for that customer \39\ and that Full FCM/Full BDs
establish the above-described written policies should suffice to make
customers aware of the protections of customer funds afforded by
segregation under the CEA and those provided by Rule 15c3-3 and SIPA.
---------------------------------------------------------------------------
\36\ See CME/CBOT Letter, p. 3.
\37\ Id.
\38\ When it considered adopting the final rules, the SEC also
noted that the acknowledgement requirement could be misconstrued
against customers and, therefore, should not be adopted as proposed.
\39\ The Commissions have clarified that when an account is
transferred and a customer's account type will change as a result of
that transfer, the required disclosures must be provided to the
customer at least ten days before the effective date of the transfer
to allow the customer time to move the account to another firm (See
infra note and accompanying text).
---------------------------------------------------------------------------
3. Changes in Account Type
New paragraph (c) of CFTC Rule 41.41 and corresponding paragraph
(o)(3) of Rule 15c3-3 set forth the general rule that a firm may change
the type of account in which customer SFPs are held. This change of
account type may be made pursuant to a customer's request, or it may be
initiated by the firm.\40\ Regardless of whether the customer or the
firm initiated the change, the firm must create a record concerning the
change and notify the customer in writing of the date that the change
will become effective.
---------------------------------------------------------------------------
\40\ As discussed above, a firm would be required to establish
procedures as to whether and when a customer or firm could change
the account type (see section C.1. above).
---------------------------------------------------------------------------
While all of the commenters supported the paragraph that allowed
firms the ability to change a customer's account type, two of the
commenters objected to the requirement that a firm must obtain a
written acknowledgment from the customer before changing the customer's
account type.\41\ These two commenters contended that this requirement
"is overly burdensome" \42\ and "effectively vests in the customer *
* * the ability to choose the type of account in which the customer's
security futures products are held." \43\ As stated above, the
Commissions have determined not to require that a firm obtain a signed
acknowledgment from a customer prior to accepting the first SFP order
from or on behalf of that customer, and have also determined not to
require that a firm obtain a signed customer acknowledgment before
changing the customer's account type.
---------------------------------------------------------------------------
\41\ See infra notes and
\42\ See CME/CBOT Letter, p. 4.
\43\ See FIA/SIA Letter, p. 3.
---------------------------------------------------------------------------
The amendments now require that a firm notify a customer in writing
of the effective date of a change of account type, and provide the
customer with the same statements specified in the new CFTC Rule
41.41(b)(1) and Rule 15c3-3(o)(2)(i) disclosure document
requirements,\44\ no less than ten business days prior to that
effective date. This requirement was incorporated so that, in the
absence of the proposed acknowledgment requirement, a customer is
notified of which regulatory regime is applicable to the account. These
rules also will apply if a customer's account type changes as part of a
bulk transfer of accounts.
---------------------------------------------------------------------------
\44\ Specifically, a customer must receive (1) a description of
the protections afforded futures accounts under section 4d of the
CEA and securities accounts under Rule 15c3-3 and SIPA; (2) a
statement indicating whether a customer's SFPs will be held in a
futures account or in a securities account and whether customers
will be permitted to make or change an election concerning account
type; and (3) a statement that the protections provided by the
alternative regulatory framework will not be available with respect
to that account.
---------------------------------------------------------------------------
One commenter stated, "[c]ustomers should be given adequate notice
so they can move their accounts or positions to another firm if they do
not want to change account types."\45\ The required prior notification
should provide the customer with time to move the account to another
firm if the customer objects to the change of account type.
---------------------------------------------------------------------------
\45\ See NFA Letter, p. 8.
---------------------------------------------------------------------------
One commenter objected to the requirement that a firm provide the
customer with a second written notice, subsequent to the change of
account type, of the date an account-type change became effective.\46\
This commenter contended that prior notice of a change of account type
should be sufficient, and that a customer troubled by the change could
close the account and do business elsewhere.\47\ The Commissions
[[Page 58289]]
have eliminated the requirement that a firm notify a customer,
subsequent to the change of account type, of the actual date of the
change of account type because the prior notification will include the
effective date of the change of account type.
---------------------------------------------------------------------------
\46\ See CME/CBOT Letter, p. 4.
\47\ Id.
---------------------------------------------------------------------------
If a Full FCM/Full BD initiates a change of account type, it should
consider the effect of its choices on its customers and the criteria
used to make these choices in light of its obligations under the CEA,
Exchange Act, and applicable self-regulatory organization rules.\48\
---------------------------------------------------------------------------
\48\ See e.g., NASD Rule 2110 and NYSE Rule 2401. Generally,
firms may initiate a change of account type for any reason, provided
it does not violate the CEA, Exchange Act, and self-regulatory
organization rules.
---------------------------------------------------------------------------
D. Recordkeeping Requirements
The final rules adopted by the Commissions provide that the
specific recordkeeping requirements under the CEA and the Exchange Act
for SFPs be determined by the type of account in which the SFPs are
held. Thus, new paragraph (d) of CFTC Rule 41.41 provides that the
CFTC's recordkeeping rules do not apply to SFP transactions and
positions in a securities account (provided that the SEC's
recordkeeping rules apply to those transactions and positions).
Corresponding paragraph (f) of Exchange Act Rule 17a-3 provides that
SEC Rule 17a-3 does not apply to SFP transactions and positions in a
futures account (provided that the CFTC's recordkeeping rules apply to
those transactions and positions).\49\ These rules are designed to
address the Commissions' obligations to avoid duplicative or
conflicting regulations relating to the maintenance of books and
records involving SFPs.
---------------------------------------------------------------------------
\49\ Because many of the record retention obligations in
Exchange Act Rule 17a-4 are dependant on the obligation to create
the record under Exchange Act Rule 17a-3, the relief provided in
paragraph (f) of Rule 17a-3 will also relieve firms from certain
Rule 17a-4 record retention obligations.
---------------------------------------------------------------------------
These final rules do not exempt firms from the books and records
rules with relation to general firm records that do not relate to SFP
transactions or positions (e.g., the firm's general ledger or corporate
organization documents). Full FCM/Full BDs presently must comply with
both the CFTC's and the SEC's books and records rules and may presently
maintain one set of general firm records to comply with both sets of
rules. The Commissions intend that the changes to the books and records
rules will eliminate any duplicative requirements applicable to an SFP
because of the fact that it is both a security and a future. However,
Full FCM/Full BDs should maintain general firm records for SFPs in the
same manner that they would under the present regulatory landscape.
The Commissions solicited comment in the Proposal regarding certain
differences between the CEA and Exchange Act (specifically, Rules 17a-3
and 17a-4) recordkeeping requirements.\50\ All of the commenters
expressed the view that application of the Commissions' recordkeeping
requirements should be determined by the type of account in which the
SFPs are held. However, one commenter suggested that CFTC Rule 41.41(d)
specifically identify the recordkeeping rules under the CEA that will
apply to SFPs held in a futures account. To address this comment, the
language in CFTC Rule 41.41(d) was modified to provide more clarity.
The rule now states that the CFTC's recordkeeping requirements set
forth in CFTC Rules 1.31, 1.32, 1.35, 1.36, 1.37, 4.23, 4.33, 18.05 and
190.06 shall apply to SFP transactions and positions in a futures
account and the SEC's recordkeeping rules (e.g., Exchange Act Rule 17a-
3 and 17a-4) shall apply to SFP transactions and positions in a
securities account.
---------------------------------------------------------------------------
\50\ As noted in the Proposal, CFTC Rule 1.31 (17 CFR 1.31)
requires that all books and records required to be kept by an FCM
must be kept for a period of five years from the date thereof, and
further, that the required books and records may be stored on
micrographic or electronic storage media unless the documents are
trading cards or other documents on which trade information is
originally recorded in writing, whereas certain records required to
be preserved pursuant to the Exchange Act Rule 17a-4 (17 CFR
240.17a-4) must be held for either three or six years, depending
upon the particular record.
---------------------------------------------------------------------------
E. Customer Account Statements
Generally, FCMs must send account statements to customers
monthly,\51\ whereas broker-dealers must send account statements to
customers on a quarterly basis.\52\ Further, customer account statement
requirements for broker-dealers are generally set by securities
industry self-regulatory organization rules. The Commissions believe
that application of the specific customer account statement delivery
requirements under the CEA and Exchange Act should be determined by the
type of account in which SFPs are held. Accordingly, new paragraph (e)
of Rule 41.41 provides that the CFTC's reporting requirements, set
forth in CEA Rules 1.33 and 1.46,\53\ shall not apply to SFP
transactions and positions in a securities account.
---------------------------------------------------------------------------
\51\ 17 CFR 1.33(a). FCMs may send a quarterly statement if the
account has neither open positions at the end of the statement
period nor any changes to the account balance since the prior
statement period.
\52\ See e.g., Exchange Act Rule 15c3-2 (17 CFR 240.15c3-2) and
NYSE Rule 409. However, in some cases broker-dealers must send
account statements to customers more frequently (see, e.g., NYSE
Rule 730), and, as a general business practice, most broker-dealers
send a monthly statement to each customer whose account has
experienced activity during that month.
\53\ 17 CFR 1.33 and 1.46.
---------------------------------------------------------------------------
F. Confirmations
The Commissions requested comment on the application to
transactions in SFPs of their confirmation rules, Rule 10b-10 under the
Exchange Act and Rule 1.33(b) under the CEA. All three commenters
stated that confirmation requirements should follow from the type of
account in which SFPs are carried. As noted above, new CFTC Rule
41.41(e) provides that CEA Rule 1.33, which includes confirmation
statement requirements, shall not apply to SFP transactions and
positions carried in a securities account. On May 31, 2002 the SEC
separately proposed amendments to its Rule 10b-10,\54\ and issued an
order to temporarily exempt firms carrying SFPs in futures accounts
from SEC Rule 10b-10 until appropriate amendments to Exchange Act Rule
10b-10 and a new Rule 11d2-1 could be adopted by the SEC.\55\ The SEC
adopted amendments to Exchange Act Rule 10b-10 and new Rule 11d2-1 on
August 27, 2002.\56\
---------------------------------------------------------------------------
\54\ 67 FR 39647 (June 10, 2002), Exchange Act Release No. 46014
(May 31, 2002).
\55\ 67 FR 39752 (June 10, 2002), Exchange Act Release No. 46015
(May 31, 2002).
\56\ Exchange Act Release No. 46471 (September 6, 2002).
---------------------------------------------------------------------------
G. CFTC Bankruptcy Treatment: Amendments to Part 190
The proposed amendments to Part 190 were intended to make clear
that a customer that is trading SFPs that are held in a securities
account at a broker-dealer would not be entitled to benefit from the
priority treatment Part 190 affords to customers in the event of
insolvency of the FCM. The proposed amendments would have excluded from
the definition of "specifically identifiable property," security
futures products and any property received to margin, guarantee or
secure such positions held in a securities account. Thus, SFP positions
and associated margin held in such accounts would have been excluded
from the net equity calculation and the definition of "customer
property." Consistent with these changes, claimants would have been
required to signify on their proof of claim form whether SFP positions
are held in a securities or futures account.
NFA was the only commenter to address this issue and it supported
the proposed rule changes, which the CFTC
[[Page 58290]]
has determined to adopt as proposed. NFA also stated that the CFTC
should seek corresponding changes to the Bankruptcy Code. The CFTC will
take the latter comment under advisement for possible further
legislative recommendations, but the CFTC does not believe that
Bankruptcy Code amendments are necessary before SFP trading may
commence.
H. Arbitration
The Commissions did not address the issue of arbitration in the
Proposal. Nevertheless, NFA commented that SFPs carried in securities
accounts should not be subject to the CFTC's general rule that
prohibits the use of pre-dispute arbitration agreements as a condition
of doing business. NFA stated that maintaining this prohibition with
respect to SFPs carried in securities accounts would be inconsistent
with the longstanding and accepted practice in the securities industry.
NFA further stated that exempting SFPs carried in securities accounts
from the prohibition would be consistent with the general principle
that differing CFTC and SEC regulatory requirements should be
determined by the type of account and would avoid operational
difficulties. The CFTC may address the arbitration issue separately.
I. Rule 15c3-3 Definitions
The SEC amended the definition of the term "customer" and has
added definitions for the terms "securities account" and "futures
account." Certain technical changes were made to the definitions from
what was proposed. Specifically, the SEC added a sentence to the Rule
15c3-3(a)(1) definition of "customer" that states, "[i]n addition,
the term [customer] shall not include a person to the extent that the
person has a claim for security futures products held in a futures
account or in a `proprietary account' as defined by the Commodity
Futures Trading Commission in section 1.3(y) of this chapter." This
definition was revised to exclude a futures account or a "proprietary
account," which is specifically exempted from the definition of
customer under the CFTC rules.\57\
---------------------------------------------------------------------------
\57\ See 17 CFR 1.3(k) and 1.3(y).
---------------------------------------------------------------------------
The term "securities account" is defined in Rule 15c3-3(a)(14) as
an account that is maintained in accordance with the requirements of
Section 15(c)(3) of the Exchange Act and Rule 15c3-3 thereunder, and
Rule 15c3-3(a)(15) defines the term "futures account" as an account
that is maintained in accordance with the segregation requirements of
section 4d of the Commodities Exchange Act (7 U.S.C. 6d) and the rules
thereunder. These definitions were changed from the Proposal to more
closely mirror the definitions used by the CFTC so that certain
customer accounts are not inadvertently omitted from coverage under
either regulatory regime.
J. Amendments to Reserve Formula Item 13 and Note F
One commenter noted that item 13 of Rule 15c3-3a (the "Reserve
Formula") allows margin required and on deposit at The Options
Clearing Corporation ("OCC") for options contracts written or
purchased in customer accounts to be included as a debit in the Reserve
Formula calculation required under Rule 15c3-3(e).\58\ This commenter
stated that in the near future, the OCC and other clearing
organizations, including clearing organizations registered with the
CFTC as derivatives clearing organizations pursuant to Section 5b of
the CEA, may clear SFPs carried by broker-dealers in the securities
accounts of customers. The commenter suggested that margin required and
on deposit with the OCC and other clearing organizations relating to
SFPs carried in customer securities accounts should also be included as
a debit in the Reserve Formula. The SEC has decided to address this
issue in a separate rulemaking.
---------------------------------------------------------------------------
\58\ 17 CFR 240.15c3-3(e).
---------------------------------------------------------------------------
K. Exchange Act Recordkeeping Rules
1. Amendment to Paragraph 17a-4(b)(9)
The SEC amended Rule 17a-4(b)(9) to provide that the records
broker-dealers are required to create or obtain pursuant to new
paragraph 15c3-3(o) \59\ must be maintained for at least three years,
the first two in an easily accessible place.
---------------------------------------------------------------------------
\59\ New paragraph 15c3-3(o) requires that when effecting a
change of an SFP customer's account type a Full FCM/Full BD must
make a record of the change.
---------------------------------------------------------------------------
Present Rule 17a-4(b)(4) requires that a broker-dealer maintain
"originals of all communications received and copies of all
communications sent * * * relating to his business as such." Thus, the
paragraph 15c3-3(o) requirements that a broker-dealer must furnish the
customer with certain disclosures, and provide each customer with
notice of the effective date of a change of account type is covered
under the present rule.
2. New Paragraph 17a-4(k)
New paragraph (k) to Exchange Act Rule 17a-4 parallels CFTC Rule
1.35(a-2)(1). This paragraph requires a broker-dealer that engages in
an SFP business, upon request of the SEC or of any self-regulatory
organization of which it is a member, to obtain from its customers and
provide to the SEC or the applicable self-regulatory organization
documentation of cash transactions underlying exchanges of SFPs for the
underlying security(ies). This type of transaction is also called an
exchange of futures for physical (or an "EFP"). The production of
this documentation is necessary, among other things, to allow
regulators to investigate claims of market manipulation.
In the futures markets, an EFP is a transaction between two parties
in which the first party buys a physical commodity from the second
party and simultaneously sells (or gives up a long) a futures contract
on that physical commodity to the second party. The CEA authorizes EFPs
only to the extent that they are conducted in accordance with the rules
of a contract market. EFPs traditionally served an important function
by providing a means of pricing a cash transaction, or of making or
taking delivery on their futures commitments outside the normal
exchange delivery system, allowing parties to offset exchange positions
through a privately negotiated transaction. EFPs are commonly used in
the futures markets to enter or exit positions in the futures market
after normal trading hours.\60\
---------------------------------------------------------------------------
\60\ See Report of the CFTC's Division of Trading and Markets:
Exchanges of Futures for Physicals (October 1987).
---------------------------------------------------------------------------
Industry representatives have informed SEC staff that EFPs may be
used with relation to SFPs. In the SFP market, an EFP would be a two
party transaction in which the first party sells an SFP (or gives up a
long) to the second party, while simultaneously buying or taking
delivery on the underlying securities from the same second party. After
the transaction, the first party will have the securities and the
second party will be long, or own, the SFP. If the second party was
short an SFP to hedge its long securities position, it may use its
newly acquired SFP to offset that short position in the SFP. The two
parties must then notify the firm or firms that hold their securities
and SFPs of the EFP so that records as to the ownership of the
transferred securities and SFPs can be amended, and the clearing agency
or organization can be notified of the change.
The SEC revised the proposed language of paragraph (k) of Rule 17a-
4 to account for the fact that Exchange Act Rules 17a-3 and 17a-4
already require that certain records regarding securities transactions
be created,
[[Page 58291]]
maintained, and made available to the SEC and self-regulatory
organizations upon request. Accordingly, paragraph (k) does not require
a broker-dealer to request and obtain from its customers or provide to
a requesting regulator documentation regarding exchanges of security
futures products for physical if the underlying cash transaction or
exchange was effected through a registered broker-dealer and is of a
type required to be recorded pursuant to Rule 17a-3.
L. Redesignation of Present Paragraphs (k) and (l) of Exchange Act Rule
17a-4
On October 26, 2001 the SEC adopted final rule amendments to
Exchange Act Rule 17a-4 that included new paragraphs (k) and (l).\61\
However, those amendments do not become effective until May 2, 2003. As
the present amendments will become effective before that date, the SEC
chose to redesignate paragraphs (k) and (l) as paragraphs (l) and (m)
and insert the new EFP requirements as paragraph (k). The effective
date of the redesignated paragraphs will not change, but will continue
to be May 2, 2003.
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\61\ 66 FR 55817, at 55841 (November 2, 2001), Exchange Act
Release No. 44992 (Oct. 26, 2001).
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M. Exchange Act Reporting, Notification, and Quarterly Count
Requirements
The SEC also is adopting final rule amendments to Rules 17a-5, 17a-
7, 17a-11, and 17a-13, to exempt certain Notice BDs from the
requirements to file certain reports,\62\ maintain records at a place
within the United States,\63\ send telegraphic notification to the
SEC,\64\ and perform quarterly securities counts to verify
positions.\65\ The CFTC has similar rules \66\ that would be applicable
to Notice BDs, and if the SEC does not exempt Notice BDs from these
rules, they would be subject to duplicative requirements. These
amendments exempt only Notice BDs that are not members of a national
securities exchange or national securities association fully-registered
with the SEC pursuant to sections 6(a) or 15A(a) of the Exchange Act
respectively ("Fully-registered National Securities Exchange" and
"Fully-registered National Securities Association").\67\ A Notice BD
that is a member of a Fully-registered National Securities Exchange or
a Fully-registered National Securities Association is still subject to
these rules.
---------------------------------------------------------------------------
\62\ Broker-dealers are required to file monthly and/or
quarterly reports (commonly referred to as FOCUS Reports), annual
audited statements, and send financial statements to customers
pursuant to Rule 17a-5 (17 CFR 240.17a-5).
\63\ Non-resident brokers and dealers are required, pursuant to
Rule 17a-7 (17 CFR 240.17a-7), to maintain certain records at a
location, designated by the firm, within the United States, or
provide the SEC with a signed undertaking stating that it will
furnish such records to representatives of the SEC upon demand.
\64\ See Rule 17a-11 (17 CFR 240.17a-11).
\65\ See Rule 17a-13 (17 CFR 240.17a-13).
\66\ See, e.g., 17 CFR 1.10 and 1.12.
\67\ 15 U.S.C. 78f(a) and 15 U.S.C. 78o-3(a). This does not
include any national securities exchanges or national securities
associations that are registered pursuant to section 6(g) or 15A(k)
of the Exchange Act (15 U.S.C. 78f(g) or 15 U.S.C. 78o-3(k)).
---------------------------------------------------------------------------
VI. Administrative Procedure Act
Section 553(d) of the APA generally provides that, unless an
exception applies, a substantive rule may not be made effective less
than 30 days after notice of the rule has been published in the Federal
Register.\68\ One exception to the 30-day requirement is an agency's
finding of good cause for providing a shorter effective date.
---------------------------------------------------------------------------
\68\ 5 U.S.C. 553(d).
---------------------------------------------------------------------------
The CFMA became law on December 21, 2000. Since the passage of the
CFMA, the Commissions have moved quickly to propose and adopt rules
that would allow broker-dealers and other market participants to begin
trading SFPs. The Commissions published for comment in the Federal
Register proposed rules on October 4, 2001 (the "Proposal").\69\ The
proposed rules were designed to reduce conflicting and duplicative
regulations applicable to both Full FCM/Full BDs and firms notice
registered \70\ with either the CFTC or the SEC, and to address certain
differences between the CEA and Exchange Act rules. After reviewing and
considering the comments received and making certain changes, the
Commissions are adopting these rules, which allow firms to maintain
customer SFPs in either a futures account subject to the CEA
segregation requirements or a securities account subject to Rule 15c3-3
and SIPA.
---------------------------------------------------------------------------
\69\ See supra note .
\70\ See supra notes 15 and 17.
---------------------------------------------------------------------------
The primary purpose of the 30-day delayed effectiveness requirement
is to give affected parties a reasonable period of time to adjust to
the new rules. However, shortening the time period before the final
rule amendments become effective will benefit, not harm, affected
parties. The final rule amendments will reduce duplicative regulation
applicable to firms that intend to effect transactions in and hold SFPs
for the benefit of customers, and it may be impractical for those firms
to engage in this business until the final rule amendments are
effective. The final rule amendments, with one exception,\71\ are
substantially the same as the proposed rules.
---------------------------------------------------------------------------
\71\ The final rule amendments eliminated the proposed
requirement that firms obtain a signed acknowledgement from a
customer before accepting an SFP order.
---------------------------------------------------------------------------
Allowing these rules to be effective prior to 30 days after
publication would result in more cost-effective and efficient trading
of SFPs. Intermediaries would be permitted to comply with the new
rules, which are specifically designed for the trading of SFPs. If
these rules are not effective on September 13, 2002 (the date that the
rules pertaining to customer margin will be effective), SFP trading may
begin and intermediaries would have to comply with two sets of
requirements prior to these rules' effective date. Subsequent to the
effective date, intermediaries then would be required to modify their
systems to comply with these rules. For these reasons, the Commissions
find that good cause exists for these rules to be effective on
September 13, 2002, the effective date of the customer margin rules
relating to security futures.
VII. Paperwork Reduction Act
CFTC: This rulemaking contains information collection requirements.
As required by the Paperwork Reduction Act of 1995 ("PRA"),\72\ the
CFTC submitted a copy of the proposed rules to the Office of Management
and Budget ("OMB") for its review. No comments were received in
response to the CFTC's invitation in the Proposal to comment on any
potential paperwork burden associated with the rules.
---------------------------------------------------------------------------
\72\ 44 U.S.C. 3501 et seq.
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SEC: The SEC revised certain collections of information under the
title "Amendments to Rules 15c3-3, 17a-3, 17a-4, 17a-5, 17a-7, 17a-11,
and 17a-13 to Recognize Security Futures Products." The rules being
amended contain currently approved collections of information under OMB
control numbers 3235-0078, 3235-0033, 3235-0279, 3235-0123, 3235-0131,
3235-0085 and 3235-0035, respectively.
Presently, Rules 17a-3, 17a-5, 17a-7, 17a-11, and 17a-13 apply only
to broker-dealers with relation to securities products. FCMs are
subject to similar CFTC rules. Because an SFP is both a security and a
future, without these amendments FCMs would be subject to these rules
and the CFTC's similar rules. Therefore, the amendments to Rules 17a-3,
17a-5, 17a-7, 17a-11, and 17a-13 will not change the paperwork burden
for broker-dealers or for FCMs. Instead, by exempting certain Notice
BDs from the requirements of those rules, no additional paperwork
burden is created.
[[Page 58292]]
The SEC submitted amendments to the information collection
requirements contained in the proposed amendments to Rules 15c3-3 and
17a-4 to OMB for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
Sec. 1320.11. In accordance with the clearance requirements of 44
U.S.C. 3507, OMB notified the SEC on January 21, 2002 and February 8,
2002 of its approval of the revisions to the collections of information
contained in Rule 17a-4 and Rule 15c3-3, respectively.
A. Collection of Information Under These Amendments
The amendments to Rule 15c3-3 require broker-dealers to provide
each customer that wishes to engage in SFP activities with a disclosure
document. The disclosure document will supply customers with
information that can be used to understand the protections that the
CFTC and SEC regulatory schemes provide to an account in which SFPs are
held. Further, a Full FCM/Full BD must send a notification to any
customer whose account type has been changed.
The amendments to Rule 17a-4 specify the length of time that the
records collected under new paragraph 15c3-3(o) must be maintained. In
addition, the amendments to Rule 17a-4 require that, if requested by a
Commission representative or a self-regulatory organization, a broker-
dealer must request and obtain certain documents underlying exchanges
of SFPs for physical securities and provide them to the requesting
regulator.
B. Proposed Use of Information
The information collected pursuant to the amendments to Rules 15c3-
3 and 17a-4 will be used by the SEC, self-regulatory organizations, and
other securities regulatory authorities during examinations and
investigations to determine whether a broker-dealer is in compliance
with these rules and with other, related customer protection
requirements. The information collected pursuant to the amendments to
the collections of information under Rules 15c3-3 and 17a-4 will be
stored by the broker-dealer and made available to the various
securities regulatory authorities as required to facilitate
examinations and investigations.
C. Respondents
These proposed amendments to Rules 15c3-3 and 17a-4 would only
apply to firms that plan to effect transactions in and hold SFPs for
the benefit of customers. In addition, these provisions would apply
only to broker-dealers that carry customer funds, securities or
property and do not claim an exemption from Rule 15c3-3 ("clearing
firms"). As of December 31, 2001, there were 412 clearing firms. In
addition, only firms that plan to effect transactions in and hold SFPs
for the benefit of customers will be required to comply with this rule.
As of December 31, 2001, 89 broker-dealers were registered with the
CFTC as FCMs, 55 of which are clearing and carrying firms. Based upon
conversations between the SEC and industry representatives regarding
the number of firms that may conduct a SFP business, the Staff
estimated that the number of firms likely to engage in this business,
in addition to the broker-dealers already registered with the CFTC as
FCMs, is 10% of the clearing and carrying firms not presently
registered with the CFTC. Thus, the Staff estimates that approximately
91 firms (55 + ((412 - 55) x 10%)) will be required to comply with
these proposed amendments.\73\
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\73\ As stated above, the SEC submitted amendments to the
information collection requirements contained in the proposed
amendments to Rules 15c3-3 and 17a-4 to OMB, and was notified of its
approval of those amendments. The SEC's estimates in those
submissions (100 respondent broker-dealers and 97.6 million customer
accounts) were based on information provided by broker-dealers in
their December 31, 2000 FOCUS filings. However, the SEC has received
FOCUS filings since those submissions were made to OMB, and we have
updated our estimates to include this new information.
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D. Total Annual Reporting and Recordkeeping Burden
1. Rule 15c3-3
Pursuant to proposed new paragraphs (o)(2) and (o)(3) of Exchange
Act Rule 15c3-3, a broker-dealer that effects transactions in SFPs for
customers must provide each customer that plans to effect SFP
transactions with a disclosure document containing certain information,
and send each SFP customer notification of any change of account type.
The SEC Staff estimates that broker-dealers engaging in an SFP business
will spend approximately 2,867 hours (or 31\1/2\ hours \74\ each x 91
clearing broker-dealers) to draft a disclosure document \75\ and a
template notification of account type change.\76\ In addition, the SEC
estimates that compliance with the amendments to Rule 15c3-3 will
require an additional 82,240 hours per year.\77\ Further, the SEC Staff
estimated the costs of printing and posting the disclosure documents
and notifications of account type change as being approximately
$986,880.\78\
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\74\ See infra notes 75 and 76. ((20 hours + 8 hours for the
disclosure document) + (3 hours + \1/2\ hour for the notification of
account type change)) = 31\1/2\.
\75\ The Staff estimates (based on its experience) that, on
average, one attorney will spend approximately 20 hours to create
the disclosure document, and one senior attorney will spend
approximately 8 hours reviewing and editing the document.
\76\ The Staff estimates (based on its experience) that, on
average one attorney will spend approximately 3 hours to create the
notification, and one senior attorney will spend approximately 30
minutes reviewing and editing the document.
\77\ Broker-dealers reported, in their December 31, 2001 FOCUS
Schedule 1 filings, that they maintained 102,800,000 customer
accounts. The SEC Staff estimates, based on the number of active
options accounts and conversations with industry representatives,
that 8% of these customers may engage in SFP transactions
(102,800,000 accounts x 8% = 8,224,000) (this would include accounts
transferred from one broker-dealer to another). Further, the Staff
estimates that 20% per year may change account type. Thus, broker-
dealers would be required to create this record for 1,644,800
accounts (or 8,224,000 accounts x 20%). The Staff believes that it
will take approximately 3 minutes to create each record. Thus, the
total annual burden associated with creating this record of change
of account type, as required pursuant to new paragraph (o)(3)(i) of
Rule 15c3-3, will be 82,240 hours (1,644,800 accounts x (3 min/60
min)).
\78\ The estimates of costs of printing the disclosure documents
are based on the number of estimated customer accounts that will be
opened to effect transactions in SFPs. The SEC Staff estimates that
the cost of printing and sending each disclosure document will be
approximately $.10 per document sent. This estimate is based on past
conversations with industry representatives regarding other rule
changes that required similar printing and postage costs: postage
may be minimized by including the disclosure document with other
information mailed to customers. Thus, the total cost to the
industry of printing and sending disclosure documents will be
approximately $822,400 (or (8,244,000 x $.10)). The SEC Staff
estimates that the cost of printing and posting each notification of
account type change will be approximately $.10 per document sent.
Therefore, the SEC Staff estimates that the cost of sending this
notification to customers will be $164,480 (1,644,800 accounts x
$.10). (($822,400 + $164,480) = $986,880).
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2. Rule 17a-4
The SEC Staff estimates that broker-dealers engaging in an SFP
business will spend approximately 9,111 hours per year (91 hours \79\ +
9,020 hours \80\ to
[[Page 58293]]
assure compliance with the amendments to Rule 17a-4.
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\79\ Only broker-dealers that engage in SFP business will be
subject to the changes to Rule 17a-4. The Staff believes that 91
broker-dealers may decide to engage in a security futures product
business (see text accompanying note). The Staff estimates that it
will take, on average, one compliance person approximately 1 hour
per year to assure that the broker-dealer is in compliance with the
record maintenance provisions of Rule 17a-4(b)(9) as it relates to
new paragraph 15c3-3(o). Thus, the total yearly burden of assuring
compliance with the amendment to Rule 17a-4(b)(9) is approximately
91 hours (1 hour x 91 broker-dealers).
\80\ The SEC Staff believes this requirement is analogous to
bluesheet requests made by the SEC to broker-dealers. Bluesheet
requests are only sent to clearing firms, 661 of which were
registered with the SEC as of December 31, 2000 (according to FOCUS
Schedule 1 filings). The SEC sent 32,278 bluesheet request letters
to 294 broker-dealers from January 1, 2000 to December 31, 2000.
Thus, 45% of the broker-dealers that could be affected received
letters (or 294 broker-dealers that received bluesheet requests/661
total clearing firms), and those broker-dealers that did receive
letters received, on average, 110 letters each (or 32,278 bluesheet
requests/294 broker-dealers that received bluesheet requests).
Therefore, the SEC Staff estimates that 41 clearing firms (45% x 91
clearing firms that engage in SFP business) will receive
approximately 110 requests each for the information required to be
collected and provided pursuant to new paragraph (k) of Rule 17a-4,
or a total of 4,510 requests (or 41 broker-dealers x 110 requests
each). The SEC Staff estimates (based on its experience) that it
will take approximately 2 hours for a broker-dealer to respond to a
request to provide this information to a regulator. Therefore, the
SEC Staff believes that it would take a total of approximately 9,020
hours each year for broker-dealers to comply with this requirement
(4,510 requests x 2 hours per request).
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Finally, the SEC Staff estimates that it may cost the broker-
dealers engaging in this business approximately $2.4 million \81\ to
update their systems to comply with the amendments to Rules 15c3-3,
17a-3, 17a-4, 17a-5, 17a-7, 17a-11, and 17a-13.
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\81\ This estimate is based on representations made by industry
representatives relating to other Commission rules that required
similar systems modifications.
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In the Proposal, the Commissions solicited comments on the proposed
collections of information. No comments were received that addressed
the PRA submission.
The collections and maintenance of information, and the reports
made to the SEC and others that are required pursuant to Rules 15c3-3
and 17a-4 are mandatory. An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a currently valid control number.
VIII. Costs and Benefits of the Rules
CFTC: Section 15 of the CEA, as amended by section 119 of the CFMA,
requires the CFTC to consider the costs and benefits of its actions
before promulgating new rules or issuing orders \82\ under the CEA. By
its terms, section 15 does not require the CFTC to quantify the costs
and benefits of a new rule or to determine whether the benefits of the
proposed regulation outweigh the costs. Rather, section 15(a) simply
requires the CFTC to "consider the costs and benefits" of its action.
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\82\ Section 15(a)(3) sets forth three exceptions to the
requirement for conducting a cost-benefit analysis, none of which
would be applicable to these rules.
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Section 15(a) further specifies that the costs and benefits of the
proposed CFTC action shall be evaluated in light of the following five
considerations: (1) Protection of market participants and the public;
(2) efficiency, competitiveness, and financial integrity of futures
markets; (3) price discovery; (4) sound risk management practices; and
(5) other public interest considerations. The CFTC may, in its
discretion, give greater weight to any one of the five enumerated areas
of concern and may, in its discretion, determine that, notwithstanding
its costs, a particular rule is necessary or appropriate to protect the
public interest or to effectuate any of the provisions or to accomplish
any of the purposes of the CEA.
There are three considerations relevant to these rules. These are:
(1) Protection of market participants and the public; (2) sound
risk management practices; and (3) other public interest
considerations. The CFTC has considered the costs and benefits of these
rules in light of these three areas of concern.
The rules include a disclosure requirement applicable to FCMs.
Specifically, CFTC Rule 41.41 requires FCMs to make disclosure
concerning the customer protections available under both the securities
and futures regulatory systems. This requirement is specifically
intended to ensure that SFP customers know what protections are, or are
not, in place in the unlikely event of the insolvency of the firm. In
addition, section 4d(c) of the CEA, as amended by the CFMA, requires
the CFTC, in consultation with the SEC, to issue such rules,
regulations, or orders as are necessary to avoid duplicative or
conflicting regulations applicable to any firm that is fully-registered
with both the CFTC and the SEC involving the application of relevant
provisions of the CEA and the regulations relating to the treatment of
customer funds. These rules are intended to focus Full FCM/Full BDs on
the need to select which of the two regulatory regimes, the segregation
requirements of the CEA or SIPA provisions, will provide coverage for
SFP customer funds in the unlikely event that the firm becomes
insolvent. This will be part of a firm's overall risk management
structure to safeguard customer and firm assets.
CFTC Rule 41.41 is intended to minimize the costs of compliance
because it provides firms with maximum flexibility, consistent with
legal requirements, in designing their own disclosure documents. The
CFTC notes that industry representatives, in consultation with staffs
of the CFTC and SEC, are developing a uniform disclosure statement
concerning SFPs.\83\ The CFTC has expressed the view that the
disclosure document should incorporate a discussion of the segregation
requirements and SIPA, and that, if it does, the CFTC will not require
the discussion to be set forth in another separate document.
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\83\ See note 26 and accompanying text.
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SEC: Passage of the CFMA in December of 2000 permitted the trading
of SFPs and established a framework for joint regulation of SFPs by the
CFTC and the SEC. This framework was necessary because the CFMA defined
an SFP to be, at the same time, both a security and a contract for
future delivery and therefore subject to both the CEA and the Exchange
Act and the rules thereunder. Recognizing that some entities may be
subject to duplicative or conflicting regulations, the CFMA amended the
CEA and the Exchange Act to: (1) Exempt notice-registrants from certain
(but not all) sections of the CEA, Exchange Act, and the rules
thereunder, and (2) direct the CFTC and the SEC to consult with each
other and issue rules, regulations, or orders, as necessary, to avoid
certain duplicative or conflicting regulations applicable to Full FCM/
Full BDs with respect to the treatment of customer funds, securities,
or property, maintenance of books and records, financial reporting, or
other financial responsibility rules, involving SFPs.\84\ To this end,
the SEC amended Exchange Act Rules 15c3-3 and 17a-4 by adding new
paragraph (o) to Rule 15c3-3, and new paragraphs (b)(9) and (k) to Rule
17a-4. The SEC also amended Exchange Act Rules 17a-3, 17a-5, 17a-7,
17a-11, and 17a-13 to exempt certain Notice BDs from those rules.
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\84\ See note 7.
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The amendments to Rule 15c3-3 allow a Full FCM/Full BD to choose
whether to carry a customer's SFP positions in a securities account or
a futures account. Whether an SFP is held by a Full FCM/Full BD in a
securities or a futures account will determine whether the account will
be subject to the CFTC's segregation requirements or the SEC's customer
protection rule and SIPA. Paragraph (o) of Rule 15c3-3 strives both to
identify the manner in which a firm holds SFPs and to assure that each
customer understands which regulatory structure will govern an account
in which SFPs are held. Accordingly, paragraph (o) of Rule 15c3-3
requires that a firm establish written policies and procedures, and
provide customers with specific disclosures. In addition, if a Full
FCM/Full BD permits the account type to be changed, the firm must also
create a detailed record of any change and notify the customer in
writing of the effective date of the change.
In the Proposal, the SEC solicited comments on all aspects of the
cost-benefit analysis, including identification of any additional costs
and/or benefits
[[Page 58294]]
of the proposed amendments. It also strongly encouraged commenters to
identify and supply any relevant data, analysis and estimates. No
comments were received that specifically addressed the cost-benefit
analysis; however, all three comment letters the SEC received did
mention certain costs and/or benefits. These comments were primarily
qualitative in nature, and are described more specifically below.
The SEC has identified below certain costs and benefits related to
the Amendments to Rules 15c3-3, 17a-3, 17a-4, 17a-5, 17a-7, 17a-11, and
17a-13. In addition, any comments received that refer to costs or
benefits are discussed in the section about which the comment was
directed.
A. Benefits
1. Elimination of Conflicting and Duplicative Regulation
The amendments to Rule 15c3-3 benefit broker-dealers by eliminating
certain conflicting regulations for Full FCM/Full BDs. More
specifically, without these amendments, duplicative regulations would
have required Full FCM/Full BDs to maintain two separate and redundant
reserves to satisfy both CFTC segregation requirements and Rule 15c3-3
reserve requirements. The amendments to Exchange Act Rules 17a-3 and
17a-4 also eliminate duplicative regulations for Notice BDs, which
would have been subject to more than one set of recordkeeping rules. In
addition, Rules 17a-5, 17a-7, 17a-11 and 17a-13 were amended to
eliminate duplicative regulation of Notice BDs.
The simplicity of these amendments benefits broker-dealers as well.
The CFTC and the SEC, in amending these rules to avoid duplicative and
conflicting regulations, attempted to provide as much flexibility and
create as few operational issues and additional costs as possible.
Instead of creating a new structure to be used solely for SFPs, the
amendments allow broker-dealers and FCMs to maintain the same
operational structures they use presently for securities and for
futures. A Full FCM/Full BD can determine which regulatory structure
will be applicable to SFPs simply by choosing the type of account in
which SFPs will be held. Notice registrants will simply continue to use
the same organizational structure and be subject to the same
regulations presently applicable to their business.
Both the CFTC and SEC customer protection regimes cause firms to
take certain steps to protect customer assets. The Commissions believe
it is unlikely that firms would attempt regulatory arbitrage based on
differences in customer protection regimes. Further, none of the
commenters suggested that differences in the two regulatory regimes
might lead to regulatory arbitrage.
One commenter, in support of the amendments allowing a firm to
choose whether to hold a customer's SFP position in a securities
account or in a futures account, stated "the Commissions' desire to
maintain consistent reporting and recordkeeping procedures that follow
the type of account in which the SFPs are held is a benefit to industry
participants." \85\
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\85\ See CME/CBOT Letter, p. 2.
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2. Customer Understanding
The purpose of these two regulatory schemes is the protection of
customer assets. The SEC believes it is important that customers are
informed of what regulatory protections apply to the account in which
their SFPs are held. If a firm does not allow customers to choose
whether their SFP positions will be held in a securities account or a
futures account, the disclosure document will help customers understand
the regulatory protections applicable to their account. If a firm
allows customers to choose whether their SFP positions will be held in
a securities account or a futures account, the requirement that a
disclosure document be sent to customers describing the protections
afforded pursuant to Rule 15c3-3 and SIPA, as well as the protections
afforded pursuant to CEA segregation rules, will assist the customer in
making an informed decision as to which regulatory scheme will protect
their account. Also, providing the customer with the required
disclosures at least ten days prior to a change of account type will
allow any customer not wanting their account type to change the
opportunity to transfer his or her account to another broker-dealer.
Without the disclosure document, it would be more difficult for the
customer to obtain the information necessary to make an informed
decision. In fact, one commenter voiced agreement with the requirement
that firms provide customers with a disclosure document, stating,
"[w]hether or not customers have a choice [as to account type], they
should have a basic understanding of the protections that apply (or do
not apply) to their account."\86\
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\86\ See NFA Letter, p. 6.
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The requirement that the broker-dealer send disclosure documents to
customers also benefits the broker-dealer. By sending this disclosure
document the broker-dealer has evidence that the customer has been
notified of which regulatory scheme will be applicable, and which
regulatory scheme will not be applicable, to his account.
3. Examination Efficiencies
Certain of the requirements included in the amendments are designed
to help examinations of broker-dealers proceed in an efficient and
effective manner. If the regulatory agency staff cannot ascertain which
regulatory structure applies to each customer account or what policies
and procedures the broker-dealer employs in relation to the
administration of those accounts, it must spend more time at the firm
to research and evidence these issues. This increases the time of
examinations and increases the costs to the broker-dealer, which must
provide additional documentation and staff time to answer the
regulatory agency staff's questions.
B. Costs
The amendments were drafted to permit flexibility in the creation
of records in order to reduce the costs to broker-dealers. In addition,
records created pursuant to the amendments will be subject to the
Exchange Act Rule 17a-4 maintenance requirements, which provide a
number of options as to how a broker-dealer may maintain records. Rule
17a-4 gives each broker-dealer the flexibility to choose for itself the
most appropriate method to comply with the rules based upon its present
processes and systems capabilities. In fact, one commenter stated,
"[a]llowing firms to select how to carry the positions will enable
firms to utilize the most cost-effective solutions when determining how
to support this product." \87\
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\87\ See FIA/SAI Letter, p. 2.
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In addition, the costs of these amendments is difficult to
ascertain because they may vary widely due to differences both in the
amount of SFP business in which a broker-dealer may engage and the
current recordkeeping systems employed by the broker-dealer.
1. Addition of Paragraph 15c3-3(o)
a. Establishment of a Written Policy
Pursuant to paragraph (o)(1)(ii) of Rule 15c3-3, a Full FCM/Full BD
that effects transactions in SFPs for customers must establish written
policies and procedures describing how customer SFP positions will be
treated and, if applicable, the process by which a customer may elect
the type of account in which SFPs will be carried. Only broker-dealers
that effect transactions in SFPs for customers must
[[Page 58295]]
draft these policies and procedures. Self-regulatory organization rules
presently require that a broker-dealer establish written procedures to
supervise the types of business in which it engages.\88\ Thus, a Full
FCM/Full BD would need to establish these policies and procedures
regardless of this amendment to Rule 15c3-3. Accordingly, the SEC
estimates there is no additional cost to a broker-dealer associated
with this amendment.
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\88\ See e.g., NSD Rule 3010.
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b. Furnishing a Disclosure Document to Customers
Pursuant to new paragraph (o)(2) of Rule 15c3-3, a broker-dealer
that effects transactions in SFPs for customers must provide each of
those customers with a disclosure document containing certain
information. The SEC believes there would be two costs associated with
furnishing this disclosure document: the initial, one-time cost to
create the document, and the cost of printing and sending the
disclosure document to customers.
One commenter indicated that it is an active member of a group of
industry representatives that is developing a uniform disclosure
statement for security futures products.\89\ The creation of a uniform
disclosure statement should decrease the initial cost of developing
such a document to broker-dealers; however, each broker-dealer that
must provide the required disclosures to its customers will still need
to review each available uniform statement to determine whether the it
satisfies the requirements of the rule as applied to the broker-
dealer's own business, and whether it wants or needs to tailor the
document for its own purposes.
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\89\ See note 26 and accompanying text.
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The SEC Staff estimates that approximately 91 firms \90\ will be
required to create a disclosure document. In addition, the SEC Staff
estimates that the hourly burden to create the disclosure document
(discussed in the PRA section) will result in a one time cost to the
industry of approximately $447,720.\91\ Further, as discussed in the
PRA section, the SEC Staff estimates that the cost of printing and
sending these disclosure documents will result in a the total annual
cost to the industry of approximately $822,400.\92\
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\90\ See text accompanying note 73.
\91\ See note 75. According to the SIA's Report on Management
and Professional Earnings in the Securities Industry 2000, Tables
107, 108 and 110 (plus 35% overhead), the hourly cost of an attorney
is approximately $156.00 and the hourly cost of a deputy general
counsel is $225.00. ((($156.00 x 20 hours) + ($225.00 x 8 hours)) x
91 broker-dealers).
\92\ See note 78.
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c. Changes of Account Type
i. Record of Change of Account Type
Pursuant to new paragraph (o)(3)(i) of Rule 15c3-3, a Full FCM/Full
BD that changes the type of account in which a customer's SFPs are held
must create a record of each change in account type that includes the
name of the customer, the account number, the date the broker-dealer
received the customer's request to change the account type, and the
date the change in account type took place. The SEC Staff believes that
not all Full FCM/Full BDs that effect transactions in SFPs for
customers will allow for changes in account type. To the extent that a
Full FCM/Full BD does permit changes of account type, these data items
are the type of information that would be easily accessed or created
and maintained; therefore, the SEC Staff believes the costs of
maintaining this information will be minimal. The SEC Staff estimates
that the hourly burden to create records of a change of account type,
as discussed in the PRA, will result in a total annual cost to the
industry of approximately $3.5 million.\93\
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\93\ See note 77. According to Table 119 of the SIA's Report on
Office Salaries In the Securities Industry 2000, the hourly cost of
an operations specialist is approximately $42.00 (which includes an
addition 35% to account for overhead costs) (82,240 hours x $42.00).
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ii. Customer Notification of Effective Date of Change of Account Type
Pursuant to new paragraph (o)(3)(ii) of Rule 15c3-3, a Full FCM/
Full BD that permits a change in the type of account in which a
customer's SFPs are held must notify the customer in writing, at least
ten days prior to the date of the change of account type, of the date
the change will become effective. One commenter objected to this
requirement, stating "[r]equiring a firm to provide a customer with a
[second] separate notice as to when the change became effective imposes
unnecessary additional administrative costs and staffing burdens on
such firms." \94\ The SEC believes that customers must be informed of
the date changes of account type became effective. However there is no
requirement that the notification be sent separately and the firm may
choose to include the notification with other correspondence that the
firm sends to the customer.
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\94\ See note 47 and accompanying text.
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The SEC Staff believes that there are two costs associated with
providing this notification to customers: the initial, one-time cost to
draft the form for notification, and the cost of printing and sending
the notification to customers. The SEC Staff estimates that the hourly
burden to create the customer notification (discussed in the PRA
section) will result in a total one time cost to the industry of
approximately $52,826.\95\
The SEC Staff believes that firms will use the least costly method
to comply with these requirements, and will probably include this
notification with other mailings sent to the customer. As stated in the
PRA section, the SEC Staff estimates that the total cost to the
industry of printing and posting the acknowledgment will be
approximately $164,480.\96\
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\95\ See note 76. According to the SIA's Report on Management
and Professional Earnings in the Securities Industry 2000, Tables
107, 108 and 110 (and adding an additional 35% to account for
overhead costs), the hourly cost of an attorney is approximately
$156.00 and the hourly cost of a deputy general counsel is $225.
((156.00 x 3 hours) + ($225 x (30 min/60 min))) x 91 broker-dealers.
\96\ See note 78.
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2. Amendments to Rule 17a-4
The amendments to Rule 17a-4 clarify that the records required to
be created pursuant to new paragraph (o) of Rule 15c3-3 must be
maintained for at least three years, the first two in an easily
accessible place. Once the broker-dealer files these records, the cost
to maintain them is minimal. The SEC believes that the main cost would
be the cost to assure that the broker-dealer complies with the rule.
The SEC Staff estimates that the hourly burden to assure compliance
with the amendment to Rule 17a-4 (discussed in the PRA section) will
result in a total annual cost to the industry of approximately
$9,214.\97\
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\97\ See note 79. Based on the SIA's Report on Management and
Professional Earnings in the Securities industry 2000, Table 051
(plus 35% overhead), the hourly cost of a compliance manager is
approximately $101.25 (($101.25 x 1 hour per broker-dealer) x 91
broker-dealers)).
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New paragraph (k) of Rule 17a-4 will require a broker-dealer that
engages in a SFP business, upon request of the SEC or a self-regulatory
organization, to request from its customers and provide to the
regulator documentation of cash transactions underlying exchanges of
security futures products for the underlying security(ies). In
addition, this is not a record that the broker-dealer will be required
to create or maintain on a regular basis but, instead, a broker-dealer
will obtain these documents from a customer and provide them to the
requesting regulator only when specifically requested.
The SEC Staff estimates that the hourly burden to respond to 4,510
[[Page 58296]]
requests \98\ for documents relating to EFPs (discussed in the PRA
section) will result in a total annual cost to the industry of
approximately $913,275.\99\
---------------------------------------------------------------------------
\98\ See note 80.
\99\ Based on the SIA's Report on Management and Professional
Earnings in the Securities Industry 2000, Table 051 (and adding an
additional 35% to account for overhead costs), the hourly cost of a
compliance manager is approximately $101.25 ($101.25 x 2 hours x
4,510 requests).
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3. Systems Changes
The SEC Staff believes that broker-dealers may need to update their
systems to provide for the printing and sending of disclosure documents
and acknowledgments to SFP customers, and to create and maintain
information as to changes of account type. The SEC Staff further
believes, based on conversations with industry representatives, that
many broker-dealers have not yet updated their systems to provide for
the trading and processing of SFPs as certain specifications of these
products have not been finalized. Consequently, the Staff believes that
any systems coding changes needed to comply with the amendments to
Rules 15c3-3 and 17a-4 could be incorporated into the initial coding
for these products, thus greatly decreasing the costs generally
associated with systems changes. Therefore, as stated in the PRA
section, the SEC Staff estimates that it may cost the broker-dealers
engaging in this business approximately $2.4 million \100\ to update
their systems to comply with the amendments to Rules 15c3-3 and 17a-4.
---------------------------------------------------------------------------
\100\ See note 81 and accompanying text.
---------------------------------------------------------------------------
IX. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
Section 3(f) of the Exchange Act \101\ provides that whenever the
SEC engages in rulemaking and must consider or determine whether an
action is necessary or appropriate in the public interest, the SEC
shall consider whether the action will promote efficiency, competition,
and capital formation. In addition, section 23(a)(2) of the Exchange
Act \102\ requires the SEC, in adopting Exchange Act rules, to consider
the impact any such rule would have on competition and to not adopt a
rule that would impose a burden on competition not necessary or
appropriate in furthering the purposes of the Exchange Act.
---------------------------------------------------------------------------
\101\ 15 U.S.C. 78c(f).
\102\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
In the Proposal, the SEC solicited comments on the effect of the
proposed rules and rule amendments on competition, efficiency, and
capital formation. No comments were received that specifically
addressed the effect the proposed rules and rule amendments may have on
competition, efficiency, and capital formation. However, one commenter
stated, "requiring a signed acknowledgment from a customer trading
through a Full FCM/Full BD [ * * * ] imposes inequitable burdens on a
Full FCM/Full BD" and "[because] notice registrants are not required
to obtain a signed acknowledgment from their customers [ * * * ] Full
FCM/Full BDs [are penalized] vis a vis notice registrants."\103\ As
stated above, the Commissions determined not to adopt the
acknowledgment requirement.
---------------------------------------------------------------------------
\103\ See CME/CBOT Letter, p. 3.
---------------------------------------------------------------------------
The SEC believes the amendments are necessary to eliminate
conflicting or duplicative rules regarding customer protection and
recordkeeping applicable to SFPs. These amendments, which provide Full
FCM/Full BDs the flexibility to choose whether SFPs will be held in a
futures account (subject to the CEA segregation requirements) or a
securities account (subject to the Exchange Act and SIPA requirements),
allow these entities to determine and apply the less burdensome
regulatory scheme. Further, the amendments also exempt certain Notice
BDs from Exchange Act Rules 17a-3, 17a-5, 17a-7, 17a-11, and 17a-13
because the CFTC has similar rules that would apply to these firms.
These amendments should provide an efficient and cost-effective
means for Full FCM/Full BDs to reconcile their conflicting customer
protection and segregation requirements with respect to SFPs. The
amendments also should promote efficiency because they allow firms the
flexibility to utilize their present systems for processing SFPs, allow
firms and/or customers to choose the regulatory scheme that will be
applied to accounts in which customer SFP positions are held, and help
educate customers regarding the different regulatory schemes (which may
be applicable to their accounts) that serve to protect their assets.
The SEC believes that the amendments will not create any anti-
competitive effects and, in fact, should promote competition by
decreasing the costs associated with engaging in an SFP business.
Finally, the SEC does not believe that the amendments will hinder
capital formation, as they harmonize SEC and CFTC customer protection
rules to eliminate duplicative regulation that would have required
duplication of reserves/segregated funds.
X. Summary of Regulatory Flexibility Act Certification
CFTC: The Regulatory Flexibility Act ("RFA") \104\ requires that
agencies, in proposing rules, consider the impact of those rules on
small businesses.\105\ These rules would apply to firms that are
registered with the CFTC as FCMs. The CFTC has previously established
certain definitions of "small entities" to be used by the CFTC in
evaluating the impact of its rules on such entities in accordance with
the RFA.\106\ The CFTC has previously determined that FCMs are not
small entities for the purpose of the RFA.\107\ In defining "small
entities" for the purpose of the RFA, the CFTC excluded FCMs based on
the fiduciary nature of FCM-customer relationships and the minimum
financial requirements that apply to FCMs.\108\ To the extent that the
rule amendments concerning dispute settlement procedures affect other
registrants, the amendments relieve existing requirements for the
registrants. No comments were received concerning the impact of these
rules on small entities.
---------------------------------------------------------------------------
\104\ 5 U.S.C. 601 et seq.
\105\ 5 U.S.C. 603(a)
\106\ 47 FR 18618 (April 30, 1982).
\107\ Id. at 18619.
\108\ Id.
---------------------------------------------------------------------------
SEC: Pursuant to section 605(b) of the Regulatory Flexibility Act,
5 U.S.C. 605(b), the Chairman of the Commission has certified that the
rules and rule amendments will not have a significant economic impact
on a substantial number of small entities. This certification,
including the reasons supporting the certification, was attached to the
Proposal,\109\ as Appendix A.
---------------------------------------------------------------------------
\109\ See note 8.
---------------------------------------------------------------------------
In the Proposal the SEC solicited comments on potential impact of
the rules and rule amendments on small entities. No comments were
received that discussed the Regulatory Flexibility Act Certification.
Text of Final Rules
List of Subjects
17 CFR Part 1
Consumer protection, Definitions, Reporting and recordkeeping
requirements.
17 CFR Part 41
Security futures products, Customer protection.
17 CFR Part 190
Consumer protection, Definitions, Reporting and recordkeeping
requirements.
[[Page 58297]]
17 CFR Part 240
Broker, dealer, securities, customer protection.
17 CFR Chapter 1--Commodity Futures Trading Commission.
In accordance with the foregoing, Chapter I of Title 17 of the Code
of Federal Regulations is amended as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for Part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a,
13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity
Futures Modernization Act of 2000, Appendix E of Pub. L. No. 106-
554, 114 Stat. 2763 (2000).
2. Section 1.3 is amended by adding paragraphs (gg)(4), (vv) and
(ww) to read as follows:
Sec. 1.3 Definitions.
* * * * *
(gg) * * *
(4) Notwithstanding paragraphs (gg)(1), (2) and (3) of this
section, the term customer funds shall exclude money, securities or
property held to margin, guarantee or secure security futures products
held in a securities account, and all money accruing as the result of
such security futures products.
* * * * *
(vv) Futures account. This term means an account that is maintained
in accordance with the segregation requirements of section 4d of the
Commodity Exchange Act and the rules thereunder.
(ww) Securities account. This term means an account that is
maintained in accordance with the requirements of section 15(c)(3) of
the Securities Exchange Act of 1934 and Rule 15c3-3 thereunder.
3. Section 1.55 is amended by adding paragraph (h) to read as
follows:
Sec. 1.55 Distribution of "Risk Disclosure Statement" by futures
commission merchants and introducing brokers.
* * * * *
(h) Notwithstanding any other provision of this section or Sec.
1.65, a person registered or required to be registered with the
Commission as a futures commission merchant pursuant to sections
4f(a)(1) or 4f(a)(2) of the Commodity Exchange Act and registered or
required to be registered with the Securities and Exchange Commission
as a broker or dealer pursuant to sections 15(b)(1) or 15(b)(11) of the
Securities Exchange Act of 1934 and rules thereunder must provide to a
customer or prospective customer, prior to the acceptance of any order
for, or otherwise handling any transaction in or in connection with, a
security futures product for a customer, the disclosures set forth in
Sec. 41.41(b)(1) of this chapter.
PART 41--SECURITY FUTURES PRODUCTS
4. The authority citation for Part 41 is revised to read as
follows:
Authority: Sections 206, 251 and 252, Pub. L. 106-554, 114 Stat.
2763, 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).
5. Section 41.41 is added to Subpart E to read as follows:
Sec. 41.41 Security futures products accounts.
(a) Where security futures products may be held. (1) A person
registered with the Commission as a futures commission merchant
pursuant to section 4f(a)(1) of the Commodity Exchange Act ("CEA")
and registered with the Securities and Exchange Commission ("SEC") as
a broker or dealer pursuant to section 15(b)(1) of the Securities
Exchange Act of 1934 ("Securities Exchange Act") ("Full FCM/Full
BD") may hold all of a customer's security futures products in a
futures account, all of a customer's security futures products in a
securities account, or some of a customer's security futures products
in a futures account and other security futures products of the same
customer in a securities account. A person registered with the
Commission as a futures commission merchant pursuant to section
4f(a)(2) of the CEA (a notice-registered FCM) may hold a customer's
security futures products only in a securities account. A person
registered with the SEC as a broker or dealer pursuant to section
15(b)(11) of the Securities Exchange Act (a notice-registered broker-
dealer) may hold a customer's security futures products only in a
futures account.
(2) A Full FCM/Full BD shall establish written policies or
procedures for determining whether customer security futures products
will be placed in a futures account and/or a securities account and, if
applicable, the process by which a customer may elect the type or types
of account in which security futures products will be held (including
the procedure to be followed if a customer fails to make an election of
account type).
(b) Disclosure requirements. (1) Except as provided in paragraph
(b)(2), before a futures commission merchant accepts the first order
for a security futures product from or on behalf of a customer, the
firm shall furnish the customer with a disclosure document containing
the following information:
(i) A description of the protections provided by the requirements
set forth under section 4d of the CEA applicable to a futures account;
(ii) A description of the protections provided by the requirements
set forth under Securities Exchange Act Rule 15c3-3 and the Securities
Investor Protection Act of 1970 applicable to a securities account;
(iii) A statement indicating whether the customer's security
futures products will be held in a futures account and/or a securities
account, or whether the firm permits customers to make or change an
election of account type; and
(iv) A statement that, with respect to holding the customer's
security futures products in a securities account or a futures account,
the alternative regulatory scheme is not available to the customer in
connection with that account.
(2) Where a customer account containing an open security futures
product position is transferred to a futures commission merchant, that
futures commission merchant may instead provide the statements
described in paragraphs (b)(1)(iii) and (b)(1)(iv) above no later than
ten business days after the date the account is transferred.
(c) Changes in account type. A Full FCM/Full BD may change the type
of account in which a customer's security futures products will be
held; provided, that:
(1) The firm creates a record of each change in account type,
including the name of the customer, the account number, the date the
firm received the customer's request to change the account type, if
applicable, and the date the change in account type became effective;
and
(2) The firm, at least ten business days before the customer's
account type is changed:
(i) Notifies the customer in writing of the date that the change
will become effective; and
(ii) Provides the customer with the disclosures described in
paragraph (b)(1) above.
(d) Recordkeeping requirements. The Commission's recordkeeping
rules set forth in Sec. Sec. 1.31, 1.32, 1.35, 1.36, 1.37, 4.23, 4.33,
18.05 and 190.06 of this chapter shall apply to security futures
product transactions and positions in a
[[Page 58298]]
futures account (as that term is defined in Sec. 1.3(vv) of this
chapter). These rules shall not apply to security futures product
transactions and positions in a securities account (as that term is
defined in Sec. 1.3(ww) of this chapter); provided, that the SEC's
recordkeeping rules apply to those transactions and positions.
(e) Reports to customers. The Commission's reporting requirements
set forth in Sec. Sec. 1.33 and 1.46 of this chapter shall apply to
security futures product transactions and positions in a futures
account (as that term is defined in Sec. 1.3(vv) of this chapter).
These rules shall not apply to security futures product transactions
and positions in a securities account (as that term is defined in Sec.
1.3(ww) of this chapter); provided, that the SEC's rules set forth in
Sec. Sec. 240.10b-10 and 240.15c3-2 of this chapter regarding delivery
of confirmations and account statements apply to those transactions and
positions.
(f) Segregation of customer funds. All money, securities, or
property held to margin, guarantee or secure security futures products
held in a futures account, or accruing to customers as a result of such
products, are subject to the segregation requirements of section 4d of
the CEA and the rules thereunder.
PART 190--BANKRUPTCY
6. The authority citation for Part 190 continues to read as
follows:
Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19 and 24,
and 11 U.S.C. 362, 546, 548, 556, and 761-766, unless otherwise
noted.
7. Section 190.01 is amended by revising paragraph (f) and by
adding paragraph (kk)(9) to read as follows:
Sec. 190.01 Definitions.
* * * * *
(f) Commodity broker means any person who is registered or required
to register as a futures commission merchant under the Commodity
Exchange Act including a person registered or required to be registered
as such under Parts 32 and 33 of this chapter, and a "commodity
options dealer," "foreign futures commission merchant," "clearing
organization," and "leverage transaction merchant" with respect to
which there is a "customer" as those terms are defined in this
section, but excluding a person registered as a futures commission
merchant under section 4f(a)(2) of the Commodity Exchange Act.
* * * * *
(kk) * * *
(9) Notwithstanding any other provision of this paragraph (kk),
security futures products, and any money, securities or property held
to margin, guarantee or secure such products, or accruing as a result
of such products, shall not be considered specifically identifiable
property for the purposes of Subchapter IV of the Bankruptcy Code or
this part 190, if held in a securities account.
* * * * *
8. Section 190.02 is amended by:
a. Removing the period and in its place adding a ";" at the end
of paragraph (d)(8);
b. Redesignating paragraphs (d)(11) and (d)(12) as paragraphs
(d)(12) and (d)(13), respectively; and
c. Adding a new paragraph (d)(11).
The revisions and additions read as follows:
Sec. 190.02 Operation of the debtor's estate subsequent to the filing
date and prior to the primary liquidation date.
* * * * *
(d) * * *
(11) Whether the claimant's positions in security futures products
are held in a futures account or a securities account, as these terms
are defined in Sec. Sec. 1.3(vv) and (ww) of this chapter,
respectively;
* * * * *
9. Section 190.07 is amended by revising paragraph
(b)(1)(iii)(B)(3) and removing the undesignated paragraph following
paragraph (b)(1)(iii)(B)(3) to read as follows:
Sec. 190.07 Calculation of allowed net equity.
* * * * *
(b) * * *
(1) * * *
(iii) * * *
(B) * * *
(3) The normal costs attributable to the payment of commissions,
brokerage, interest, taxes, storage, transaction fees, insurance and
other costs and charges lawfully incurred in connection with the
purchase, sale, exercise, or liquidation of any commodity contract in
such account. For purposes of this paragraph (b)(1), the open trade
balance of a customer's account shall be computed by subtracting the
unrealized loss in value of the open commodity contracts held by or for
such account from the unrealized gain in value of the open commodity
contracts held by or for such account. In calculating the ledger
balance or open trade balance of any customer, exclude any security
futures products, any gains or losses realized on trades in such
products, any property received to margin, guarantee or secure such
products (including interest thereon or the proceeds thereof), to the
extent any of the foregoing are held in a securities account, and any
disbursements to or on behalf of such customer in connection with such
products or such property held in a securities account.
* * * * *
10. Section 190.08 is amended by revising paragraphs (a)(2)(v) and
(a)(2)(vi) and by adding paragraph (a)(2)(vii) to read as follows:
Sec. 190.08 Allocation of property and allowance of claims.
* * * * *
(a) * * *
(2) * * *
(v) Property deposited by a customer with a commodity broker after
the entry of an order for relief which is not necessary to meet the
maintenance margin requirements applicable to the accounts of such
customer;
(vi) Property hypothecated pursuant to Sec. 1.30 of this chapter
to the extent of the loan of margin with respect thereto; and
(vii) Money, securities or property held to margin, guarantee or
secure security futures products, or accruing as a result of such
products, if held in a securities account.
* * * * *
11. Section 190.10 is amended by adding paragraph (h) to read as
follows:
Sec. 190.10 General.
* * * * *
(h) Rule of construction. Contracts in security futures products
held in a securities account shall not be considered to be "from or
for the commodity futures account" or "from or for the commodity
options account" of such customers, as such terms are used in section
761(9) of the Bankruptcy Code.
12. Appendix A to Part 190 is amended by adding Item III g. to
Bankruptcy Appendix Form 4--Proof of Claim to read as follows:
Appendix A to Part 190--Bankruptcy Forms
* * * * *
Bankruptcy Appendix Form 4--Proof of Claim
* * * * *
III. * * *
g. Whether the claimant's positions in security futures products
are held in a futures account or a securities account, as these terms
are defined in Sec. Sec. 1.3(vv) and (ww) of this chapter,
respectively.
* * * * *
Dated: September 9, 2002.
[[Page 58299]]
By the Commodity Futures Trading Commission.
Jean A. Webb,
Secretary of the Commission.
Securities and Exchange Commission
17 CFR Chapter II
The amendments are adopted pursuant to the authority conferred on
the SEC by the Exchange Act, including Sections 3(b), 4A, 15(c)(3),
17(a), and 23(a).
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for Part 240 is amended by adding the
following citations to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
Section 240.15c3-3 is also issued under 15 U.S.C. 78o(c)(2),
78(c)(3), 78q(a), 78w(a); sec. 6(c), 84 Stat. 1652; 15 U.S.C. 78fff.
Section 240.15c3-3(o) is also issued under Pub. L. 106-554, 114
Stat. 2763, section 203.
* * * * *
2. Section 240.15c3-3 is amended by:
a. Removing the authority citation following Sec. 240.15c3-3;
b. Adding a new sentence following the fourth sentence in the
introductory text of paragraph (a)(1);
c. Adding paragraphs (a)(l4) and (a)(15); and
d. Adding paragraph (o).
The revisions and additions read as follows:
Sec. 240.15c3-3 Customer protection--reserves and custody of
securities.
(a) * * *
(1) * * * In addition, the term shall not include a person to the
extent that the person has a claim for security futures products held
in a futures account, or any security futures product and any futures
product held in a "proprietary account" as defined by the Commodity
Futures Trading Commission in Sec. 1.3(y) of this chapter. * * *
* * * * *
(14) The term securities account shall mean an account that is
maintained in accordance with the requirements of section 15(c)(3) of
the Act (15 U.S.C. 78o(c)(3)) and Sec. 240.15c3-3.
(15) The term futures account (also referred to as "commodity
account") shall mean an account that is maintained in accordance with
the segregation requirements of section 4d of the Commodity Exchange
Act (7 U.S.C. 6d) and the rules thereunder.
* * * * *
(o) Security futures products.--(1) Where security futures products
shall be held. A broker or dealer registered with the Commission
pursuant to section 15(b)(1) of the Act (15 U.S.C. 78o(b)(1)) that is
also a futures commission merchant registered with the Commodity
Futures Trading Commission pursuant to section 4f(a)(1) of the
Commodity Exchange Act (7 U.S.C. 6f(a)(1)):
(i) Shall hold a customer's security futures products in either a
securities account or a futures account; and
(ii) Shall establish written policies or procedures for determining
whether customer security futures products will be placed in a
securities account or a futures account and, if applicable, the process
by which a customer may elect the type or types of account in which
security futures products will be held (including the procedure to be
followed if a customer fails to make an election of account type).
(2) Disclosure and record requirements.--(i) Except as provided in
paragraph (o)(2)(ii), before a broker or dealer registered with the
Commission pursuant to section 15(b)(1) of the Act (15 U.S.C.
78o(b)(1)) accepts the first order for a security futures product from
or on behalf of a customer, the broker or dealer shall furnish the
customer with a disclosure document containing the following
information:
(A) A description of the protections provided by the requirements
set forth under this section and the Securities Investor Protection Act
of 1970 (15 U.S.C. 78aaa et seq.) applicable to a securities account;
(B) A description of the protections provided by the requirements
set forth under section 4d of the Commodity Exchange Act (7 U.S.C. 6d)
applicable to a futures account;
(C) A statement indicating whether the customer's security futures
products will be held in a securities account or a futures account, or
whether the firm permits customers to make or change an election of
account type; and
(D) A statement that, with respect to holding the customer's
security futures products in a securities account or a futures account,
the alternative regulatory scheme is not available to the customer with
relation to that account.
(ii) Where a customer account containing an open security futures
product position is transferred to a broker or dealer registered with
the Commission pursuant to section 15(b)(1) of the Act (15 U.S.C.
78o(b)(1)), that broker or dealer may instead provide the statements
described in paragraphs (o)(2)(i)(C) and (o)(2)(i)(D) of this section
no later than ten business days after the date the account is received.
(3) Changes in account type. A broker or dealer registered with the
Commission pursuant to section 15(b)(1) of the Act (15 U.S.C.
78o(b)(1)) that is also a futures commission merchant registered
pursuant to section 4f(a)(1) of the Commodity Exchange Act (7 U.S.C.
6f(a)(1)) may change the type of account in which a customer's security
futures products will be held; provided that:
(i) The broker or dealer creates a record of each change in account
type, including the name of the customer, the account number, the date
the broker or dealer received the customer's request to change the
account type, if applicable, and the date the change in account type
became effective; and
(ii) The broker or dealer, at least ten days before the customer's
account type is changed:
(A) Notifies the customer in writing of the date that the change
will become effective; and
(B) Provides the customer with the disclosures described in
paragraph (o)(2)(i) of this section.
4. Section 240.17a-3 is amended by adding paragraph (f) to read as
follows:
Sec. 240.17a-3 Records to be made by certain exchange members,
brokers and dealers.
* * * * *
(f) Security futures products. The provisions of this section shall
not apply to security futures product transactions and positions in a
futures account (as that term is defined in Sec. 240.15c3-3(a)(15));
provided, that the Commodity Futures Trading Commission's recordkeeping
rules apply to those transactions and positions.
5. Section 240.17a-4 is amended by:
a. Revising paragraph (b)(9);
b. Redesignating paragraphs (k) and (l), which become effective on
May 2, 2003, as paragraphs (l) and (m); and
c. Adding new paragraph (k).
The revisions and addition read as follows:
Sec. 240.17a-4 Records to be preserved by certain exchange members,
brokers and dealers.
* * * * *
(b) * * *
[[Page 58300]]
(9) The records required to be made pursuant to Sec. 240.15c3-
3(d)(4) and (o).
* * * * *
(k) Exchanges of futures for physical.
(1) Except as provided in paragraph (k)(2) of this section, upon
request of any designee or representative of the Commission or of any
self-regulatory organization of which it is a member, every member,
broker or dealer subject to this section shall request and obtain from
its customers documentation regarding an exchange of security futures
products for physical securities, including documentation of underlying
cash transactions and exchanges. Upon receipt of such documentation,
the member, broker or dealer shall promptly provide that documentation
to the requesting designee or representative.
(2) This paragraph (k) does not apply to an underlying cash
transaction(s) or exchange(s) that was effected through a member,
broker or dealer registered with the Commission and is of a type
required to be recorded pursuant to Sec. 240.17a-3.
6. Section 240.17a-5 is amended by adding paragraph (l)(4) to read
as follows:
Sec. 240.17a-5 Reports to be made by certain brokers and dealers.
* * * * *
(l) * * *
(4) The provisions of Sec. 240.17a-5 shall not apply to a broker
or dealer registered pursuant to section 15(b)(11)(A) of the Act (15
U.S.C. 78o(b)(11)(A)) that is not a member of either a national
securities exchange pursuant to section 6(a) of the Act (15 U.S.C.
78f(a)) or a national securities association registered pursuant to
section 15A(a) of the Act (15 U.S.C. 78o-3(a)).
* * * * *
7. Section 240.17a-7 is amended by:
a. Removing from paragraphs (a)(1) and (a)(2) the words "paragraph
(b)" and in their place adding "paragraphs (b) and (c)"; and
b. Redesignating paragraph (c) as paragraph (d) and adding new
paragraph (c) to read as follows:
Sec. 240.17a-7 Records of non-resident brokers and dealers.
* * * * *
(c) The provisions of this section shall not apply to a broker or
dealer registered pursuant to section 15(b)(11)(A) of the Act (15
U.S.C. 78o(b)(11)(A)) that is not a member of either a national
securities exchange pursuant to section 6(a) of the Act (15 U.S.C.
78f(a)) or a national securities association registered pursuant to
section 15A(a) of the Act (15 U.S.C. 78o-3(a)).
* * * * *
8. Section 240.17a-11 is amended by adding paragraph (i) to read as
follows:
Sec. 240.17a-11 Notification provisions for brokers and dealers.
* * * * *
(i) The provisions of this section shall not apply to a broker or
dealer registered pursuant to section 15(b)(11)(A) of the Act (15
U.S.C. 78o(b)(11)(A)) that is not a member of either a national
securities exchange pursuant to section 6(a) of the Act (15 U.S.C.
78f(a)) or a national securities association registered pursuant to
section 15A(a) of the Act (15 U.S.C. 78o-3(a)).
9. Section 240.17a-13 is amended by redesignating paragraph (e) as
paragraph (f) and adding new paragraph (e) to read as follows:
Sec. 240.17a-13 Quarterly security counts to be made by certain
exchange members, brokers, and dealers.
* * * * *
(e) The provisions of this section shall not apply to a broker or
dealer registered pursuant to section 15(b)(11)(A) of the Act (15
U.S.C. 78o(b)(11)(A)) that is not a member of either a national
securities exchange pursuant to section 6(a) of the Act (15 U.S.C.
78f(a)) or a national securities association registered pursuant to
section 15A(a) of the Act (15 U.S.C. 78o-3(a)).
* * * * *
Dated: September 9, 2002.
By the Securities and Exchange Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-23274 Filed 9-12-02; 8:45 am]
BILLING CODE 6351-01-P