[Federal Register: October 4, 2001 (Volume 66, Number 193)]
[Proposed Rules]
[Page 50785-50804]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04oc01-24]
[[Page 50785]]
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Part VI
Commodity Futures Trading Commission
Securities and Exchange Commission
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17 CFR Parts 1, 41, and 190
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; Proposed
Rule
[[Page 50786]]
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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. 34-44854; 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 proposed rules.
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SUMMARY: The Commodity Futures Trading Commission ("CFTC") and the
Securities and Exchange Commission ("SEC") (the "Commissions") are
proposing rules under the Commodity Exchange Act ("CEA") and the
Securities Exchange Act of 1934 ("Exchange Act") as part of the
process of establishing a joint regulatory framework for persons
registered with the CFTC as a futures commission merchant ("FCM") and
registered with the SEC as a broker or dealer ("broker-dealer") to
effect transactions in security futures products for customers. These
rules are being proposed pursuant to provisions of the Commodity
Futures Modernization Act of 2000 ("CFMA") that direct the
Commissions to address duplicative or conflicting regulations relating
to the treatment of customer funds, securities or property involving
security futures products applicable to any firm fully-registered with
the CFTC as an FCM pursuant to CEA section 4f(a)(1) and fully-
registered with the SEC as broker-dealer pursuant to Exchange Act
section 15(b)(1). As proposed, the rules would require certain firms
conducting business in security futures products to make choices
concerning the treatment of accounts trading security futures products
and require firms to make disclosure to customers concerning the
treatment of their accounts. In addition, the proposed rules are
designed to reduce duplicative regulations applicable to firms notice
registered with the SEC pursuant to Exchange Act section 15(b)(11).
These proposed rules are intended to address certain differences
between the CEA and Exchange Act rules.
DATES: Comments must be received on or before November 5, 2001.
ADDRESSES: Comments should be sent to both agencies at the addresses
listed below.
CFTC: Comments should be sent to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington,
DC 20581, Attention: Office of the Secretariat. Comments may be sent by
facsimile transmission to (202) 418-5521, or by e-mail to
[email protected]. Reference should be made to "Proposed Rule 41.42--
Treatment of Customer Funds."
SEC: Persons wishing to submit written comments should send three
copies to Jonathan G. Katz, Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Comments
also may be submitted electronically at the following e-mail address:
[email protected]. All comment letters should refer to File No. S7-
17-01; this file number should be included on the subject line if e-
mail is used.
Comment letters received will be available for public inspection
and copying in the SEC's Public Reference Room, 450 Fifth Street, NW.,
Washington, DC 20549-0102. Electronically submitted comment letters
will be posted on the SEC's Internet web site http://www.sec.gov). The
SEC does not edit personal identifying information, such as names or e-
mail addresses, from electronic submissions. Submit only the
information you wish to make publicly available.
FOR FURTHER INFORMATION CONTACT:
CFTC: Lawrence B. Patent, Associate Chief Counsel, Robert B.
Wasserman, Associate Director, or Helene D. Schroeder, Special Counsel,
Division of Trading and Markets, 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; or Bonnie L.
Gauch, Attorney, at (202) 942-0765, Office of Risk Management and
Control; and with respect to Exchange Act Rule 10b-10, Catherine
McGuire, Chief Counsel, or Theodore R. Lazo, Special Counsel, at (202)
942-0073 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 Broker-Dealers and FCMs that Effect
Transactions in Security Futures Products
C. The Applicability of CFTC and SEC Customer Protection Rules
and SIPA to Accounts Holding SFPs
1. Segregation Requirements
2. Rule 15c3-3 and SIPA
3. The CFTC and SEC Customer Protection Rules and SIPA Apply to
Firms that Are Full FCMs/Full BDs
III. Proposed Rules and Amendments
A. Proposed Amendment to CFTC Rule 1.55
B. Proposed New Rule 41.42 and Paragraph (o) of Rule 15c3-3
1. Where SFPs May Be Held
2. Requirements for Holding and Effecting Transactions in SFPs
for the Benefit of Customers
a. Disclosure Document Requirement
b. Customer Acknowledgement Requirement
3. Changes in Account Type
4. Recordkeeping Requirements
C. Customer Account Statements
D. Confirmations
E. CFTC Bankruptcy Treatment: Proposed Amendments to Part 190
F. Rule 15c3-3 Definitions
G. Exchange Act Recordkeeping Rules
H. Exchange Act Reporting, Notification, and Quarterly Count
Requirements
IV. General Request for Comments
V. Paperwork Reduction Act
CFTC
SEC
A. Collection of Information under these Amendments
B. Proposed Use of Information
C. Respondents
D. Total Annual Reporting and Recordkeeping Burden
1. Rule 15c3-3
2. Rule 17a-4
E. Request for Comment
VI. Costs and Benefits of The Proposed Amendments
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. Obtaining an Acknowledgement from Customers
d. Creation of a Record of Changes of Account Type
e. Obtaining an Acknowledgement from Customers
f. Customer Notification of Effective Date of Change of Account
Type
[[Page 50787]]
2. Amendments to Rule 17a-4
3. Systems Changes
VII. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
VIII. Summary of Regulatory Flexibility Act Certification CFTC SEC
IX. Text of Proposed 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 \4\ ("SFPs"). In addition, the CFMA
amended the CEA and the Exchange Act to require that the CFTC and SEC
consult with each other regarding regulations with which firms that are
"fully-registered" with both the CFTC \5\ and the SEC \6\ ("Full
FCM/Full BDs") must comply, and issue such rules, regulations, or
orders as are necessary to avoid duplicative or conflicting regulations
applicable to such firms with respect to the treatment of customer
funds, securities, or property, maintenance of books and records,
financial reporting, or other financial responsibility rules, involving
security futures products.\7\ The relevant provisions of the CFMA will
become effective no sooner than one year from the date of the enactment
of the CFMA (December 21, 2001).\8\
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\1\ Appendix E of 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 Exchange Act Release No. 44724 (August 20, 2001), 66 FR 44489
(August 23, 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 based 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) 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\ CEA section 1a(32) (7 U.S.C. 1a(32)) and Exchange Act
section 3(a)(56) (15 U.S.C. 78c(a)(56)).
\5\ Pursuant to CEA section 4f(a)(1) (7 U.S.C. 6f(a)(1)).
\6\ Pursuant to Exchange Act section 15(b)(1) (15 U.S.C.
78o(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)).
\8\ 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)).
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In order to avoid conflicting or duplicative regulation, the
Commissions are proposing new rules that would permit a Full FCM/Full
BD to choose (or let its customers choose) whether an account in which
SFPs are held will be treated as a futures account subject to the
segregation requirements of the CEA, or as a securities account subject
to Exchange Act Rule 15c3-3 ("Rule 15c3-3") and the Securities
Investor Protection Act of 1970 ("SIPA").\9\ The Commissions are also
proposing new rules that would require certain firms that engage in an
SFP business: To establish written policies stating how customer SFP
positions will be held; to make certain disclosures to customers
regarding the nature and applicability of the protections that may be
available to customers pursuant to the segregation requirements of the
CEA, or the provisions of Rule 15c3-3 and SIPA; and to obtain a signed
acknowledgement from each customer stating that the customer
understands which regulatory scheme governs the account in which SFPs
are held, and that the account will not be protected under the
alternative regulatory scheme. These disclosure and acknowledgement
requirements are intended to address any confusion that might arise as
to whether the segregation requirements of the CEA or the provisions of
Rule 15c3-3 and SIPA provisions apply to an account in which SFPs are
held. To facilitate this rule change, the Commissions are also
proposing new definitions for the terms "futures account" \10\ and
"securities account." \11\
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\9\ 15 U.S.C. 78aaa et seq.
\10\ Proposed new paragraphs (vv) of CFTC Rule 1.3 and (a)(15)
of Rule 15c3-3.
\11\ Proposed new paragraphs (ww) of CFTC Rule 1.3 and (a)(14)
of Rule 15c3-3.
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Separately, the Commissions are proposing to amend existing rules
or add additional requirements designed to assure that the above-
mentioned changes correspond with the existing regulatory structure.
Specifically, the CFTC is proposing to amend its basic risk disclosure
rule to require the above disclosures to customers concerning the
segregation requirements and the provisions of Rule 15c3-3 and SIPA,
and to amend the Part 190 bankruptcy rules to recognize differences in
the treatment of futures accounts and securities accounts holding SFPs.
The SEC is proposing to amend its Rule 15c3-3 definition of
"customer," \12\ and to amend Rules 17a-3, 17a-4, 17a-5, 17a-7, 17a-
11, and 17a-13 \13\ to avoid duplicative regulation for certain FCMs
registered with the SEC pursuant to section 15(b)(11) and the rules
adopted by the SEC,\14\ as well as for Full FCM/Full BDs, and to
clarify the length of time that records required to be created pursuant
to new section (o) of Rule 15c3-3 must be maintained.
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\12\ 17 CFR 240.15c3-3(a)(1).
\13\ 17 CFR 240.17a-3, 240.17a-4, 240.17a-5, 240.17a-7, 240.17a-
11, and 240.17a-13 respectively.
\14\ 15 U.S.C. 78o(b)(11)(A)(i) and Exchange Act Release No.
44730 (August 21, 2001), 66 FR 45137 (August 27, 2001).
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II. Background
A. Security Futures Products
Generally, 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 based on the value thereof,
except exempted securities (with the exclusion of municipal securities)
and certain agreements, contracts, or transactions excluded from the
CEA.\15\ Except as otherwise provided in a rule, regulation, or order
issued jointly by the SEC and CFTC, a security future must be based
upon common stock or such other equity securities as the SEC and the
CFTC jointly determine appropriate.\16\ Further, the term "security
futures product" means a security future or any put, call, straddle,
option, or privilege on any security future.\17\
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\15\ See note 3.
\16\ CEA section 2(a)(1)(D)(i)(III) (7 U.S.C. 4(a)(1)(D)(i)(II))
and Exchange Act section 6(h)(3)(D)(i)(III) (15 U.S.C.
78f(h)(3)(D)).
\17\ See note 4.
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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.\18\ In
addition, definitions of the terms "security future" \19\ and
"security futures product" \20\ were added to the Exchange Act and
the CEA. Pursuant to these changes, a security futures product is both
a security and a future and, therefore, is subject to the jurisdiction
of the CFTC and the SEC.
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\18\ Exchange Act sections 3(a)(10) and (11) respectively (15
U.S.C. 78c(a)(10) and 15 U.S.C. 78c(a)(11)).
\19\ See note 3.
\20\ See note 4 and accompanying text.
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[[Page 50788]]
B. Regulation of Broker-Dealers and FCMs that Effect Transactions in
Security Futures Products
As an SFP is both a security and a future, a person must be
registered both as an FCM 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 provide notice registration procedures for persons that
may be required to register with the SEC or the CFTC solely because
they are effecting SFP transactions. Under the notice registration
procedures, an FCM may register with the SEC pursuant to Section
15(b)(11) of the Exchange Act and the rules adopted by the SEC \21\
("Notice BD") and a broker-dealer may register with the CFTC pursuant
to Section 4f(a)(2) of the CEA and rules adopted by the CFTC \22\
("Notice FCM"). Notice BDs are exempt from certain provisions of the
Exchange Act,\23\ and Notice FCMs are exempt from certain provisions of
the CEA.\24\ These statutory provisions were designed to allow persons
that previously had engaged "solely" in either the securities or
futures business to participate in SFP business without being subject
to conflicting or duplicative regulation.
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\21\ See note 14.
\22\ 7 U.S.C. 6f(a)(2) and 66 FR 43080 (August 17, 2001).
\23\ Exchange Act section 15(b)(11)(B) (15 U.S.C.
78o(b)(11)(B)).
\24\ CEA section 4f(a)(4)(A) (7 U.S.C. 6f(a)(4)(A)).
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C. The Applicability of CFTC and SEC Customer Protection Rules and SIPA
to Accounts Holding SFPs
The CEA requires that customer funds be segregated and separately
accounted for by FCMs.\25\ In addition, the Exchange Act and certain
rules enacted thereunder require that a broker-dealer follow certain
steps to assure that customer assets are not used to fund the broker-
dealer's business.\26\ These provisions provide similar protections for
customers, but, when applied to SFPs, could cause a Full FCM/Full BD to
maintain two separate reserves to satisfy both sets of requirements.
However, pursuant to the CEA, Exchange Act, and SIPA, a broker-dealer
that also is a Notice FCM is not subject to the segregation
requirements of the CEA,\27\ and an FCM that also is a Notice BD is not
subject to Rule 15c3-3 \28\ and may not be a member of the Securities
Investor Protection Corporation ("SIPC").\29\
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\25\ CEA section 4d (7 U.S.C. 6d).
\26\ Exchange Act section 15(c)(3) (15 U.S.C. 78o(c)(3)), and 17
CFR 240.15c3-3.
\27\ CEA section 4f(a)(4)(A)(ii) (7 U.S.C. 6f(a)(4)(A)(ii)).
\28\ Exchange Act section 15(b)(11)(B)(iii) (15 U.S.C.
78o(b)(11)(B)(iii)).
\29\ SIPA section 3(a)(2)(A) (15 U.S.C. 78ccc(a)(2)(A)).
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1. Segregation Requirements
Section 4d of the CEA \30\ sets forth the segregation requirements
that apply to FCMs with respect to commodity interest transactions. By
this provision, an FCM must treat and deal with money, securities and
property received from customers, or accruing to such customers as a
result of trades, as belonging to such customers.\31\ The money,
securities and property of customers also may not be commingled with
the funds of the FCM nor used to margin or guarantee the trades or
contracts, or to secure or extend the credit, of any customer or person
other than the one for whom the same are held.\32\ Such money,
securities and property, however, may, for convenience, be commingled
with the money, securities and property of other customers when
deposited with a bank, trust company, clearing organization or another
FCM.
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\30\ See note 25.
\31\ CEA section 4d(a)(2) (7 U.S.C. 6d(a)(2)).
\32\ Id.
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These segregation requirements protect the money, securities and
property of customers of an FCM that are deposited to engage in
commodity interest transactions. They provide protection by requiring
that the customer funds be segregated from the FCM's own funds and
strictly limit the permitted uses of the funds to customer-related
transactions (such as to post margin and pay the daily variation
settlement for customers' positions at the various futures clearing
organizations). An FCM must have sufficient funds in segregation at all
times to meet its obligations to customers. A firm must complete a
computation demonstrating compliance with its segregation requirement
on a daily basis.\33\ If customer funds held in segregated accounts are
less than the FCM's segregation requirement, the FCM must immediately
deposit its own funds into the segregated account to meet the
requirements and report immediately that it was undersegregated.\34\
There is no limit on the amount of customer funds that is protected.
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\33\ 17 CFR 1.32.
\34\ 17 CFR 1.12(h).
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In the event of bankruptcy, customer claims have priority with
respect to customer funds over all claims except administrative
expenses related to such funds. If there also is a shortfall in the
amount of funds held in segregation for customers, the distribution of
customer funds proceeds on a pro rata basis.
Although the segregation requirements apply to an FCM with respect
to SFPs, they are specifically made inapplicable by the CFMA to Notice
FCMs.\35\ Thus, the segregation requirements apply only to a firm that
is fully-registered as an FCM.
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\35\ CEA section 4f(a)(4)(A)(ii) (7 U.S.C. 6f(a)(4)(A)(ii)).
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2. Rule 15c3-3 and SIPA
Pursuant to Rule 15c3-3, broker-dealers that carry customer
accounts are required to maintain, at all times when deposits are
required, a "Special Reserve Bank Account for the Exclusive Benefit of
Customers" \36\ ("Special Reserve Account"). A broker-dealer must
maintain in this account cash and/or qualified securities in amounts
computed under a specified formula (the "Reserve Requirement").\37\
The funds so held must be segregated from any other bank account of the
broker-dealer.\38\ Generally, broker-dealers that must maintain $1
million or more in their Special Reserve Accounts will compute their
Reserve Requirement on a weekly basis (i.e., as of each Friday). If
necessary, these broker-dealers must then make a deposit to the Special
Reserve Account to bring the balance in that account up to the Reserve
Requirement no later than one hour after the opening of banking
business on the second following business day.\39\ Although Rule 15c3-3
applies to a broker-dealer with respect to SFPs, changes made to the
Exchange Act by the CFMA make the Rule inapplicable to a Notice BD.\40\
Thus, Rule 15c3-3 applies only to a firm that is a fully-registered
broker-dealer.
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\36\ 17 CFR 240.15c3-3(e).
\37\ Id.
\38\ Id.
\39\ 17 CFR 240.15c3-3(e)(3).
\40\ Exchange Act section 15(b)(11)(B)(iii) (15 U.S.C.
78o(b)(11)(B)(iii)).
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SIPA provides additional protection for customer funds and
securities held by a broker-dealer. SIPA defines the term "customer"
as "any person * * * who has a claim on account of securities
received, acquired, or held by the debtor in the ordinary course of its
business as a broker or dealer from or for the securities accounts of
such person [including] any person who has deposited cash with the
debtor for the purpose of purchasing securities * * *." \41\ The CFMA
amended SIPA's definition of the term "security" to include a
"security futures product." \42\ Accordingly, a customer's funds held
by
[[Page 50789]]
a fully-registered broker-dealer for the purposes of trading SFPs
benefit from SIPA protection, provided that a customer's SFP positions
are carried in a securities account.
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\41\ SIPA section 16(2) (15 U.S.C. 78111(2)).
\42\ SIPA section 16(14) (15 U.S.C. 78111(14)).
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With limited exceptions, every broker-dealer registered pursuant to
Section 15(b)(1) of the Exchange Act must be a member of SIPC.\43\ When
a SIPC member is closed due to bankruptcy or other financial
difficulties, SIPC works to return to customers the cash and securities
held by the broker-dealer. SIPA also provides that, to the extent that
the broker-dealer does not have sufficient resources to return the cash
and securities to customers, SIPC will replace the missing assets, up
to $500,000 per customer (including $100,000 for cash claims). The CFMA
further amended SIPA to provide that any FCM that registers as a Notice
BD may not become a member of SIPC.\44\ Because these Notice BDs are
not members of SIPC, the customer funds held by them would not benefit
from SIPA protection.
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\43\ See note 29.
\44\ Id.
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3. The CFTC and SEC Customer Protection Rules and SIPA Apply to Firms
That Are Full FCMs/Full BDs
As discussed above, an FCM that is a "Notice BD" is not subject
to Rule 15c3-3 and is not a member of SIPC. Similarly, a broker-dealer
that is a "Notice FCM" is not subject to the segregation requirements
of the CEA. Thus, an account in which customer SFP positions are held
that is carried by a notice registrant is protected either by Rule
15c3-3 and SIPA or by the CEA segregation scheme, but not by both.
However, absent the proposed rules, a Full FCM/Full BD would need to
comply with the segregation requirements of the CEA, Rule 15c3-3, and
SIPA with relation to customer accounts in which SFPs are held because
an SFP is both a security and a future.
As amended by the CFMA, Section 4d(c) of the CEA \45\ and Section
15(c)(3)(B) of the Exchange Act \46\ require that the Commissions, in
consultation with each other, issue such rules as are necessary to
avoid duplicative or conflicting regulations applicable to a Full FCM/
Full BD. The proposed rules would alleviate duplicative regulation by
permitting Full FCM/Full BDs to either choose, or allow their customers
to choose, whether SFP positions will be held in a futures account
subject to CEA segregation requirements or a securities account subject
to Rule 15c3-3 and SIPA.
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\45\ 7 U.S.C. 6d(c).
\46\ 15 U.S.C. 78o(c)(3)(B).
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III. Proposed Rules and Amendments
A. Proposed Amendment to CFTC Rule 1.55
CFTC Rule 1.55, which sets forth the general disclosure obligations
of FCMs and introducing brokers, would be amended by adding proposed
paragraph (h) to require FCMs that are soliciting or accepting orders
for or otherwise handling any transaction in SFPs to provide the
disclosures that are proposed to be added by CFTC Rule 41.42 ("Rule
41.42"). These obligations would not apply to a firm if it does not
engage in SFP transactions on behalf of customers. Nor would they apply
to a firm with respect to customers that do not engage in such
transactions. However, if the customer engages or intends to engage in
SFP transactions, the disclosure must be made, regardless of whether
the customer is a retail client or an eligible contract
participant.\47\
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\47\ See note 8.
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B. Proposed New Rule 41.42 and Paragraph (o) of Rule 15c3-3
1. Where SFPs May Be Held
Paragraph (a) of proposed Rule 41.42 and corresponding paragraph
(o)(1) of Rule 15c3-3 would confirm that a Full FCM/Full BD is
permitted to hold customer SFPs in either a futures account or a
securities account.\48\ The Full FCM/Full BD may choose either to
maintain all customer SFPs in futures accounts, to maintain all
customer SFPs in securities accounts, or to maintain some customers'
SFP positions in futures accounts and other customers' SFP positions in
securities accounts. In addition, a Full FCM/Full BD may decide to
provide some or all of its customers with the discretion to select
where their SFP positions will be held. In any event, the Full FCM/Full
BD would have the choice to decide whether customer SFPs will be held
in a futures account or in a securities account, or to provide
customers with the discretion to select the account type.
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\48\ The proposed amendments also would add paragraphs (vv) and
(ww) to CFTC Rule 1.3, and corresponding paragraphs (a)(15) and
(a)(14) to Rule 15c3-3, which define the terms "futures account"
and "securities account." Proposed paragraph 41.42(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).
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The Commissions request comment on whether any differences in
regulatory structure between the CEA and Exchange Act customer
protection rules would cause broker-dealers or FCMs, or the customers
of either, to be placed at a disadvantage if one structure were used as
compared to the other, either from a regulatory or operational
perspective. Further, the Commissions request comment on proposed
paragraphs (a) of Rule 41.42 and (o)(1) of Rule 15c3-3 that permit
firms to choose the type of account in which customer SFPs will be
held, including with respect to any operational or regulatory issues.
In addition, the Commissions request comment as to whether either the
ability to provide customers with a choice as to the type of account in
which they would like SFP positions to be held or the act of providing
customers with such choice would raise any issues, including any
operational or regulatory issues.
Proposed paragraph (a)(2) of Rule 41.42 and corresponding paragraph
(o)(1)(ii) of Rule 15c3-3 would require a firm to establish a written
policy describing whether customer SFPs and any customer assets used to
margin them will be held in a futures account or a securities account.
The firm's policy could stipulate that the firm holds SFPs for
customers solely in securities accounts or solely in futures accounts.
Alternatively, the firm's policy could provide that the firm permits
customers to make an election as to the type of account in which SFPs
will be held. If the firm decided to permit customers to make such an
election, the firm would have to detail in its written policy the
process and the procedure to be followed by the firm where the customer
failed to make an election. Further, if a firm allows certain customers
to make an election as to account type, but does not allow other
customers to make such an election, the written policy should clearly
explain which customers may or may not make an election.
2. Requirements for Holding and Effecting Transactions in SFPs for the
Benefit of Customers
Proposed paragraph (b) of Rule 41.42 and corresponding paragraph
(o)(2) of Rule 15c3-3 set forth a number of requirements that a firm
would have to meet before it could hold or effect transactions in SFPs
on behalf of a customer. Firms that do not permit customers to hold
SFPs or engage in SFP transactions would not be affected by the
proposed requirements.
The proposed rules also would apply where an account is transferred
from another FCM or broker-dealer. For instance, a Full FCM/Full BD
would be required to have written procedures relating to when a
disclosure document will be provided to and an
[[Page 50790]]
acknowledgement obtained from a customer transferring in an account
containing SFPs. As with new accounts, firms would need to send a
disclosure document and obtain an acknowledgement before any order for
an SFP could be accepted from the customer. If the customer's SFPs are
held in a futures account at the delivering firm, but the receiving
firm's procedure is to maintain customer SFP positions in a securities
account, the receiving broker-dealer would be required to receive a
written acknowledgement of this change in account type from the
customer.
a. Disclosure Document Requirement
Proposed new paragraph (b)(1) of Rule 41.42 and corresponding
paragraph (o)(2)(i) of Rule 15c3-3 set forth the disclosure document
requirements that would apply to a firm that engages in SFPs
transactions on behalf of customers. 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 regulations of the
Commissions. Specifically, these paragraphs would require a firm that
effects SFPs transactions on behalf of customers to provide its
customers with a general description of the protections afforded
futures accounts under Section 4d of the CEA and securities accounts
under Rule 15c3-3 and SIPA. In addition, the firm would have to
indicate whether the customer's SFPs will be held in a futures account
or in a securities account. The disclosure required pursuant to
proposed paragraphs (b)(1)(iii) of Rule 41.42 and corresponding
paragraph (o)(2)(i)(C) of Rule 15c3-3 also requires that a firm
indicate whether the firm permits its customers to make or change an
election. The proposed paragraphs also would require the firm to
include a statement in the disclosure document that the protections
provided by the alternative regulatory scheme would not be available
with respect to that account.
The firm would not be required to furnish a disclosure document to
every customer. Disclosure would be required only with respect to
customers that engage or intend to engage in SFP transactions or for
whom the firm holds SFPs. The Commissions expect that this disclosure
document will be provided to a customer either when an account is
opened or at some later date were the customer to express an interest
in engaging in SFP transactions (but before an order to buy or sell an
SFP is accepted by the firm).
In order to provide firms with maximum flexibility, the proposed
rules do not set forth specific prescribed language that a firm would
have to include in a disclosure document. Industry representatives
developing a model disclosure document concerning SFPs have consulted
the staffs of the Commissions. The staffs have encouraged these
industry representatives to include discussions of both the segregation
requirements and Rule 15c3-3 and SIPA protections in one model
disclosure document.
The Commissions request comment on the disclosure document
requirements contained in proposed paragraphs (b)(1) of Rule 41.42 and
(o)(2)(i) of Rule 15c3-3, including any operational or regulatory
issues. The Commissions also invite comments as to whether the rules
should mandate specific language and, if so, suggestions as to what
language should be included in the rules.
b. Customer Acknowledgement Requirement
So that a customer trading SFPs understands which protections would
apply to that customer's account, proposed paragraph (b)(2) of Rule
41.42 and corresponding paragraph (o)(2)(ii) of Rule 15c3-3 would
require that a Full FCM/Full BD obtain a signed acknowledgement from
such customer before the firm could accept an order for a SFP from that
customer. The acknowledgement would have to specify which regulatory
regime applies and that the customer understands that the account will
not be protected under the alternative regulatory scheme. This
acknowledgement will help to evidence that a customer understands that
an SFP held in a futures account is not covered by SIPA and an SFP held
in a securities account is not protected by segregation. Notice
registrants are not required to obtain this acknowledgment from
customers because they are only subject to one customer protection
regulatory scheme.\49\
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\49\ See notes 21 through 24 and accompanying text.
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The Commissions request comment on the requirement to obtain a
signed acknowledgement contained in proposed paragraphs (b)(2) of Rule
41.42 and (o)(2)(ii) of Rule 15c3-3, including any customer protection,
operational or regulatory issues. The Commissions also invite comment
as to whether a signed acknowledgement is necessary to demonstrate that
a customer understands the protections applicable to an account in
which SFPs are traded and held, or, if not, what other procedure may
instead be used to demonstrate the customer's understanding.
3. Changes in Account Type
Proposed paragraph (c) of Rule 41.42 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 may be
made pursuant to a customer's request, or the firm could make a
unilateral decision to change a customer's account type based on an
assessment that one regulatory scheme or another is preferable or cost-
effective. If a firm changes a customer's account type, the firm would
be required to create a detailed record concerning the change, obtain a
signed acknowledgement from the customer indicating that the customer
understood which regulatory scheme governs the account and that the
account would not be protected under the alternative regulatory scheme,
and notify the customer in writing of the date that the change became
effective.
While the rules would permit a Full FCM/Full BD to choose the type
of account in which customer SFP positions would be held, and to
unilaterally change the type of account in which customer SFP positions
would be held, the Commissions expect that each firm will make these
choices without unfairly disadvantaging its customers. A Full FCM/Full
BD 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 SRO Rules. At the same time, firms may have
many reasons to change account types (e.g., operational purposes), and
the Commissions do not intend to limit a firm's ability to initiate
account type changes for legitimate business purposes.
The Commissions invite comment on the advisability of allowing
firms to change the type of account in which customer SFPs are held,
including any operational or regulatory issues.
4. Recordkeeping Requirements
Proposed paragraph (d) of Rule 41.42 and corresponding paragraph
(f)(2) of Exchange Act Rule 17a-3 are intended to clarify what
recordkeeping requirements would apply to a Full FCM/Full BD that
effects transactions in and holds SFPs for the benefit of customers and
to address the Commissions' obligations to avoid duplicative or
conflicting regulations relating to the maintenance of books and
[[Page 50791]]
records involving SFPs by Full FCMs/Full BDs.
Certain differences exist between the CFTC books and records rules
and Exchange Act Rules 17a-3 and 17a-4. For instance, CFTC Rule 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.\50\ Certain records required to be preserved pursuant to the
Exchange Act Rule 17a-4, by contrast, must be held for either three or
six years, depending upon the particular record.
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\50\ 17 CFR 1.31.
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The Commissions believe that application of the specific
recordkeeping requirements under the CEA and the Exchange Act should
follow from the type of account in which the SFPs are held. Thus, if
SFPs are held in a futures account, the recordkeeping requirements
under the CEA would apply to the firm with respect to that account.
Conversely, if SFPs are held in a securities account, the recordkeeping
rules under the securities laws would apply. Such recordkeeping
requirements would be in addition to those that would be imposed by
proposed Rule 41.42 and paragraph (o) of Rule 15c3-3.
The Commissions request comment as to whether any records required
to be created or maintained pursuant to either regulatory scheme should
also be required by the recordkeeping rules of the other regulator so
that full and complete records are maintained regarding SFP
transactions under both regulatory schemes. In addition, the
Commissions request comment on whether the amendments to the
Commissions' record creation and maintenance rules proposed in this
release are sufficient to avoid conflicting or duplicative regulation.
C. Customer Account Statements
The Commissions similarly believe that application of the specific
customer account statement delivery requirements under the CEA and the
Exchange Act should follow from the type of account in which SFPs are
held. Generally, FCMs must send account statements to customers
monthly,\51\ whereas broker-dealers must send account statements to
customers on a quarterly basis.\52\ Nevertheless, the Commissions
propose that application of the requirements for sending account
statements to customers should follow from the type of account in which
the SFPs are held.\53\
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\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\ E.g., 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\ Proposed paragraph (e) of Rule 41.42.
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D. Confirmations
The Commissions request comment on the application to transactions
in SFPs of their confirmation rules (Rules 10b-10 under the Exchange
Act \54\ and Rule 1.33(b) under the CEA),\55\ which have different
requirements. Should the application of the confirmation rules to FCMs
and broker-dealers follow from the type of account in which SFPs are
held? Does the information that FCM customers receive on confirmations
prepared pursuant to CEA Rule 1.33(b) serve the purposes of Exchange
Act Rule 10b-10? Should FCMs provide the particular information
required by Exchange Act Rule 10b-10 to customers in SFP transactions
upon the customers' request, to the extent that the information is not
already provided on the confirmation that the FCM prepares pursuant to
CEA Rule 1.33(b)? What would be the cost(s) to FCMs to provide the
information required under Exchange Act Rule 10b-10 on SFP
confirmations? What would be the cost(s) to broker-dealers to provide
the information required under Rule 1.33(b) on SFP confirmations? How
long would it take firms to implement systems to provide this
information? Are there any other considerations relating to customers
that should be taken into account?
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\54\ 17 CFR 240.10b-10.
\55\ 17 CFR 1.33(b).
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E. CFTC Bankruptcy Treatment: Proposed Amendments to Part 190
The proposed amendments to part 190 are 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 amendments would exclude 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. SFP positions and associated margin held
in such accounts would be excluded from the net equity calculation and
the definition of "customer property." Consistent with these changes,
claimants would have to signify on their proof of claim form whether
SFP positions are held in a securities or futures account.
F. Rule 15c3-3 Definitions
The SEC is proposing to change the definition of "customer" and,
as stated earlier, to add new definitions of "securities account" and
"futures account" to establish which customer assets will be
protected under the Exchange Act/SIPA scheme and which will be
protected under the CEA/Part 190 scheme. To this end, a sentence has
been added to the 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." Further, new definitions of the terms
"securities account" and "futures account" have been added to Rule
15c3-3 to clarify the customer definition by distinguishing the
difference between a securities account and a futures account, as well
as certain requirements set forth in proposed subsection (o) to Rule
15c3-3.
G. Exchange Act Recordkeeping Rules
The SEC is proposing to amend Rule 17a-3 by adding paragraph (f)(1)
to clarify that an FCM that is a Notice BD is not subject to Rule 17a-
3. This will also exempt such firms from compliance with much of Rule
17a-4. As stated previously, the SEC is also proposing to add paragraph
(f)(2), which would clarify the recordkeeping requirements for Full
FCM/Full BDs to avoid duplicative and conflicting regulation. The SEC
is also proposing to amend Rule 17a-4 to clarify the length of time
certain records must be maintained, and to incorporate a paragraph
similar to CFTC Rule 1.35(a-2)(1) relating to documentation of cash
transactions underlying exchanges of futures for cash commodities.
The SEC is of the view that, to alleviate potentially duplicative
regulations, application of the recordkeeping requirements under the
CEA and the Exchange Act should follow from the type of account in
which the SFPs are held. As discussed above, proposed paragraph 17a-
3(f) would codify this position. As a Notice BD must hold customer SFP
positions in a futures account, it would not be subject to Exchange Act
Rules 17a-3 and 17a-4. However, although a Notice BD is not subject to
the record creation
[[Page 50792]]
requirements set forth in Rule 17a-3, it would be required to provide
the SEC staff with documentation maintained pursuant to CFTC rules
relating to SFP activities if such documents are requested.\56\ The
relief from Rule 17a-3 applicable to a Full FCM/Full BD is limited to
circumstances where it holds or effects transactions in SFPs in a
futures account.
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\56\ See Exchange Act section 17(b) (15 U.S.C. 78q(b)).
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The SEC is also proposing to amend Rule 17a-4(b)(9) to establish
the length of time that those records broker-dealers must create
pursuant to new paragraph 15c3-3(o) must be maintained. This paragraph
will clarify that records created pursuant to new paragraph 15c3-3(o)
must be kept for at least three years, the first two in an easily
accessible place.
Lastly, the SEC is proposing new paragraph (k) to Exchange Act Rule
17a-4, which is meant to parallel the requirements of CFTC Rule 1.35(a-
2)(1). This paragraph would require a broker-dealer that engages in an
SFP business, upon request of the SEC, to request from its customers
and provide to the SEC 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 physicals (or an
"EFP"),\57\ and is usually negotiated by the parties rather than
being executed openly and competitively on an exchange or contract
market. To fulfill its obligations under this rule, a broker-dealer may
include the requirement that customers provide this information, if
requested, in the account opening documents. The purpose of this
proposed rule is to provide securities regulators with a method of
obtaining information on each transaction underlying SFPs. Further,
this information may be necessary to protect against market
manipulation relating to physically-settled SFPs.
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\57\ An EFP involves simultaneous transactions in the futures
and securities markets. Thus, one party buys the security and
simultaneously sells (or gives up the long) SFPs while the other
party sells the security and simultaneously buys (or receives long)
SFPs.
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H. Exchange Act Reporting, Notification, and Quarterly Count
Requirements
The SEC is also proposing new paragraphs 17a-5(a)(5), 17a-7(c),
17a-11(e), and 17a-13(e), which would exempt certain Notice BDs from
the requirements to file FOCUS reports,\58\ maintain records at a place
within the United States,\59\ send telegraphic notification to the
SEC,\60\ and perform quarterly securities counts to verify
positions.\61\ These exemptions would be limited to 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").\62\ Notice BDs that are only members of one or more
designated contract markets or derivatives transaction execution
facilities, registered with the CFTC pursuant to CEA Sections 5 and 5a
\63\ and also registered as national securities exchanges or national
securities associations solely for the purpose of trading SFPs by
filing notice pursuant to either Section 6(g) or 15A(k) of the Exchange
Act,\64\ would not be required to file FOCUS reports.
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\58\ Broker-dealers are required to file monthly and/or
quarterly reports on Form X-17A-5 pursuant to Rule 17a-5(a) (17 CFR
240.17a-5(a)), commonly referred to as FOCUS Reports.
\59\ 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.
\60\ Pursuant to Rule 17a-11 (17 CFR 240.17a-11).
\61\ Pursuant to Rule 17a-13 (17 CFR 240.17a-13).
\62\ 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)).
\63\ 7 U.S.C. 7 and 7a.
\64\ 15 U.S.C. 78f(g) or 15 U.S.C. 78o-3(k).
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IV. General Request for Comments
In addition to the specific requests for comments included in the
release, the Commissions invite interested persons to submit written
comments on all aspects of the proposed amendments. The Commissions
also request comment as to whether there are other issues raised by the
CFMA, including those related to any CEA, Exchange Act, and SIPA
inconsistencies or areas of duplicative regulation regarding
segregation, customer protection, creation and maintenance of records,
customer statement and confirmation requirements, requirements to make
or send reports or notifications to regulatory authorities, and
requirements to periodically count or verify positions that have not
been addressed in this release.
V. Paperwork Reduction Act
CFTC
This proposed rulemaking contains information collection
requirements within the meaning of the Paperwork Reduction Act of 1995
("PRA").\65\ The CFTC has submitted a copy of this part to the Office
of Management and Budget ("OMB") for its review.
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\65\ 44 U.S.C. 3501 et seq.
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Collection of Information
Part 41, Relating to security futures products, OMB Control Number
3038-0059.
The estimated burden associated with the proposed new rule would be
450 hours, which will result from new disclosure requirements
applicable to FCMs. An estimated 225 firms will issue such disclosure
statements and will obtain acknowledgements from customers.
The estimated burden of the proposed new rule was calculated as
follows:
Estimated number of respondents: 225.
Reports annually by each respondent: 2.
Total annual Responses: 450.
Estimated average Number of Hours Per Response: 1.
Estimated Total Number of Hours of Annual Burden in Fiscal Year:
450.
This annual reporting burden of 450 hours represents an increase of
450 hours as a result of the proposed new rule.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, Room 10235 New Executive
Building, Washington, DC 20503, Attention: Desk Officer for the
Commodity Futures Trading Commission.
The CFTC considers comments by the public on this proposed
collection of information in--
� Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of the CFTC,
including whether the information will have a practical use;
� Evaluating the accuracy of the CFTC's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
� Enhancing the quality, usefulness, and clarity of the
information to be collected; and
� Minimizing the burden of collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
[[Page 50793]]
OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register. A
comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of publication. This does not affect the
deadline for the public to comment to the CFTC on the proposed
regulations. Copies of the information collection submission to OMB are
available from the CFTC Clearance Officer, 1155 21st Street, NW,
Washington, DC 20581, (202) 418-5160.
SEC
Certain provisions of the proposed amendments contain "collection
of information" requirements within the meaning of the PRA. The SEC
has submitted the proposed amendments to OMB for review in accordance
with 44 U.S.C. 3507(d) and 5 CFR Sec. 1320.11. The SEC is revising the
collection 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. The SEC projects that these amendments will change the
burden for firms with respect to only two of these rules, specifically
Rule 15c3-3 and 17a-4 (OMB control numbers 3235-0078 and 3235-0279
respectively), because the amendments to Rules 17a-3, 17a-5, 17a-7,
17a-11, and 17a-13 exempt certain Notice BDs from the requirements of
those rules. The collections and maintenance of information, and the
reports made to the SEC and others that are required pursuant to rules
15c3-3, 17a-3, 17a-4, 17a-5, 17a-7, 17a-11, and 17a-13 are mandatory.
Reports made to the SEC pursuant to Rules 17a-5 and 17a-11 are
considered by the SEC to be confidential financial information. 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.
A. Collection of Information under these Amendments
As mentioned previously in this release, the Amendments to Rules
15c3-3, 17a-3, 17a-4, 17a-5, 17a-7, 17a-11, and 17a-13 to Recognize
Security Futures Products would require a broker-dealer that effects
transactions in and hold SFPs for customers to establish a written
policy, create a disclosure document and provide it to each customer
that engages in SFP activities, obtain a signed acknowledgement from
every such customer, and, if the broker-dealer also allows for changes
of account type to be made, create a record of each change of account
type, obtain a signed acknowledgement from every customer whose account
type has been changed, and send notification of the effective date of
the change to the customer. These records would need to be maintained
by the broker-dealer for at least three years, the first two in an
easily accessible place. The collection of information would be
mandatory for each broker-dealer that wishes to effect transactions in
and hold SFPs for customers.
B. Proposed Use of Information
The information collected pursuant to the proposed amendments to
Rules 15c3-3, 17a-3, 17a-4, 17a-5, 17a-7, 17a-11, and 17a-13 would be
used by the SEC, SROs, and other securities regulatory authorities,
during examinations and investigations, to determine that a broker-
dealer is in compliance with these rules and with other, related
customer protection requirements. No governmental agency would
regularly receive any of the information described above. Instead, the
information would be stored by the broker-dealer and made available to
the various securities regulatory authorities as required to facilitate
examinations and investigations. Broker-dealers would also be required
to provide each customer that wishes to engage in SFP activities a
disclosure document, obtain an acknowledgement from every such
customer, and send a notification to any customer whose account type
has been changed.\66\ The disclosure document would be used by
customers to determine the protections provided by the various
regulatory schemes to an account in which SFPs are held.
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\66\ Proposed paragraph (o) of Rule 15c3-3.
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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 provision could only apply
to broker-dealers that carry customer funds, securities or property and
do not claim an exemption from Rule 15c3-3 ("clearing and carrying
firms"). As of December 31, 2000, there were 425 registered broker-
dealers doing a public business and not claiming an exemption from Rule
15c3-3 ("clearing and carrying 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 March 31,
2001, 90 broker-dealers were registered with the CFTC as FCMs, 63 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 estimates that the number of
firms that will decide 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 100 firms (63 + ((425 -
63) x 10%)) will be required to comply with these proposed
amendments.
The amendments to Rules 17a-3, 17a-5, 17a-7, 17a-11, and 17a-13
exempt certain parties from those rules, so they do not create any
additional burdens.
D. Total Annual Reporting and Recordkeeping Burden
The hour burden of the proposed amendments to Rules 15c3-3, 17a-3,
17a-4, 17a-5, 17a-7, 17a-11, and 17a-13 is difficult to ascertain as
any additional burdens would vary widely due to differences in broker-
dealer SFP activity levels and current procedures and systems employed
by the broker-dealers. The proposed amendments were drafted to permit
flexible methods for the creation of records in order to reduce the
burdens on broker-dealers.
The changes to Rules 17a-3, 17a-5, 17a-7, 17a-11 and 17a-13 will
exempt certain broker-dealers that are registered by filing a notice
with the SEC pursuant to Section 15(b)(11) of the Exchange Act from the
requirements of these rules. Thus, they do not create or change any
burdens or costs.
1. Rule 15c3-3
Pursuant to proposed new paragraph (o)(2)(iii) of Rule 15c3-3, a
broker-dealer that effects transactions in SFPs for customers must
obtain an acknowledgement from each customer indicating that a customer
understands which regulatory structure will not apply to an account in
which SFP transactions are effected or held. Broker-dealers will incur
processing costs relating to receipt, tracking, and filing the signed
acknowledgements. As stated previously, the SEC Staff estimates, based
on conversations with industry groups, that 7,808,000 customers may
want to effect transactions in SFPs and will therefore need to return
the acknowledgement. The Staff estimates that it will take a person 5
minutes to
[[Page 50794]]
process each acknowledgement.\67\ Thus, the total burden associated
with processing these acknowledgements will be approximately 650,700
hours per year.\68\
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\67\ As the majority of clearing and carrying firms use
automated account recordkeeping systems, the Staff believes that
"processing" would consist of accessing the customer account
record and noting receipt of the acknowledgement, then filing or
scanning the acknowledgement. This estimate is based on
representations made by industry representatives relating to other
rule changes that included similar processing requirements.
\68\ Or ((5min/60min) x 7,808,000 accounts). However, it
should be noted that the Staff believes it to be unlikely that
broker-dealers will experience 100% turnover in the number of SFP
accounts, so these costs may decrease in subsequent years.
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Pursuant to proposed new paragraph (o)(3)(i) of Rule 15c3-3, a
broker-dealer that changes the type of account in which a customer's
SFPs are held must create a record of each change in account type. The
Staff believes that not all broker-dealers that effect transactions in
SFPs for customers will allow for changes in account type. To the
extent that a broker-dealer does provide for changes of account type,
the information required to be recorded is the type of information that
could be easily accessed or created and maintained, therefore the Staff
believes the costs of maintaining this information will be minimal. As
discussed above, the Staff estimates that broker-dealers would be
required to create this record for 1,561,600 accounts.\69\ The Staff
believes that it will take approximately 3 minutes to create each
record.\70\ Thus, the total annual burden associated with creating this
record of change of account type will be 78,080 hours.\71\
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\69\ As stated previously, the Staff estimates that 7,808,000
customers may want to engage in SFP transactions. Further, the Staff
estimates that 20% per year may change account type. 20% of
7,808,000 is 1,561,600.
\70\ In fact, the Staff believes that most firms will have this
process automated. To the extent that no person need be involved in
the generation of this record, the costs will be very minimal.
\71\ (1,561,600 accounts x(3min/60min). However, it should be
noted that the Staff believes it to be unlikely that broker-dealers
will experience 100% turnover in the number of SFP accounts, so
these cost may decrease in subsequent years.
---------------------------------------------------------------------------
Pursuant to proposed new paragraph (o)(3)(ii) of Rule 15c3-3, a
broker-dealer that changes the type of account in which a customer's
SFPs are held must obtain an acknowledgement from each customer whose
account type was changed indicating that a customer understands which
regulatory structure will not apply to that account. As discussed
above, the Staff estimates that 1,561,600 accounts per year may change
account type, thus broker-dealers would be required to obtain an
acknowledgement from 1,561,600 customers. The Staff believes that it
will take a broker-dealer approximately 5 minutes to process each
acknowledgement. Thus, the total yearly burden of processing these
acknowledgements will be approximately 130,133 hours.\72\
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\72\ ((5min/60min) x 1,561,600 accounts). However, it should
be noted that the Staff believes it to be unlikely that broker-
dealers will experience 100% turnover in the number of SFP accounts,
so these costs may decrease in subsequent years.
---------------------------------------------------------------------------
In total the SEC estimates that compliance with the proposed
amendments to Rule 15c3-3 will require an additional 858,913 hours per
year (650,700 \73\ + 78,080 \74\ + 130,133 \75\).
---------------------------------------------------------------------------
\73\ Associated with proposed paragraph (o)(2)(iii) (17 CFR
240.15c3-3(o)(2)(iii)).
\74\ Associated with proposed paragraph (o)(3)(i) (17 CFR
240.15c3-3(o)(3)(i)).
\75\ Associated with proposed paragraph (o)(3)(ii) (17 CFR
240.15c3-3(o)(3)(ii)).
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2. Rule 17a-4
The changes to Rule 17a-4 clarify that the records required to be
created pursuant to proposed paragraph 15c3-3(o) must be maintained for
at least three years, two in an easily accessible place. Once these
records are filed, the cost to maintain them is minimal. The SEC
believes that the main cost would be the cost to assure that the
broker-dealer is in compliance with the rule. 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 paragraph 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 100
hours (1 hour x 100 broker-dealers).
New paragraph 17a-4(k) would require that a broker-dealer that
engages in a SFP business, upon request of the SEC, request from its
customers and provide to the SEC documentation of cash transactions
underlying exchanges of security futures products for the underlying
security(ies). Broker-dealers can include an agreement that customers
provide the broker-dealer with this documentation in many other account
opening agreements or in the acknowledgement document, which must be
created and the cost of which is provided for above. It has not yet
been determined whether SFPs will be cash settled or physically
settled. In addition, this is not a record which the broker-dealer
would be required to create or maintain, but instead, a broker-dealer
would only create this record when requested by the SEC.
The SEC Staff believes this requirement to be 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.\76\ 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, and those broker-dealers that did receive letters
received, on average, 110 letters each. Therefore, the SEC Staff
estimates that 45 clearing and carrying firms that engage in SFP
business will receive approximately 110 requests for the information
required to be collected and provided pursuant to proposed paragraph
(k) of Rule 17a-4, or a total of 4,950 requests. 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 9,900 hours each year for broker-
dealers to comply with this requirement.\77\
---------------------------------------------------------------------------
\76\ See note 84.
\77\ (4,950 requests x 2 hours per request) = 9,900 hours per
year.
---------------------------------------------------------------------------
In total the SEC estimates that compliance with the proposed
amendments to Rule 17a-4 will require an additional 10,000 hours per
year.
E. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), the SEC solicits comments to--
(i) Evaluate whether the proposed collections of information are
necessary for the proper performance of the functions of the agency,
including whether the information shall have practical utility; (ii)
Evaluate the accuracy of the agency's estimate of the burden of the
proposed collections of information; (iii) Enhance the quality,
utility, and clarity of the information to be collected; (iv) Minimize
the burden of the collections of information on those who are to
respond, including through the use of automated collection techniques
or other forms of information technology. The SEC strongly encourages
commenters to identify and supply any relevant data, analysis and
estimates concerning the burden of the proposed rules, especially where
any commenter believes the SEC's estimates to be inaccurate.
Persons desiring to submit comments on the collection of
information requirements proposed above should direct them to the
following persons: (1) Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs,
[[Page 50795]]
Office of Management and Budget, Room 10102, New Executive Office
Building, Washington, DC 20503; and (2) Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609 with reference to File No. S7-17-01. OMB is required to
make a decision concerning the collections of information between 30
and 60 days after publication, so a comment to OMB is best assured of
having its full effect if OMB receives it within 30 days of
publication. The SEC has submitted the proposed collections of
information to OMB for approval. Requests for the materials submitted
to OMB by the Commission with regard to these collections of
information should be in writing, refer to File No. S7-17-01, and be
submitted to the Securities and Exchange Commission, Records
Management, Office of Filings and Information Services, 450 Fifth
Street, NW., Washington, DC 20549.
VI. Costs and Benefits of the Proposed Amendments
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 regulations or issuing orders \78\ under the
CEA. By its terms, Section 15 does not require the CFTC to quantify the
costs and benefits of a new regulation 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.
---------------------------------------------------------------------------
\78\ Section 15(a)(3) sets forth three exceptions to the
requirement for conducting a cost benefit analysis, none of which
would be applicable to the proposed rule changes.
---------------------------------------------------------------------------
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 this proposal. 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 this
proposal in light of these three areas of concern.
The proposal includes a disclosure requirement applicable to FCMs.
Specifically, proposed rule 41.42 would require FCMs to make disclosure
concerning the customer protections available under both the securities
and futures regulatory systems. This requirement and the requirement
that Full FCM/Full BDs obtain an acknowledgement from each customer
stating that the customer is aware that the alternative regulatory
protections are inapplicable to the customer's SFP account are
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. The proposed rule is intended to focus the dually-
registered firms 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.
As proposed, Rule 41.42 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.\79\ The CFTC notes that industry representatives, in
consultation with staffs of the CFTC and SEC, are developing a model
disclosure document concerning SFPs. 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.
---------------------------------------------------------------------------
\79\ The Commissions have requested comment, however, on whether
the proposed amendments should include standard mandatory language
to be used by all firms.
---------------------------------------------------------------------------
The CFTC invites public comment concerning its evaluation of the
costs and benefits of the proposed rule. Commenters are invited to
submit any data that they may have that will help in quantifying the
costs and benefits of the proposed rules.
SEC
Passage of the CFMA in December of 2000 permitted the trading of
single stock and narrow-based stock index futures 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. In addition, the CFMA amended the CEA and the Exchange Act
to require that any exchange or association listing SFPs and any
intermediary effecting transactions in SFPs must register with both the
CFTC and the SEC, subjecting these parties to both sets of regulations.
Although the CFMA amended the CEA and the Exchange Act such that
fully-registered broker-dealers that are Notice FCMs are not subject to
certain sections of the CEA and the rules thereunder, and that fully-
registered FCMs that are Notice BDs are not subject to certain sections
of the Exchange Act and the rules thereunder, Notice FCMs were not
exempted from the entire CEA and Notice BDs were not exempted from the
entire Exchange Act. In addition, firms that are fully-registered with
both the CFTC and the SEC are fully subject to both the CEA and the
Exchange Act and the rules thereunder.
Recognizing that some Full FCM/Full BDs may be subject to
duplicative or conflicting regulations, the CFMA amended the CEA and
the Exchange Act to direct the CFTC and the SEC to issue rules,
regulations, or orders, as necessary, to avoid certain duplicative or
conflicting regulations.\80\ To this end, the SEC is proposing to amend
Exchange Act Rules 15c3-3 and 17a-4 by adding new paragraphs (o) and
(b)(9) respectively. The SEC is also proposing amendments that would
exempt certain Notice BDs from Exchange Act Rules 17a-3, 17a-5, 17a-7,
17a-11, and 17a-13.
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\80\ 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)) respectively.
---------------------------------------------------------------------------
The amendments to Rule 15c3-3 would allow a Full FCM/Full BD to
[[Page 50796]]
choose to carry a customer's SFP positions either in a securities
account or a futures account. Whether a 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. To both identify the manner in
which a firm holds SFPs and to assure that each customer understands
which regulatory structure will be applied to an account in which SFPs
are held, proposed paragraph (o) of Rule 15c3-3 requires that a firm
establish written policies, provide customers with specific
disclosures, and obtain written acknowledgements from customers
indicating that the customer understands which regulatory structure
governs an account in which SFPs are held. In addition, if a firm
provides a structure that permits the account type to be changed, the
firm must also create a detailed record of any change, obtain an
additional acknowledgement from the customer indicating that they
understand a change has been made and that the account will be
protected pursuant to a new regulatory structure, and notify the
customer in writing of the effective date of the change.
The SEC has identified below certain costs and benefits relating to
the proposed Amendments to Rules 15c3-3, 17a-3, 17a-4, 17a-5, 17a-7,
17a-11, and 17a-13 to Recognize Security Futures Products. The SEC
requests comments on all aspects of this cost-benefit analysis,
including identification of any additional costs and/or benefits of the
proposed amendments. The SEC strongly encourages commenters to identify
and supply any relevant data, analysis and estimates concerning the
costs and/or benefits of the proposed amendments.
A. Benefits
1. Elimination of Conflicting and Duplicative Regulation
The proposed amendments to Rule 15c3-3 benefit broker-dealers by
eliminating certain conflicting regulations for Full FCM/Full BDs. 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.
The simplicity of these amendments benefits broker-dealers as well.
The CFTC and the SEC, in amending these rules to eliminate 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
Commissions made changes to the existing rules. Effectively, the
proposed amendments allow broker-dealers and FCMs to maintain the same
operational structure they use presently for securities and for
futures, and simply choose the type of account in which SFPs will be
held, therefore determining which regulatory structure will be
applicable to SFPs.
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. In addition, the requirement that a broker-dealer obtain
a written acknowledgement from the customer indicating that the
customer understands that an account will not be protected pursuant to
the alternative regulatory scheme commemorates the customer's
understanding of this issue, protecting both the customer and the
broker-dealer. Without the disclosure document, it would be more
difficult for the customer to obtain the information necessary to make
an informed decision.
The requirement that the broker-dealer send a disclosure document
to customers and obtain a written acknowledgement from them also
benefits the broker-dealer. By sending this disclosure document and
obtaining the customer's signed acknowledgement, the broker-dealer
evidences that the customer has been notified and has agreed to the
regulations applicable to an account. If a dispute with the customer
were to arise, the broker-dealer may use the signed acknowledgement as
evidence that the customer consented to the regulatory program that
applied to the account.
3. Examination Efficiencies
Certain of the requirements included in the amendments are designed
to assure that examinations of broker-dealers proceed in an efficient
and effective manner. If the regulatory agency staff is unable to
ascertain which regulatory structure is applicable to each customer
account or what procedures the broker-dealer employs with 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 similarly increases the costs both to the regulatory
agency conducting the examination and 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 proposed amendments would 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. This
gives each broker-dealer the flexibility to choose the least costly
method to comply with the rules based upon its present processes and
systems capabilities.
In addition, the cost of these proposed amendments is difficult to
ascertain because they would 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 proposed paragraph (o)(1)(ii) of Rule 15c3-3, a Full
FCM/Full BD that effects transactions in SFPs for customers must
establish a written policy describing how customer SFP positions will
be treated, and, if applicable, the process by which a customer may
elect the regulatory scheme that will apply to an account. Only broker-
dealers that decide to effect transactions in SFPs for customers must
draft these policies. SRO rules presently require that a broker-dealer
establish written procedures to supervise the types of business in
which it engages.\81\ Thus, a Full FCM/Full BD would need to establish
these procedures regardless of this amendment to Rule 15c3-3.
[[Page 50797]]
Accordingly, the SEC estimates there is no cost associated with this
amendment.
---------------------------------------------------------------------------
\81\ E.g., NASD Rule 3010.
---------------------------------------------------------------------------
b. Furnishing a Disclosure Document to Customers
Pursuant to proposed new paragraph (o)(2)(i) 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.
The SEC understands that various industry groups are working to
create template disclosure documents for use by the broker-dealer and
FCM community. The creation of a template should decrease the cost to
broker-dealers; however, each broker-dealer that creates such a
disclosure document will still need to review the available template(s)
to determine whether the template satisfies the requirements of the
proposed rule as applied to the broker-dealer's own business, and
whether it wants to tailor the document for its own purposes. Rule
15c3-3 applies to clearing firms that will carry accounts in which SFPs
are held for the benefit of customers. As of December 31, 2000, there
were 425 registered broker-dealers doing a public business and not
claiming an exemption from Rule 15c3-3 ("clearing and carrying
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 March 31, 2001, 90 broker-dealers were registered
with the CFTC as FCMs, 63 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 SEC
Staff estimates that the number of firms that will decide 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. Therefore, the SEC Staff estimates
that approximately 100 firms (63 + ((425 - 63) x 10%))) will be
required to create a disclosure document. For each firm that does
create a disclosure document, the SEC 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.
According to the Securities Industry Association ("SIA"), the hourly
cost of an attorney is approximately $156.00 \82\ and the hourly cost
of a deputy general counsel is $225.00.\83\ Thus, the total, one-time
cost of creating a disclosure document is approximately $492,000 (or
(($156.00 x 20 hours) + ($225.00 x 8 hours)) x 100 broker-
dealers).
---------------------------------------------------------------------------
\82\ Based on the SIA's Report on Management and Professional
Earnings in the Securities Industry 2000, Tables 107 (Attorney) and
108 (Compliance Attorney) plus 35% overhead.
\83\ Based on the SIA's Report on Management and Professional
Earnings in the Securities Industry 2000, Table 110 (Deputy General
Counsel) plus 35% overhead.
---------------------------------------------------------------------------
The costs of printing the disclosure documents will be based on the
number of customer accounts that will be opened to effect transactions
in SFPs. At this time, it is not clear how many customers will want to
engage in this type of business. As of December 31, 2000, broker-
dealers reported that they maintained 97,600,000 customer accounts.\84\
The SEC Staff estimates, based on conversations with industry groups,
that 8% of these customers may engage in SFP transactions \85\
(97,600,000 accounts x 8% = 7,808,000).
---------------------------------------------------------------------------
\84\ December 31, 2000, FOCUS Schedule 1 filings.
\85\ The SEC Staff derived its estimate from the number of
active options accounts and conversations with industry
representatives.
---------------------------------------------------------------------------
The costs of printing and sending the disclosure document to
customers will be based on the number of customer accounts that will be
opened by customers to effect transactions in SFPs. As discussed above,
the SEC Staff estimates that 7,808,000 customers may engage in SFP
transactions. In addition, the SEC Staff estimates that the cost of
printing and sending each disclosure document will be approximately
$.10 per document sent.\86\ Thus, the cost of printing and sending the
document required pursuant to proposed paragraph 15c3-3(o) will be
approximately $780,800 (or (7,808,000 x $.10)).\87\
---------------------------------------------------------------------------
\86\ This estimate is based on past conversations with industry
representatives regarding other rule changes which required similar
printing and postage costs. Postage may be minimized by including
the disclosure document with other information mailed to customers.
\87\ However, it should be noted that the SEC Staff believes it
to be unlikely that broker-dealers will experience 100% turnover in
the number of SFP accounts, so these costs may decrease in
subsequent years.
---------------------------------------------------------------------------
c. Obtaining an Acknowledgement From Customers
Pursuant to proposed new paragraph (o)(2)(ii) of Rule 15c3-3, a
broker-dealer that effects transactions in SFPs for customers must
obtain an acknowledgement from each such customer indicating that the
customer understands which regulatory structure will apply and which
will not apply to an account in which SFP transactions are effected or
held. The SEC believes that broker-dealers will send the
acknowledgement form to customers along with the disclosure document,
thus substantially reducing the cost of sending the acknowledgement to
customers. Aside from the postage costs, there are still costs that
will be incurred relating to the development of the document and
printing the documents to be sent. In addition, broker-dealers will
incur processing costs relating to receipt, tracking, and filing the
signed acknowledgements.
As an acknowledgement would be far more simple to create than a
disclosure document, and in fact could be incorporated into the
disclosure document, the SEC Staff estimates (based on its experience)
that, on average, for each broker-dealer that creates these documents,
one attorney will spend approximately 2 hours to create the
acknowledgement or that portion of the disclosure document that must be
returned by the customer as an acknowledgement, and one senior attorney
will spend approximately 1 hour reviewing and editing the document. As
stated above, the SEC Staff estimates that 100 broker-dealers will
create an acknowledgement. According to the SIA, the hourly cost of an
attorney is approximately $156.00 \88\ and the hourly cost of a deputy
general counsel is $225.00.\89\ Thus, the total, one-time cost of
creating an acknowledgement or that portion of the disclosure document
that must be returned by the customer as an acknowledgement is
approximately $53,700 (or ($156.00 x 2) + ($225.00 x 1) x 100
broker-dealers).
---------------------------------------------------------------------------
\88\ See note 82.
\89\ See note 83.
---------------------------------------------------------------------------
The costs of printing the acknowledgement to be sent as part of or
along with the disclosure document to customers will be based on the
number of customer accounts that will be opened to effect transactions
in SFPs. The SEC Staff estimates that the cost of printing each
acknowledgement will be, on average, approximately $.045 per document
sent.\90\ As discussed above, the SEC Staff estimates that 7,808,000
customers may want to engage in SFP transactions. Thus, the total cost
of printing the acknowledgement will be approximately $351,360 (or
(7,808,000 x $.045)).\91\
---------------------------------------------------------------------------
\90\ See note 86.
\91\ See note 87.
---------------------------------------------------------------------------
When the customer returns these acknowledgements, the broker-dealer
will need to process and file them. All
[[Page 50798]]
customers that want to effect transactions in SFPs will need to return
the acknowledgement. Therefore, based on the above estimates, broker-
dealers will need to process 7,808,000 acknowledgements. The SEC Staff
estimates that it will take 5 minutes to process each
acknowledgement.\92\ The SEC Staff believes that a broker-dealer would
have a new accounts clerk process the acknowledgements as part of the
required account documents. According to the SIA, the hourly cost of a
new accounts clerk is approximately $23.40.\93\ Thus, the total cost of
processing these acknowledgements will be approximately $15.2 million
(($23.40 per hour x (5min/60min)) x 7,808,000 accounts).\94\
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\92\ As the majority of clearing and carrying firms use
automated account recordkeeping systems, the SEC Staff believes that
"processing" would consist of; accessing the customer account
record and noting receipt of the acknowledgement, then filing or
scanning the acknowledgement. This estimate is based on
representations made by industry representatives relating to other
rule changes that included similar processing requirements.
\93\ Based on the SIA's Report on Office Salaries In the
Securities Industry 2000, Table 062 (New Accounts Clerk) plus 35%
overhead.
\94\ See note 87.
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d. Creation of a Record of Changes of Account Type
Pursuant to proposed new paragraph (o)(3)(i) of Rule 15c3-3, a
broker-dealer 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 broker-dealers that effect transactions in SFPs
for customers will allow for changes in account type. To the extent
that a broker-dealer does provide for 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. As discussed above, the
SEC Staff estimates that 7,808,000 customers may want to engage in SFP
transactions. Further, the SEC Staff estimates that at most 20% per
year may change account type.\95\ Thus, broker-dealers would be
required to create this record for, at most, 1,561,600 accounts (or
7,808,000 accounts x 20%). The SEC Staff believes that broker-dealers
will have operations clerks create this record, and estimates that it
will take an operations clerk approximately 3 minutes to create each
record.\96\ According to the SIA, the hourly cost of an operations
specialist is approximately $42.00.\97\ Thus, the total annual cost of
creating this record of change of account type will be, at most,
$3,279,360 (or ((1,561,600 accounts x (3min/60min)) x $42.00).
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\95\ The SEC Staff does not believe that all broker-dealers that
choose to engage in an SFP business will allow for changes of
account type because it may be costly to do so. In addition, it is
unlikely that many customers will change their account type once
they have signed an acknowledgement. To the best of the SEC Staff's
knowledge, there is no existing similar procedure to use as a basis
for comparison.
\96\ In fact, the SEC Staff believes that most firms will have
this process automated. To the extent that no person need be
involved in the generation of this record, the costs will be
minimal.
\97\ Based on the SIA's Report on Office Salaries In the
Securities Industry 2000, Table 119 (Operations Specialist) plus 35%
overhead.
---------------------------------------------------------------------------
e. Obtaining an Acknowledgement from Customers
Pursuant to proposed new paragraph (o)(3)(ii) of Rule 15c3-3, a
broker-dealer that changes the type of account in which a customer's
SFPs are held must obtain an acknowledgement from each customer whose
account type was changed indicating that the customer understands which
regulatory structure will apply and which will not apply to that
account. As discussed above, the SEC Staff estimates that, at most,
1,561,600 accounts per year may change account type; thus, broker-
dealers would be required to obtain an acknowledgement from, at most,
1,561,600 customers per year. The SEC Staff believes that a broker-
dealer would have a new accounts clerk process the acknowledgements as
part of the required account documents, and that it would take the new
accounts clerk approximately 5 minutes to process each acknowledgement.
According to the SIA, the hourly cost of a new accounts clerk is
approximately $23.40.\98\ Thus, the total cost of processing these
acknowledgements will be approximately $3 million (($23.40 x (5min/
60min)) x 1,561,600 accounts).
---------------------------------------------------------------------------
\98\ See note 93.
---------------------------------------------------------------------------
f. Customer Notification of Effective Date of Change of Account Type
Pursuant to proposed new paragraph (o)(3)(iii) of Rule 15c3-3, a
broker-dealer that changes the type of account in which a customer's
SFPs are held must promptly notify the customer in writing of the date
that change became effective. The SEC Staff believes that there are two
costs associated with providing this notification to customers: The
initial, one-time cost to draft the notification, and the cost of
printing and sending the notification to customers.
The SEC 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. According to the SIA, the
hourly cost of an attorney is approximately $156.00 \99\ and the hourly
cost of a deputy general counsel is $225.00. \100\ Thus, the total,
one-time cost of drafting the notification is approximately $58,050 (or
((156.00 x 3 hours) + ($225 x (30 min/60 min))) x 100 broker-
dealers)).
---------------------------------------------------------------------------
\99\ See note 82.
\100\ See note 83.
---------------------------------------------------------------------------
As discussed above, the SEC estimates that 1,561,600 accounts per
year may change account type; thus, broker-dealers would be required to
send this notification to 1,561,600 customers. The SEC Staff believes
that firms will use the least cost method to comply with these
requirements, and will probably include this notification with other
mailings sent to the customer. The SEC Staff estimates that the cost of
printing and posting each notification will be approximately $.10 per
document sent.\101\ Therefore, the SEC Staff estimates that the cost of
sending this notification to customers will be $156,160 (1,561,600
accounts x $.10).
---------------------------------------------------------------------------
\101\ See note 86.
---------------------------------------------------------------------------
2. Amendments to Rule 17a-4
The proposed amendments to Rule 17a-4 clarify that the records
required to be created pursuant to new paragraph 15c3-3(o) 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 is in compliance with the
rule. The SEC Staff estimates that, on average, one compliance person
will spend approximately 1 hour per year to assure that the broker-
dealer is in compliance with the record maintenance provisions of
paragraph 17a-4(b)(9) as it relates to new paragraph 15c3-3(o).
According to the SIA, the hourly cost of a compliance manager is
approximately $101.25.\102\ Thus, the total yearly cost of assuring
compliance with the proposed amendment to Rule 17a-4 is approximately
$10,125 (or (101.25 x 1 hour) x 100 broker-dealers).
---------------------------------------------------------------------------
\102\ Based on the SIA's Report on Management and Professional
Earnings in the Securities Industry 2001, Table 051 (Compliance
Manager) plus 35% overhead.
---------------------------------------------------------------------------
New paragraph 17a-4(k) would require a broker-dealer that engages
in a SFP business, upon request of the SEC,
[[Page 50799]]
to request from its customers and provide to the SEC documentation of
cash transactions underlying exchanges of security futures products for
the underlying security(ies). Broker-dealers can include an agreement
that customers provide the broker-dealer with this documentation in
many other account opening agreements or in the acknowledgement
document, which must be created and the cost of which is discussed
above. It has not yet been determined whether SFPs will be cash settled
or physically settled. In addition, this is not a record which the
broker-dealer would be required to create or maintain on a regular
basis, but instead, a broker-dealer would create this record only when
specifically requested by the SEC.
The SEC Staff believes this requirement to be 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.\103\ 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, and those broker-dealers that did receive
letters received, on average, 110 letters each. Therefore, the SEC
Staff estimates that 45 clearing and carrying firms that engage in SFP
business will receive approximately 110 requests for the information
required to be collected and provided pursuant to proposed paragraph
(k) of Rule 17a-4, or a total of 4,950 requests. The SEC Staff
estimates (based on its experience) that it will take approximately 2
hours for a compliance manager 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 9,900 hours, for a total cost of
$1,002,375 per year for broker-dealers to comply with this requirement
((4,950 requests x 2 hours per request) = 9,900 hours per year; (9,900
hours per year x $101.25 per hour \104\ = $1,002,375).
---------------------------------------------------------------------------
\103\ See note 84.
\104\ See note 102.
---------------------------------------------------------------------------
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 acknowledgements 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. Due to this, the Staff believes that
any systems coding changes needed to comply with the proposed
amendments to Rules 15c3-3, 17a-3, 17a-4, 17a-5, 17a-7, 17a-11, and
17a-13 could be incorporated into the initial coding for these
products, thus greatly decreasing the costs generally associated with
systems changes. Therefore, the SEC Staff estimates that it may cost
the broker-dealers engaging in this business approximately $2.4 million
\105\ to update their systems to comply with the proposed amendments to
Rules 15c3-3, 17a-3, 17a-4, 17a-5, 17a-7, 17a-11, and 17a-13.
---------------------------------------------------------------------------
\105\ This estimate is based on representations made by industry
representatives relating to other rule changes that included similar
systems modifications.
---------------------------------------------------------------------------
VII. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
Section 3(f) of the Exchange Act \106\ provides that whenever the
SEC is engaged in rulemaking and is required to 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. The proposed amendments, which are
intended to allow firms that plan to effect transactions in and hold
SFPs for the benefit of customers a method to choose which type of
regulatory structure will be applied to those customer positions,
should serve as an efficient and cost-effective means for those
entities to reconcile their conflicting customer protection and
segregation requirements with respect to SFPs. These amendments 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 educate customers regarding
the different regulatory schemes, which may be applicable to their
accounts, that serve to protect their assets.
---------------------------------------------------------------------------
\106\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
Section 23(a)(2) of the Exchange Act \107\ 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. The SEC preliminarily believes the proposed
amendments are necessary to eliminate conflicting or duplicative rules
regarding customer protection and recordkeeping applicable to SFPs. The
proposed amendments would allow 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), and consequently whether certain
CEA or Exchange Act recordkeeping and reporting requirements, as well
as requirements to reconcile all positions at least quarterly, will
apply. This allows these Full FCM/Full to apply whatever regulatory
scheme would be less burdensome. The proposed amendments would 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. Because the purpose of the proposed amendments is to
eliminate conflicting and duplicative regulation with relation to
Exchange Act section 15c(3) and 17(a) \108\ in light of the CFMA, the
SEC preliminarily believes that our proposals will not create any anti-
competitive effects and in fact should promote competition by
decreasing the costs associated with engaging in an SFP business.
---------------------------------------------------------------------------
\107\ 15 U.S.C. 78w(a)(2).
\108\ 5 U.S.C. 78o(c)(3) and 15 U.S.C. 78q(a).
---------------------------------------------------------------------------
The SEC requests comment on whether the proposed amendments are
expected to promote efficiency, competition, and capital formation.
VIII. Summary of Regulatory Flexibility Act Certification
CFTC
The Regulatory Flexibility Act ("RFA") \109\ requires that
agencies, in proposing rules, consider the impact of those rules on
small businesses.\110\ The proposed 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.\111\ The CFTC has previously determined that FCMs are not
small entities for the purpose of the RFA.\112\ 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
[[Page 50800]]
apply to FCMs.\113\ Accordingly, the Acting Chairman, on behalf of the
CFTC, certifies pursuant to Section 5(b) of the RFA \114\ that the
proposed rules will not have a significant economic impact on a
substantial number of small entities.
---------------------------------------------------------------------------
\109\ 5 U.S.C. 601 et seq.
\110\ 5 U.S.C. 603(a).
\111\ 47 FR 18618 (April 30, 1982)
\112\ Id. at 18619.
\113\ Id.
\114\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
SEC
Section 3(a) of the RFA \115\ requires the SEC to undertake an
initial regulatory flexibility analysis of the effects of proposed
rules and rule amendments on small entities, unless the SEC Chairman
certifies that the rules and rule amendments, if adopted, would not
have a significant economic impact on a substantial number of small
entities.\116\
---------------------------------------------------------------------------
\115\ See note 110.
\116\ See note 114.
---------------------------------------------------------------------------
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 and
carrying firms"). As of December 31, 2000, there were 425 registered
clearing and carrying firms. As of March 31, 2001, 90 broker-dealers
were registered with the CFTC as FCMs, 63 of which are clearing and
carrying firms. Of these clearing and carrying firms registered with
the SEC, 16 would be considered to be small entities,\117\ none of
which is registered with the CFTC as a FCM. In conversations with the
SEC Staff, broker-dealers have expressed the view that they are
uncertain as to how many firms, aside from those that are already
registered with the CFTC to engage in a commodity and futures business,
will conduct a SFP business. Based upon these conversations, the Staff
estimates that the number of firms that will decide 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
100 firms (63 + ((425-63) x 10%))) will be required to comply with
these proposed amendments. Using the 10% estimate, the Staff believes
that up to two small business entities may decide to engage in this
type of business and therefore could be affected by the proposed
amendments, but that the proposed amendments would not have a
significant economic impact on a substantial number of small business
entities.
---------------------------------------------------------------------------
\117\ Pursuant to 17 CFR Sec. 240.0-10, "the term small
business or small organization shall: [ * * * ] (c) [w]hen used with
reference to a broker or dealer, mean a broker or dealer that: (1)
[h]ad total capital (net worth plus subordinated liabilities) of
less than $500,000 on the date in the prior fiscal year as of which
is audited financial statements were prepared pursuant to
Sec. 240.17-5(d) or, if not required to file such statements, a
broker or dealer that had total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last business day of the
preceding fiscal year (or in the time that it has been in business,
if shorter); and (2) [i]s not affiliated with any person (other than
a natural person) that is not a small business or small organization
as defined in this section * * *" (17 CFR Sec. 240.0-10(c)).
Further, pursuant to Sec. 240.0-10(i), "[f]or purposes of paragraph
(c) of this section, a broker or dealer is affiliated with another
person if [* * *] [s]uch broker or dealer introduces transactions in
securities, other than registered investment company securities or
interests or participations in insurance company separate accounts,
to such other person or introduces accounts of customers or other
brokers or dealers, other than accounts that hold only registered
investment company securities or interests or participations in
insurance company separate accounts, to such other person that
carries such accounts on a fully disclosed basis." (17 CFR
Sec. 240.0-10(i)).
---------------------------------------------------------------------------
The SEC Chairman has certified that the proposed rules and
amendments, if adopted, would not have a significant economic impact on
a substantial number of small entities. A copy of the certification is
attached as Appendix A.
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, the SEC is also requesting information regarding the
potential impact of the proposed rules and rule amendments on the
economy on an annual basis. Commenters should provide empirical data to
support their views.
IX. Text of Proposed 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.
17 CFR Part 240
Brokers, Customer protection, Dealers, Securities.
17 CFR Chapter I
Commodity Futures Trading Commission.
In accordance with the foregoing, the Commodity Futures Trading
Commission hereby proposes to amend Chapter I of Title 17 of the Code
of Federal Regulations 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, 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, 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 governed by the
segregation requirements of Section 4d of the Commodity Exchange Act
and the rules thereunder.
(ww) Securities account. This term means an account governed by the
reserve requirements of Section 15 of the Securities Exchange Act of
1934 and the rules 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. 41.42(b)(1) of this chapter.
[[Page 50801]]
PART 41--SECURITY FUTURES PRODUCTS
4. The authority citation for Part 41 continues to read as follows:
Authority: Section 252, Pub. L. 106-554, 114 Stat. 2763, 7
U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a.
5. Section 41.42 is added to read as follows:
Sec. 41.42 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 a customer's security futures products in a futures
account or 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) If the futures commission merchant is also a broker or dealer
registered pursuant to Section 15(b)(1) of the Securities Exchange Act,
the futures commission merchant shall establish a written policy
describing whether customer security futures products will be placed in
a futures account or a securities account and, if applicable, the
process by which a customer may elect the type 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. Before a futures commission merchant
accepts an order for a security futures product from a customer, the
firm shall:
(1) 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 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) Obtain an acknowledgement that includes the dated signature of
each owner of the account stating that the customer understands that
the account will not be protected under the alternative regulatory
scheme, if the futures commission merchant is also a broker or dealer
registered pursuant to Section 15(b)(1) of the Securities Exchange Act.
(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 shall create 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;
(2) Before the date the change in account types becomes effective,
the firm must obtain an acknowledgement that includes the dated
signature of each owner of the account stating that the customer
understands that the account in which the security futures products
will be held will not be protected pursuant to the alternative
regulatory scheme; and
(3) The firm shall promptly notify the customer in writing of the
date that the change became effective.
(d) Recordkeeping requirements. The Commission's recordkeeping
rules shall apply to security futures products held in a futures
account. The SEC's recordkeeping rules shall apply to security futures
products held in a securities account and compliance therewith is
required under this section.
(e) Reports to customers. The Commission's reporting requirements
set forth in Secs. 1.33 and 1.46 of this chapter shall apply to futures
commission merchants holding security futures products in a futures
account.
(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, 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
[[Page 50802]]
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
(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 Secs. 1.3(vv) and (ww) of this chapter,
respectively.
* * * * *
By the Commodity Futures Trading Commission.
Dated: September 26, 2001.
Jean A. Webb,
Secretary of the Commission.
Securities and Exchange Commission
17 CFR Chapter II
The amendments are proposed pursuant to the authority conferred on
the Securities and Exchange Commission by the Exchange Act, including
Sections 3(b), 15(c)(3), 17(a), and 23(a).
In accordance with the foregoing, the Securities and Exchange
Commission hereby proposes that Title 17 Chapter II of the Code of
Federal Regulations be 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, 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 Secs. 15(c)(2), 15(c)(3),
17(a), 23(a), 48 Stat. 895, 897, 901, secs. 3, 4, 8, 49 Stat. 1377,
1379, secs. 2, 5, 52, Stat. 1075, 1076, sec. 7(d), 84 Stat. 1653; 15
U.S.C. 78o(c), 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. The authority citation following Sec. 240.15c3-3, is removed.
3. Section 240.15c3-3 is amended by:
a. Amending paragraph (a)(1) by adding a new sentence following the
fourth sentence;
b. Adding paragraphs (a)(l4) and (a)(15); and
c. 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. * * *
* * * * *
(14) The term securities account shall mean the account of a
customer.
(15) The term futures account (also referred to as "commodity
account") shall mean an account in which security futures products are
held but which is not otherwise a securities account.
* * * * *
(o) Security futures products--(1) Where security futures products
shall be held. A broker or dealer registered with the Commission
pursuant to 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)):
(i) May hold a customer's security futures products in a securities
account or a futures account; and
(ii) Shall establish a written policy describing 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 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).
[[Page 50803]]
(2) Disclosure and record requirements. Before a broker or dealer
accepts an order for a security futures product from a customer, the
broker or dealer shall:
(i) 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 Commodities 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 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) Obtain, if the broker or dealer 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)), an acknowledgement, that includes the
dated signature of each owner of the account, stating that the customer
understands that the account will not be protected under the
alternative regulatory scheme.
(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 shall create 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.
(ii) Before the date the change in account types becomes effective,
the broker-dealer must obtain an acknowledgement that includes the
dated signature of each owner of the account, stating that the customer
understands that the account in which the security futures products
will be held will not be protected under the alternative regulatory
scheme.
(iii) The broker or dealer shall promptly notify the customer in
writing of the date that the change became effective.
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:
(1) A broker or dealer registered pursuant to section 15(b)(11)(A)
of the Act (15 U.S.C. 78o(b)(11)(A)) to the extent that it holds or
effects transactions in security futures products in a futures account
(as that term is defined in Sec. 240.15c3-3(a)(15)); and
(2) A broker or dealer registered 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)), to the extent that it holds or
effects transactions in security futures products in a futures account
(as that term is defined in Sec. 240.15c3-3(a)(15)).
5. Section 240.17a-4 is amended by revising paragraph (b)(9) and
adding paragraph (k) to read as follows:
Sec. 240.17a-4 Records to be preserved by certain exchange members,
brokers and dealers.
* * * * *
(b) * * *
(9) The records required to be made pursuant to Sec. 240.15c3-
3(d)(4) and (o).
* * * * *
(k) Every member, broker or dealer subject to this section that
engages in the business of effecting transactions in or holding
security future products shall, upon request of representatives of the
Commission, request from its customers and, upon receipt thereof,
provide to those representatives documentation of cash transactions
underlying exchanges of security futures products for securities or
exchanges of security futures products in connection with securities
transactions.
6. Section 240.17a-5 is amended by redesignating paragraph (a)(5)
as paragraph (a)(6) and adding new paragraph (a)(5) to read as follows:
Sec. 240.17a-5 Reports to be made by certain brokers and dealers.
(a) * * *
(5) The provisions of this paragraph (a) 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) 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 new 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)).
* * * * *
By the Securities and Exchange Commission.
[[Page 50804]]
Dated: September 26, 2001.
Margaret H. McFarland,
Deputy Secretary.
Note: Appendix A to the Preamble will not appear in the Code of
Federal Regulations.
APPENDIX A
Regulatory Flexibility Act Certification
I, Harvey L. Pitt, Chairman of the Securities and Exchange
Commission (the "Commission"), hereby certify, pursuant to 5
U.S.C. 605(b), that the proposed amendments to Rules 15c3-3, 17a-3,
17a-4, 17a-5, 17a-7, 17a-11 and 17a-13 under the Securities Exchange
Act of 1934 (17 CFR Secs. 240.15c3-3, 240.17a-3, 240.17a-4, 240.17a-
5, 240.17a-7, 240.17a-11, and 240.17a-13 respectively), would not,
if adopted, have a significant economic impact on a substantial
number of small entities. These proposed amendments would eliminate
conflicting and duplicative regulation relating to the manner in
which certain Commission and Commodity Futures Trading Commission
customer protection, recordkeeping, reporting, telegraphic notice,
and quarterly securities count requirements apply to security
futures products.
The proposed amendments would apply only to firms that plan to
effect transactions in and hold security futures products 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.
Accordingly, the proposed amendments, if adopted, would not have
a significant economic impact on a substantial number of small
entities.
Dated: September 25, 2001.
Harvey L. Pitt,
Chairman.
[FR Doc. 01-24573 Filed 10-3-01; 8:45 am]
BILLING CODE 6351-01-P; 8001-01-P