[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4745 Introduced in House (IH)]

103d CONGRESS
  2d Session
                                H. R. 4745

     To provide a framework for Securities and Exchange Commission 
  supervision and regulation of derivatives activities, and for other 
                               purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             July 13, 1994

 Mr. Markey (for himself and Mr. Synar) introduced the following bill; 
       which was referred to the Committee on Energy and Commerce

_______________________________________________________________________

                                 A BILL


 
     To provide a framework for Securities and Exchange Commission 
  supervision and regulation of derivatives activities, and for other 
                               purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Derivatives Dealers Act of 1994''.

SEC. 2. DEFINITIONS.

    Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)) is amended by adding at the end the following new paragraphs:
            ``(53) The term `derivative' means any financial contract 
        or other instrument that derives its value from the value or 
        performance of any security, currency exchange rate, or 
        interest rate (or group or index thereof), but does not 
        include--
                    ``(A) any security that is traded on a national 
                securities exchange or on an automated interdealer 
                quotation system sponsored by a securities association 
                registered under section 15A of this title;
                    ``(B) any forward contract which has a maturity at 
                the time of issuance not exceeding 270 days;
                    ``(C) any contract of sale of a commodity for 
                future delivery, or any option on such a contract, 
                traded or executed on a designated contract market and 
                subject to regulation under the Commodity Exchange Act; 
                or
                    ``(D) any deposit held by a financial institution.
            ``(54) The term `derivatives dealer' means any person 
        engaged in the business of buying, selling, or entering into 
        derivatives for his own account, but does not include--
                    ``(A) any person insofar as such person buys, 
                sells, or enters into derivatives for his own account, 
                either individually or in a fiduciary capacity, but not 
                as part of a regular business; or
                    ``(B) any financial institution.
            ``(55) The term `material associated person' means any 
        associated person of a broker, dealer, government securities 
        broker, government securities dealer, municipal securities 
        dealer, or derivatives dealer (other than a natural person) 
        whose business activities are reasonably likely to have a 
        material impact on the financial or operational condition of 
        any such broker, dealer, government securities broker, 
        government securities dealer, municipal securities dealer, or 
        derivatives dealer, including on its net capital, its 
        liquidity, or its ability to conduct or finance its operations.
            ``(56) The term `person associated with a derivatives 
        dealer' or `associated person of a derivatives dealer' means 
        any partner, officer, director, or branch manager of such 
        derivatives dealer (or any person occupying a similar status or 
        performing similar functions), and any other employee of such 
        derivatives dealer who is engaged in the management, direction, 
        supervision, or performance of any activities relating to 
        derivatives, and any person directly or indirectly controlling, 
        controlled by, or under common control with such derivatives 
        dealer.
            ``(57) The term `designated examining authority' means the 
        national securities exchange or registered securities 
        association of which a registered broker or dealer is a member, 
        and if such broker or dealer is a member of more than 1 such 
        self-regulatory organization, the organization designated by 
        the Commission as the principal examining authority for such 
        broker or dealer.''.

                      TITLE I--DERIVATIVES DEALERS

SEC. 101. DERIVATIVES DEALER REGISTRATION.

    The Securities Exchange Act of 1934 is hereby amended by inserting 
after section 15C (15 U.S.C. 78o-5) the following new section:

``SEC. 15D. DERIVATIVES DEALERS.

    ``(a) Registration Required.--
            ``(1) Registration of derivatives dealers.--
                    ``(A) Registration requirement.--It shall be 
                unlawful for any derivatives dealer (other than a 
                registered broker or dealer, or a material associated 
                person of a registered broker or dealer that has filed 
                notice in accordance with subparagraph (B) of this 
                paragraph) to make use of the mails or any means or 
                instrumentality of interstate commerce to effect any 
                transaction in, or to induce or attempt to induce the 
                purchase or sale of, any derivative unless such 
                derivatives dealer is registered in accordance with 
                paragraph (2) of this subsection.
                    ``(B) Material associated persons of brokers and 
                dealers.--
                            ``(i) Notice requirement.--It shall be 
                        unlawful for any derivatives dealer that is a 
                        material associated person of a registered 
                        broker or dealer (other than a material 
                        associated person of a registered broker or 
                        dealer that is itself a registered broker or 
                        dealer, or a derivatives dealer that is 
                        registered in accordance with paragraph (2) of 
                        this subsection) to make use of the mails or 
                        any means or instrumentality of interstate 
                        commerce to effect any transaction in, or to 
                        induce or attempt to induce the purchase or 
                        sale of, any derivative unless such derivatives 
                        dealer has filed with the Commission written 
                        notice that it is a derivatives dealer. When 
                        such a derivatives dealer ceases to act as such 
                        it shall file with the Commission a written 
                        notice that it is no longer acting as a 
                        derivatives dealer.
                            ``(ii) Form of notice.--Such notices shall 
                        be in such form and contain such information 
                        concerning a derivatives dealer and any persons 
                        associated with such derivatives dealer as the 
                        Commission shall, by rule, prescribe as 
                        necessary or appropriate in the public interest 
                        or for the protection of investors.
            ``(2) Registration procedure.--A derivatives dealer subject 
        to the registration requirement of paragraph (1)(A) of this 
        subsection may be registered by filing with the Commission an 
        application for registration in such form and containing such 
        information and documents concerning such derivatives dealer 
        and any of its associated persons as the Commission, by rule, 
        may prescribe as necessary or appropriate in the public 
        interest or for the protection of investors. Within 45 days of 
        the date of filing of such application (or within such longer 
        period as to which the applicant consents), the Commission 
        shall--
                    ``(A) by order grant registration, or
                    ``(B) institute proceedings to determine whether 
                registration should be denied. Such proceedings shall 
                include notice of the grounds for denial under 
                consideration and opportunity for hearing and shall be 
                concluded within 120 days of the date of the filing of 
                the application for registration. At the conclusion of 
                such proceedings, the Commission, by order, shall grant 
                or deny such registration. The order granting 
                registration shall not be effective until such 
                derivatives dealer has become a member of a securities 
                association registered under section 15A of this title, 
                unless the Commission has exempted such derivatives 
                dealer, by rule or order, from such membership. The 
                Commission may extend the time for the conclusion of 
                such proceedings for up to 90 days if it finds good 
                cause for such extension and publishes its reasons for 
                so finding or for such longer period as to which the 
                applicant consents.
        The Commission shall grant the registration of a derivatives 
        dealer if the Commission finds that the requirements of this 
        section are satisfied. The Commission shall deny such 
        registration if it does not make such a finding or if it finds 
        that if the applicant were so registered, its registration 
        would be subject to suspension or revocation under subsection 
        (c) of this section.
            ``(3) Prohibited conduct.--Any provision of this title 
        (other than section 5 or paragraph (1) of this subsection) 
        which prohibits any act, practice, or course of business if the 
        mails or any means or instrumentality of interstate commerce is 
        used in connection therewith shall also prohibit any such act, 
        practice, or course of business by any derivatives dealer 
        registered or having filed notice under paragraph (1) of this 
        subsection or any person acting on behalf of such derivatives 
        dealer, irrespective of any use of the mails or any means or 
        instrumentality of interstate commerce in connection therewith.
            ``(4) Exemptions.--The Commission, by rule or order, upon 
        the Commission's own motion or upon application, may 
        conditionally or unconditionally exempt any derivatives dealer, 
        or class of derivatives dealers, from any provision of this 
        section, or the rules thereunder, if the Commission finds that 
        such exemption is consistent with the public interest, the 
        protection of investors, and the purposes of this title.
    ``(b) Rules.--
            ``(1) Authority.--The Commission shall propose and adopt 
        rules to effect the purposes of this title with respect to 
        transactions in derivatives effected by derivatives dealers 
        registered or required to register under subsection (a)(1)(A) 
        of this section as follows:
                    ``(A) Financial responsibility.--Such rules shall 
                provide safeguards with respect to the financial 
                responsibility and related practices of such 
                derivatives dealers including, but not limited to, 
                capital adequacy standards and the carrying and use of 
                customers' deposits or credit balances.
                    ``(B) Reports.--Such rules shall require every such 
                derivatives dealer to make reports to and furnish 
                copies of records to the Commission, and to file with 
                the Commission, annually or more frequently, a balance 
                sheet and income statement certified by an independent 
                public accountant, prepared on a calendar or fiscal 
                year basis, and such other financial statements (which 
                shall, as the Commission specifies, be certified) and 
                information concerning its financial condition as 
                required by such rules.
                    ``(C) Recordkeeping.--Such rules shall require 
                records to be made and kept by such derivatives dealers 
                and shall specify the periods for which such records 
                shall be preserved.
            ``(2) Authority to limit disclosure of information.--
        Notwithstanding any other provision of law, the Commission 
        shall not be compelled to disclose any information required to 
        be kept or reported under rules adopted under paragraph (1) of 
        this subsection. Nothing in this paragraph shall authorize the 
        Commission to withhold information from Congress, or prevent 
        the Commission from complying with a request for information 
        from any other Federal department or agency requesting the 
        information for purposes within the scope of its jurisdiction, 
        or complying with an order of a court of the United States in 
        an action brought by the United States or the Commission. For 
        purposes of section 552 of title 5, United States Code, this 
        paragraph shall be considered a statute described in subsection 
        (b)(3)(B) of such section 552.
            ``(3) Fraudulent acts and practices.--With respect to any 
        derivatives dealer, the Commission may, by rule or regulation 
        define, and prescribe means reasonably designed to prevent, 
        such acts and practices as are fraudulent, deceptive, or 
        manipulative.
            ``(4) Compliance with rules under this section.--No 
        derivatives dealer shall make use of the mails or any means or 
        instrumentality of interstate commerce to effect any 
        transaction in, or to induce or attempt to induce the purchase 
        or sale of, any derivative in contravention of any rule under 
        this section.
    ``(c) Enforcement by the Commission.--
            ``(1) Administrative powers to impose sanctions.--With 
        respect to any derivatives dealer registered or required to 
        register under subsection (a)(1)(A) of this section--
                    ``(A) Derivatives dealers.--The Commission, by 
                order, shall censure, place limitations on the 
                activities, functions, or operations of, suspend for a 
                period not exceeding 12 months, or revoke the 
                registration of such derivatives dealer, if it finds, 
                on the record after notice and opportunity for hearing, 
                that such censure, placing of limitations, suspension, 
                or revocation is in the public interest and that such 
                derivatives dealer, or any person associated with such 
                derivatives dealer (whether prior or subsequent to 
                becoming so associated), has committed or omitted any 
                act or omission enumerated in subparagraph (A), (D), 
                (E), or (G) of paragraph (4) of section 15(b) of this 
                title, has been convicted of any offense specified in 
                subparagraph (B) of such paragraph (4) within 10 years 
                of the commencement of the proceedings under this 
                paragraph, or is enjoined from any action, conduct, or 
                practice specified in subparagraph (C) of such 
                paragraph (4).
                    ``(B) Suspension or withdrawal pending final 
                determination.--Pending final determination whether 
                registration of any derivatives dealer shall be 
                revoked, the Commission, by order, may suspend such 
                registration, if such suspension appears to the 
                Commission, after notice and opportunity for hearing, 
                to be necessary or appropriate in the public interest 
                or for the protection of investors. Any registered 
                derivatives dealer may, upon such terms and conditions 
                as the Commission may deem necessary in the public 
                interest or for the protection of investors, withdraw 
                from registration by filing a written notice of 
                withdrawal with the Commission. If the Commission finds 
                that any registered derivatives dealer is no longer in 
                existence or has ceased to do business as a derivatives 
                dealer, the Commission, by order, shall cancel the 
                registration of such derivatives dealer.
                    ``(C) Associated persons.--The Commission, by 
                order, shall censure or place limitations on the 
                activities or functions of any person associated, or 
                seeking to become associated, with a derivatives dealer 
                registered or required to register under subsection 
                (a)(1)(A) of this section or suspend for a period not 
                exceeding 12 months or bar any such person from being 
                associated with such a derivatives dealer, if the 
                Commission finds, on the record after notice and 
                opportunity for hearing, that such censure, placing of 
                limitations, suspension, or bar is in the public 
                interest and that such person has committed or omitted 
                any act or omission enumerated in subparagraph (A), 
                (D), (E), or (G) of paragraph (4) of section 15(b) of 
                this title, has been convicted of any offense specified 
                in subparagraph (B) of such paragraph (4) within 10 
                years of the commencement of the proceedings under this 
                paragraph, or is enjoined from any action, conduct, or 
                practice specified in subparagraph (C) of such 
                paragraph (4).
            ``(2) Persons Suspended or Barred From Association.--It 
        shall be unlawful for any person as to whom an order entered 
        pursuant to paragraph (1) of this subsection suspending or 
        barring him from being associated with a derivatives dealer is 
        in effect willfully to become, or to be, associated with a 
        derivatives dealer without the consent of the Commission, and 
        it shall be unlawful for any derivatives dealer to permit such 
        a person to become, or remain, a person associated with it 
        without the consent of the Commission, if such derivatives 
        dealer knew, or, in the exercise of reasonable care should have 
        known, of such order.
    ``(d) Examination of Records.--All records of a derivatives dealer 
registered or required to register under subsection (a)(1)(A) of this 
section, or that has filed notice or is required to file notice under 
subsection (a)(1)(B) of this section, are subject at any time, or from 
time to time, to such reasonable periodic, special, or other 
examinations by representatives of the Commission as the Commission 
deems necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
this title.
    ``(e) Securities Association Membership.--
            ``(1) Membership requirement.--It shall be unlawful for any 
        derivatives dealer registered or required to register with the 
        Commission under subsection (a)(1)(A) of this section to effect 
        any transaction in, or induce or attempt to induce the purchase 
        or sale of, any derivative, unless such derivatives dealer is a 
        member of a securities association registered under section 15A 
        of this title.
            ``(2) Exemption.--The Commission, by rule or order, as it 
        deems consistent with the public interest and the protection of 
        investors, may conditionally or unconditionally exempt from 
        paragraph (1) of this subsection any derivatives dealer or 
        class of derivatives dealers specified in such rule or 
        order.''.

               TITLE II--BROKER-DEALER OVERSIGHT REFORMS

SEC. 201. DERIVATIVES ON SECURITIES.

    Section 3(a)(10) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(10)) is amended by inserting ``derivative,'' after ``any put, 
call, straddle, option,'' the first place it appears.

SEC. 202. NATIONAL SECURITIES EXCHANGES.

    Section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) is 
amended by adding at the end the following new subsection:
    ``(g) A national securities exchange may adopt and implement rules 
applicable to members of such exchange, and material associated persons 
that have filed notice or are required to file notice under section 
15D(a)(1)(B) of this title and that are associated with members for 
which the exchange is the designated examining authority, who engage in 
transactions in derivatives--
            ``(1) to enforce compliance with applicable provisions of 
        this title and the rules and regulations thereunder;
            ``(2) to provide that any such person shall be 
        appropriately disciplined for violations of applicable 
        provisions of this title and the rules and regulations 
        thereunder;
            ``(3) to provide for reasonable inspection and examination 
        of the books and records of any such person;
            ``(4) to prevent fraudulent and manipulative acts and 
        practices;
            ``(5) to promote just and equitable principles of trade; 
        and
            ``(6) to require the establishment of, and adherence to, 
        appropriate internal controls structures.''.

SEC. 203. FINANCIAL RESPONSIBILITY.

    Section 15(c)(3) of the Securities Exchange Act of 1934 (15 U.S.C. 
78o(c)(3)) is amended--
            (1) by striking ``and'' at the end of clause (A); and
            (2) by inserting after ``requirements for all brokers and 
        dealers'' the following: ``, and (C) require the maintenance of 
        sufficient capital levels taking into account the financial 
        activities conducted by, the customary sources of capital and 
        funding of, and the credit risk and aggregate leverage of, any 
        derivatives dealer that is a material associated person of the 
        broker or dealer and that has filed notice or is required to 
        file notice under section 15D(a)(1)(B) of this title''.

SEC. 204. REGISTERED SECURITIES ASSOCIATION.

    Section 15A of the Securities Exchange Act of 1934 (15 U.S.C. 78o-
3) is hereby amended by adding at the end the following new subsection:
    ``(j) A registered securities association may adopt and implement 
rules applicable to members of such association, and material 
associated persons that have filed notice or are required to file 
notice under section 15D(a)(1)(B) of this title and that are associated 
with members for which the association is the designated examining 
authority, who engage in transactions in derivatives--
            ``(1) to enforce compliance with applicable provisions of 
        this title and the rules and regulations thereunder;
            ``(2) to provide that any such person shall be 
        appropriately disciplined, in accordance with subsections 
        (b)(7), (b)(8), and (h) of this section, for violations of 
        applicable provisions of this title and the rules and 
        regulations thereunder;
            ``(3) to provide for reasonable inspection and examination 
        of the books and records of any such person;
            ``(4) to prevent fraudulent and manipulative acts and 
        practices;
            ``(5) to promote just and equitable principles of trade; 
        and
            ``(6) to require the establishment of, and adherence to, 
        appropriate internal controls structures.''.

SEC. 205. RISK ASSESSMENT FOR GOVERNMENT SECURITIES BROKERS AND 
              DEALERS.

    Section 15C(b)(2) of the Securities Exchange Act of 1934 (15 U.S.C. 
78o-5(b)(2)) is amended by striking subparagraphs (A) and (B) and 
inserting the following:
            ``(A) Obligations to obtain, maintain, and report 
        information.--Every person who is registered as a government 
        securities broker or government securities dealer under this 
        section shall obtain such information and make and keep such 
        records as the Secretary by rule prescribes concerning (i) the 
        registered person's policies, procedures, or systems for 
        monitoring and controlling financial and operational risks to 
        it resulting from the activities of any of its associated 
        persons, other than a natural person, and (ii) with respect to 
        any of its material associated persons, such material 
        associated person's financial activities, including trading 
        activity in any financial, securities, or derivatives market. 
        Such records shall be in such form as the Secretary shall 
        prescribe and shall include such information as may be 
        necessary to evaluate any effect that such material associated 
        person's activities may have on any financial, securities, or 
        derivatives market, or any participant in such market. The 
        Secretary, by rule or order, may require reports of such 
        information to be filed with the registered person's 
        appropriate regulatory agency at such intervals as the 
        Secretary prescribes as necessary or appropriate in the public 
        interest, for the protection of investors, or otherwise in 
        furtherance of the purposes of this title.
            ``(B) Authority to require additional information.--If the 
        appropriate regulatory agency concludes that it has concerns 
        regarding the financial or operational condition of any 
        government securities broker or government securities dealer 
        registered under this section or concerns regarding activities 
        affecting the stability or integrity of the securities or 
        derivatives markets, such agency may require the registered 
        person to make reports concerning the financial, securities, 
        and derivatives activities of any of such person's material 
        associated persons. The appropriate regulatory agency, in 
        requiring reports pursuant to this subparagraph, shall specify 
        the information required, the period for which it is required, 
        the time and date on which the information must be furnished, 
        and whether the information is to be furnished directly to the 
        appropriate regulatory agency or to the designated examining 
        authority for such person.''.

SEC. 206. RISK ASSESSMENT FOR BROKERS AND DEALERS.

    Section 17(h) of the Securities Exchange Act of 1934 (15 U.S.C. 
78q(h)) is amended by striking paragraphs (1) and (2) and inserting the 
following:
            ``(1) Obligation to obtain, maintain, and report 
        information.--Every person who is (A) a registered broker or 
        dealer, or (B) a registered municipal securities dealer for 
        which the Commission is the appropriate regulatory agency, 
        shall obtain such information and make and keep such records as 
        the Commission by rule prescribes concerning (i) the registered 
        person's policies, procedures, or systems for monitoring and 
        controlling financial and operational risks to it resulting 
        from the activities of any of its associated persons, other 
        than a natural person, and (ii) with respect to any of its 
        material associated persons, such material associated person's 
        financial activities, including trading activity in any 
        financial, securities, or derivatives market. Such records 
        shall be in such form as the Commission shall prescribe and 
        shall include such information as may be necessary to evaluate 
        any effect that such material associated person's activities 
        may have on any financial, securities, or derivatives market, 
        or any participant in such market. The Commission, by rule or 
        order, may require reports of such information to be filed with 
        the Commission at such intervals as the Commission prescribes 
        as necessary or appropriate in the public interest, for the 
        protection of investors, or otherwise in furtherance of the 
        purposes of this title.
            ``(2) Authority to require additional information.--If the 
        Commission concludes that it has concerns regarding the 
        financial or operational condition of (A) any registered broker 
        or dealer, or (B) any registered municipal securities dealer, 
        government securities broker, or government securities dealer 
        for which the Commission is the appropriate regulatory agency, 
        or concerns regarding activities affecting the stability or 
        integrity of the securities or derivatives markets, the 
        Commission may require the registered person to make reports 
        concerning the financial, securities, and derivatives 
        activities of any of such person's material associated persons. 
        The Commission, in requiring reports pursuant to this 
        paragraph, shall specify the information required, the period 
        for which it is required, the time and date on which the 
        information must be furnished, and whether the information is 
        to be furnished directly to the Commission or to the designated 
        examining authority for such person.''.

SEC. 207. RULES, REGULATIONS, AND ORDERS; ANNUAL REPORTS.

    Section 23(a)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 
78w(a)(1)) is amended by inserting ``derivatives,'' after ``and may for 
such purposes classify persons, securities,''.

SEC. 208. CONFORMING AMENDMENTS.

    Section 3(a)(48) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(48)) is amended to read as follows:
            ``(48) The term `registered broker or dealer' means a 
        broker or dealer registered or required to register pursuant to 
        section 15 or 15B of this title, except that--
                    ``(A) in paragraph (3)(A) of this subsection and in 
                section 6, the term means such a broker or dealer or a 
                government securities broker or government securities 
                dealer registered or required to register pursuant to 
                section 15C(a)(1)(A) of this title; and
                    ``(B) in paragraph (3)(B) of this subsection and in 
                section 15A, the term means such a broker or dealer, a 
                government securities broker or government securities 
                dealer registered or required to register pursuant to 
                section 15C(a)(1)(A) of this title, or a derivatives 
                dealer registered or required to register pursuant to 
                section 15D(a)(1)(A) of this title.''.
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HR 4745 IH----2