[Title 17 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2024 Edition]
[From the U.S. Government Publishing Office]
[[Page i]]
Title 17
Commodity and Securities Exchanges
________________________
Part 241 to End
Revised as of April 1, 2024
Containing a codification of documents of general
applicability and future effect
As of April 1, 2024
Published by the Office of the Federal Register
National Archives and Records Administration as a
Special Edition of the Federal Register
[[Page ii]]
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[[Page iii]]
Table of Contents
Page
Explanation................................................. v
Title 17:
Chapter II--Securities and Exchange Commission
(Continued) 3
Chapter IV--Department of the Treasury 643
Finding Aids:
Table of CFR Titles and Chapters........................ 721
Alphabetical List of Agencies Appearing in the CFR...... 741
Table of OMB Control Numbers............................ 751
List of CFR Sections Affected........................... 757
[[Page iv]]
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Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 17 CFR 242.100
refers to title 17, part
242, section 100.
----------------------------
[[Page v]]
EXPLANATION
The Code of Federal Regulations is a codification of the general and
permanent rules published in the Federal Register by the Executive
departments and agencies of the Federal Government. The Code is divided
into 50 titles which represent broad areas subject to Federal
regulation. Each title is divided into chapters which usually bear the
name of the issuing agency. Each chapter is further subdivided into
parts covering specific regulatory areas.
Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
The appropriate revision date is printed on the cover of each
volume.
LEGAL STATUS
The contents of the Federal Register are required to be judicially
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HOW TO USE THE CODE OF FEDERAL REGULATIONS
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To determine whether a Code volume has been amended since its
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EFFECTIVE AND EXPIRATION DATES
Each volume of the Code contains amendments published in the Federal
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OMB CONTROL NUMBERS
The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires
Federal agencies to display an OMB control number with their information
collection request.
[[Page vi]]
Many agencies have begun publishing numerous OMB control numbers as
amendments to existing regulations in the CFR. These OMB numbers are
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PAST PROVISIONS OF THE CODE
Provisions of the Code that are no longer in force and effect as of
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for 1949-1963, 1964-1972, 1973-1985, and 1986-2000.
``[RESERVED]'' TERMINOLOGY
The term ``[Reserved]'' is used as a place holder within the Code of
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not accidentally dropped due to a printing or computer error.
INCORPORATION BY REFERENCE
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This material, like any other properly issued regulation, has the force
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What is a proper incorporation by reference? The Director of the
Federal Register will approve an incorporation by reference only when
the requirements of 1 CFR part 51 are met. Some of the elements on which
approval is based are:
(a) The incorporation will substantially reduce the volume of
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(b) The matter incorporated is in fact available to the extent
necessary to afford fairness and uniformity in the administrative
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(c) The incorporating document is drafted and submitted for
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this volume.
[[Page vii]]
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Oliver A. Potts,
Director,
Office of the Federal Register
April 1, 2024.
[[Page ix]]
THIS TITLE
Title 17--Commodity and Securities Exchanges is composed of five
volumes. The first two volumes, containing parts 1-40 and 41-199,
comprise Chapter I--Commodity Futures Trading Commission. The third
volume contains Chapter II--Securities and Exchange Commission, parts
200-239. The fourth volume, comprising part 240, contains additional
regulations of the Securities and Exchange Commission. The fifth volume,
comprising part 241 to end, contains the remaining regulations of the
Securities and Exchange Commission and Chapter IV--Department of the
Treasury. The contents of these volumes represent all current
regulations codified under this title by the Commodity Futures Trading
Commission, the Securities and Exchange Commission, and the Department
of the Treasury as of April 1, 2024.
The OMB control numbers for the Securities and Exchange Commission
appear in Sec. 200.800 of chapter II. For the convenience of the user,
Sec. 200.800 is reprinted in the Finding Aids sections of volume 4,
containing part 240, and volume 5, containing part 241 to end.
For this volume, Robert J. Sheehan, III was Chief Editor. The Code
of Federal Regulations publication program is under the direction of
John Hyrum Martinez, assisted by Stephen J. Frattini.
[[Page 1]]
TITLE 17--COMMODITY AND SECURITIES EXCHANGES
(This book contains part 241 to end)
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Part
chapter ii--Securities and Exchange Commission (Continued).. 241
chapter iv--Department of the Treasury...................... 400
[[Page 3]]
CHAPTER II--SECURITIES AND EXCHANGE COMMISSION (CONTINUED)
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Part Page
241 Interpretative releases relating to the
Securities Exchange Act of 1934 and
general rules and regulations thereunder 5
242 Regulations M, SHO, ATS, AC, NMS, SE, and
SBSR, and customer margin requirements
for security futures.................... 11
243 Regulation FD............................... 160
244 Regulation G................................ 162
245 Regulation blackout trading restriction..... 164
246 Credit risk retention....................... 170
247 Regulation R--Exemptions and definitions
related to the exceptions for banks from
the definition of broker................ 212
248 Regulations S-P, S-AM, and S-ID............. 226
249 Forms, Securities Exchange Act of 1934...... 277
249a
Forms, Securities Investor Protection Act of 1970 [Reserved]
249b Further forms, Securities Exchange Act of
1934.................................... 299
250 Cross-border antifraud law-enforcement
authority............................... 301
251-254
[Reserved]
255 Proprietary trading and certain interests in
and relationships with covered funds.... 301
256-259
[Reserved]
260 General rules and regulations, Trust
Indenture Act of 1939................... 348
261 Interpretative releases relating to the
Trust Indenture Act of 1939 and general
rules and regulations thereunder........ 366
269 Forms prescribed under the Trust Indenture
Act of 1939............................. 366
270 Rules and regulations, Investment Company
Act of 1940............................. 369
271 Interpretative releases relating to the
Investment Company Act of 1940 and
general rules and regulations thereunder 546
[[Page 4]]
274 Forms prescribed under the Investment
Company Act of 1940..................... 549
275 Rules and regulations, Investment Advisers
Act of 1940............................. 557
276 Interpretative releases relating to the
Investment Advisers Act of 1940 and
general rules and regulations thereunder 613
279 Forms prescribed under the Investment
Advisers Act of 1940.................... 614
281 Interpretative releases relating to
corporate reorganizations under Chapter
X of the Bankruptcy Act................. 615
285 Rules and regulations pursuant to section
15(a) of the Bretton Woods Agreements
Act..................................... 615
286 General rules and regulations pursuant to
section 11(a) of the Inter-American
Development Bank Act.................... 617
287 General rules and regulations pursuant to
section 11(a) of the Asian Development
Bank Act................................ 619
288 General rules and regulations pursuant to
section 9(a) of the African Development
Bank Act................................ 621
289 General rules and regulations pursuant to
section 13(a) of the International
Finance Corporation Act................. 623
290 General rules and regulations pursuant to
section 9(a) of the European Bank for
Reconstruction and Development Act...... 625
300 Rules of the Securities Investor Protection
Corporation............................. 627
301 Forms, Securities Investor Protection
Corporation............................. 634
302 Orderly liquidation of covered brokers or
dealers................................. 635
303-399
[Reserved]
[[Page 5]]
PART 241_INTERPRETATIVE RELEASES RELATING TO THE SECURITIES
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER-
-Table of Contents
Authority: 15 U.S.C. 78a et seq.
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Release
Subject No. Date Fed. Reg. Vol. and Page
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Excerpt from letter relating to section 16(a)...... 21 Oct. 1, 1934 11 FR 10968.
Statement by Commission to correct the erroneous 68 July 22, 1934 Do.
impression created by certain commercial
institutions with respect to the necessity for
filing reports with the Commission.
Letter of General Counsel relating to section 16(a) 116 Mar. 9, 1935 Do.
Opinion of General Counsel relating to section 175 Apr. 16, 1935 Do.
16(a).
Excerpt from a general letter relating to section 227 May 14, 1935 Do.
16(a).
Opinion of the Director of the Division of Forms 1131 Apr. 7, 1937 Do.
and Regulations discussing the definition of
``parent'' as used in various forms under the
Securities Act of 1933 and the Securities Exchange
Act of 1934.
Statement by Commission with respect to the purpose 1350 Aug. 13, 1937 11 FR 10969.
of the disclosure requirements of section 14 and
the rules adopted thereunder.
Opinion of Director of the Trading and Exchange 1411 Oct. 7, 1937 Do.
Division relating to Rules X-15C1-6 (17 CFR
240.15c1-6) and X-10B-2 (17 CFR 240.10b-2).
Opinion of Director of the Trading and Exchange 1462 Nov. 15, 1937 Do.
Division relating to Rule X-15C1-1(a) (17 CFR,
240.15c1-1a).
Partial text of letter of February 2, 1938, from 1571 Feb. 5, 1938 Do.
the Secretary of the New York Stock Exchange to
its members, relating to Rules X-3B-3 (17 CFR
240.3b-3), X-10A-1 (17 CFR 240.10a-1), and X-10A-2
(17 CFR 240.10a-2), together with a letter from
Director of Trading and Exchange Division,
concurring in the opinions expressed by the
Exchange.
Opinion of General Counsel relating to section 1965 Dec. 21, 1938 11 FR 10970.
16(a).
Letter of General Counsel concerning the services 2066 May 5, 1939 11 FR 10971.
of former employees of the Commission in
connection with matters with which such employees
become familiar during their course of employment
with the Commission.
Statement of Commission and separate statement by 2446 Mar. 18, 1940 Do.
Commissioner Healy on the problem of regulating
the ``pegging, fixing and stabilizing'' of
security prices under sections 9(a)(2), 9(a)(6)
and 15(c)(1) of the Securities Exchange Act.
Statement of Commission respecting distinctions 2687 Nov. 16, 1940 11 FR 10981.
between the reporting requirements of section
16(a) of the Securities Exchange Act of 1934 and
section 30(f) of the Investment Company Act of
1940.
Statement of Commission issued in connection with 2690 Nov. 15, 1940 11 FR 10982.
the adoption of Rules X-8C-1 (17 CFR, 240.8c-1)
and X-15-C2-1 (17 CFR, 240.15c 2-1) under the
Securities Exchange Act of 1934 relating to the
hypothecation of customers' securities by members
of national securities exchanges and other brokers
and dealers.
Opinion of General Counsel relating to paragraph 2822 Mar. 17, 1941 11 FR 10983.
(b)(2)(ii) of Rules X-8C-1 (17 CFR, 240.8c-1) and
X-15C2-1 (17 CFR, 240.15C 2-1) under the
Securities Exchange Act.
Partial text of letter sent by Director of the 3040 Oct. 13, 1941 11 FR 10984.
Trading and Exchange Division to certain
securities dealers who had failed to keep records
of the times of their securities transactions, as
required by Rules X-17A-3 (17 CFR, 240.17a-3) and
X-17A-4 (17 CFR, 240.17a-4) under the Securities
Exchange Act.
Opinion of General Counsel relating to the anti- 3056 Oct. 27, 1941 Do.
manipulation provisions of sections 9(a)(2), 10(b)
and 15(c)(1) of the Securities Exchange Act of
1934, as well as section 17(a) of the Securities
Act of 1933.
Opinion of Chief Counsel to the Corporation Finance 3069 Jan. 4, 1945 11 FR 10985.
Division relating to when-issued trading of
securities the issuance of which has already been
approved by a Federal district court under Chapter
X of the Bankruptcy Act.
Statement of Commission policy with respect to the 3085 Dec. 6, 1941 Do.
acceleration of the effective date of a
registration statement.
Letter of Director of the Corporation Finance 3380 Feb. 2, 1943 Do.
Division relating to sections 14 and 18.
Excerpts from letters of Director of the 3385 Feb. 17, 1943 Do.
Corporation Finance Division relating to section
14 and Schedule 14A under Regulation X-14 (17 CFR,
240.14a-9).
Opinion of Director of the Trading and Exchange 3505 Nov. 16, 1943 11 FR 10986.
Division relating to the anti-manipulation
provisions of sections 9(a)(2), 10(b), and
15(c)(1) of the Securities Exchange Act of 1934,
and 17(a) of the Securities Act of 1933.
Opinion of Director of the Trading and Exchange 3506 Nov. 16, 1943 11 FR 10987.
Division relating to the anti-manipulation
provisions of sections 9(a)(2), 10(b), and
15(c)(1) of the Securities Exchange Act of 1934,
and 17(a) of the Securities Act of 1933.
[[Page 6]]
Statement of the Commission relating to the anti- 3572 June 1, 1944 Do.
fraud provisions of section 17(a) of the
Securities Act of 1933, and sections 10(b) and
15(c)(1) of the Securities Exchange Act of 1934.
Letter of Director of the Corporation Finance 3638 Jan. 3, 1945 11 FR 10988.
Division relating to section 20 and to Rule X-14A-
7 (17 CFR, 240.14a-7) under the Securities
Exchange Act of 1934.
Statement by Commission relating to section 3(a)(1) 3639 Jan. 4, 1945 Do.
Statement of the Commission in connection with the 3674 Apr. 9, 1945 Do.
adoption of certain amendments to Form 3-M, one of
the forms for registration of over-the-counter
brokers or dealers under section 15(b) of the
Securities Exchange Act of 1934, and to Rule X-15B-
2 (17 CFR, 240.15b-2), the rule governing the
filing of supplemental statements to such
applications.
Statement by Commission relating to the adoption of 3803 Mar. 28, 1946 Do.
Rule X-13A-6B (17 CFR, 240.13a-6b).
Statement of the Commission in connection with 4163 Sept. 16, 1948 13 FR 4163.
notice of opportunity to submit proposals for
regulations or legislation regarding the
stabilization of market prices by persons offering
securities to the public.
Statement of the Commission accompanying November 4185 Nov. 5, 1948 13 FR 6680.
5, 1948, revision of Sec. 240.14 of this chapter
(Regulation X-14).
Opinion of the General Counsel, relating to the use 4593 Apr. 18, 1951 16 FR 3387.
of ``hedge clauses'' by brokers, dealers,
investment advisers, and others.
Statement of the Commission regarding public 5633 Jan. 31, 1958 23 FR 841.
offerings of investment contracts providing for
the acquisition, sale or servicing of mortgages or
deeds of trust.
Statement of the Commission as to the applicability 6419 Nov. 18, 1960 25 FR 12178.
of the Federal securities laws to real estate
investment trusts.
Statement of the Commission concerning standards of 6721 Feb. 2, 1962 27 FR 1251.
conduct for registered broker-dealers in the
distribution of unregistered securities.
Opinion of Philip A. Loomis, Jr., Director of 6726 Feb. 8, 1962 27 FR 1415.
Division of Trading and Exchanges of the
Commission, on the application of section
11(d)(1), Securities Exchange Act of 1934, to
broker-dealers engaged in ``equity funding'',
``secured funding'', and ``life funding''.
Statement of the Commission cautioning broker- 6778 Apr. 16, 1962 27 FR 3991.
dealers about violating the anti-fraud provisions
of the Federal securities laws when making short
sales in which they delay effecting the covering
transaction to acquire the security.
Statement of Commission showing circumstances in 7 6982 Dec. 28, 1962 28 FR 276.
cases where profits in real estate transactions
were not earned at time transactions were recorded
but that the sales were designed to create the
illusion of profits or value as a basis for the
sale of securities.
Answer of the Commission to four questions relating 7078 May 15, 1963 28 FR 5133.
to the solicitation of proxies.
Statement by the Commission on the maintenance of 7169 Nov. 13, 1963 28 FR 12617.
rec-ords of transactions by brokers-dealers as
underwriters of investment company shares
according to Rule 17a-3 under section 17(a) of the
Securities Exchange Act of 1934 (17 CFR 240.17a-3).
Opinion of the General Counsel relating to 7208 Jan. 7, 1964 29 FR 341.
participation by broker-dealer firms in proxy
solicitations.
Statement of the Commission re applicability of 7366 July 9, 1964 29 FR 9828.
Securities Act of 1933 to offerings of securities
outside the U.S. and re applicability of section
15(a) of the Securities Exchange Act of 1934 to
foreign underwriters as part of program of
Presidential Task Force to reduce U.S. balance of
payments deficit and protect U.S. gold reserves.
Summary and interpretation by the Commission of 7425 Sept. 14, 1964 29 FR 13455.
amendments to the Securities Act of 1933 and
Securities Exchange Act of 1934 as contained in
the Securities Acts Amendments of 1964.
Opinion and statement of the Commission in regard 7763 Dec. 7, 1965 30 FR 15420.
to proper reporting of deferred income taxes
arising from installment sales.
Statement of the Commission to clarify the meaning 7793 Jan. 19, 1966 31 FR 1005.
of ``beneficial ownership of securities'' as
relates to beneficial ownership of securities held
by family members.
Program by the Commission which it requests that 7805 Jan. 26, 1966 31 FR 2475.
issuing companies follow in order to expedite the
processing of proxy material.
Statement of the Commission setting the date of May 7824 Feb. 14, 1966 31 FR 3175.
1, 1966 after which filings must reflect
beneficial ownership of securities held by family
members.
Policy statement by the Director of the Division of 7920 July 19, 1966 31 FR 10076.
Trading and Markets re consummation of securities
transactions by brokers-dealers when trading is
suspended.
Opinions of the Commission on the acceleration of 8336 June 18, 1968 33 FR 10086.
the effective date of a registration statement
under the Securities Act of 1933 and on the
clearance of proxy material such as convertible
preferred shares considered residual securities in
determining earnings per share applicable to
common stock.
[[Page 7]]
Statement of the Commission to alert prospective 8351 July 5, 1968 33 FR 10134.
borrowers obtaining loans for real estate
development about recent fraudulent schemes.
Statement of the Commission warning broker-dealers 8363 July 29, 1968 33 FR 11150.
to be prompt in the consummation of securities
transactions and about the penalty for not so
doing.
Statement of the Commission re broker-dealer 8389 Aug. 29, 1968 33 FR 13005.
registration of insurance companies acting as
agents for distribution of ``variable annuities''
and application of regulations for such under the
Securities Exchange Act of 1934.
Statement of the Commission reminding broker-dealer 8404 Sept. 11, 1968 33 FR 14286.
managements to establish and maintain an effective
supervisory system and failure to do so will
result in disciplinary action against the firm and
responsible individuals.
Statement of the Commission clarifying that 8409 Sept. 16, 1968 33 FR 14545.
industrial revenue bonds sold according to Rule
131 (17 CFR 230.131) and Rule 3b-5 (17 CFR 240.3b-
5) are not affected if acquired and paid for by
the underwriters on or before December 31, 1968.
Statement of the Commission cautioning brokers and 8638 July 2, 1969 34 FR 11581.
dealers with respect to effecting transactions of
``spin offs'' and ``shell corporations''.
Commission's statement about publicity concerning 8728 Oct. 20, 1969 34 FR 17433.
the petroleum discoveries on the North Slope of
Alaska.
Commission's warning statement re sale and 8733 Nov. 4, 1969 34 FR 18160.
distribution of whisky warehouse receipts.
Letter by Philip A. Loomis, Jr., General Counsel 8746 Nov. 10, 1969 34 FR 18543.
for the Commission, explaining obligations of
mutual fund managements and brokers with respect
to commissions on portfolio brokerage of mutual
funds.
Publication of the Commission's guidelines re 8907 June 23, 1970 35 FR 12103.
applicability of Federal securities laws to offer
and sale outside the U.S. of shares of registered
open-end investment companies.
Statement of the Commission reminding reporting 8995 Oct. 15, 1970 35 FR 16733.
companies of obligation re Commission's rules to
file reports on a timely basis.
Commission's statement re exemption of certain 9016 Nov. 6, 1970 35 FR 17990.
industrial revenue bonds from registration, etc.
requirements in view of amendment of Securities
Act of 1933 and of Securities Exchange Act of 1934
by ``section 401'' (Pub. L. 91-1037).
Commission's views relating to important questions 9049 Dec. 23, 1970 35 FR 19986.
re the accounting by registered investment
companies for investment securities in their
financial statements and in the periodic
computations of net asset value for the purpose of
pricing their shares.
Publication of the Commission's procedure to be 9065 Jan. 25, 1971 36 FR 2600.
followed if requests are to be met for no action
or interpretative letters and responses thereto to
be made available for public use.
Interpretations of the Commission in regard to 9083 Feb. 18, 1971 36 FR 4483.
requirements for registration statements and
reports concerning information requested re
description of business, summary of operations,
and financial statements.
Statement of the Commission warning the public 9148 Apr. 12, 1971 36 FR 8239.
about novel unsecured debt securities which appear
to invite unwarranted comparisons with bank
savings accounts, savings and loan association
accounts, and bank time deposit certificates.
Statement of the Commission prohibiting the 9210 June 16, 1971 36 FR 11918.
reduction of fixed charges by amounts representing
interest or investment income or gains on
retirement of debt in registration statements or
reports filed with the Commission.
Statement of the Commission calling attention to 9252 July 19, 1971 36 FR 13988.
requirements in its forms and rules under the
Securities Act of 1933 and the Securities and
Exchange Act of 1934 for disclosure of legal
proceedings and descriptions of registrant's
business as these requirements relate to material
matters involving the environment and civil rights.
Commission's policy requiring the inclusion in 9279 Aug. 10, 1971 36 FR 15527.
financial statements of the ratio of earnings to
fixed charges for the total enterprise in
equivalent prominence with the ratio for the
registrant or registrant and consolidated
subsidiaries.
Policy of Commission's Division of Corporation 9345 Sept. 27, 1971 36 FR 19362.
Finance to defer processing registration
statements and amendments filed under the
Securities Act of 1933 by issuers whose reports
are delinquent until such reports are brought up
to date.
Commission's statement concerning applicability of 9387 Nov. 30, 1971 36 FR 23289.
securities laws to multilevel distributorships and
other business opportunities offered through
pyramid sales plans.
Statement by the Commission regarding payment of 9395 Nov. 24, 1971 36 FR 23359.
solicitation fees in tender offers.
Commission's statement concerning offering and sale 9444 Jan. 14, 1972 37 FR 600.
of securities in non-public offerings and
applicability of antifraud provisions of
securities acts.
Statement of the Commission's views on the present ........ Mar. 14, 1972 37 FR 5286
status of the securities markets and the direction
in which the public interest requires that they
evolve in the future.
[[Page 8]]
Commission endorses the establishment by all 9548 Apr. 5, 1972 37 FR 6850.
publicly held companies of audit committees
composed of outside directors.
Applicability of Commission's policy statement on 9598 May 18, 1972 37 FR 9988.
the future structure of securities markets to
selection of brokers and payment of commissions by
institutional managers.
Commission's statement and policy on misleading pro 9618 June 9, 1972 37 FR 11559.
rata stock distributions to shareholders.
Commission's guidelines on independence of 9662 June 19, 1972 37 FR 14294.
certifying accountants; example cases and
Commission's conclusions.
Commission's decisions on recommendations of 9796 Mar. 1, 1973 38 FR 5457.
advisory committee regarding commencement of
enforcement proceedings and termination of staff
investigations.
Commission's interpretation of risk-sharing test in 9798 Oct. 5, 1972 37 FR 20937.
pooling-of-interest accounting.
Commission's statement that short-selling 9824 Oct. 25, 1972 37 FR 22796.
securities prior to offering date is a possible
violation of antifraud and antimanipulative laws.
Commission reaffirms proper accounting treatment to 9867 Dec. 13, 1972 37 FR 26516.
be followed by a lessee when the lessor is created
as a conduit for debt financing.
Commission's interpretations of a rule (15c3-3) 9922 Jan. 18, 1973 38 FR 1737.
dealing with customer protection by securities
brokers and dealers.
Amendment of previous interpretation (AS-130) of 9927 Jan. 18, 1973 38 FR 1734.
risk-sharing test in pooling of interest
accounting.
Commission clarifies effective dates of Rule 15c3-3 9946 Feb. 5, 1973 38 FR 3313.
Commission's designation of control locations for 9969 Feb. 5, 1973 Do.
foreign securities.
Commission's findings on disclosure of projections 9984 Mar. 19, 1973 38 FR 7220.
of future economic performance by issuers of
publicly traded securities.
Commission's views on reporting cash flow and other 10041 Apr. 11, 1973 38 FR 9158.
related data.
Commission's statement on obligations of 10181 June 1, 1973 38 FR 17201.
underwriters with respect to discretionary
accounts.
Commission's opinion on net capital treatment of 10209 June 8, 1973 38 FR 16774.
securities position, obligation and transactions
in suspended securities.
Commission expresses concern with failure of 10214 July 10, 1973 38 FR 18366.
issuers to timely and properly file periodic and
current report.
Commission's statement and policy on application of 10304 Aug. 3, 1973 38 FR 20820.
minimum net capital requirement.
Commission's conclusions as to certain problem 10363 Sept. 10, 1973 38 FR 24635.
relating to the effect of treasury stock
transactions on accounting for business
combinations.
Commission's interpretation of market 10388 Sept. 20, 1973 38 FR 26358.
identification requirement of rule for reporting
of market information on transactions in listed
securities.
Commission's response to the New York Stock 10391 Sept. 25, 1973 38 FR 26716.
Exchange's proposed interpretation of ``affiliated
person''.
Commission request for comments on Accounting 10422 Oct. 17, 1973 38 FR 28819.
Series Release No. 46.
Commission's guidelines for control locations for 10429 Oct. 23, 1973 38 FR 29217.
foreign securities.
Commission's views and comments relating to 10547 Jan. 7, 1974 39 FR 1261.
quarterly reporting on Form 10-Q and Form 10-QSB.
Statement by the Commission on disclosure of the 10569 Jan. 10, 1974 39 FR 1511.
impact of possible fuel shortages on the
operations of issuers.
Commission's statement on disclosure of inventory 10580 Jan. 17, 1974 39 FR 2085.
profits reflected in income in periods of rising
prices.
Commission decision on trading in securities issued 10610 Jan. 31, 1974 39 FR 3932.
or guaranteed by the governments of Bulgaria,
Hungary, and Romania.
Commission views on disclosure of illegal campaign 10673 Mar. 11, 1974 39 FR 10237.
contributions.
Commission's statement of policy and 10363A Apr. 12, 1974 39 FR 14588.
interpretations.
Commission's statement regarding maintenance of 10756 May 9, 1974 39 FR 16440.
current books and records by brokers and dealers.
Commission's practices on reporting of natural gas 10857 June 14, 1974 39 FR 27556.
reserve estimates.
Commission's views on business combinations 10898 July 3, 1974 39 FR 26719.
involving open-end investment companies.
Commission's guidelines for filings related to 10899 July 3, 1974 39 FR 26720.
extractive reserves and natural gas supplies.
Commission's guidelines for registration and 10961 Aug. 14, 1974 39 FR 31894.
reporting.
Commission's requirements for financial statements; 11029 Sept. 27, 1974 39 FR 36578.
limited partnerships in annual reports.
Commission's examples of unusual risks and 11150 Dec. 23, 1994 40 FR 2678.
uncertainties.
Letters of the Division of Corporation Finance with 11156 Dec. 26, 1994 40 FR 1695.
respect to certain proposed arrangements for the
sale of gold bullion.
Commission's statement on disclosure problems 11198 Jan. 23, 1975 40 FR 6483.
relating to LIFO accounting.
Commission's guidelines on Accounting Series 11470 June 13, 1975 40 FR 27441.
Release No. 148.
Brokers and dealers effecting transactions in 11854 Nov. 20, 1975 40 FR 57786.
municipal securities.
Financial responsibility requirements of brokers 11969 Jan 2, 1976 41 FR 5277.
and dealers.
Brokers and dealers effecting transactions in 12021 .............. 41 FR 3469.
municipal securities.
Interpretation of certain terms in item 10 of Form 12078 Feb. 17, 1976 41 FR 7089.
BD.
Brokers and dealers effecting transactions in 12288 Apr. 15, 1976 41 FR 15842.
municipal securities.
[[Page 9]]
Standards for disclosure; oil and gas reserve...... 12435 May 12, 1976 41 FR 21764.
Brokers and dealers effecting transactions in 12496 June 11, 1976 41 FR 23668.
municipal securities.
Statement of informal proposals for the rendering 12599 July 20, 1976 41 FR 29989.
of staff advice with respect to shareholder
proposals.
Guides for statistical disclosure by bank holding 12748 Aug. 31, 1976 41 FR 39007.
companies.
Uniform net capital rule........................... 12766 Sept. 14, 1976 41 FR 39014.
Uniform net capital rule........................... 12927 Oct. 27, 1976 41 FR 48335.
Brokers and dealers effecting transactions in 12932 Oct. 27, 1976 41 FR 48336.
municipal securities.
Brokers and dealers effecting transactions in 13108 Jan. 4, 1977 42 FR 759.
municipal securities.
Brokers and dealers effecting transactions in 13362 Mar. 21, 1977 42 FR 15310.
municipal securities.
Rescission of certain accounting series releases... 13630 June 15, 1977 42 FR 33282.
Guideline regarding the preparation of integrated 13639 June 17, 1977 42 FR 31780.
reports to shareholders.
Industry segment determination..................... 14523 Mar. 3, 1978 43 FR 9599.
Securities transactions by members of national 14563 Mar. 14, 1978 43 FR 11542.
securities exchanges.
Application of registration requirements to certain 14699 Apr. 24, 1978 43 FR 18163.
tender offers and the application of tender offer
provisions to certain cash-option mergers.
Reporting by certain institutional investors of 14830 June 13, 1978 43 FR 25420.
beneficial ownership of certain equity securities
which as of the end of any month exceeds ten
percent of the class.
Division of investment management's interpretative 15292 Nov. 2, 1978 43 FR 52697.
positions relating to Rule 13f-1 and related Form
13F.
Guides for disclosure of projections of future 15305 Nov. 7, 1978 43 FR 53246.
economic performance.
Commission's statement regarding disclosure of 15371 Nov. 29, 1978 43 FR 57596.
impact of Wage and Price Standards for 1979 on the
operations of issuers.
Statement of the views of the Commission's Division 15572 Feb. 15, 1979 44 FR 11541.
of Corporation Finance with respect to disclosure
in proxy statements containing certain sale of
assets transactions.
Short sales; interpretation of rule................ 16150 Aug. 30, 1979 44 FR 53159.
Shareholder communications, shareholder 16163 Sept. 6, 1979 44 FR 53426.
participation in the corporate electoral process
and corporate governance generally.
Environmental disclosure requirements.............. 16224 Sept. 27, 1979 44 FR 56924.
Pooled income funds................................ 16478 Jan. 10, 1980 45 FR 3258.
Tender offer rules................................. 16623 Mar. 5, 1980 45 FR 15521.
Proxy rules........................................ 16833 May 23, 1980 45 FR 36374.
Clearing agencies.................................. 16900 June 17, 1980 45 FR 41920.
Guides for statistical disclosure by bank holding 16961 July 8, 1980 45 FR 47142.
companies.
Transfer agents.................................... 17111 Sept. 2, 1980 45 FR 59840.
Amendments to guides............................... 17114 Sept. 2, 1980 45 FR 63647.
Extension date of clearing agencies for form filing 17231 Oct. 20, 1980 45 FR 70857.
Beneficial ownership rules......................... 17354 Dec. 4, 1980 45 FR 81559.
Distribution of proxy materials to beneficial 17424 Jan. 7, 1981 46 FR 3204.
shareowners.
Foreign Corrupt Practices Act of 1977.............. 17500 Jan. 29, 1981 46 FR 11544.
Analysis of results of 1980 proxy statement 17518 Feb. 5, 1981 46 FR 11954.
disclosure monitoring program.
Option and option-related transactions during 17609 Mar. 6, 1981 46 FR 16670.
underwritten offerings.
Going private transactions under rule 13e-3........ 17719 Apr. 13, 1981 46 FR 22571.
Insider reporting and trading...................... 18114 Sept. 23, 1981 46 FR 48147.
Retail repurchase agreements by banks and savings 18122 Sept. 25, 1981 46 FR 48637.
and loan associations.
Analysis of results of 1981 proxy statement 18532 Mar. 3, 1982 47 FR 10794.
disclosure monitoring program.
Rescission of guides and redesignation of industry 18525 Mar. 3, 1982 47 FR 11481.
guides (effective May 24, 1982).
Amendments to guides............................... 19337 Dec. 15, 1982 47 FR 57911.
Revision of financial statement requirements and 19570 Mar. 7, 1983 48 FR 11104.
industry guide disclosure for bank holding
companies..
Commission's views on Colema Realty Corp. v. R. D. 19756 May 11, 1983 48 FR 23173.
Bibow, et al.
Revision of industry guide disclosures for bank 20068 Aug. 11, 1983 48 FR 37609.
holding companies.
Public statements by corporate representatives..... 20560 Jan. 13, 1984 49 FR 2468.
Research reports................................... 21332 Sept. 19, 1984 49 FR 37574.
Commission views on computer brokerage systems..... 21383 Oct. 9, 1984 49 FR 40159.
Guide for disclosures concerning reserves for 21521 Nov. 27, 1984 49 FR 47601.
unpaid claims and claim adjustment expenses of
property-casualty underwriters.
Brokerage and research services concerning scope of 23170 Apr. 23, 1986 51 FR 16012.
section 28(e) of Securities Exchange Act of 1934.
Application of Rule 10b--6 under the Securities 23611 Sept. 11, 1986 51 FR 33248.
Exchange Act of 1934 to persons participating in
shelf distributions.
Industry guides for statistical disclosure by bank 23846 Nov. 25, 1986 51 FR 43599.
holding companies.
Tender offers rules................................ 24296 Apr. 3, 1987 52 FR 11458.
Statement of the Commission Regarding Disclosure 25951 Aug. 1, 1988 53 FR 29228.
Obligations of Companies Affected by the
Government's Defense Contract Procurement Inquiry
and Related Issues.
Statement of the Commission Regarding Disclosure by 26508 Feb. 1, 1989 54 FR 5603.
Issuers of interests in Publicly Offered Commodity
Pools.
Management's discussion and analysis of financial 26831 May 18, 1989 54 FR 22427.
condition and results of operations; certain
investment company disclosures.
[[Page 10]]
Modifying and confirming the interpretation of 26985 June 28, 1989 54 FR 28814.
municipal underwriter securities responsibilities.
Liquidation of Index Arbitrage Positions........... 27938 Apr. 30, 1990 55 FR 17949.
Ownership reports on trading by officers, directors 29131 Apr. 26, 1991 56 FR 19928.
and principal security holders.
Limited partnership reorganizations and public 29314 June 17, 1991 56 FR 28986.
offerings of limited partnership interests.
Registration of Successors to Broker-Dealers and 31661 Jan. 4, 1993 58 FR 11.
Investment Advisors.
Statement of the Commission regarding disclosure 33741 Mar. 9, 1994 59 FR 12758.
obligations of municipal securities issuers and
others.
Amendment of interpretation regarding substantive 34061 May 12, 1994 59 FR 26109.
repossession of collateral.
Use of electronic media for delivery purposes...... 36345 Oct. 6, 1995 60 FR 53467.
Use of electronic media for delivery purposes...... 37182 May 9, 1996 61 FR 24651.
Statement of the Commission Regarding Use of 39779 Mar. 23, 1998 63 FR 14813
Internet Web Sites to Offer Securities, Solicit
Securities Transactions or Advertise Investment
Services Offshore.
Confirmation and Affirmation of Securities Trades; 39829 Apr. 6, 1998 63 FR 17947
Matching.
Statement of the Commission Regarding Disclosure of 40277 July 29, 1998 63 FR 41404.
Year 2000 Issues and Consequences by Public
Companies, Investment Advisers, Investment
Companies, and Municipal Securities Issuers.
Use of electronic media............................ 42728 Apr. 28, 2000 65 FR 25856.
Commission Guidance on Mini-Tender Offers and 43069 July 24, 2000 65 FR 46588.
Limited Partnership Tender Offers.
Commission Guidance to Broker-Dealers on the Use of 44238 May 7, 2001 66 FR 22921.
Electronic Storage Media Under the Electronic
Signatures in Global and National Commerce Act of
2000 With Respect to Rule 17a-4(f).
Application of the Electronic Signatures in Global 44424 June 21, 2001 66 FR 33176.
and National Commerce Act to Record Retention
Requirements Pertaining to Issuers.
Calculation of Average Weekly Trading Volume....... 44820A Sept. 27, 2001 66 FR 49274
Commission Guidance on the Scope of Section 28(e) 45194 Dec. 27, 2001 67 FR 8
of the Exchange Act.
Commission Guidance on Trading in Security Futures 46101 June 21, 2002 67 FR 43246
Products.
Electronic Storage of Broker-Dealer Records........ 47806 May 7, 2003 68 FR 25283
Books and Records Requirements for Brokers and 47910 May 22, 2003 68 FR 32311
Dealers Under the Securities Exchange Act of 1934.
Commission Guidance on Rule 3b-3 and Married Put 48795 November 17, 68 FR 65822
Transactions. 2003
Commission Guidance Regarding Management's 48960 December 19, 68 FR 75065
Discussion and Analysis of Financial Condition and 2003
Results of Operations.
Commission Guidance Regarding the Public Company 49708 May 14, 2004 69 FR 29066
Accounting Oversight Board's Auditing and Related
Profesional Practice Standard No. 1.
Short Sales........................................ 50103 July 28, 2004 69 FR 48029
Prohibited Conduct in Connection with IPO 51500 April 7, 2005 70 FR 19677
Allocations.
Commission Guidance Regarding Accounting for Sales 52885 December 5, 70 FR 73345
of Vaccines and Bioterror Countermeasures to the 2005
Federal Government for Placement Into the
Pediatric Vaccine Stockpile or the Strategic
National Stockpile.
Commission Guidance Regarding Client Commission 54165 July 18, 2006 71 FR 41996
Practices Under Section 28(e) of the Securities
and Exchange Act of 1934.
Commission Guidance Regarding Management's Report 55929 June 20, 2007 72 FR 35343
on Internal Control Over Financial Reporting Under
Section 13(a) or 15(d) of the Securities and
Exchange Act of 1934.
Commission Guidance Regarding and Amendment to the 58024 June 25, 2008 73 FR 40152
Rules Relating to Organization and Program
Management Concerning Proposed Rule Changes Filed
by Self-Regulatory Organizations.
Commission Guidance on the Use of Company Web Sites 58288 Aug. 1, 2008 73 FR 45874
Commission Guidance and Revisions to the Cross- 58597 Sept. 19, 2008 73 FR 60094
Border Tender Offer, Exchange Offer, Rights
Offerings, and Business Combination Rules and
Beneficial Ownership Reporting Rules for Certain
Foreign Institutions.
Regulation SHO Amendments.......................... 58775 Oct. 14, 2008 73 FR 61706
Commission Guidance Regarding the Financial 60519A Aug. 25, 2009 74 FR 42773
Accounting Standards Board's Accounting Standards
Codification.
Commission Guidance Regarding Disclosure Related to 61469 Feb. 2, 2010 75 FR 62973
Climate Change.
Amendment to Municipal Securities Disclosure....... 62184A May 26, 2010 75 FR 33156
Commission Guidance on Presentation of Liquidity 62934 Sept. 17, 2010 75 FR 59897
and Capital Resources Disclosures in Management's
Discussion and Analysis.
Commission Guidance Regarding Auditing, 62991 Sept. 24, 2010 75 FR 60617
Attestation, and Related Professional Practice
Standards Related to Brokers and Dealers.
Commission Guidance Regarding Definitions of 67448 July 17, 2012 77 FR 42988
Mortgage Related Security and Small Business
Related Security.
Further Definition of ``Swap,'' ``Security-Based 67453 July 18, 2012 77 FR 48362
Swap,'' and ``Security-Based Swap Agreement'';
Mixed Swaps; Security-Based Swap Agreement
Recordkeeping.
[[Page 11]]
Application of ``Security-Based Swap Dealer'' and 34-72472 June 25, 2014 79 FR 47371
``Major Security-Based Swap Participant''
Definitions to Cross-Border Security-Based Swap
Activities.
Commission Guidance Regarding the Definition of the 34-75250 June 19, 2015 80 FR 37536
Terms ``Spouse'' and ``Marriage'' Following the
Supreme Court's Decision in United States v.
Windsor.
Interpretation of the SEC's Whistleblower Rules 34-75592 Aug. 4, 2015 80 FR 47831
under Section 21F of the Securities Exchange Act
of 1934.
Interpretation Regarding Automated Quotations Under 34-78102 June 17, 2016 81 FR 40793
Regulation NMS.
Commission Guidance Regarding Revenue Recognition 34-81428 Aug. 18, 2017 82 FR 41148
for Bill-and-Hold Arrangements.
Updates to Commission Guidance Regarding Accounting 34-81429 Aug. 18, 2017 82 FR 41150
for Sales of Vaccines and Bioterror
Countermeasures to the Federal Government for
Placement into the Pediatric Vaccine Stockpile or
the Strategic National Stockpile.
Commission Interpretation and Guidance Regarding 34-86721 Aug. 21, 2019 84 FR 47419.
the Applicability of the Proxy Rules to Proxy
Voting Advice.
Commission Guidance on Management's Discussion and 34-88094 Jan. 30, 2020 85 FR 10571
Analysis of Financial Condition and Results of
Operations.
----------------------------------------------------------------------------------------------------------------
PART 242_REGULATIONS M, SHO, ATS, AC, NMS, SE, AND SBSR, AND
CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES-
-Table of Contents
Regulation M
Sec.
242.100 Preliminary note; definitions.
242.101 Activities by distribution participants.
242.102 Activities by issuers and selling security holders during a
distribution.
242.103 Nasdaq passive market making.
242.104 Stabilizing and other activities in connection with an offering.
242.105 Short selling in connection with a public offering.
Regulation SHO--Regulation of Short Sales
242.200 Definition of ``short sale'' and marking requirements.
242.201 Circuit breaker.
242.203 Borrowing and delivery requirements.
242.204 Close-out requirement.
Regulation ATS--Alternative Trading Systems
242.300 Definitions.
242.301 Requirements for alternative trading systems.
242.302 Recordkeeping requirements for alternative trading systems.
242.303 Record preservation requirements for alternative trading
systems.
242.304 NMS Stock ATSs.
Customer Margin Requirements for Security Futures
242.400 Customer margin requirements for security futures--authority,
purpose, interpretation, and scope.
242.401 Definitions.
242.402 General provisions.
242.403 Required margin.
242.404 Type, form and use of margin.
242.405 Withdrawal of margin.
242.406 Undermargined accounts.
Regulation AC--Analyst Certification
242.500 Definitions
242.501 Certifications in connection with research reports.
242.502 Certifications in connection with public appearances.
242.503 Certain foreign research reports.
242.504 Notification to associated persons.
242.505 Exclusion for news media.
Regulation NMS--Regulation of the National Market System
242.600 NMS security designation and definitions.
242.601 Dissemination of transaction reports and last sale data with
respect to transactions in NMS stocks.
242.602 Dissemination of quotations in NMS securities.
242.603 Distribution, consolidation, and display of information with
respect to quotations for and transactions in NMS stocks.
242.604 Display of customer limit orders.
242.605 Disclosure of order execution information.
242.606 Disclosure of order routing information.
242.607 Customer account statements.
242.608 Filing and amendment of national market system plans.
[[Page 12]]
242.609 Registration of securities information processors: form of
application and amendments.
242.610 Access to quotations.
242.611 Order protection rule.
242.612 Minimum pricing increment.
242.613 Consolidated audit trail.
242.614 Registration and responsibilities of competing consolidators.
Regulation SE--Registration and Regulation of Security-Based Swap
Execution Facilities
242.800 Scope.
242.801 Applicable provisions.
242.802 Definitions.
242.803 Requirements and procedures for registration.
242.804 Listing products for trading by certification.
242.805 Voluntary submission of new products for Commission review and
approval.
242.806 Voluntary submission of rules for Commission review and
approval.
242.807 Self-certification of rules.
242.808 Availability of public information.
242.809 Staying of certification and tolling of review period pending
jurisdictional determination.
242.810 Product filings by security-based swap execution facilities that
are not yet registered and by dormant security-based swap
execution facilities.
242.811 Information relating to security-based swap execution facility
compliance.
242.812 Enforceability.
242.813 Prohibited use of data collected for regulatory purposes.
242.814 Entity operating both a national securities exchange and
security-based swap execution facility.
242.815 Methods of execution for Required and Permitted Transactions.
242.816 Trade execution requirement and exemptions therefrom.
242.817 Trade execution compliance schedule.
242.818 Core Principle 1--Compliance with core principles.
242.819 Core Principle 2--Compliance with rules.
242.820 Core Principle 3--Security-based swaps not readily susceptible
to manipulation.
242.821 Core Principle 4--Monitoring of trading and trade processing.
242.822 Core Principle 5--Ability to obtain information.
242.823 Core Principle 6--Financial integrity of transactions.
242.824 Core Principle 7--Emergency authority.
242.825 Core Principle 8--Timely publication of trading information.
242.826 Core Principle 9--Recordkeeping and reporting.
242.827 Core Principle 10--Antitrust considerations.
242.828 Core Principle 11--Conflicts of interest.
242.829 Core Principle 12--Financial resources.
242.830 Core Principle 13--System safeguards.
242.831 Core Principle 14--Designation of chief compliance officer.
242.832 Application of the trade execution requirement to cross-border
security-based swap transactions.
242.833 Cross-border exemptions.
242.834 Mitigation of conflicts of interest of security-based swap
execution facilities and certain exchanges.
242.835 Notice to Commission by security-based swap execution facility
of final disciplinary action or denial or limitation of
access.
Regulation SBSR--Regulatory Reporting and Public Dissemination of
Security-Based Swap Information
242.900 Definitions
242.901 Reporting obligations.
242.902 Public dissemination of transaction reports.
242.903 Coded information.
242.904 Operating hours of registered security-based swap data
repositories.
242.905 Correction of errors in security-based swap information.
242.906 Other duties of participants.
242.907 Policies and procedures of registered security-based swap data
repositories.
242.908 Cross-border matters.
242.909 Registration of security-based swap data repository as a
securities information processor.
Regulation SCI_Systems Compliance and Integrity
242.1000 Definitions.
242.1001 Obligations related to policies and procedures of SCI entities.
242.1002 Obligations related to SCI events.
242.1003 Obligations related to systems changes; SCI review.
242.1004 SCI entity business continuity and disaster recovery plans
testing requirements for members or participants.
242.1005 Recordkeeping requirements related to compliance with
Regulation SCI.
242.1006 Electronic filing and submission.
242.1007 Requirements for service bureaus.
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78c-4,
78g(c)(2), 78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g),
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, 80a-37,
and 8343.
[[Page 13]]
Source: 62 FR 544, Jan. 3, 1997, unless otherwise noted.
Regulation M
Sec. 242.100 Preliminary note; definitions.
(a) Preliminary note: Any transaction or series of transactions,
whether or not effected pursuant to the provisions of Regulation M
(Sec. Sec. 242.100-242.105 of this chapter), remain subject to the
antifraud and antimanipulation provisions of the securities laws,
including, without limitation, Section 17(a) of the Securities Act of
1933 [15 U.S.C. 77q(a)] and Sections 9, 10(b), and 15(c) of the
Securities Exchange Act of 1934 [15 U.S.C. 78i, 78j(b), and 78o(c)].
(b) For purposes of regulation M (Sec. Sec. 242.100 through 242.105
of this chapter) the following definitions shall apply:
ADTV means the worldwide average daily trading volume during the two
full calendar months immediately preceding, or any 60 consecutive
calendar days ending within the 10 calendar days preceding, the filing
of the registration statement; or, if there is no registration statement
or if the distribution involves the sale of securities on a delayed
basis pursuant to Sec. 230.415 of this chapter, two full calendar
months immediately preceding, or any consecutive 60 calendar days ending
within the 10 calendar days preceding, the determination of the offering
price.
Affiliated purchaser means:
(1) A person acting, directly or indirectly, in concert with a
distribution participant, issuer, or selling security holder in
connection with the acquisition or distribution of any covered security;
or
(2) An affiliate, which may be a separately identifiable department
or division of a distribution participant, issuer, or selling security
holder, that, directly or indirectly, controls the purchases of any
covered security by a distribution participant, issuer, or selling
security holder, whose purchases are controlled by any such person, or
whose purchases are under common control with any such person; or
(3) An affiliate, which may be a separately identifiable department
or division of a distribution participant, issuer, or selling security
holder, that regularly purchases securities for its own account or for
the account of others, or that recommends or exercises investment
discretion with respect to the purchase or sale of securities; Provided,
however, That this paragraph (3) shall not apply to such affiliate if
the following conditions are satisfied:
(i) The distribution participant, issuer, or selling security
holder:
(A) Maintains and enforces written policies and procedures
reasonably designed to prevent the flow of information to or from the
affiliate that might result in a violation of Sec. Sec. 242.101,
242.102, and 242.104; and
(B) Obtains an annual, independent assessment of the operation of
such policies and procedures; and
(ii) The affiliate has no officers (or persons performing similar
functions) or employees (other than clerical, ministerial, or support
personnel) in common with the distribution participant, issuer, or
selling security holder that direct, effect, or recommend transactions
in securities; and
(iii) The affiliate does not, during the applicable restricted
period, act as a market maker (other than as a specialist in compliance
with the rules of a national securities exchange), or engage, as a
broker or a dealer, in solicited transactions or proprietary trading, in
covered securities.
Agent independent of the issuer means a trustee or other person who
is independent of the issuer. The agent shall be deemed to be
independent of the issuer only if:
(1) The agent is not an affiliate of the issuer; and
(2) Neither the issuer nor any affiliate of the issuer exercises any
direct or indirect control or influence over the prices or amounts of
the securities to be purchased, the timing of, or the manner in which,
the securities are to be purchased, or the selection of a broker or
dealer (other than the independent agent itself) through which purchases
may be executed; Provided, however, That the issuer or its affiliate
will not be deemed to have such control or influence solely because it
revises not more than once in any three-month period the source of the
shares to fund the plan the basis for determining the amount of its
contributions to a plan, or the basis for determining
[[Page 14]]
the frequency of its allocations to a plan, or any formula specified in
a plan that determines the amount or timing of securities to be
purchased by the agent.
Asset-backed security has the meaning contained in Sec. 229.1101 of
this chapter.
At-the-market offering means an offering of securities at other than
a fixed price.
Business day refers to a 24 hour period determined with reference to
the principal market for the securities to be distributed, and that
includes a complete trading session for that market.
Completion of participation in a distribution. Securities acquired
in the distribution for investment by any person participating in a
distribution, or any affiliated purchaser of such person, shall be
deemed to be distributed. A person shall be deemed to have completed its
participation in a distribution as follows:
(1) An issuer or selling security holder, when the distribution is
completed;
(2) An underwriter, when such person's participation has been
distributed, including all other securities of the same class that are
acquired in connection with the distribution, and any stabilization
arrangements and trading restrictions in connection with the
distribution have been terminated; Provided, however, That an
underwriter's participation will not be deemed to have been completed if
a syndicate overallotment option is exercised in an amount that exceeds
the net syndicate short position at the time of such exercise; and
(3) Any other person participating in the distribution, when such
person's participation has been distributed.
Covered security means any security that is the subject of a
distribution, or any reference security.
Current exchange rate means the current rate of exchange between two
currencies, which is obtained from at least one independent entity that
provides or disseminates foreign exchange quotations in the ordinary
course of its business.
Distribution means an offering of securities, whether or not subject
to registration under the Securities Act, that is distinguished from
ordinary trading transactions by the magnitude of the offering and the
presence of special selling efforts and selling methods.
Distribution participant means an underwriter, prospective
underwriter, broker, dealer, or other person who has agreed to
participate or is participating in a distribution.
Electronic communications network has the meaning provided in Sec.
242.600.
Employee has the meaning contained in Form S-8 (Sec. 239.16b of
this chapter) relating to employee benefit plans.
Exchange Act means the Securities Exchange Act of 1934 (15 U.S.C.
78a et seq.).
Independent bid means a bid by a person who is not a distribution
participant, issuer, selling security holder, or affiliated purchaser.
NASD means the National Association of Securities Dealers, Inc. or
any of its subsidiaries.
Nasdaq means the electronic dealer quotation system owned and
operated by The Nasdaq Stock Market, Inc.
Nasdaq security means a security that is authorized for quotation on
Nasdaq, and such authorization is not suspended, terminated, or
prohibited.
Net purchases means the amount by which a passive market maker's
purchases exceed its sales.
Offering price means the price at which the security is to be or is
being distributed.
Passive market maker means a market maker that effects bids or
purchases in accordance with the provisions of Sec. 242.103.
Penalty bid means an arrangement that permits the managing
underwriter to reclaim a selling concession from a syndicate member in
connection with an offering when the securities originally sold by the
syndicate member are purchased in syndicate covering transactions.
Plan means any bonus, profit-sharing, pension, retirement, thrift,
savings, incentive, stock purchase, stock option, stock ownership, stock
appreciation, dividend reinvestment, or similar plan; or any dividend or
interest reinvestment plan or employee benefit plan as defined in Sec.
230.405 of this chapter.
Principal market means the single securities market with the largest
aggregate reported trading volume for the
[[Page 15]]
class of securities during the 12 full calendar months immediately
preceding the filing of the registration statement; or, if there is no
registration statement or if the distribution involves the sale of
securities on a delayed basis pursuant to Sec. 230.415 of this chapter,
during the 12 full calendar months immediately preceding the
determination of the offering price. For the purpose of determining the
aggregate trading volume in a security, the trading volume of depositary
shares representing such security shall be included, and shall be
multiplied by the multiple or fraction of the security represented by
the depositary share. For purposes of this paragraph, depositary share
means a security, evidenced by a depositary receipt, that represents
another security, or a multiple or fraction thereof, deposited with a
depositary.
Prospective underwriter means a person:
(1) Who has submitted a bid to the issuer or selling security
holder, and who knows or is reasonably certain that such bid will be
accepted, whether or not the terms and conditions of the underwriting
have been agreed upon; or
(2) Who has reached, or is reasonably certain to reach, an
understanding with the issuer or selling security holder, or managing
underwriter that such person will become an underwriter, whether or not
the terms and conditions of the underwriting have been agreed upon.
Public float value shall be determined in the manner set forth on
the front page of Form 10-K (Sec. 249.310 of this chapter), even if the
issuer of such securities is not required to file Form 10-K, relating to
the aggregate market value of common equity securities held by non-
affiliates of the issuer.
Reference period means the two full calendar months immediately
preceding the filing of the registration statement or, if there is no
registration statement or if the distribution involves the sale of
securities on a delayed basis pursuant to Sec. 230.415 of this chapter,
the two full calendar months immediately preceding the determination of
the offering price.
Reference security means a security into which a security that is
the subject of a distribution (``subject security'') may be converted,
exchanged, or exercised or which, under the terms of the subject
security, may in whole or in significant part determine the value of the
subject security.
Restricted period means:
(1) For any security with an ADTV value of $100,000 or more of an
issuer whose common equity securities have a public float value of $25
million or more, the period beginning on the later of one business day
prior to the determination of the offering price or such time that a
person becomes a distribution participant, and ending upon such person's
completion of participation in the distribution; and
(2) For all other securities, the period beginning on the later of
five business days prior to the determination of the offering price or
such time that a person becomes a distribution participant, and ending
upon such person's completion of participation in the distribution.
(3) In the case of a distribution involving a merger, acquisition,
or exchange offer, the period beginning on the day proxy solicitation or
offering materials are first disseminated to security holders, and
ending upon the completion of the distribution.
Securities Act means the Securities Act of 1933 (15 U.S.C. 77a et
seq.).
Selling security holder means any person on whose behalf a
distribution is made, other than an issuer.
Stabilize or stabilizing means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing, or
maintaining the price of a security.
Structural credit risk model means any commercially or publicly
available model that calculates, based on an issuer's balance sheet, the
probability that the value of the issuer will fall below the threshold
at which the issuer would fail to make scheduled debt payments, at or by
the expiration of a defined period.
Syndicate covering transaction means the placing of any bid or the
effecting of any purchase on behalf of the sole distributor or the
underwriting syndicate or group to reduce a short position created in
connection with the offering.
[[Page 16]]
30% ADTV limitation means 30 percent of the market maker's ADTV in a
covered security during the reference period, as obtained from the NASD.
Underwriter means a person who has agreed with an issuer or selling
security holder:
(1) To purchase securities for distribution; or
(2) To distribute securities for or on behalf of such issuer or
selling security holder; or
(3) To manage or supervise a distribution of securities for or on
behalf of such issuer or selling security holder.
[62 FR 544, Jan. 3, 1997, as amended at 62 FR 11323, Mar. 12, 1997; 70
FR 1623, Jan. 7, 2005; 70 FR 37619, June 29, 2005; 88 FR 39994, June 20,
2023]
Sec. 242.101 Activities by distribution participants.
(a) Unlawful Activity. In connection with a distribution of
securities, it shall be unlawful for a distribution participant or an
affiliated purchaser of such person, directly or indirectly, to bid for,
purchase, or attempt to induce any person to bid for or purchase, a
covered security during the applicable restricted period; Provided,
however, That if a distribution participant or affiliated purchaser is
the issuer or selling security holder of the securities subject to the
distribution, such person shall be subject to the provisions of Sec.
242.102, rather than this section.
(b) Excepted Activity. The following activities shall not be
prohibited by paragraph (a) of this section:
(1) Research. The publication or dissemination of any information,
opinion, or recommendation, if the conditions of Sec. 230.138, Sec.
230.139, or Sec. 230.139b of this chapter are met; or
(2) Transactions complying with certain other sections. Transactions
complying with Sec. Sec. 242.103 or 242.104; or
(3) Odd-lot transactions. Transactions in odd-lots; or transactions
to offset odd-lots in connection with an odd-lot tender offer conducted
pursuant to Sec. 240.13e-4(h)(5) of this chapter; or
(4) Exercises of securities. The exercise of any option, warrant,
right, or any conversion privilege set forth in the instrument governing
a security; or
(5) Unsolicited transactions. Unsolicited brokerage transactions; or
unsolicited purchases that are not effected from or through a broker or
dealer, on a securities exchange, or through an inter-dealer quotation
system or electronic communications network; or
(6) Basket transactions. (i) Bids or purchases, in the ordinary
course of business, in connection with a basket of 20 or more securities
in which a covered security does not comprise more than 5% of the value
of the basket purchased; or
(ii) Adjustments to such a basket in the ordinary course of business
as a result of a change in the composition of a standardized index; or
(7) De minimis transactions. Purchases during the restricted period,
other than by a passive market maker, that total less than 2% of the
ADTV of the security being purchased, or unaccepted bids; Provided,
however, That the person making such bid or purchase has maintained and
enforces written policies and procedures reasonably designed to achieve
compliance with the other provisions of this section; or
(8) Transactions in connection with a distribution. Transactions
among distribution participants in connection with a distribution, and
purchases of securities from an issuer or selling security holder in
connection with a distribution, that are not effected on a securities
exchange, or through an inter-dealer quotation system or electronic
communications network; or
(9) Offers to sell or the solicitation of offers to buy. Offers to
sell or the solicitation of offers to buy the securities being
distributed (including securities acquired in stabilizing), or
securities offered as principal by the person making such offer or
solicitation; or
(10) Transactions in Rule 144A securities. Transactions in
securities eligible for resale under Sec. 230.144A(d)(3) of this
chapter, or any reference security, if the Rule 144A securities are sold
in the United States solely to:
(i) Qualified institutional buyers, as defined in Sec.
230.144A(a)(1) of this chapter, or to purchasers that the seller and any
person acting on behalf of the seller reasonably believes are qualified
institutional buyers, in transactions exempt from registration under
section 4(2) of the Securities Act (15 U.S.C.
[[Page 17]]
77d(2)) or Sec. Sec. 230.144A or Sec. 230.500 et seq of this chapter;
or
(ii) Persons not deemed to be ``U.S. persons'' for purposes of
Sec. Sec. 230.902(o)(2) or 230.902(o)(7) of this chapter, during a
distribution qualifying under paragraph (b)(10)(i) of this section.
(c) Excepted Securities. The provisions of this section shall not
apply to any of the following securities:
(1) Actively-traded securities. Securities that have an ADTV value
of at least $1 million and are issued by an issuer whose common equity
securities have a public float value of at least $150 million; Provided,
however, That such securities are not issued by the distribution
participant or an affiliate of the distribution participant; or
(2) Certain nonconvertible and asset-backed securities. (i)
Nonconvertible debt securities and nonconvertible preferred securities
of issuers for which the probability of default, estimated as of the
sixth business day immediately preceding the determination of the
offering price and over the horizon of 12 full calendar months from such
day, is 0.055% or less, as determined and documented, in writing, by the
distribution participant acting as the lead manager (or in a similar
capacity) of a distribution, as derived from a structural credit risk
model; or
(ii) Asset-backed securities that are offered pursuant to an
effective shelf registration statement filed on Form SF-3 (Sec. 239.45
of this chapter); or
(3) Exempted securities. ``Exempted securities'' as defined in
section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)); or
(4) Face-amount certificates or securities issued by an open-end
management investment company or unit investment trust. Face-amount
certificates issued by a face-amount certificate company, or redeemable
securities issued by an open-end management investment company or a unit
investment trust. Any terms used in this paragraph (c)(4) that are
defined in the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.)
shall have the meanings specified in such Act.
(d) Exemptive authority. Upon written application or upon its own
motion, the Commission may grant an exemption from the provisions of
this section, either unconditionally or on specified terms and
conditions, to any transaction or class of transactions, or to any
security or class of securities.
[62 FR 544, Jan. 3, 1997, as amended at 77 FR 18685, Mar. 28, 2012; 78
FR 44805, July 24, 2013; 83 FR 64222, Dec. 13, 2018; 88 FR 39994, June
20, 2023]
Sec. 242.102 Activities by issuers and selling security holders
during a distribution.
(a) Unlawful Activity. In connection with a distribution of
securities effected by or on behalf of an issuer or selling security
holder, it shall be unlawful for such person, or any affiliated
purchaser of such person, directly or indirectly, to bid for, purchase,
or attempt to induce any person to bid for or purchase, a covered
security during the applicable restricted period; Except That if an
affiliated purchaser is a distribution participant, such affiliated
purchaser may comply with Sec. 242.101, rather than this section.
(b) Excepted Activity. The following activities shall not be
prohibited by paragraph (a) of this section:
(1) Odd-lot transactions. Transactions in odd-lots, or transactions
to offset odd-lots in connection with an odd-lot tender offer conducted
pursuant to Sec. 240.13e-4(h)(5) of this chapter; or
(2) Transactions by closed-end investment companies. (i)
Transactions complying with Sec. 270.23c-3 of this chapter; or
(ii) Periodic tender offers of securities, at net asset value,
conducted pursuant to Sec. 240.13e-4 of this chapter by a closed-end
investment company that engages in a continuous offering of its
securities pursuant to Sec. 230.415 of this chapter; Provided, however,
That such securities are not traded on a securities exchange or through
an inter-dealer quotation system or electronic communications network;
or
(3) Redemptions by commodity pools or limited partnerships.
Redemptions by commodity pools or limited partnerships, at a price based
on net asset value, which are effected in accordance with the terms and
conditions of the instruments governing the securities; Provided,
however, That such securities are not traded on a securities exchange,
or through an inter-dealer
[[Page 18]]
quotation system or electronic communications network; or
(4) Exercises of securities. The exercise of any option, warrant,
right, or any conversion privilege set forth in the instrument governing
a security; or
(5) Offers to sell or the solicitation of offers to buy. Offers to
sell or the solicitation of offers to buy the securities being
distributed; or
(6) Unsolicited purchases. Unsolicited purchases that are not
effected from or through a broker or dealer, on a securities exchange,
or through an inter-dealer quotation system or electronic communications
network; or
(7) Transactions in Rule 144A securities. Transactions in securities
eligible for resale under Sec. 230.144A(d)(3) of this chapter, or any
reference security, if the Rule 144A securities are sold in the United
States solely to:
(i) Qualified institutional buyers, as defined in Sec.
230.144A(a)(1) of this chapter, or to purchasers that the seller and any
person acting on behalf of the seller reasonably believes are qualified
institutional buyers, in transactions exempt from registration under
section 4(2) of the Securities Act (15 U.S.C. 77d(2)) or Sec. Sec.
230.144A or Sec. 230.500 et seq of this chapter; or
(ii) Persons not deemed to be ``U.S. persons'' for purposes of
Sec. Sec. 230.902(o)(2) or 230.902(o)(7) of this chapter, during a
distribution qualifying under paragraph (b)(7)(i) of this section.
(c) Plans. (1) Paragraph (a) of this section shall not apply to
distributions of securities pursuant to a plan, which are made:
(i) Solely to employees or security holders of an issuer or its
subsidiaries, or to a trustee or other person acquiring such securities
for the accounts of such persons; or
(ii) To persons other than employees or security holders, if bids
for or purchases of securities pursuant to the plan are effected solely
by an agent independent of the issuer and the securities are from a
source other than the issuer or an affiliated purchaser of the issuer.
(2) Bids for or purchases of any security made or effected by or for
a plan shall be deemed to be a purchase by the issuer unless the bid is
made, or the purchase is effected, by an agent independent of the
issuer.
(d) Excepted Securities. The provisions of this section shall not
apply to any of the following securities:
(1) Actively-traded reference securities. Reference securities with
an ADTV value of at least $1 million that are issued by an issuer whose
common equity securities have a public float value of at least $150
million; Provided, however, That such securities are not issued by the
issuer, or any affiliate of the issuer, of the security in distribution.
(2) Certain nonconvertible and asset-backed securities. (i)
Nonconvertible debt securities and nonconvertible preferred securities
of issuers for which the probability of default, estimated as of the
sixth business day immediately preceding the determination of the
offering price and over the horizon of 12 full calendar months from such
day, is 0.055% or less, as determined and documented, in writing, by the
distribution participant acting as the lead manager (or in a similar
capacity) of a distribution, as derived from a structural credit risk
model, pursuant to Sec. 242.101(c)(2)(i); or
(ii) Asset-backed securities that are offered pursuant to an
effective shelf registration statement filed on Form SF-3 (Sec. 239.45
of this chapter); or
(3) Exempted securities. ``Exempted securities'' as defined in
section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)); or
(4) Face-amount certificates or securities issued by an open-end
management investment company or unit investment trust. Face-amount
certificates issued by a face-amount certificate company, or redeemable
securities issued by an open-end management investment company or a unit
investment trust. Any terms used in this paragraph (d)(4) that are
defined in the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.)
shall have the meanings specified in such Act.
(e) Exemptive Authority. Upon written application or upon its own
motion, the Commission may grant an exemption from the provisions of
this section, either unconditionally or on specified terms and
conditions, to any
[[Page 19]]
transaction or class of transactions, or to any security or class of
securities.
[62 FR 544, Jan. 3, 1997, as amended at 62 FR 11323, Mar. 12, 1997; 77
FR 18685, Mar. 28, 2012; 78 FR 44805, July 24, 2013; 88 FR 39994, June
20, 2023]
Sec. 242.103 Nasdaq passive market making.
(a) Scope of section. This section permits broker-dealers to engage
in market making transactions in covered securities that are Nasdaq
securities without violating the provisions of Sec. 242.101; Except
That this section shall not apply to any security for which a
stabilizing bid subject to Sec. 242.104 is in effect, or during any at-
the-market offering or best efforts offering.
(b) Conditions to be met--(1) General limitations. A passive market
maker must effect all transactions in the capacity of a registered
market maker on Nasdaq. A passive market maker shall not bid for or
purchase a covered security at a price that exceeds the highest
independent bid for the covered security at the time of the transaction,
except as permitted by paragraph (b)(3) of this section or required by a
rule promulgated by the Commission or the NASD governing the handling of
customer orders.
(2) Purchase limitation. On each day of the restricted period, a
passive market maker's net purchases shall not exceed the greater of its
30% ADTV limitation or 200 shares (together, ``purchase limitation'');
Provided, however, That a passive market maker may purchase all of the
securities that are part of a single order that, when executed, results
in its purchase limitation being equalled or exceeded. If a passive
market maker's net purchases equal or exceed its purchase limitation, it
shall withdraw promptly its quotations from Nasdaq. If a passive market
maker withdraws its quotations pursuant to this paragraph, it may not
effect any bid or purchase in the covered security for the remainder of
that day, irrespective of any later sales during that day, unless
otherwise permitted by Sec. 242.101.
(3) Requirement to lower the bid. If all independent bids for a
covered security are reduced to a price below the passive market maker's
bid, the passive market maker must lower its bid promptly to a level not
higher than the then highest independent bid; Provided, however, That a
passive market maker may continue to bid and effect purchases at its bid
at a price exceeding the then highest independent bid until the passive
market maker purchases an aggregate amount of the covered security that
equals or, through the purchase of all securities that are part of a
single order, exceeds the lesser of two times the minimum quotation size
for the security, as determined by NASD rules, or the passive market
maker's remaining purchasing capacity under paragraph (b)(2) of this
section.
(4) Limitation on displayed size. At all times, the passive market
maker's displayed bid size may not exceed the lesser of the minimum
quotation size for the covered security, or the passive market maker's
remaining purchasing capacity under paragraph (b)(2) of this section;
Provided, however, That a passive market maker whose purchasing capacity
at any time is between one and 99 shares may display a bid size of 100
shares.
(5) Identification of a passive market making bid. The bid displayed
by a passive market maker shall be designated as such.
(6) Notification and reporting to the NASD. A passive market maker
shall notify the NASD in advance of its intention to engage in passive
market making, and shall submit to the NASD information regarding
passive market making purchases, in such form as the NASD shall
prescribe.
(7) Prospectus disclosure. The prospectus for any registered
offering in which any passive market maker intends to effect
transactions in any covered security shall contain the information
required in Sec. Sec. 228.502, 228.508, 229.502, and 229.508 of this
chapter.
(c) Transactions at prices resulting from unlawful activity. No
transaction shall be made at a price that the passive market maker knows
or has reason to know is the result of activity that is fraudulent,
manipulative, or deceptive under the securities laws, or any rule or
regulation thereunder.
[[Page 20]]
Sec. 242.104 Stabilizing and other activities in connection with
an offering.
(a) Unlawful activity. It shall be unlawful for any person, directly
or indirectly, to stabilize, to effect any syndicate covering
transaction, or to impose a penalty bid, in connection with an offering
of any security, in contravention of the provisions of this section. No
stabilizing shall be effected at a price that the person stabilizing
knows or has reason to know is in contravention of this section, or is
the result of activity that is fraudulent, manipulative, or deceptive
under the securities laws, or any rule or regulation thereunder.
(b) Purpose. Stabilizing is prohibited except for the purpose of
preventing or retarding a decline in the market price of a security.
(c) Priority. To the extent permitted or required by the market
where stabilizing occurs, any person stabilizing shall grant priority to
any independent bid at the same price irrespective of the size of such
independent bid at the time that it is entered.
(d) Control of stabilizing. No sole distributor or syndicate or
group stabilizing the price of a security or any member or members of
such syndicate or group shall maintain more than one stabilizing bid in
any one market at the same price at the same time.
(e) At-the-market offerings. Stabilizing is prohibited in an at-the-
market offering.
(f) Stabilizing levels--(1) Maximum stabilizing bid. Notwithstanding
the other provisions of this paragraph (f), no stabilizing shall be made
at a price higher than the lower of the offering price or the
stabilizing bid for the security in the principal market (or, if the
principal market is closed, the stabilizing bid in the principal market
at its previous close).
(2) Initiating stabilizing--(i) Initiating stabilizing when the
principal market is open. After the opening of quotations for the
security in the principal market, stabilizing may be initiated in any
market at a price no higher than the last independent transaction price
for the security in the principal market if the security has traded in
the principal market on the day stabilizing is initiated or on the most
recent prior day of trading in the principal market and the current
asked price in the principal market is equal to or greater than the last
independent transaction price. If both conditions of the preceding
sentence are not satisfied, stabilizing may be initiated in any market
after the opening of quotations in the principal market at a price no
higher than the highest current independent bid for the security in the
principal market.
(ii) Initiating stabilizing when the principal market is closed. (A)
When the principal market for the security is closed, but immediately
before the opening of quotations for the security in the market where
stabilizing will be initiated, stabilizing may be initiated at a price
no higher than the lower of:
(1) The price at which stabilizing could have been initiated in the
principal market for the security at its previous close; or
(2) The most recent price at which an independent transaction in the
security has been effected in any market since the close of the
principal market, if the person stabilizing knows or has reason to know
of such transaction.
(B) When the principal market for the security is closed, but after
the opening of quotations in the market where stabilizing will be
initiated, stabilizing may be initiated at a price no higher than the
lower of:
(1) The price at which stabilization could have been initiated in
the principal market for the security at its previous close; or
(2) The last independent transaction price for the security in that
market if the security has traded in that market on the day stabilizing
is initiated or on the last preceding business day and the current asked
price in that market is equal to or greater than the last independent
transaction price. If both conditions of the preceding sentence are not
satisfied, under this paragraph (f)(2)(ii)(B)(2), stabilizing may be
initiated at a price no higher than the highest current independent bid
for the security in that market.
(iii) Initiating stabilizing when there is no market for the
security or before the offering price is determined. If no bona fide
market for the security being distributed exists at the time stabilizing
[[Page 21]]
is initiated, no stabilizing shall be initiated at a price in excess of
the offering price. If stabilizing is initiated before the offering
price is determined, then stabilizing may be continued after
determination of the offering price at the price at which stabilizing
then could be initiated.
(3) Maintaining or carrying over a stabilizing bid. A stabilizing
bid initiated pursuant to paragraph (f)(2) of this section, which has
not been discontinued, may be maintained, or carried over into another
market, irrespective of changes in the independent bids or transaction
prices for the security.
(4) Increasing or reducing a stabilizing bid. A stabilizing bid may
be increased to a price no higher than the highest current independent
bid for the security in the principal market if the principal market is
open, or, if the principal market is closed, to a price no higher than
the highest independent bid in the principal market at the previous
close thereof. A stabilizing bid may be reduced, or carried over into
another market at a reduced price, irrespective of changes in the
independent bids or transaction prices for the security. If stabilizing
is discontinued, it shall not be resumed at a price higher than the
price at which stabilizing then could be initiated.
(5) Initiating, maintaining, or adjusting a stabilizing bid to
reflect the current exchange rate. If a stabilizing bid is expressed in
a currency other than the currency of the principal market for the
security, such bid may be initiated, maintained, or adjusted to reflect
the current exchange rate, consistent with the provisions of this
section. If, in initiating, maintaining, or adjusting a stabilizing bid
pursuant to this paragraph (f)(5), the bid would be at or below the
midpoint between two trading differentials, such stabilizing bid shall
be adjusted downward to the lower differential.
(6) Adjustments to stabilizing bid. If a security goes ex-dividend,
ex-rights, or ex-distribution, the stabilizing bid shall be reduced by
an amount equal to the value of the dividend, right, or distribution.
If, in reducing a stabilizing bid pursuant to this paragraph (f)(6), the
bid would be at or below the midpoint between two trading differentials,
such stabilizing bid shall be adjusted downward to the lower
differential.
(7) Stabilizing of components. When two or more securities are being
offered as a unit, the component securities shall not be stabilized at
prices the sum of which exceeds the then permissible stabilizing price
for the unit.
(8) Special prices. Any stabilizing price that otherwise meets the
requirements of this section need not be adjusted to reflect special
prices available to any group or class of persons (including employees
or holders of warrants or rights).
(g) Offerings with no U.S. stabilizing activities. (1) Stabilizing
to facilitate an offering of a security in the United States shall not
be deemed to be in violation of this section if all of the following
conditions are satisfied:
(i) No stabilizing is made in the United States;
(ii) Stabilizing outside the United States is made in a jurisdiction
with statutory or regulatory provisions governing stabilizing that are
comparable to the provisions of this section; and
(iii) No stabilizing is made at a price above the offering price in
the United States, except as permitted by paragraph (f)(5) of this
section.
(2) For purposes of this paragraph (g), the Commission by rule,
regulation, or order may determine whether a foreign statute or
regulation is comparable to this section considering, among other
things, whether such foreign statute or regulation: specifies
appropriate purposes for which stabilizing is permitted; provides for
disclosure and control of stabilizing activities; places limitations on
stabilizing levels; requires appropriate recordkeeping; provides other
protections comparable to the provisions of this section; and whether
procedures exist to enable the Commission to obtain information
concerning any foreign stabilizing transactions.
(h) Disclosure and notification. (1) Any person displaying or
transmitting a bid that such person knows is for the purpose of
stabilizing shall provide prior notice to the market on which such
stabilizing will be effected, and shall disclose its purpose to the
person with whom the bid is entered.
[[Page 22]]
(2) Any person effecting a syndicate covering transaction or
imposing a penalty bid shall provide prior notice to the self-regulatory
organization with direct authority over the principal market in the
United States for the security for which the syndicate covering
transaction is effected or the penalty bid is imposed.
(3) Any person subject to this section who sells to, or purchases
for the account of, any person any security where the price of such
security may be or has been stabilized, shall send to the purchaser at
or before the completion of the transaction, a prospectus, offering
circular, confirmation, or other document containing a statement similar
to that comprising the statement provided for in Item 502(d) of
Regulation S-B (Sec. 228.502(d) of this chapter) or Item 502(d) of
Regulation S-K (Sec. 229.502(d) of this chapter).
(i) Recordkeeping requirements. A person subject to this section
shall keep the information and make the notification required by Sec.
240.17a-2 of this chapter.
(j) Excepted securities. The provisions of this section shall not
apply to:
(1) Exempted securities. ``Exempted securities,'' as defined in
section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)); or
(2) Transactions of Rule 144A securities. Transactions in securities
eligible for resale under Sec. 230.144A(d)(3) of this chapter, if such
securities are sold in the United States solely to:
(i) Qualified institutional buyers, as defined in Sec.
230.144A(a)(1) of this chapter, or to purchasers that the seller and any
person acting on behalf of the seller reasonably believes are qualified
institutional buyers, in a transaction exempt from registration under
section 4(2) of the Securities Act (15 U.S.C. 77d(2)) or Sec. Sec.
230.144A or Sec. 230.500 et seq of this chapter; or
(ii) Persons not deemed to be ``U.S. persons'' for purposes of
Sec. Sec. 230.902(o)(2) or 230.902(o)(7) of this chapter, during a
distribution qualifying under paragraph (j)(2)(i) of this section.
(k) Exemptive authority. Upon written application or upon its own
motion, the Commission may grant an exemption from the provisions of
this section, either unconditionally or on specified terms and
conditions, to any transaction or class of transactions, or to any
security or class of securities.
[62 FR 544, Jan. 3, 1997, as amended at 62 FR 11323, Mar. 12, 1997; 62
FR 13213, Mar. 19, 1997; 77 FR 18685, Mar. 28, 2012; 78 FR 44805, July
24, 2013]
Sec. 242.105 Short selling in connection with a public offering.
(a) Unlawful activity. In connection with an offering of equity
securities for cash pursuant to a registration statement or a
notification on Form 1-A (Sec. 239.90 of this chapter) or Form 1-E
(Sec. 239.200 of this chapter) filed under the Securities Act of 1933
(``offered securities''), it shall be unlawful for any person to sell
short (as defined in Sec. 242.200(a)) the security that is the subject
of the offering and purchase the offered securities from an underwriter
or broker or dealer participating in the offering if such short sale was
effected during the period (``Rule 105 restricted period'') that is the
shorter of the period:
(1) Beginning five business days before the pricing of the offered
securities and ending with such pricing; or
(2) Beginning with the initial filing of such registration statement
or notification on Form 1-A or Form 1-E and ending with the pricing.
(b) Excepted activity--(1) Bona fide purchase. It shall not be
prohibited for such person to purchase the offered securities as
provided in paragraph (a) of this section if:
(i) Such person makes a bona fide purchase(s) of the security that
is the subject of the offering that is:
(A) At least equivalent in quantity to the entire amount of the Rule
105 restricted period short sale(s);
(B) Effected during regular trading hours;
(C) Reported to an ``effective transaction reporting plan'' (as
defined in Sec. 242.600(b)(30); and
(D) Effected after the last Rule 105 restricted period short sale,
and no later than the business day prior to the day of pricing; and
(ii) Such person did not effect a short sale, that is reported to an
effective transaction reporting plan, within the 30 minutes prior to the
close of regular trading hours (as defined in
[[Page 23]]
Sec. 242.600(b)(77)) on the business day prior to the day of pricing.
(2) Separate accounts. Paragraph (a) of this section shall not
prohibit the purchase of the offered security in an account of a person
where such person sold short during the Rule 105 restricted period in a
separate account, if decisions regarding securities transactions for
each account are made separately and without coordination of trading or
cooperation among or between the accounts.
(3) Investment companies. Paragraph (a) of this section shall not
prohibit an investment company (as defined by Section 3 of the
Investment Company Act) that is registered under Section 8 of the
Investment Company Act, or a series of such company (investment company)
from purchasing an offered security where any of the following sold the
offered security short during the Rule 105 restricted period:
(i) An affiliated investment company, or any series of such a
company; or
(ii) A separate series of the investment company.
(c) Excepted offerings. This section shall not apply to offerings
that are not conducted on a firm commitment basis.
(d) Exemptive authority. Upon written application or upon its own
motion, the Commission may grant an exemption from the provisions of
this section, either unconditionally or on specified terms and
conditions, to any transaction or class of transactions, or to any
security or class of securities.
[62 FR 544, Jan. 3, 1997, as amended at 69 FR 48029, Aug. 6, 2004; 72 FR
45107, Aug. 10, 2007; 83 FR 58427, Nov. 19, 2018; 86 FR 18809, Apr. 9,
2021]
Regulation SHO--Regulation of Short Sales
Sec. 242.200 Definition of ``short sale'' and marking requirements.
(a) The term short sale shall mean any sale of a security which the
seller does not own or any sale which is consummated by the delivery of
a security borrowed by, or for the account of, the seller.
(b) A person shall be deemed to own a security if:
(1) The person or his agent has title to it; or
(2) The person has purchased, or has entered into an unconditional
contract, binding on both parties thereto, to purchase it, but has not
yet received it; or
(3) The person owns a security convertible into or exchangeable for
it and has tendered such security for conversion or exchange; or
(4) The person has an option to purchase or acquire it and has
exercised such option; or
(5) The person has rights or warrants to subscribe to it and has
exercised such rights or warrants; or
(6) The person holds a security futures contract to purchase it and
has received notice that the position will be physically settled and is
irrevocably bound to receive the underlying security.
(c) A person shall be deemed to own securities only to the extent
that he has a net long position in such securities.
(d) A broker or dealer shall be deemed to own a security, even if it
is not net long, if:
(1) The broker or dealer acquired that security while acting in the
capacity of a block positioner; and
(2) If and to the extent that the broker or dealer's short position
in the security is the subject of offsetting positions created in the
course of bona fide arbitrage, risk arbitrage, or bona fide hedge
activities.
(e) A broker-dealer shall be deemed to own a security even if it is
not net long, if:
(1) The broker-dealer is unwinding index arbitrage position
involving a long basket of stock and one or more short index futures
traded on a board of trade or one or more standardized options contracts
as defined in 17 CFR 240.9b-1(a)(4); and
(2) If and to the extent that the broker-dealer's short position in
the security is the subject of offsetting positions created and
maintained in the course of bona-fide arbitrage, risk arbitrage, or bona
fide hedge activities; and
(3) The sale does not occur during a period commencing at the time
that the NYSE Composite Index has declined by two percent or more from
its closing value on the previous day and
[[Page 24]]
terminating upon the end of the trading day. The two percent shall be
calculated at the beginning of each calendar quarter and shall be two
percent, rounded down to the nearest 10 points, of the average closing
value of the NYSE Composite Index for the last month of the previous
quarter.
(f) In order to determine its net position, a broker or dealer shall
aggregate all of its positions in a security unless it qualifies for
independent trading unit aggregation, in which case each independent
trading unit shall aggregate all of its positions in a security to
determine its net position. Independent trading unit aggregation is
available only if:
(1) The broker or dealer has a written plan of organization that
identifies each aggregation unit, specifies its trading objective(s),
and supports its independent identity;
(2) Each aggregation unit within the firm determines, at the time of
each sale, its net position for every security that it trades;
(3) All traders in an aggregation unit pursue only the particular
trading objective(s) or strategy(s) of that aggregation unit and do not
coordinate that strategy with any other aggregation unit; and
(4) Individual traders are assigned to only one aggregation unit at
any time.
(g) A broker or dealer must mark all sell orders of any equity
security as ``long,'' ``short,'' or ``short exempt.''
(1) An order to sell shall be marked ``long'' only if the seller is
deemed to own the security being sold pursuant to paragraphs (a) through
(f) of this section and either:
(i) The security to be delivered is in the physical possession or
control of the broker or dealer; or
(ii) It is reasonably expected that the security will be in the
physical possession or control of the broker or dealer no later than the
settlement of the transaction.
(2) A sale order shall be marked ``short exempt'' only if the
provisions of Sec. 242.201(c) or (d) are met.
(h) Upon written application or upon its own motion, the Commission
may grant an exemption from the provisions of this section, either
unconditionally or on specified terms and conditions, to any transaction
or class of transactions, or to any security or class of securities, or
to any person or class of persons.
[69 FR 48029, Aug. 6, 2004, as amended at 72 FR 36359, July 3, 2007; 72
FR 45557, Aug. 14, 2007; 75 FR 11323, Mar. 10, 2010]
Sec. 242.201 Circuit breaker.
(a) Definitions. For the purposes of this section:
(1) The term covered security shall mean any NMS stock as defined in
Sec. 242.600(b)(55).
(2) The term effective transaction reporting plan for a covered
security shall have the same meaning as in Sec. 242.600(b)(30).
(3) The term listing market shall have the same meaning as the term
``primary listing exchange'' as defined in Sec. 242.600(b)(68).
(4) The term national best bid shall have the same meaning as in
Sec. 242.600(b)(50).
(5) The term odd lot shall have the same meaning as in Sec.
242.600(b)(58).
(6) The term plan processor shall have the same meaning as in Sec.
242.600(b)(67).
(7) The term regular trading hours shall have the same meaning as in
Sec. 242.600(b)(77).
(8) The term riskless principal shall mean a transaction in which a
broker or dealer, after having received an order to buy a security,
purchases the security as principal at the same price to satisfy the
order to buy, exclusive of any explicitly disclosed markup or markdown,
commission equivalent, or other fee, or, after having received an order
to sell, sells the security as principal at the same price to satisfy
the order to sell, exclusive of any explicitly disclosed markup or
markdown, commission equivalent, or other fee.
(9) The term trading center shall have the same meaning as in Sec.
242.600(b)(95).
(b)(1) A trading center shall establish, maintain, and enforce
written policies and procedures reasonably designed to:
(i) Prevent the execution or display of a short sale order of a
covered security at a price that is less than or equal to the current
national best bid if the price of that covered security decreases by 10%
or more from the covered security's closing price as determined by
[[Page 25]]
the listing market for the covered security as of the end of regular
trading hours on the prior day; and
(ii) Impose the requirements of paragraph (b)(1)(i) of this section
for the remainder of the day and the following day when a national best
bid for the covered security is calculated and disseminated on a current
and continuing basis pursuant to an effective national market system
plan.
(iii) Provided, however, that the policies and procedures must be
reasonably designed to permit:
(A) The execution of a displayed short sale order of a covered
security by a trading center if, at the time of initial display of the
short sale order, the order was at a price above the current national
best bid; and
(B) The execution or display of a short sale order of a covered
security marked ``short exempt'' without regard to whether the order is
at a price that is less than or equal to the current national best bid.
(2) A trading center shall regularly surveil to ascertain the
effectiveness of the policies and procedures required by paragraph
(b)(1) of this section and shall take prompt action to remedy
deficiencies in such policies and procedures.
(3) The determination regarding whether the price of a covered
security has decreased by 10% or more from the covered security's
closing price as determined by the listing market for the covered
security as of the end of regular trading hours on the prior day shall
be made by the listing market for the covered security and, if such
decrease has occurred, the listing market shall immediately make such
information available as provided in Sec. 242.603(b).
(c) Following any determination and notification pursuant to
paragraph (b)(3) of this section with respect to a covered security, a
broker or dealer submitting a short sale order of the covered security
in question to a trading center may mark the order ``short exempt'' if
the broker or dealer identifies the order as being at a price above the
current national best bid at the time of submission; provided, however:
(1) The broker or dealer that identifies a short sale order of a
covered security as ``short exempt'' in accordance with this paragraph
(c) must establish, maintain, and enforce written policies and
procedures reasonably designed to prevent incorrect identification of
orders for purposes of this paragraph; and
(2) The broker or dealer shall regularly surveil to ascertain the
effectiveness of the policies and procedures required by paragraph
(c)(1) of this section and shall take prompt action to remedy
deficiencies in such policies and procedures.
(d) Following any determination and notification pursuant to
paragraph (b)(3) of this section with respect to a covered security, a
broker or dealer may mark a short sale order of a covered security
``short exempt'' if the broker or dealer has a reasonable basis to
believe that:
(1) The short sale order of a covered security is by a person that
is deemed to own the covered security pursuant to Sec. 242.200,
provided that the person intends to deliver the security as soon as all
restrictions on delivery have been removed.
(2) The short sale order of a covered security is by a market maker
to offset customer odd-lot orders or to liquidate an odd-lot position
that changes such broker's or dealer's position by no more than a unit
of trading.
(3) The short sale order of a covered security is for a good faith
account of a person who then owns another security by virtue of which he
is, or presently will be, entitled to acquire an equivalent number of
securities of the same class as the securities sold; provided such sale,
or the purchase which such sale offsets, is effected for the bona fide
purpose of profiting from a current difference between the price of the
security sold and the security owned and that such right of acquisition
was originally attached to or represented by another security or was
issued to all the holders of any such securities of the issuer.
(4) The short sale order of a covered security is for a good faith
account and submitted to profit from a current price difference between
a security on a foreign securities market and a security on a securities
market subject to the jurisdiction of the United States, provided that
the short seller has an
[[Page 26]]
offer to buy on a foreign market that allows the seller to immediately
cover the short sale at the time it was made. For the purposes of this
paragraph (d)(4), a depository receipt of a security shall be deemed to
be the same security as the security represented by such receipt.
(5)(i) The short sale order of a covered security is by an
underwriter or member of a syndicate or group participating in the
distribution of a security in connection with an over-allotment of
securities; or
(ii) The short sale order of a covered security is for purposes of a
lay-off sale by an underwriter or member of a syndicate or group in
connection with a distribution of securities through a rights or standby
underwriting commitment.
(6) The short sale order of a covered security is by a broker or
dealer effecting the execution of a customer purchase or the execution
of a customer ``long'' sale on a riskless principal basis. In addition,
for purposes of this paragraph (d)(6), a broker or dealer must have
written policies and procedures in place to assure that, at a minimum:
(i) The customer order was received prior to the offsetting
transaction;
(ii) The offsetting transaction is allocated to a riskless principal
or customer account within 60 seconds of execution; and
(iii) The broker or dealer has supervisory systems in place to
produce records that enable the broker or dealer to accurately and
readily reconstruct, in a time-sequenced manner, all orders on which a
broker or dealer relies pursuant to this exception.
(7) The short sale order is for the sale of a covered security at
the volume weighted average price (VWAP) that meets the following
criteria:
(i) The VWAP for the covered security is calculated by:
(A) Calculating the values for every regular way trade reported in
the consolidated system for the security during the regular trading
session, by multiplying each such price by the total number of shares
traded at that price;
(B) Compiling an aggregate sum of all values; and
(C) Dividing the aggregate sum by the total number of reported
shares for that day in the security.
(ii) The transactions are reported using a special VWAP trade
modifier.
(iii) The VWAP matched security:
(A) Qualifies as an ``actively-traded security'' pursuant to Sec.
242.101 and Sec. 242.102; or
(B) The proposed short sale transaction is being conducted as part
of a basket transaction of twenty or more securities in which the
subject security does not comprise more than 5% of the value of the
basket traded.
(iv) The transaction is not effected for the purpose of creating
actual, or apparent, active trading in or otherwise affecting the price
of any security.
(v) A broker or dealer shall be permitted to act as principal on the
contra-side to fill customer short sale orders only if the broker's or
dealer's position in the covered security, as committed by the broker or
dealer during the pre-opening period of a trading day and aggregated
across all of its customers who propose to sell short the same security
on a VWAP basis, does not exceed 10% of the covered security's relevant
average daily trading volume.
(e) No self-regulatory organization shall have any rule that is not
in conformity with, or conflicts with, this section.
(f) Upon written application or upon its own motion, the Commission
may grant an exemption from the provisions of this section, either
unconditionally or on specified terms and conditions, to any person or
class of persons, to any transaction or class of transactions, or to any
security or class of securities to the extent that such exemption is
necessary or appropriate, in the public interest, and is consistent with
the protection of investors.
[75 FR 11323, Mar. 10, 2010, as amended at 83 FR 58427, Nov. 19, 2018;
86 FR 18809, Apr. 9, 2021]
Sec. 242.203 Borrowing and delivery requirements.
(a) Long sales. (1) If a broker or dealer knows or has reasonable
grounds to believe that the sale of an equity security was or will be
effected pursuant to an
[[Page 27]]
order marked ``long,'' such broker or dealer shall not lend or arrange
for the loan of any security for delivery to the purchaser's broker
after the sale, or fail to deliver a security on the date delivery is
due.
(2) The provisions of paragraph (a)(1) of this section shall not
apply:
(i) To the loan of any security by a broker or dealer through the
medium of a loan to another broker or dealer;
(ii) If the broker or dealer knows, or has been reasonably informed
by the seller, that the seller owns the security, and that the seller
would deliver the security to the broker or dealer prior to the
scheduled settlement of the transaction, but the seller failed to do so;
or
(iii) If, prior to any loan or arrangement to loan any security for
delivery, or failure to deliver, a national securities exchange, in the
case of a sale effected thereon, or a national securities association,
in the case of a sale not effected on an exchange, finds:
(A) That such sale resulted from a mistake made in good faith;
(B) That due diligence was used to ascertain that the circumstances
specified in Sec. 242.200(g) existed; and
(C) Either that the condition of the market at the time the mistake
was discovered was such that undue hardship would result from covering
the transaction by a ``purchase for cash'' or that the mistake was made
by the seller's broker and the sale was at a permissible price under any
applicable short sale price test.
(b) Short sales. (1) A broker or dealer may not accept a short sale
order in an equity security from another person, or effect a short sale
in an equity security for its own account, unless the broker or dealer
has:
(i) Borrowed the security, or entered into a bona-fide arrangement
to borrow the security; or
(ii) Reasonable grounds to believe that the security can be borrowed
so that it can be delivered on the date delivery is due; and
(iii) Documented compliance with this paragraph (b)(1).
(2) The provisions of paragraph (b)(1) of this section shall not
apply to:
(i) A broker or dealer that has accepted a short sale order from
another registered broker or dealer that is required to comply with
paragraph (b)(1) of this section, unless the broker or dealer relying on
this exception contractually undertook responsibility for compliance
with paragraph (b)(1) of this section;
(ii) Any sale of a security that a person is deemed to own pursuant
to Sec. 242.200, provided that the broker or dealer has been reasonably
informed that the person intends to deliver such security as soon as all
restrictions on delivery have been removed. If the person has not
delivered such security within 35 days after the trade date, the broker-
dealer that effected the sale must borrow securities or close out the
short position by purchasing securities of like kind and quantity;
(iii) Short sales effected by a market maker in connection with
bona-fide market making activities in the security for which this
exception is claimed; and
(iv) Transactions in security futures.
(3) If a participant of a registered clearing agency has a fail to
deliver position at a registered clearing agency in a threshold security
for thirteen consecutive settlement days, the participant shall
immediately thereafter close out the fail to deliver position by
purchasing securities of like kind and quantity:
(i) Provided, however, that a participant of a registered clearing
agency that has a fail to deliver position at a registered clearing
agency in a threshold security on the effective date of this amendment
and which, prior to the effective date of this amendment, had been
previously grandfathered from the close-out requirement in this
paragraph (b)(3) (i.e., because the participant of a registered clearing
agency had a fail to deliver position at a registered clearing agency on
the settlement day preceding the day that the security became a
threshold security), shall close out that fail to deliver position
within thirty-five consecutive settlement days of the effective date of
this amendment by purchasing securities of like kind and quantity;
(ii) Provided, however, that if a participant of a registered
clearing agency has a fail to deliver position at a registered clearing
agency in a threshold
[[Page 28]]
security that was sold pursuant to Sec. 230.144 of this chapter for
thirty-five consecutive settlement days, the participant shall
immediately thereafter close out the fail to deliver position in the
security by purchasing securities of like kind and quantity;
(iii) Provided, however, that a participant of a registered clearing
agency that has a fail to deliver position at a registered clearing
agency in a threshold security on the effective date of this amendment
and which, prior to the effective date of this amendment, had been
previously excepted from the close-out requirement in paragraph (b)(3)
of this section (i.e., because the participant of a registered clearing
agency had a fail to deliver position in the threshold security that is
attributed to short sales effected by a registered options market maker
to establish or maintain a hedge on options positions that were created
before the security became a threshold security), shall immediately
close out that fail to deliver position, including any adjustments to
the fail to deliver position, within 35 consecutive settlement days of
the effective date of this amendment by purchasing securities of like
kind and quantity;
(iv) If a participant of a registered clearing agency has a fail to
deliver position at a registered clearing agency in a threshold security
for thirteen consecutive settlement days, the participant and any broker
or dealer for which it clears transactions, including any market maker
that would otherwise be entitled to rely on the exception provided in
paragraph (b)(2)(iii) of this section, may not accept a short sale order
in the threshold security from another person, or effect a short sale in
the threshold security for its own account, without borrowing the
security or entering into a bona-fide arrangement to borrow the
security, until the participant closes out the fail to deliver position
by purchasing securities of like kind and quantity;
(v) If a participant of a registered clearing agency entitled to
rely on the 35 consecutive settlement day close-out requirement
contained in paragraph (b)(3)(i), (b)(3)(ii), or (b)(3)(iii) of this
section has a fail to deliver position at a registered clearing agency
in the threshold security for 35 consecutive settlement days, the
participant and any broker or dealer for which it clears transactions,
including any market maker, that would otherwise be entitled to rely on
the exception provided in paragraph (b)(2)(ii) of this section, may not
accept a short sale order in the threshold security from another person,
or effect a short sale in the threshold security for its own account,
without borrowing the security or entering into a bona fide arrangement
to borrow the security, until the participant closes out the fail to
deliver position by purchasing securities of like kind and quantity;
(vi) If a participant of a registered clearing agency reasonably
allocates a portion of a fail to deliver position to another registered
broker or dealer for which it clears trades or for which it is
responsible for settlement, based on such broker or dealer's short
position, then the provisions of this paragraph (b)(3) relating to such
fail to deliver position shall apply to the portion of such registered
broker or dealer that was allocated the fail to deliver position, and
not to the participant; and
(vii) A participant of a registered clearing agency shall not be
deemed to have fulfilled the requirements of this paragraph (b)(3) where
the participant enters into an arrangement with another person to
purchase securities as required by this paragraph (b)(3), and the
participant knows or has reason to know that the other person will not
deliver securities in settlement of the purchase.
(c) Definitions. (1) For purposes of this section, the term market
maker has the same meaning as in section 3(a)(38) of the Securities
Exchange Act of 1934 (``Exchange Act'') (15 U.S.C. 78c(a)(38)).
(2) For purposes of this section, the term participant has the same
meaning as in section 3(a)(24) of the Exchange Act (15 U.S.C.
78c(a)(24)).
(3) For purposes of this section, the term registered clearing
agency means a clearing agency, as defined in section 3(a)(23)(A) of the
Exchange Act (15 U.S.C. 78c(a)(23)(A)), that is registered with the
Commission pursuant to section 17A of the Exchange Act (15 U.S.C. 78q-
1).
[[Page 29]]
(4) For purposes of this section, the term security future has the
same meaning as in section 3(a)(55) of the Exchange Act (15 U.S.C.
78c(a)(55)).
(5) For purposes of this section, the term settlement day means any
business day on which deliveries of securities and payments of money may
be made through the facilities of a registered clearing agency.
(6) For purposes of this section, the term threshold security means
any equity security of an issuer that is registered pursuant to section
12 of the Exchange Act (15 U.S.C. 78l) or for which the issuer is
required to file reports pursuant to section 15(d) of the Exchange Act
(15 U.S.C. 78o(d)):
(i) For which there is an aggregate fail to deliver position for
five consecutive settlement days at a registered clearing agency of
10,000 shares or more, and that is equal to at least 0.5% of the issue's
total shares outstanding;
(ii) Is included on a list disseminated to its members by a self-
regulatory organization; and
(iii) Provided, however, that a security shall cease to be a
threshold security if the aggregate fail to deliver position at a
registered clearing agency does not exceed the level specified in
paragraph (c)(6)(i) of this section for five consecutive settlement
days.
(d) Exemptive authority. Upon written application or upon its own
motion, the Commission may grant an exemption from the provisions of
this section, either unconditionally or on specified terms and
conditions, to any transaction or class of transactions, or to any
security or class of securities, or to any person or class of persons.
[69 FR 48029, Aug. 6, 2004, as amended at 72 FR 45557, Aug. 14, 2007; 73
FR 61706, Oct. 17, 2008]
Sec. 242.204 Close-out requirement.
(a) A participant of a registered clearing agency must deliver
securities to a registered clearing agency for clearance and settlement
on a long or short sale in any equity security by settlement date, or if
a participant of a registered clearing agency has a fail to deliver
position at a registered clearing agency in any equity security for a
long or short sale transaction in that equity security, the participant
shall, by no later than the beginning of regular trading hours on the
settlement day following the settlement date, immediately close out its
fail to deliver position by borrowing or purchasing securities of like
kind and quantity; Provided, however:
(1) If a participant of a registered clearing agency has a fail to
deliver position at a registered clearing agency in any equity security
and the participant can demonstrate on its books and records that such
fail to deliver position resulted from a long sale, the participant
shall by no later than the beginning of regular trading hours on the
third consecutive settlement day following the settlement date,
immediately close out the fail to deliver position by purchasing or
borrowing securities of like kind and quantity;
(2) If a participant of a registered clearing agency has a fail to
deliver position at a registered clearing agency in any equity security
resulting from a sale of a security that a person is deemed to own
pursuant to Sec. 242.200 and that such person intends to deliver as
soon as all restrictions on delivery have been removed, the participant
shall, by no later than the begining of regular trading hours on the
thirty-fifth consecutive calendar day following the trade date for the
transaction, immediately close out the fail to deliver position by
purchasing securities of like kind and quantity; or
(3) If a participant of a registered clearing agency has a fail to
deliver position at a registered clearing agency in any equity security
that is attributable to bona fide market making activities by a
registered market maker, options market maker, or other market maker
obligated to quote in the over-the-counter market, the participant shall
by no later than the beginning of regular trading hours on the third
consecutive settlement day following the settlement date, immediately
close out the fail to deliver position by purchasing or borrowing
securities of like kind and quantity.
(b) If a participant of a registered clearing agency has a fail to
deliver position in any equity security at a registered clearing agency
and does not close out such fail to deliver position in accordance with
the requirements of
[[Page 30]]
paragraph (a) of this section, the participant and any broker or dealer
from which it receives trades for clearance and settlement, including
any market maker that would otherwise be entitled to rely on the
exception provided in Sec. 242.203(b)(2)(iii), may not accept a short
sale order in the equity security from another person, or effect a short
sale in the equity security for its own account, to the extent that the
broker or dealer submits its short sales to that participant for
clearance and settlement, without first borrowing the security, or
entering into a bona fide arrangement to borrow the security, until the
participant closes out the fail to deliver position by purchasing
securities of like kind and quantity and that purchase has cleared and
settled at a registered clearing agency; Provided, however: A broker or
dealer shall not be subject to the requirements of this paragraph if the
broker or dealer timely certifies to the participant of a registered
clearing agency that it has not incurred a fail to deliver position on
settlement date for a long or short sale in an equity security for which
the participant has a fail to deliver position at a registered clearing
agency or that the broker or dealer is in compliance with paragraph (e)
of this section.
(c) The participant must notify any broker or dealer from which it
receives trades for clearance and settlement, including any market maker
that would otherwise be entitled to rely on the exception provided in
Sec. 242.203(b)(2)(iii):
(1) That the participant has a fail to deliver position in an equity
security at a registered clearing agency that has not been closed out in
accordance with the requirements of paragraph (a) of this section; and
(2) When the purchase that the participant has made to close out the
fail to deliver position has cleared and settled at a registered
clearing agency.
(d) If a participant of a registered clearing agency reasonably
allocates a portion of a fail to deliver position to another registered
broker or dealer for which it clears trades or from which it receives
trades for settlement, based on such broker's or dealer's short
position, the provisions of paragraphs (a) and (b) of this section
relating to such fail to deliver position shall apply to such registered
broker or dealer that was allocated the fail to deliver position, and
not to the participant. A broker or dealer that has been allocated a
portion of a fail to deliver position that does not comply with the
provisions of paragraph (a) of this section must immediately notify the
participant that it has become subject to the requirements of paragraph
(b) of this section.
(e) Even if a participant of a registered clearing agency has not
closed out a fail to deliver position at a registered clearing agency in
accordance with paragraph (a) of this section, or has not allocated a
fail to deliver position to a broker or dealer in accordance with
paragraph (d) of this section, a broker or dealer shall not be subject
to the requirements of paragraph (a) or (b) of this section if the
broker or dealer purchases or borrows the securities, and if:
(1) The purchase or borrow is bona fide;
(2) The purchase or borrow is executed after trade date but by no
later than the end of regular trading hours on settlement date for the
transaction;
(3) The purchase or borrow is of a quantity of securities sufficient
to cover the entire amount of that broker's or dealer's fail to deliver
position at a registered clearing agency in that security; and
(4) The broker or dealer can demonstrate that it has a net flat or
net long position on its books and records on the day of the purchase or
borrow.
(f) A participant of a registered clearing agency shall not be
deemed to have fulfilled the requirements of this section where the
participant enters into an arrangement with another person to purchase
or borrow securities as required by this section, and the participant
knows or has reason to know that the other person will not deliver
securities in settlement of the purchase or borrow.
(g) Definitions. (1) For purposes of this section, the term
settlement date shall mean the business day on which delivery of a
security and payment of money is to be made through the facilities of a
registered clearing agency in connection with the sale of a security.
[[Page 31]]
(2) For purposes of this section, the term regular trading hours has
the same meaning as in Sec. 242.600(b)(77) (Rule 600(b)(77) of
Regulation NMS).
[74 FR 38292, July 31, 2009, as amended at 83 FR 58427, Nov. 19, 2018;
86 FR 18809, Apr. 9, 2021]
Regulation ATS--Alternative Trading Systems
Source: Sections 242.300 through 242.303 appear at 63 FR 70921, Dec.
22, 1998, unless otherwise noted.
Preliminary Notes
1. An alternative trading system is required to comply with the
requirements in this Regulation ATS, unless such alternative trading
system:
(a) Is registered as a national securities exchange;
(b) Is exempt from registration as a national securities exchange
based on the limited volume of transactions effected on the alternative
trading system; or
(c) Trades only government securities and certain other related
instruments.
All alternative trading systems must comply with the antifraud,
antimanipulation, and other applicable provisions of the federal
securities laws.
2. The requirements imposed upon an alternative trading system by
Regulation ATS are in addition to any requirements applicable to broker-
dealers registered under section 15 of the Act, (15 U.S.C. 78o).
3. An alternative trading system must comply with any applicable
state law relating to the offer or sale of securities or the
registration or regulation of persons or entities effecting transactions
in securities.
4. The disclosures made pursuant to the provisions of this section
are in addition to any other disclosure requirements under the federal
securities laws.
Sec. 242.300 Definitions.
For purposes of this section, the following definitions shall apply:
(a) Alternative trading system means any organization, association,
person, group of persons, or system:
(1) That constitutes, maintains, or provides a market place or
facilities for bringing together purchasers and sellers of securities or
for otherwise performing with respect to securities the functions
commonly performed by a stock exchange within the meaning of Sec.
240.3b-16 of this chapter; and
(2) That does not:
(i) Set rules governing the conduct of subscribers other than the
conduct of such subscribers' trading on such organization, association,
person, group of persons, or system; or
(ii) Discipline subscribers other than by exclusion from trading.
(b) Subscriber means any person that has entered into a contractual
agreement with an alternative trading system to access such alternative
trading system for the purpose of effecting transactions in securities
or submitting, disseminating, or displaying orders on such alternative
trading system, including a customer, member, user, or participant in an
alternative trading system. A subscriber, however, shall not include a
national securities exchange or national securities association.
(c) Affiliate of a subscriber means any person that, directly or
indirectly, controls, is under common control with, or is controlled by,
the subscriber, including any employee.
(d) Debt security shall mean any security other than an equity
security, as defined in Sec. 240.3a11-1 of this chapter, as well as
non-participatory preferred stock.
(e) Order means any firm indication of a willingness to buy or sell
a security, as either principal or agent, including any bid or offer
quotation, market order, limit order, or other priced order.
(f) Control means the power, directly or indirectly, to direct the
management or policies of the broker-dealer of an alternative trading
system, whether through ownership of securities, by contract, or
otherwise. A person is presumed to control the broker-dealer of an
alternative trading system, if that person:
(1) Is a director, general partner, or officer exercising executive
responsibility (or having similar status or performing similar
functions);
(2) Directly or indirectly has the right to vote 25 percent or more
of a class of voting security or has the power to sell or direct the
sale of 25 percent or more of a class of voting securities of the
broker-dealer of the alternative trading system; or
(3) In the case of a partnership, has contributed, or has the right
to receive
[[Page 32]]
upon dissolution, 25 percent or more of the capital of the broker-dealer
of the alternative trading system.
(g) NMS stock shall have the meaning provided in Sec. 242.600;
provided, however, that a debt or convertible debt security shall not be
deemed an NMS stock for purposes of this Regulation ATS.
(h) Effective transaction reporting plan shall have the meaning
provided in Sec. 242.600.
(i) Corporate debt security shall mean any security that:
(1) Evidences a liability of the issuer of such security;
(2) Has a fixed maturity date that is at least one year following
the date of issuance; and
(3) Is not an exempted security, as defined in section 3(a)(12) of
the Act (15 U.S.C. 78c(a)(12)).
(j) Commercial paper shall mean any note, draft, or bill of exchange
which arises out of a current transaction or the proceeds of which have
been or are to be used for current transactions, and which has a
maturity at the time of issuance of not exceeding nine months, exclusive
of days of grace, or any renewal thereof the maturity of which is
likewise limited.
(k) NMS Stock ATS means an alternative trading system, as defined in
paragraph (a) of this section, that trades NMS stocks, as defined in
paragraph (g) of this section.
[62 FR 544, Jan. 3, 1997, as amended at 70 FR 37619, June 29, 2005; 74
FR 52372, Oct. 9, 2009; 83 FR 38911, Aug. 7, 2018]
Sec. 242.301 Requirements for alternative trading systems.
(a) Scope of section. An alternative trading system shall comply
with the requirements in paragraph (b) of this section, unless such
alternative trading system:
(1) Is registered as an exchange under section 6 of the Act, (15
U.S.C. 78f);
(2) Is exempted by the Commission from registration as an exchange
based on the limited volume of transactions effected;
(3) Is operated by a national securities association;
(4)(i) Is registered as a broker-dealer under sections 15(b) or 15C
of the Act (15 U.S.C. 78o(b), and 78o-5), or is a bank, and
(ii) Limits its securities activities to the following instruments:
(A) Government securities, as defined in section 3(a)(42) of the
Act, (15 U.S.C. 78c(a)(42));
(B) Repurchase and reverse repurchase agreements solely involving
securities included within paragraph (a)(4)(ii)(A) of this section;
(C) Any put, call, straddle, option, or privilege on a government
security, other than a put, call, straddle, option, or privilege that:
(1) Is traded on one or more national securities exchanges; or
(2) For which quotations are disseminated through an automated
quotation system operated by a registered securities association; and
(D) Commercial paper.
(5) Is exempted, conditionally or unconditionally, by Commission
order, after application by such alternative trading system, from one or
more of the requirements of paragraph (b) of this section or Sec.
242.304. The Commission will grant such exemption only after determining
that such an order is consistent with the public interest, the
protection of investors, and the removal of impediments to, and
perfection of the mechanisms of, a national market system.
(b) Requirements. Every alternative trading system subject to this
Regulation ATS, pursuant to paragraph (a) of this section, shall comply
with the requirements in this paragraph (b).
(1) Broker-dealer registration. The alternative trading system shall
register as a broker-dealer under section 15 of the Act, (15 U.S.C.
78o).
(2) Notice. (i) The alternative trading system shall file an initial
operation report on Form ATS, Sec. 249.637 of this chapter, in
accordance with the instructions therein, at least 20 days prior to
commencing operation as an alternative trading system.
(ii) The alternative trading system shall file an amendment on Form
ATS at least 20 calendar days prior to implementing a material change to
the operation of the alternative trading system.
(iii) If any information contained in the initial operation report
filed under paragraph (b)(2)(i) of this section becomes inaccurate for
any reason and
[[Page 33]]
has not been previously reported to the Commission as an amendment on
Form ATS, the alternative trading system shall file an amendment on Form
ATS correcting such information within 30 calendar days after the end of
each calendar quarter in which the alternative trading system has
operated.
(iv) The alternative trading system shall promptly file an amendment
on Form ATS correcting information previously reported on Form ATS after
discovery that any information filed under paragraphs (b)(2)(i), (ii) or
(iii) of this section was inaccurate when filed.
(v) The alternative trading system shall promptly file a cessation
of operations report on Form ATS in accordance with the instructions
therein upon ceasing to operate as an alternative trading system.
(vi) Every notice or amendment filed pursuant to this paragraph
(b)(2) shall constitute a ``report'' within the meaning of sections 11A,
17(a), 18(a), and 32(a), (15 U.S.C. 78k-1, 78q(a), 78r(a), and 78ff(a)),
and any other applicable provisions of the Act.
(vii) The reports provided for in paragraph (b)(2) of this section
shall be considered filed upon receipt by the Division of Trading and
Markets, at the Commission's principal office in Washington, DC.
Duplicate originals of the reports provided for in paragraphs (b)(2)(i)
through (v) of this section must be filed with surveillance personnel
designated as such by any self-regulatory organization that is the
designated examining authority for the alternative trading system
pursuant to Sec. 240.17d-1 of this chapter simultaneously with filing
with the Commission. Duplicates of the reports required by paragraph
(b)(9) of this section shall be provided to surveillance personnel of
such self-regulatory authority upon request. All reports filed pursuant
to this paragraph (b)(2) and paragraph (b)(9) of this section shall be
deemed confidential when filed.
(viii) An NMS Stock ATS that is operating pursuant to an initial
operation report on Form ATS on file with the Commission as of January
7, 2019 (``Legacy NMS Stock ATS'') shall be subject to the requirements
of paragraphs (b)(2)(i) through (vii) of this section until that ATS
files an initial Form ATS-N with the Commission pursuant to Sec.
242.304(a)(1)(iv)(A). Thereafter, the Legacy NMS Stock ATS shall file
reports pursuant to Sec. 242.304. An alternative trading system that
trades NMS stocks and securities other than NMS stocks shall be subject
to the requirements of Sec. 242.304 of this chapter with respect to NMS
stocks and paragraph (b)(2) of this section with respect to non-NMS
stocks. As of January 7, 2019, an entity seeking to operate as an NMS
Stock ATS shall not be subject to the requirements of paragraphs
(b)(2)(i) through (vii) of this section and shall file reports pursuant
to Sec. 242.304.
(3) Order display and execution access. (i) An alternative trading
system shall comply with the requirements set forth in paragraph
(b)(3)(ii) of this section, with respect to any NMS stock in which the
alternative trading system:
(A) Displays subscriber orders to any person (other than alternative
trading system employees); and
(B) During at least 4 of the preceding 6 calendar months, had an
average daily trading volume of 5 percent or more of the aggregate
average daily share volume for such NMS stock as reported by an
effective transaction reporting plan.
(ii) Such alternative trading system shall provide to a national
securities exchange or national securities association the prices and
sizes of the orders at the highest buy price and the lowest sell price
for such NMS stock, displayed to more than one person in the alternative
trading system, for inclusion in the quotation data made available by
the national securities exchange or national securities association to
vendors pursuant to Sec. 242.602.
(iii) With respect to any order displayed pursuant to paragraph
(b)(3)(ii) of this section, an alternative trading system shall provide
to any broker-dealer that has access to the national securities exchange
or national securities association to which the alternative trading
system provides the prices and sizes of displayed orders pursuant to
paragraph (b)(3)(ii) of this section, the ability to effect a
transaction with such orders that is:
(A) Equivalent to the ability of such broker-dealer to effect a
transaction
[[Page 34]]
with other orders displayed on the exchange or by the association; and
(B) At the price of the highest priced buy order or lowest priced
sell order displayed for the lesser of the cumulative size of such
priced orders entered therein at such price, or the size of the
execution sought by such broker-dealer.
(4) Fees. The alternative trading system shall not charge any fee to
broker-dealers that access the alternative trading system through a
national securities exchange or national securities association, that is
inconsistent with equivalent access to the alternative trading system
required by paragraph (b)(3)(iii) of this section. In addition, if the
national securities exchange or national securities association to which
an alternative trading system provides the prices and sizes of orders
under paragraphs (b)(3)(ii) and (b)(3)(iii) of this section establishes
rules designed to assure consistency with standards for access to
quotations displayed on such national securities exchange, or the market
operated by such national securities association, the alternative
trading system shall not charge any fee to members that is contrary to,
that is not disclosed in the manner required by, or that is inconsistent
with any standard of equivalent access established by such rules.
(5) Fair access. (i) An alternative trading system shall comply with
the requirements in paragraph (b)(5)(ii) of this section, if during at
least 4 of the preceding 6 calendar months, such alternative trading
system had:
(A) With respect to any NMS stock, 5 percent or more of the average
daily volume in that security reported by an effective transaction
reporting plan;
(B) With respect to an equity security that is not an NMS stock and
for which transactions are reported to a self-regulatory organization, 5
percent or more of the average daily trading volume in that security as
calculated by the self-regulatory organization to which such
transactions are reported;
(C) With respect to municipal securities, 5 percent or more of the
average daily volume traded in the United States; or
(D) With respect to corporate debt securities, 5 percent or more of
the average daily volume traded in the United States.
(ii) An alternative trading system shall:
(A) Establish written standards for granting access to trading on
its system;
(B) Not unreasonably prohibit or limit any person in respect to
access to services offered by such alternative trading system by
applying the standards established under paragraph (b)(5)(ii)(A) of this
section in an unfair or discriminatory manner;
(C) Make and keep records of:
(1) All grants of access including, for all subscribers, the reasons
for granting such access; and
(2) All denials or limitations of access and reasons, for each
applicant, for denying or limiting access; and
(D) Report the information required on Form ATS-R (Sec. 249.638 of
this chapter) regarding grants, denials, and limitations of access.
(iii) Notwithstanding paragraph (b)(5)(i) of this section, an
alternative trading system shall not be required to comply with the
requirements in paragraph (b)(5)(ii) of this section, if such
alternative trading system:
(A) Matches customer orders for a security with other customer
orders;
(B) Such customers' orders are not displayed to any person, other
than employees of the alternative trading system; and
(C) Such orders are executed at a price for such security
disseminated by an effective transaction reporting plan, or derived from
such prices.
(6) Capacity, integrity, and security of automated systems. (i) The
alternative trading system shall comply with the requirements in
paragraph (b)(6)(ii) of this section, if during at least 4 of the
preceding 6 calendar months, such alternative trading system had:
(A) With respect to municipal securities, 20 percent or more of the
average daily volume traded in the United States; or
(B) With respect to corporate debt securities, 20 percent or more of
the average daily volume traded in the United States.
[[Page 35]]
(ii) With respect to those systems that support order entry, order
routing, order execution, transaction reporting, and trade comparison,
the alternative trading system shall:
(A) Establish reasonable current and future capacity estimates;
(B) Conduct periodic capacity stress tests of critical systems to
determine such system's ability to process transactions in an accurate,
timely, and efficient manner;
(C) Develop and implement reasonable procedures to review and keep
current its system development and testing methodology;
(D) Review the vulnerability of its systems and data center computer
operations to internal and external threats, physical hazards, and
natural disasters;
(E) Establish adequate contingency and disaster recovery plans;
(F) On an annual basis, perform an independent review, in accordance
with established audit procedures and standards, of such alternative
trading system's controls for ensuring that paragraphs (b)(6)(ii)(A)
through (E) of this section are met, and conduct a review by senior
management of a report containing the recommendations and conclusions of
the independent review; and
(G) Promptly notify the Commission staff of material systems outages
and significant systems changes.
(iii) Notwithstanding paragraph (b)(6)(i) of this section, an
alternative trading system shall not be required to comply with the
requirements in paragraph (b)(6)(ii) of this section, if such
alternative trading system:
(A) Matches customer orders for a security with other customer
orders;
(B) Such customers' orders are not displayed to any person, other
than employees of the alternative trading system; and
(C) Such orders are executed at a price for such security
disseminated by an effective transaction reporting plan, or derived from
such prices.
(7) Examinations, inspections, and investigations. The alternative
trading system shall permit the examination and inspection of its
premises, systems, and records, and cooperate with the examination,
inspection, or investigation of subscribers, whether such examination is
being conducted by the Commission or by a self-regulatory organization
of which such subscriber is a member.
(8) Recordkeeping. The alternative trading system shall:
(i) Make and keep current the records specified in Sec. 242.302;
and
(ii) Preserve the records specified in Sec. 242.303.
(9) Reporting. The alternative trading system shall:
(i) Separately file the information required by Form ATS-R (Sec.
249.638 of this chapter) for transactions in NMS stocks, as defined in
paragraph (g) of this section, and transactions in securities other than
NMS stocks within 30 calendar days after the end of each calendar
quarter in which the market has operated after the effective date of
this section; and
(ii) Separately file the information required by Form ATS-R for
transactions in NMS stocks and transactions in securities other than NMS
stocks within 10 calendar days after an alternative trading system
ceases to operate.
(10) Written procedures to ensure the confidential treatment of
trading information. (i) The alternative trading system shall establish
adequate written safeguards and written procedures to protect
subscribers' confidential trading information. Such written safeguards
and written procedures shall include:
(A) Limiting access to the confidential trading information of
subscribers to those employees of the alternative trading system who are
operating the system or responsible for its compliance with these or any
other applicable rules;
(B) Implementing standards controlling employees of the alternative
trading system trading for their own accounts; and
(ii) The alternative trading system shall adopt and implement
adequate written oversight procedures to ensure that the written
safeguards and procedures established pursuant to paragraph (b)(10)(i)
of this section are followed.
(11) Name. The alternative trading system shall not use in its name
the word ``exchange,'' or derivations of the
[[Page 36]]
word ``exchange,'' such as the term ``stock market.''
[63 FR 70921, Dec. 22, 1998, as amended at 65 FR 13235, Mar. 13, 2000;
70 FR 37619, June 29, 2005; 74 FR 52372, Oct. 9, 2009; 79 FR 72436, Dec.
5, 2014; 83 FR 38911, Aug. 7, 2018]
Sec. 242.302 Recordkeeping requirements for alternative trading systems.
To comply with the condition set forth in paragraph (b)(8) of Sec.
242.301, an alternative trading system shall make and keep current the
following records:
(a) A record of subscribers to such alternative trading system
(identifying any affiliations between the alternative trading system and
subscribers to the alternative trading system, including common
directors, officers, or owners);
(b) Daily summaries of trading in the alternative trading system
including:
(1) Securities for which transactions have been executed;
(2) Transaction volume, expressed with respect to equity securities
in:
(i) Number of trades;
(ii) Number of shares traded; and
(iii) Total settlement value in terms of U.S. dollars; and
(3) Transaction volume, expressed with respect to debt securities
in:
(i) Number of trades; and
(ii) Total U.S. dollar value; and
(c) Time-sequenced records of order information in the alternative
trading system, including:
(1) Date and time (expressed in terms of hours, minutes, and
seconds) that the order was received;
(2) Identity of the security;
(3) The number of shares, or principal amount of bonds, to which the
order applies;
(4) An identification of the order as related to a program trade or
an index arbitrage trade as defined in New York Stock Exchange Rule 80A;
(5) The designation of the order as a buy or sell order;
(6) The designation of the order as a short sale order;
(7) The designation of the order as a market order, limit order,
stop order, stop limit order, or other type or order;
(8) Any limit or stop price prescribed by the order;
(9) The date on which the order expires and, if the time in force is
less than one day, the time when the order expires;
(10) The time limit during which the order is in force;
(11) Any instructions to modify or cancel the order;
(12) The type of account, i.e., retail, wholesale, employee,
proprietary, or any other type of account designated by the alternative
trading system, for which the order is submitted;
(13) Date and time (expressed in terms of hours, minutes, and
seconds) that the order was executed;
(14) Price at which the order was executed;
(15) Size of the order executed (expressed in number of shares or
units or principal amount); and
(16) Identity of the parties to the transaction.
Sec. 242.303 Record preservation requirements for alternative
trading systems.
(a) To comply with the condition set forth in paragraph (b)(8) of
Sec. 242.301, an alternative trading system shall preserve the
following records:
(1) For a period of not less than three years, the first two years
in an easily accessible place, an alternative trading system shall
preserve:
(i) All records required to be made pursuant to Sec. 242.302;
(ii) All notices provided by such alternative trading system to
subscribers generally, whether written or communicated through automated
means, including, but not limited to, notices addressing hours of system
operations, system malfunctions, changes to system procedures,
maintenance of hardware and software, instructions pertaining to access
to the market and denials of, or limitations on, access to the
alternative trading system;
(iii) If subject to paragraph (b)(5)(ii) of Sec. 242.301, at least
one copy of such alternative trading system's standards for access to
trading, all documents relevant to the alternative trading systems
decision to grant, deny, or limit access to any person, and all other
documents made or received by the alternative trading system in the
course of complying with paragraph (b)(5) of Sec. 242.301; and
[[Page 37]]
(iv) At least one copy of all documents made or received by the
alternative trading system in the course of complying with paragraph
(b)(6) of Sec. 242.301, including all correspondence, memoranda,
papers, books, notices, accounts, reports, test scripts, test results,
and other similar records.
(v) At least one copy of the written safeguards and written
procedures to protect subscribers' confidential trading information and
the written oversight procedures created in the course of complying with
paragraph (b)(10) of Sec. 242.301.
(2) During the life of the enterprise and of any successor
enterprise, an alternative trading system shall preserve:
(i) All partnership articles or, in the case of a corporation, all
articles of incorporation or charter, minute books and stock certificate
books; and
(ii) Copies of reports filed pursuant to paragraph (b)(2) of Sec.
242.301 or Sec. 242.304 of this chapter and records made pursuant to
paragraph (b)(5) of Sec. 242.301 of this chapter.
(b) The records required to be maintained and preserved pursuant to
paragraph (a) of this section must be produced, reproduced, and
maintained in paper form or in any of the forms permitted under Sec.
240.17a-4(f) of this chapter.
(c) Alternative trading systems must comply with any other
applicable recordkeeping or reporting requirement in the Act, and the
rules and regulations thereunder. If the information in a record
required to be made pursuant to this section is preserved in a record
made pursuant to Sec. 240.17a-3 or Sec. 240.17a-4 of this chapter, or
otherwise preserved by the alternative trading system (whether in
summary or some other form), this section shall not require the sponsor
to maintain such information in a separate file, provided that the
sponsor can promptly sort and retrieve the information as if it had been
kept in a separate file as a record made pursuant to this section, and
preserves the information in accordance with the time periods specified
in paragraph (a) of this section.
(d) The records required to be maintained and preserved pursuant to
this section may be prepared or maintained by a service bureau,
depository, or other recordkeeping service on behalf of the alternative
trading system. An agreement with a service bureau, depository, or other
recordkeeping service shall not relieve the alternative trading system
from the responsibility to prepare and maintain records as specified in
this section. The service bureau, depository, or other recordkeeping
service shall file with the Commission a written undertaking in a form
acceptable to the Commission, signed by a duly authorized person, to the
effect that such records are the property of the alternative trading
system required to be maintained and preserved and will be surrendered
promptly on request of the alternative trading system, and shall include
the following provision: With respect to any books and records
maintained or preserved on behalf of (name of alternative trading
system), the undersigned hereby undertakes to permit examination of such
books and records at any time, or from time to time, during business
hours by the staff of the Securities and Exchange Commission, any self-
regulatory organization of which the alternative trading system is a
member, or any State securities regulator having jurisdiction over the
alternative trading system, and to promptly furnish to the Commission,
self-regulatory organization of which the alternative trading system is
a member, or any State securities regulator having jurisdiction over the
alternative trading system a true, correct, complete and current hard
copy of any, all, or any part of, such books and records.
(e) Every alternative trading system shall furnish to any
representative of the Commission promptly upon request, legible, true,
and complete copies of those records that are required to be preserved
under this section.
[63 FR 70921, Dec. 22, 1998, as amended at 66 FR 55841, Nov. 2, 2001; 83
FR 38911, Aug. 7, 2018]
Sec. 242.304 NMS Stock ATSs.
(a) Conditions to the exemption. Unless not required to comply with
Regulation ATS pursuant to Sec. 242.301(a), an NMS Stock ATS must
comply with Sec. Sec. 242.300 through 242.304 (except
[[Page 38]]
Sec. 242.301(b)(2)(i) through (vii)) to be exempt pursuant to Sec.
240.3a1-1(a)(2).
(1) Initial Form ATS-N. (i) Filing and effectiveness requirement. No
exemption is available to an NMS Stock ATS pursuant to Sec. 240.3a1-
1(a)(2) unless the NMS Stock ATS files with the Commission an initial
Form ATS-N, in accordance with the conditions of this section, and the
initial Form ATS-N is effective pursuant to paragraph (a)(1)(iii) or
(a)(1)(iv)(A) of this section.
(ii) Commission review period. (A) The Commission may, by order, as
provided in paragraph (a)(1)(iii) of this section, declare an initial
Form ATS-N filed by an NMS Stock ATS ineffective no later than 120
calendar days from the date of filing with the Commission, or, if
applicable, the end of the extended review period. The Commission may
extend the initial Form ATS-N review period for:
(1) An additional 90 calendar days, if the Form ATS-N is unusually
lengthy or raises novel or complex issues that require additional time
for review, in which case the Commission will notify the NMS Stock ATS
in writing within the initial 120-calendar day review period and will
briefly describe the reason for the determination for which additional
time for review is required; or
(2) Any extended review period to which a duly authorized
representative of the NMS Stock ATS agrees in writing.
(B) During review by the Commission of the initial Form ATS-N, the
NMS Stock ATS shall amend its initial Form ATS-N pursuant to the
requirements of paragraphs (a)(2)(i)(B) and (C) of this section. To make
material changes to its initial Form ATS-N during the Commission review
period, the NMS Stock ATS shall withdraw its filed initial Form ATS-N
and may refile an initial Form ATS-N pursuant to paragraph (a)(1) of
this section.
(iii) Effectiveness; Ineffectiveness determination. (A) An initial
Form ATS-N, as amended, filed by an NMS Stock ATS will become effective,
unless declared ineffective, upon the earlier of:
(1) The completion of review by the Commission and publication
pursuant to paragraph (b)(2)(i) of this section; or
(2) The expiration of the review period, or, if applicable, the end
of the extended review period, pursuant to paragraph (a)(1)(ii) of this
section.
(B) The Commission will, by order, declare an initial Form ATS-N
ineffective if it finds, after notice and opportunity for hearing, that
such action is necessary or appropriate in the public interest, and is
consistent with the protection of investors. If the Commission declares
an initial Form ATS-N ineffective, the NMS Stock ATS shall be prohibited
from operating as an NMS Stock ATS pursuant to Sec. 240.3a1-1(a)(2). An
initial Form ATS-N declared ineffective does not prevent the NMS Stock
ATS from subsequently filing a new Form ATS-N.
(iv) Transition for Legacy NMS Stock ATSs. (A) Initial Form ATS-N
filing requirements. A Legacy NMS Stock ATS shall file with the
Commission an initial Form ATS-N, in accordance with the conditions of
this section, no earlier than January 7, 2019, and no later than
February 8, 2019. An initial Form ATS-N filed by a Legacy NMS Stock ATS
shall supersede and replace for purposes of the exemption the previously
filed Form ATS of the Legacy NMS Stock ATS. The Legacy NMS Stock ATS may
operate, on a provisional basis, pursuant to the filed initial Form ATS-
N, and any amendments thereto, during the review of the initial Form
ATS-N by the Commission. An initial Form ATS-N filed by a Legacy NMS
Stock ATS, as amended, will become effective, unless declared
ineffective, upon the earlier of:
(1) The completion of review by the Commission and publication
pursuant to paragraph (b)(2)(i) of this section; or
(2) The expiration of the review period, or, if applicable, the end
of the extended review period, pursuant to paragraph (a)(1)(iv)(B) of
this section.
(B) Commission review period; Ineffectiveness determination. The
Commission may, by order, as provided in paragraph (a)(1)(iii) of this
section, declare an initial Form ATS-N filed by a Legacy NMS Stock ATS
ineffective no later than 120 calendar days from the date of filing with
the Commission, or, if applicable, the end of the extended review
period. The Commission may extend the initial Form ATS-N review period
for a Legacy NMS Stock ATS for:
[[Page 39]]
(1) An additional 120 calendar days if the initial Form ATS-N is
unusually lengthy or raises novel or complex issues that require
additional time for review, in which case the Commission will notify the
Legacy NMS Stock ATS in writing within the initial 120-calendar day
review period and will briefly describe the reason for the determination
for which additional time for review is required; or
(2) Any extended review period to which a duly-authorized
representative of the Legacy NMS Stock ATS agrees in writing.
(C) Amendments to initial Form ATS-N. During review by the
Commission of the initial Form ATS-N filed by a Legacy NMS Stock ATS,
the Legacy NMS Stock ATS shall amend its initial Form ATS-N pursuant to
the requirements of paragraphs (a)(2)(i)(A) through (D) of this section.
(2) Form ATS-N amendment. (i) Filing requirements. An NMS Stock ATS
shall amend a Form ATS-N, in accordance with the conditions of this
section:
(A) At least 30 calendar days, except as provided by paragraph
(a)(2)(i)(D) of this section, prior to the date of implementation of a
material change to the operations of the NMS Stock ATS or to the
activities of the broker-dealer operator or its affiliates that are
subject to disclosure on Form ATS-N (``Material Amendment'');
(B) No later than 30 calendar days after the end of each calendar
quarter to correct information that has become inaccurate or incomplete
for any reason and was not required to be reported to the Commission as
a Form ATS-N amendment pursuant to paragraphs (a)(2)(i)(A), (C), or (D)
of this section (``Updating Amendment'');
(C) Promptly, to correct information in any previous disclosure on
Form ATS-N, after discovery that any information previously filed on
Form ATS-N was materially inaccurate or incomplete when filed
(``Correcting Amendment''); or
(D) No later than seven calendar days after information required to
be disclosed in Part III, Items 24 and 25 on Form ATS-N has become
inaccurate or incomplete (``Order Display and Fair Access Amendment'').
(ii) Commission review period; Ineffectiveness determination. The
Commission will, by order, declare ineffective any Form ATS-N amendment
filed pursuant to paragraphs (a)(2)(i)(A) through (D) of this section,
no later than 30 calendar days from filing with the Commission, if the
Commission finds that such action is necessary or appropriate in the
public interest, and is consistent with the protection of investors. A
Form ATS-N amendment declared ineffective shall prohibit the NMS Stock
ATS from operating pursuant to the ineffective Form ATS-N amendment. A
Form ATS-N amendment declared ineffective does not prevent the NMS Stock
ATS from subsequently filing a new Form ATS-N amendment. During review
by the Commission of a Material Amendment, the NMS Stock ATS shall amend
the Material Amendment pursuant to the requirements of paragraphs
(a)(2)(i)(B) through (C) of this section. To make material changes to a
filed Material Amendment during the Commission review period, an NMS
Stock ATS shall withdraw its filed Material Amendment and must file the
new Material Amendment pursuant to (a)(2)(i)(A) of this section.
(3) Notice of cessation. An NMS Stock ATS shall notice its cessation
of operations on Form ATS-N at least 10 business days prior to the date
the NMS Stock ATS will cease to operate as an NMS Stock ATS. The notice
of cessation shall cause the Form ATS-N to become ineffective on the
date designated by the NMS Stock ATS.
(4) Suspension, limitation, and revocation of the exemption from the
definition of exchange. (i) The Commission will, by order, if it finds,
after notice and opportunity for hearing, that such action is necessary
or appropriate in the public interest, and is consistent with the
protection of investors, suspend for a period not exceeding twelve
months, limit, or revoke the exemption for an NMS Stock ATS pursuant to
Sec. 240.3a1-1(a)(2) of this chapter.
(ii) If the exemption for an NMS Stock ATS is suspended or revoked
pursuant to paragraph (a)(4)(i) of this section, the NMS Stock ATS shall
be prohibited from operating pursuant to the exemption pursuant to Sec.
240.3a1-1(a)(2) of this chapter. If the exemption
[[Page 40]]
for an NMS Stock ATS is limited pursuant to paragraph (a)(4)(i) of this
section, the NMS Stock ATS shall be prohibited from operating in a
manner otherwise inconsistent with the terms and conditions of the
Commission order.
(b) Public disclosures. (1) Every Form ATS-N filed pursuant to this
section shall constitute a ``report'' within the meaning of sections
11A, 17(a), 18(a), and 32(a) (15 U.S.C. 78k-1, 78q(a), 78r(a), and
78ff(a)), and any other applicable provisions of the Act.
(2) The Commission will make public via posting on the Commission's
website, each:
(i) Effective initial Form ATS-N, as amended;
(ii) Order of ineffective initial Form ATS-N;
(iii) Form ATS-N amendment to an effective Form ATS-N:
(A) Material Amendments: The cover page of the Material Amendment
will be made public by the Commission upon filing and, unless the
Commission declares the Material Amendment ineffective, the entirety of
the Material Amendment, as amended, will be made public by the
Commission following the expiration of the review period pursuant to
paragraph (a)(2)(ii) of this section.
(B) Updating, Correcting, and Order Display and Fair Access
Amendments: The entirety of Updating, Correcting, and Order Display and
Fair Access Amendments will be made public by the Commission upon
filing. Notwithstanding the foregoing, an Updating or Correcting
Amendment filed to a Material Amendment will be made public by the
Commission following the expiration of the review period for such
Material Amendment pursuant to paragraph (a)(2)(ii) of this section.
(iv) Order of ineffective Form ATS-N amendment;
(v) Notice of cessation; and
(vi) Order suspending, limiting, or revoking the exemption for an
NMS Stock ATS from the definition of an ``exchange'' pursuant to Sec.
240.3a1-1(a)(2) of this chapter.
(3) Each NMS Stock ATS shall make public via posting on its website
a direct URL hyperlink to the Commission's website that contains the
documents enumerated in paragraph (b)(2) of this section.
(c) Form ATS-N disclosure requirements. (1) An NMS Stock ATS must
file a Form ATS-N in accordance with the instructions therein.
(2) Any report required to be filed with the Commission under this
section shall be filed on Form ATS-N, and include all information as
prescribed in Form ATS-N and the instructions thereto. Such document
shall be executed at, or prior to, the time Form ATS-N is filed and
shall be retained by the NMS Stock ATS in accordance with Sec. Sec.
242.303 and Sec. 232.302 of this chapter, and the instructions in Form
ATS-N.
[83 FR 38911, Aug. 7, 2018]
Customer Margin Requirements for Security Futures
Source: 67 FR 53176, Aug. 14, 2002, unless otherwise noted.
Sec. 242.400 Customer margin requirements for security futures-
-authority, purpose, interpretation, and scope.
(a) Authority and purpose. Sections 242.400 through 242.406 and 17
CFR 41.42 through 41.49 (``this Regulation, Sec. Sec. 242.400 through
242.406'') are issued by the Securities and Exchange Commission
(``Commission'') jointly with the Commodity Futures Trading Commission
(``CFTC''), pursuant to authority delegated by the Board of Governors of
the Federal Reserve System under section 7(c)(2)(A) of the Securities
Exchange Act of 1934 (``Act'') (15 U.S.C. 78g(c)(2)(A)). The principal
purpose of this Regulation (Sec. Sec. 242.400 through 242.406) is to
regulate customer margin collected by brokers, dealers, and members of
national securities exchanges, including futures commission merchants
required to register as brokers or dealers under section 15(b)(11) of
the Act (15 U.S.C. 78o(b)(11)), relating to security futures.
(b) Interpretation. This Regulation (Sec. Sec. 242.400 through
242.406) shall be jointly interpreted by the Commission and the CFTC,
consistent with the criteria set forth in clauses (i) through (iv) of
section 7(c)(2)(B) of the Act (15
[[Page 41]]
U.S.C. 78g(c)(2)(B)) and the provisions of Regulation T (12 CFR part
220).
(c) Scope. (1) This Regulation (Sec. Sec. 242.400 through 242.406)
does not preclude a self-regulatory authority, under rules that are
effective in accordance with section 19(b)(2) of the Act (15 U.S.C.
78s(b)(2)) or section 19(b)(7) of the Act (15 U.S.C. 78s(b)(7)) and, as
applicable, section 5c(c) of the Commodity Exchange Act (``CEA'') (7
U.S.C. 7a-2(c)), or a security futures intermediary from imposing
additional margin requirements on security futures, including higher
initial or maintenance margin levels, consistent with this Regulation
(Sec. Sec. 242.400 through 242.406), or from taking appropriate action
to preserve its financial integrity.
(2) This Regulation (Sec. Sec. 242.400 through 242.406) does not
apply to:
(i) Financial relations between a customer and a security futures
intermediary to the extent that they comply with a portfolio margining
system under rules that meet the criteria set forth in section
7(c)(2)(B) of the Act (15 U.S.C. 78g(c)(2)(B)) and that are effective in
accordance with section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)) and,
as applicable, section 5c(c) of the CEA (7 U.S.C. 7a-2(c));
(ii) Financial relations between a security futures intermediary and
a foreign person involving security futures traded on or subject to the
rules of a foreign board of trade;
(iii) Margin requirements that clearing agencies registered under
section 17A of the Exchange Act (15 U.S.C. 78q-1) or derivatives
clearing organizations registered under section 5b of the CEA (7 U.S.C.
7a-1) impose on their members;
(iv) Financial relations between a security futures intermediary and
a person based on a good faith determination by the security futures
intermediary that such person is an exempted person; and
(v) Financial relations between a security futures intermediary and,
or arranged by a security futures intermediary for, a person relating to
trading in security futures by such person for its own account, if such
person:
(A) Is a member of a national securities exchange or national
securities association registered pursuant to section 15A(a) of the Act
(15 U.S.C. 78o-3(a)); and
(B) Is registered with such exchange or such association as a
security futures dealer pursuant to rules that are effective in
accordance with section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)) and,
as applicable, section 5c(c) of the CEA (7 U.S.C. 7a-2(c)), that:
(1) Require such member to be registered as a floor trader or a
floor broker with the CFTC under Section 4f(a)(1) of the CEA (7 U.S.C.
6f(a)(1)), or as a dealer with the Commission under section 15(b) of the
Act (15 U.S.C. 78o(b));
(2) Require such member to maintain records sufficient to prove
compliance with this paragraph (c)(2)(v) and the rules of the exchange
or association of which it is a member;
(3) Require such member to hold itself out as being willing to buy
and sell security futures for its own account on a regular or continuous
basis; and
(4) Provide for disciplinary action, including revocation of such
member's registration as a security futures dealer, for such member's
failure to comply with this Regulation (Sec. Sec. 242.400 through
242.406) or the rules of the exchange or association.
(d) Exemption. The Commission may exempt, either unconditionally or
on specified terms and conditions, financial relations involving any
security futures intermediary, customer, position, or transaction, or
any class of security futures intermediaries, customers, positions, or
transactions, from one or more requirements of this Regulation
(Sec. Sec. 242.400 through 242.406), if the Commission determines that
such exemption is necessary or appropriate in the public interest and
consistent with the protection of investors. An exemption granted
pursuant to this paragraph shall not operate as an exemption from any
CFTC rules. Any exemption that may be required from such rules must be
obtained separately from the CFTC.
Sec. 242.401 Definitions.
(a) For purposes of this Regulation (Sec. Sec. 242.400 through
242.406) only, the following terms shall have the meanings set forth in
this section.
[[Page 42]]
(1) Applicable margin rules and margin rules applicable to an
account mean the rules and regulations applicable to financial relations
between a security futures intermediary and a customer with respect to
security futures and related positions carried in a securities account
or futures account as provided in Sec. 242.402(a) of this Regulation
(Sec. Sec. 242.400 through 242.406).
(2) Broker shall have the meaning provided in section 3(a)(4) of the
Act (15 U.S.C. 78c(a)(4)).
(3) Contract multiplier means the number of units of a narrow-based
security index expressed as a dollar amount, in accordance with the
terms of the security future contract.
(4) Current market value means, on any day:
(i) With respect to a security future:
(A) If the instrument underlying such security future is a stock,
theproduct of the daily settlement price of such security future as
shown by any regularly published reporting or quotation service, and the
applicable number of shares per contract; or
(B) If the instrument underlying such security future is a narrow-
based security index, as defined in section 3(a)(55)(B) of the Act (15
U.S.C. 78c(a)(55)(B)), the product of the daily settlement price of such
security future as shown by any regularly published reporting or
quotation service, and the applicable contract multiplier.
(ii) With respect to a security other than a security future, the
most recent closing sale price of the security, as shown by any
regularly published reporting or quotation service. If there is no
recent closing sale price, the security futures intermediary may use any
reasonable estimate of the market value of the security as of the most
recent close of business.
(5) Customer excludes an exempted person and includes:
(i) Any person or persons acting jointly:
(A) On whose behalf a security futures intermediary effects a
security futures transaction or carries a security futures position; or
(B) Who would be considered a customer of the security futures
intermediary according to the ordinary usage of the trade;
(ii) Any partner in a security futures intermediary that is
organized as a partnership who would be considered a customer of the
security futures intermediary absent the partnership relationship; and
(iii) Any joint venture in which a security futures intermediary
participates and which would be considered a customer of the security
futures intermediary if the security futures intermediary were not a
participant.
(6) Daily settlement price means, with respect to a security future,
the settlement price of such security future determined at the close of
trading each day, under the rules of the applicable exchange, clearing
agency, or derivatives clearing organization.
(7) Dealer shall have the meaning provided in section 3(a)(5) of the
Act (15 U.S.C. 78c(a)(5)).
(8) Equity means the equity or margin equity in a securities or
futures account, as computed in accordance with the margin rules
applicable to the account and subject to adjustment under Sec.
242.404(c), (d) and (e) of this Regulation (Sec. Sec. 242.400 through
242.406).
(9) Exempted person means:
(i) A member of a national securities exchange, a registered broker
or dealer, or a registered futures commission merchant, a substantial
portion of whose business consists of transactions in securities,
commodity futures, or commodity options with persons other than brokers,
dealers, futures commission merchants, floor brokers, or floor traders,
and includes a person who:
(A) Maintains at least 1000 active accounts on an annual basis for
persons other than brokers, dealers, persons associated with a broker or
dealer, futures commission merchants, floor brokers, floor traders, and
persons affiliated with a futures commission merchant, floor broker, or
floor trader that are effecting transactions in securities, commodity
futures, or commodity options;
(B) Earns at least $10 million in gross revenues on an annual basis
from transactions in securities, commodity futures, or commodity options
with persons other than brokers, dealers, persons associated with a
broker or dealer, futures commission merchants,
[[Page 43]]
floor brokers, floor traders, and persons affiliated with a futures
commission merchant, floor broker, or floor trader; or
(C) Earns at least 10 percent of its gross revenues on an annual
basis from transactions in securities, commodity futures, or commodity
options with persons other than brokers, dealers, persons associated
with a broker or dealer, futures commission merchants, floor brokers,
floor traders, and persons affiliated with a futures commission
merchant, floor broker, or floor trader.
(ii) For purposes of paragraph (a)(9)(i) of this section only,
persons affiliated with a futures commission merchant, floor broker, or
floor trader means any partner, officer, director, or branch manager of
such futures commission merchant, floor broker, or floor trader (or any
person occupying a similar status or performing similar functions), any
person directly or indirectly controlling, controlled by, or under
common control with such futures commission merchant, floor broker, or
floor trader, or any employee of such a futures commission merchant,
floor broker, or floor trader.
(iii) A member of a national securities exchange, a registered
broker or dealer, or a registered futures commission merchant that has
been in existence for less than one year may meet the definition of
exempted person based on a six-month period.
(10) Exempted security shall have the meaning provided in section
3(a)(12) of the Act (15 U.S.C. 78c(a)(12)).
(11) Floor broker shall have the meaning provided in Section 1a(16)
of the CEA (7 U.S.C. 1a(16)).
(12) Floor trader shall have the meaning provided in Section 1a(17)
of the CEA (7 U.S.C. 1a(17)).
(13) Futures account shall have the meaning provided in Sec.
240.15c3-3(a) of this chapter.
(14) Futures commission merchant shall have the meaning provided in
Section 1a of the CEA (7 U.S.C. 1a).
(15) Good faith, with respect to making a determination or accepting
a statement concerning financial relations with a person, means that the
security futures intermediary is alert to the circumstances surrounding
such financial relations, and if in possession of information that would
cause a prudent person not to make the determination or accept the
notice or certification without inquiry, investigates and is satisfied
that it is correct.
(16) Listed option means a put or call option that is:
(i) Issued by a clearing agency that is registered under section 17A
of the Act (15 U.S.C. 17q-1) or cleared and guaranteed by a derivatives
clearing organization that is registered under Section 5b of the CEA (7
U.S.C. 7a-1); and
(ii) Traded on or subject to the rules of a self-regulatory
authority.
(17) Margin call means a demand by a security futures intermediary
to a customer for a deposit of cash, securities or other assets to
satisfy the required margin for security futures or related positions or
a special margin requirement.
(18) Margin deficiency means the amount by which the required margin
in an account is not satisfied by the equity in the account, as computed
in accordance with Sec. 242.404 of this Regulation (Sec. Sec. 242.400
through 242.406).
(19) Margin equity security shall have the meaning provided in
Regulation T.
(20) Margin security shall have the meaning provided in Regulation
T.
(21) Member shall have the meaning provided in section 3(a)(3) of
the Act (15 U.S.C. 78c(a)(3)), and shall include persons registered
under section 15(b)(11) of the Act (15 U.S.C. 78o(b)(11)) that are
permitted to effect transactions on a national securities exchange
without the services of another person acting as executing broker.
(22) Money market mutual fund means any security issued by an
investment company registered under section 8 of the Investment Company
Act of 1940 (15 U.S.C. 80a-8) that is considered a money market fund
under Sec. 270.2a-7 of this chapter.
(23) Persons associated with a broker or dealer shall have the
meaning provided in section 3(a)(18) of the Act (15 U.S.C. 78c(a)(18)).
(24) Regulation T means Regulation T promulgated by the Board of
Governors of the Federal Reserve System, 12 CFR part 220, as amended
from time to time.
[[Page 44]]
(25) Regulation T collateral value, with respect to a security,
means the current market value of the security reduced by the percentage
of required margin for a position in the security held in a margin
account under Regulation T.
(26) Related position, with respect to a security future, means any
position in an account that is combined with the security future to
create an offsetting position as provided in Sec. 242.403(b)(2) of this
Regulation (Sec. Sec. 242.400 through 242.406).
(27) Related transaction, with respect to a position or transaction
in a security future, means:
(i) Any transaction that creates, eliminates, increases or reduces
an offsetting position involving a security future and a related
position, as provided in Sec. 242.403(b)(2) of this Regulation
(Sec. Sec. 242.400 through 242.406); or
(ii) Any deposit or withdrawal of margin for the security future or
a related position, except as provided in Sec. 242.405(b) of this
Regulation (Sec. Sec. 242.400 through 242.406).
(28) Securities account shall have the meaning provided in Sec.
240.15c3-3(a) of this chapter.
(29) Security futures intermediary means any creditor as defined in
Regulation T with respect to its financial relations with any person
involving security futures.
(30) Self-regulatory authority means a national securities exchange
registered under section 6 of the Act (15 U.S.C. 78f), a national
securities association registered under section 15A of the Act (15
U.S.C. 78o-3), a contract market registered under Section 5 of the CEA
(7 U.S.C. 7) or Section 5f of the CEA (7 U.S.C. 7b-1), or a derivatives
transaction execution facility registered under Section 5a of the CEA (7
U.S.C. 7a).
(31) Special margin requirement shall have the meaning provided in
Sec. 242.404(e)(1)(ii) of this Regulation (Sec. Sec. 242.400 through
242.406).
(32) Variation settlement means any credit or debit to a customer
account, made on a daily or intraday basis, for the purpose of marking
to market a security future or any other contract that is:
(i) Issued by a clearing agency that is registered under section 17A
of the Act (15 U.S.C. 78q-1) or cleared and guaranteed by a derivatives
clearing organization that is registered under Section 5b of the CEA (7
U.S.C. 7a-1); and
(ii) Traded on or subject to the rules of a self-regulatory
authority.
(b) Terms used in this Regulation (Sec. Sec. 242.400 through
242.406) and not otherwise defined in this section shall have the
meaning set forth in the margin rules applicable to the account.
(c) Terms used in this Regulation (Sec. Sec. 242.400 through
242.406) and not otherwise defined in this section or in the margin
rules applicable to the account shall have the meaning set forth in the
Act and the CEA; if the definitions of a term in the Act and the CEA are
inconsistent as applied in particular circumstances, such term shall
have the meaning set forth in rules, regulations, or interpretations
jointly promulgated by the Commission and the CFTC.
Sec. 242.402 General provisions.
(a) Applicable margin rules. Except to the extent inconsistent with
this Regulation (Sec. Sec. 242.400 through 242.406):
(1) A security futures intermediary that carries a security future
on behalf of a customer in a securities account shall record and conduct
all financial relations with respect to such security future and related
positions in accordance with Regulation T and the margin rules of the
self-regulatory authorities of which the security futures intermediary
is a member.
(2) A security futures intermediary that carries a security future
on behalf of a customer in a futures account shall record and conduct
all financial relations with respect to such security future and related
positions in accordance with the margin rules of the self-regulatory
authorities of which the security futures intermediary is a member.
(b) Separation and consolidation of accounts. (1) The requirements
for security futures and related positions in one account may not be met
by considering items in any other account, except as permitted or
required under paragraph (b)(2) of this section or applicable margin
rules. If withdrawals of
[[Page 45]]
cash, securities or other assets deposited as margin are permitted under
this Regulation (Sec. Sec. 242.400 through 242.406), bookkeeping
entries shall be made when such cash, securities, or assets are used for
purposes of meeting requirements in another account.
(2) Notwithstanding paragraph (b)(1) of this section, the security
futures intermediary shall consider all futures accounts in which
security futures and related positions are held that are within the same
regulatory classification or account type and are owned by the same
customer to be a single account for purposes of this Regulation
(Sec. Sec. 242.400 through 242.406). The security futures intermediary
may combine such accounts with other futures accounts that are within
the same regulatory classification or account type and are owned by the
same customer for purposes of computing a customer's overall margin
requirement, as permitted or required by applicable margin rules.
(c) Accounts of partners. If a partner of the security futures
intermediary has an account with the security futures intermediary in
which security futures or related positions are held, the security
futures intermediary shall disregard the partner's financial relations
with the firm (as shown in the partner's capital and ordinary drawing
accounts) in calculating the margin or equity of any such account.
(d) Contribution to joint venture. If an account in which security
futures or related positions are held is the account of a joint venture
in which the security futures intermediary participates, any interest of
the security futures intermediary in the joint account in excess of the
interest which the security futures intermediary would have on the basis
of its right to share in the profits shall be margined in accordance
with this Regulation (Sec. Sec. 242.400 through 242.406).
(e) Extensions of credit. (1) No security futures intermediary may
extend or maintain credit to or for any customer for the purpose of
evading or circumventing any requirement under this Regulation
(Sec. Sec. 242.400 through 242.406).
(2) A security futures intermediary may arrange for the extension or
maintenance of credit to or for any customer by any person, provided
that the security futures intermediary does not willfully arrange credit
that would constitute a violation of Regulation T, U or X of the Board
of Governors of the Federal Reserve System (12 CFR parts 220, 221, and
224) by such person.
(f) Change in exempted person status. Once a person ceases to
qualify as an exempted person, it shall notify the security futures
intermediary of this fact before entering into any new security futures
transaction or related transaction that would require additional margin
to be deposited under this Regulation (Sec. Sec. 242.400 through
242.406). Financial relations with respect to any such transactions
shall be subject to the provisions of this Regulation (Sec. Sec.
242.400 through 242.406).
Sec. 242.403 Required margin.
(a) Applicability. Each security futures intermediary shall
determine the required margin for the security futures and related
positions held on behalf of a customer in a securities account or
futures account as set forth in this section.
(b) Required margin--(1) General rule. The required margin for each
long or short position in a security future shall be fifteen (15)
percent of the current market value of such security future.
(2) Offsetting positions. Notwithstanding the margin levels
specified in paragraph (b)(1) of this section, a self-regulatory
authority may set the required initial or maintenance margin level for
an offsetting position involving security futures and related positions
at a level lower than the level that would be required under paragraph
(b)(1) of this section if such positions were margined separately,
pursuant to rules that meet the criteria set forth in section 7(c)(2)(B)
of the Act (15 U.S.C. 78g(c)(2)(B)) and are effective in accordance with
section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)) and, as applicable,
Section 5c(c) of the CEA (7 U.S.C. 7a-2(c)).
(c) Procedures for certain margin level adjustments. An exchange
registered under section 6(g) of the Act (15 U.S.C. 78f(g)), or a
national securities association registered under section 15A(k) of the
Act (15 U.S.C. 78o-3(k)), may raise or lower the required margin level
for a
[[Page 46]]
security future to a level not lower than that specified in this
section, in accordance with section 19(b)(7) of the Act (15 U.S.C.
78s(b)(7)).
[67 FR 53176, Aug. 14, 2002, as amended at 85 FR 75146, Nov. 24, 2020]
Sec. 242.404 Type, form and use of margin.
(a) When margin is required. Margin is required to be deposited
whenever the required margin for security futures and related positions
in an account is not satisfied by the equity in the account, subject to
adjustment under paragraph (c) of this section.
(b) Acceptable margin deposits. (1) The required margin may be
satisfied by a deposit of cash, margin securities (subject to paragraph
(b)(2) of this section), exempted securities, any other asset permitted
under Regulation T to satisfy a margin deficiency in a securities margin
account, or any combination thereof, each as valued in accordance with
paragraph (c) of this section.
(2) Shares of a money market mutual fund may be accepted as a margin
deposit for purposes of this Regulation (Sec. Sec. 242.400 through
242.406), provided that:
(i) The customer waives any right to redeem the shares without the
consent of the security futures intermediary and instructs the fund or
its transfer agent accordingly;
(ii) The security futures intermediary (or clearing agency or
derivatives clearing organization with which the shares are deposited as
margin) obtains the right to redeem the shares in cash, promptly upon
request; and
(iii) The fund agrees to satisfy any conditions necessary or
appropriate to ensure that the shares may be redeemed in cash, promptly
upon request.
(c) Adjustments--(1) Futures accounts. For purposes of this section,
the equity in a futures account shall be computed in accordance with the
margin rules applicable to the account, subject to the following:
(i) A security future shall have no value;
(ii) Each net long or short position in a listed option on a
contract for future delivery shall be valued in accordance with the
margin rules applicable to the account;
(iii) Except as permitted in paragraph (e) of this section, each
margin equity security shall be valued at an amount no greater than its
Regulation T collateral value;
(iv) Each other security shall be valued at an amount no greater
than its current market value reduced by the percentage specified for
such security in Sec. 240.15c3-1(c)(2)(vi) of this chapter;
(v) Freely convertible foreign currency may be valued at an amount
no greater than its daily marked-to-market U.S. dollar equivalent;
(vi) Variation settlement receivable (or payable) by an account at
the close of trading on any day shall be treated as a credit (or debit)
to the account on that day; and
(vii) Each other acceptable margin deposit or component of equity
shall be valued at an amount no greater than its value under Regulation
T.
(2) Securities accounts. For purposes of this section, the equity in
a securities account shall be computed in accordance with the margin
rules applicable to the account, subject to the following:
(i) A security future shall have no value;
(ii) Freely convertible foreign currency may be valued at an amount
no greater than its daily mark-to-market U.S. dollar equivalent; and
(iii) Variation settlement receivable (or payable) to an account at
the close of trading on any day shall be treated as a credit (or debit)
by the account on that day.
(d) Satisfaction restriction. Any transaction, position or deposit
that is used to satisfy the required margin for security futures or
related positions under this Regulation (Sec. Sec. 242.400 through
242.406), including a related position, shall be unavailable to satisfy
the required margin for any other position or transaction or any other
requirement.
(e) Alternative collateral valuation for margin equity securities in
a futures account. (1) Notwithstanding paragraph (c)(1)(iii) of this
section, a security futures intermediary need not value a margin equity
security at its Regulation T collateral value when determining whether
the required margin
[[Page 47]]
for the security futures and related positions in a futures account is
satisfied, provided that:
(i) The margin equity security is valued at an amount no greater
than the current market value of the security reduced by the lowest
percentage level of margin required for a long position in the security
held in a margin account under the rules of a national securities
exchange registered pursuant to section 6(a) of the Act (15 U.S.C.
78f(a));
(ii) Additional margin is required to be deposited on any day when
the day's security futures transactions and related transactions would
create or increase a margin deficiency in the account if the margin
equity securities were valued at their Regulation T collateral value,
and shall be for the amount of the margin deficiency so created or
increased (a ``special margin requirement''); and
(iii) Cash, securities, or other assets deposited as margin for the
positions in an account are not permitted to be withdrawn from the
account at any time that:
(A) Additional cash, securities, or other assets are required to be
deposited as margin under this section for a transaction in the account
on the same or a previous day; or
(B) The withdrawal, together with other transactions, deposits, and
withdrawals on the same day, would create or increase a margin
deficiency if the margin equity securities were valued at their
Regulation T collateral value.
(2) All security futures transactions and related transactions on
any day shall be combined to determine the amount of a special margin
requirement. Additional margin deposited to satisfy a special margin
requirement shall be valued at an amount no greater than its Regulation
T collateral value.
(3) If the alternative collateral valuation method set forth in
paragraph (e) of this section is used with respect to an account in
which security futures or related positions are carried:
(i) An account that is transferred from one security futures
intermediary to another may be treated as if it had been maintained by
the transferee from the date of its origin, if the transferee accepts,
in good faith, a signed statement of the transferor (or, if that is not
practicable, of the customer), that any margin call issued under this
Regulation (Sec. Sec. 242.400 through 242.406) has been satisfied; and
(ii) An account that is transferred from one customer to another as
part of a transaction, not undertaken to avoid the requirements of this
Regulation (Sec. Sec. 242.400 through 242.406), may be treated as if it
had been maintained for the transferee from the date of its origin, if
the security futures intermediary accepts in good faith and keeps with
the transferee account a signed statement of the transferor describing
the circumstances for the transfer.
(f) Guarantee of accounts. No guarantee of a customer's account
shall be given any effect for purposes of determining whether the
required margin in an account is satisfied, except as permitted under
applicable margin rules.
Sec. 242.405 Withdrawal of margin.
(a) By the customer. Except as otherwise provided in Sec.
242.404(e)(1)(ii) of this Regulation (Sec. Sec. 242.400 through
242.406), cash, securities, or other assets deposited as margin for
positions in an account may be withdrawn, provided that the equity in
the account after such withdrawal is sufficient to satisfy the required
margin for the security futures and related positions in the account
under this Regulation (Sec. Sec. 242.400 through 242.406).
(b) By the security futures intermediary. Notwithstanding paragraph
(a) of this section, the security futures intermediary, in its usual
practice, may deduct the following items from an account in which
security futures or related positions are held if they are considered in
computing the balance of such account:
(1) Variation settlement payable, directly or indirectly, to a
clearing agency that is registered under section 17A of the Act (15
U.S.C. 78q-1) or a derivatives clearing organization that is registered
under section 5b of the CEA (7 U.S.C. 7a-1);
(2) Interest charged on credit maintained in the account;
[[Page 48]]
(3) Communication or shipping charges with respect to transactions
in the account;
(4) Payment of commissions, brokerage, taxes, storage and other
charges lawfully accruing in connection with the positions and
transactions in the account;
(5) Any service charges that the security futures intermediary may
impose; or
(6) Any other withdrawals that are permitted from a securities
margin account under Regulation T, to the extent permitted under
applicable margin rules.
Sec. 242.406 Undermargined accounts.
(a) Failure to satisfy margin call. If any margin call required by
this Regulation (Sec. Sec. 242.400 through 242.406) is not met in full,
the security futures intermediary shall take the deduction required with
respect to an undermargined account in computing its net capital under
Commission or CFTC rules.
(b) Accounts that liquidate to a deficit. If at any time there is a
liquidating deficit in an account in which security futures are held,
the security futures intermediary shall take steps to liquidate
positions in the account promptly and in an orderly manner.
(c) Liquidation of undermargined accounts not required.
Notwithstanding Section 402(a) of this Regulation (Sec. Sec. 242.400
through 242.406), section 220.4(d) of Regulation T (12 CFR 220.4(d))
respecting liquidation of positions in lieu of deposit shall not apply
with respect to security futures carried in a securities account.
Regulation AC--Analyst Certification
Source: 68 FR 9492, February 27, 2003, unless otherwise noted.
Sec. 242.500 Definitions.
For purposes of Regulation AC (Sec. Sec. 242.500 through 242.505 of
this chapter) the term:
Covered person of a broker or dealer means an associated person of
that broker or dealer but does not include:
(1) An associated person:
(i) If the associated person has no officers (or persons performing
similar functions) or employees in common with the broker or dealer who
can influence the activities of research analysts or the content of
research reports; and
(ii) If the broker or dealer maintains and enforces written policies
and procedures reasonably designed to prevent the broker or dealer, any
controlling persons, officers (or persons performing similar functions),
and employees of the broker or dealer from influencing the activities of
research analysts and the content of research reports prepared by the
associated person.
(2) An associated person who is an investment adviser:
(i) Not registered with the Commission as an investment adviser
because of the prohibition of section 203A of the Investment Advisers
Act of 1940 (15 U.S.C. 80b-3a); and
(ii) Not registered or required to be registered with the Commission
as a broker or dealer.
Note to definition of covered person: An associated person of a
broker or dealer who is not a covered person continues to be subject to
the federal securities laws, including the anti-fraud provisions of the
federal securities laws.
Foreign person means any person who is not a U.S. person.
Foreign security means a security issued by a foreign issuer for
which a U.S. market is not the principal trading market.
Public appearance means any participation by a research analyst in a
seminar, forum (including an interactive electronic forum), or radio or
television or other interview, in which the research analyst makes a
specific recommendation or provides information reasonably sufficient
upon which to base an investment decision about a security or an issuer.
Registered broker or dealer means a broker or dealer registered or
required to register pursuant to section 15 or section 15B of the
Securities Exchange Act of 1934 (15 U.S.C. 78o or 78o-4) or a government
securities broker or government securities dealer registered or required
to register pursuant to section 15C(a)(1)(A) of the Securities Exchange
Act of 1934 (15 U.S.C. 78o-5(a)(1)(A)).
[[Page 49]]
Research analyst means any natural person who is primarily
responsible for the preparation of the content of a research report.
Research report means a written communication (including an
electronic communication) that includes an analysis of a security or an
issuer and provides information reasonably sufficient upon which to base
an investment decision.
Third party research analyst means:
(1) With respect to a broker or dealer, any research analyst not
employed by that broker or dealer or any associated person of that
broker or dealer; and
(2) With respect to a covered person of a broker or dealer, any
research analyst not employed by that covered person, by the broker or
dealer with whom that covered person is associated, or by any other
associated person of the broker or dealer with whom that covered person
is associated.
United States has the meaning contained in Sec. 230.902(l) of this
chapter.
U.S. person has the meaning contained in Sec. 230.902(k) of this
chapter.
Sec. 242.501 Certifications in connection with research reports.
(a) A broker or dealer or covered person that publishes, circulates,
or provides a research report prepared by a research analyst to a U.S.
person in the United States shall include in that research report a
clear and prominent certification by the research analyst containing the
following:
(1) A statement attesting that all of the views expressed in the
research report accurately reflect the research analyst's personal views
about any and all of the subject securities or issuers; and
(2)(i) A statement attesting that no part of the research analyst's
compensation was, is, or will be, directly or indirectly, related to the
specific recommendations or views expressed by the research analyst in
the research report; or
(ii) A statement:
(A) Attesting that part or all of the research analyst's
compensation was, is, or will be, directly or indirectly, related to the
specific recommendations or views expressed by the research analyst in
the research report;
(B) Identifying the source, amount, and purpose of such
compensation; and
(C) Further disclosing that the compensation could influence the
recommendations or views expressed in the research report.
(b) A broker or dealer or covered person that publishes, circulates,
or provides a research report prepared by a third party research analyst
to a U.S. person in the United States shall be exempt from the
requirements of this section with respect to such research report if the
following conditions are satisfied:
(1) The employer of the third party research analyst has no officers
(or persons performing similar functions) or employees in common with
the broker or dealer or covered person; and
(2) The broker or dealer (or, with respect to a covered person, the
broker or dealer with whom the covered person is associated) maintains
and enforces written policies and procedures reasonably designed to
prevent the broker or dealer, any controlling persons, officers (or
persons performing similar functions), and employees of the broker or
dealer from influencing the activities of the third party research
analyst and the content of research reports prepared by the third party
research analyst.
Sec. 242.502 Certifications in connection with public appearances.
(a) If a broker or dealer publishes, circulates, or provides a
research report prepared by a research analyst employed by the broker or
dealer or covered person to a U.S. person in the United States, the
broker or dealer must make a record within 30 days after any calendar
quarter in which the research analyst made a public appearance that
contains the following:
(1) A statement by the research analyst attesting that the views
expressed by the research analyst in all public appearances during the
calendar quarter accurately reflected the research analyst's personal
views at that time about any and all of the subject securities or
issuers; and
(2) A statement by the research analyst attesting that no part of
the research analyst's compensation was, is,
[[Page 50]]
or will be, directly or indirectly, related to the specific
recommendations or views expressed by the research analyst in such
public appearances.
(b) If the broker or dealer does not obtain a statement by the
research analyst in accordance with paragraph (a) of this section:
(1) The broker or dealer shall promptly notify in writing its
examining authority, designated pursuant to section 17(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78q(d)) and Sec. 240.17d-2
of this chapter, that the research analyst did not provide the
certifications specified in paragraph (a) of this section; and
(2) For 120 days following notification pursuant to paragraph (b)(1)
of this section, the broker or dealer shall disclose in any research
report prepared by the research analyst and published, circulated, or
provided to a U.S. person in the United States that the research analyst
did not provide the certifications specified in paragraph (a) of this
section.
(c) In the case of a research analyst who is employed outside the
United States by a foreign person located outside the United States,
this section shall only apply to a public appearance while the research
analyst is physically present in the United States.
(d) A broker or dealer shall preserve the records specified in
paragraphs (a) and (b) of this section in accordance with Sec. 240.17a-
4 of this chapter and for a period of not less than 3 years, the first 2
years in an accessible place.
Sec. 242.503 Certain foreign research reports.
A foreign person, located outside the United States and not
associated with a registered broker or dealer, who prepares a research
report concerning a foreign security and provides it to a U.S. person in
the United States in accordance with the provisions of Sec. 240.15a-
6(a)(2) of this chapter shall be exempt from the requirements of this
regulation.
Sec. 242.504 Notification to associated persons.
A broker or dealer shall notify any person with whom that broker or
dealer is associated who publishes, circulates, or provides research
reports:
(a) Whether the broker or dealer maintains and enforces written
policies and procedures reasonably designed to prevent the broker or
dealer, any controlling persons, officers (or persons performing similar
functions), or employees of the broker or dealer from influencing the
activities of research analysts and the content of research reports
prepared by the associated person; and
(b) Whether the associated person has any officers (or persons
performing similar functions) or employees in common with the broker or
dealer who can influence the activities of research analysts or the
content of research reports and, if so, the identity of those persons.
Sec. 242.505 Exclusion for news media.
No provision of this Regulation AC shall apply to any person who:
(a) Is the publisher of any bona fide newspaper, news magazine or
business or financial publication of general and regular circulation;
and
(b) Is not registered or required to be registered with the
Commission as a broker or dealer or investment adviser.
Regulation NMS--Regulation of the National Market System
Source: 70 FR 37620, June 29, 2005, unless otherwise noted.
Sec. 242.600 NMS security designation and definitions.
(a) The term national market system security as used in section
11A(a)(2) of the Act (15 U.S.C. 78k-1(a)(2)) shall mean any NMS security
as defined in paragraph (b) of this section.
(b) For purposes of Regulation NMS (Sec. Sec. 242.600 through
242.612), the following definitions shall apply:
(1) Actionable indication of interest means any indication of
interest that explicitly or implicitly conveys all of the following
information with respect to any order available at the venue sending the
indication of interest:
(i) Symbol;
(ii) Side (buy or sell);
[[Page 51]]
(iii) A price that is equal to or better than the national best bid
for buy orders and the national best offer for sell orders; and
(iv) A size that is at least equal to one round lot.
(2) Administrative data means administrative, control, and other
technical messages made available by national securities exchanges and
national securities associations pursuant to the effective national
market system plan or plans required under Sec. 242.603(b) or the
technical specifications thereto as of April 9, 2021.
(3) Aggregate quotation size means the sum of the quotation sizes of
all responsible brokers or dealers who have communicated on any national
securities exchange bids or offers for an NMS security at the same
price.
(4) Alternative trading system has the meaning provided in Sec.
242.300(a).
(5) Auction information means all information specified by national
securities exchange rules or effective national market system plans that
is generated by a national securities exchange leading up to and during
auctions, including opening, reopening, and closing auctions, and
publicly disseminated during the time periods and at the time intervals
provided in such rules and plans.
(6) Automated quotation means a quotation displayed by a trading
center that:
(i) Permits an incoming order to be marked as immediate-or-cancel;
(ii) Immediately and automatically executes an order marked as
immediate-or-cancel against the displayed quotation up to its full size;
(iii) Immediately and automatically cancels any unexecuted portion
of an order marked as immediate-or-cancel without routing the order
elsewhere;
(iv) Immediately and automatically transmits a response to the
sender of an order marked as immediate-or-cancel indicating the action
taken with respect to such order; and
(v) Immediately and automatically displays information that updates
the displayed quotation to reflect any change to its material terms.
(7) Automated trading center means a trading center that:
(i) Has implemented such systems, procedures, and rules as are
necessary to render it capable of displaying quotations that meet the
requirements for an automated quotation set forth in paragraph (b)(6) of
this section;
(ii) Identifies all quotations other than automated quotations as
manual quotations;
(iii) Immediately identifies its quotations as manual quotations
whenever it has reason to believe that it is not capable of displaying
automated quotations; and
(iv) Has adopted reasonable standards limiting when its quotations
change from automated quotations to manual quotations, and vice versa,
to specifically defined circumstances that promote fair and efficient
access to its automated quotations and are consistent with the
maintenance of fair and orderly markets.
(8) Average effective spread means the share-weighted average of
effective spreads for order executions calculated, for buy orders, as
double the amount of difference between the execution price and the
midpoint of the national best bid and national best offer at the time of
order receipt and, for sell orders, as double the amount of difference
between the midpoint of the national best bid and national best offer at
the time of order receipt and the execution price.
(9) Average realized spread means the share-weighted average of
realized spreads for order executions calculated, for buy orders, as
double the amount of difference between the execution price and the
midpoint of the national best bid and national best offer five minutes
after the time of order execution and, for sell orders, as double the
amount of difference between the midpoint of the national best bid and
national best offer five minutes after the time of order execution and
the execution price; provided, however, that the midpoint of the final
national best bid and national best offer disseminated for regular
trading hours shall be used to calculate a realized spread if it is
disseminated less than five minutes after the time of order execution.
[[Page 52]]
(10) Best bid and best offer mean the highest priced bid and the
lowest priced offer.
(11) Bid or offer means the bid price or the offer price
communicated by a member of a national securities exchange or member of
a national securities association to any broker or dealer, or to any
customer, at which it is willing to buy or sell one or more round lots
of an NMS security, as either principal or agent, but shall not include
indications of interest.
(12) Block size with respect to an order means it is:
(i) Of at least 10,000 shares; or
(ii) For a quantity of stock having a market value of at least
$200,000.
(13) Categorized by order size means dividing orders into separate
categories for sizes from 100 to 499 shares, from 500 to 1999 shares,
from 2000 to 4999 shares, and 5000 or greater shares.
(14) Categorized by order type means dividing orders into separate
categories for market orders, marketable limit orders, inside-the-quote
limit orders, at-the-quote limit orders, and near-the-quote limit
orders.
(15) Categorized by security means dividing orders into separate
categories for each NMS stock that is included in a report.
(16) Competing consolidator means a securities information processor
required to be registered pursuant to Sec. 242.614 (Rule 614) or a
national securities exchange or national securities association that
receives information with respect to quotations for and transactions in
NMS stocks and generates a consolidated market data product for
dissemination to any person.
(17) Consolidated display means:
(i) The prices, sizes, and market identifications of the national
best bid and national best offer for a security; and
(ii) Consolidated last sale information for a security.
(18) Consolidated last sale information means the price, volume, and
market identification of the most recent transaction report for a
security that is disseminated pursuant to an effective national market
system plan.
(19) Consolidated market data means the following data, consolidated
across all national securities exchanges and national securities
associations:
(i) Core data;
(ii) Regulatory data;
(iii) Administrative data;
(iv) Self-regulatory organization-specific program data; and
(v) Additional regulatory, administrative, or self-regulatory
organization-specific program data elements defined as such pursuant to
the effective national market system plan or plans required under Sec.
242.603(b).
(20) Consolidated market data product means any data product
developed by a competing consolidator that contains consolidated market
data or data components of consolidated market data. For purposes of
this paragraph (b)(20), data components of consolidated market data
include the enumerated elements, and any subcomponent of the enumerated
elements, of consolidated market data in paragraph (b)(19) of this
section. All consolidated market data products must reflect data
consolidated across all national securities exchanges and national
securities associations.
(21) Core data means:
(i) The following information with respect to quotations for, and
transactions in, NMS stocks:
(A) Quotation sizes;
(B) Aggregate quotation sizes;
(C) Best bid and best offer;
(D) National best bid and national best offer;
(E) Protected bid and protected offer;
(F) Transaction reports;
(G) Last sale data;
(H) Odd-lot information;
(I) Depth of book data; and
(J) Auction information.
(ii) For purposes of the calculation and dissemination of core data
by competing consolidators, as defined in paragraph (b)(16) of this
section, and the calculation of core data by self-aggregators, as
defined in paragraph (b)(84) of this section, the best bid and best
offer, national best bid and national best offer, protected bid and
protected offer, and depth of book data shall include odd-lots that when
aggregated are equal to or greater than a round lot; such aggregation
shall occur
[[Page 53]]
across multiple prices and shall be disseminated at the least aggressive
price of all such aggregated odd-lots.
(iii) Competing consolidators shall represent the quotation sizes of
the following data elements, if disseminated in a consolidated market
data product as defined in paragraph (b)(20) of this section, as the
number of shares rounded down to the nearest multiple of a round lot:
The best bid and best offer, national best bid and national best offer,
protected bid and protected offer, depth of book data, and auction
information.
(iv) Competing consolidators shall attribute the following data
elements, if disseminated in a consolidated market data product as
defined in paragraph (b)(20) of this section, to the national securities
exchange or national securities association that is the source of each
such data element: Best bid and best offer, national best bid and
national best offer, protected bid and protected offer, transaction
reports, last sale data, odd-lot information, depth of book data, and
auction information.
(22) Covered order means any market order or any limit order
(including immediate-or-cancel orders) received by a market center
during regular trading hours at a time when a national best bid and
national best offer is being disseminated, and, if executed, is executed
during regular trading hours, but shall exclude any order for which the
customer requests special handling for execution, including, but not
limited to, orders to be executed at a market opening price or a market
closing price, orders submitted with stop prices, orders to be executed
only at their full size, orders to be executed on a particular type of
tick or bid, orders submitted on a ``not held'' basis, orders for other
than regular settlement, and orders to be executed at prices unrelated
to the market price of the security at the time of execution.
(23) Customer means any person that is not a broker or dealer.
(24) Customer limit order means an order to buy or sell an NMS stock
at a specified price that is not for the account of either a broker or
dealer; provided, however, that the term customer limit order shall
include an order transmitted by a broker or dealer on behalf of a
customer.
(25) Customer order means an order to buy or sell an NMS security
that is not for the account of a broker or dealer, but shall not include
any order for a quantity of a security having a market value of at least
$50,000 for an NMS security that is an option contract and a market
value of at least $200,000 for any other NMS security.
(26) Depth of book data means all quotation sizes at each national
securities exchange and on a facility of a national securities
association at each of the next five prices at which there is a bid that
is lower than the national best bid and offer that is higher than the
national best offer. For these five prices, the aggregate size available
at each price, if any, at each national securities exchange and national
securities association shall be attributed to such exchange or
association.
(27) Directed order means an order from a customer that the customer
specifically instructed the broker or dealer to route to a particular
venue for execution.
(28) Dynamic market monitoring device means any service provided by
a vendor on an interrogation device or other display that:
(i) Permits real-time monitoring, on a dynamic basis, of transaction
reports, last sale data, or quotations with respect to a particular
security; and
(ii) Displays the most recent transaction report, last sale data, or
quotation with respect to that security until such report, data, or
quotation has been superseded or supplemented by the display of a new
transaction report, last sale data, or quotation reflecting the next
reported transaction or quotation in that security.
(29) Effective national market system plan means any national market
system plan approved by the Commission (either temporarily or on a
permanent basis) pursuant to Sec. 242.608.
(30) Effective transaction reporting plan means any transaction
reporting plan approved by the Commission pursuant to Sec. 242.601.
(31) Electronic communications network means, for the purposes of
Sec. 242.602(b)(5), any electronic system
[[Page 54]]
that widely disseminates to third parties orders entered therein by an
exchange market maker or OTC market maker, and permits such orders to be
executed against in whole or in part; except that the term electronic
communications network shall not include:
(i) Any system that crosses multiple orders at one or more specified
times at a single price set by the system (by algorithm or by any
derivative pricing mechanism) and does not allow orders to be crossed or
executed against directly by participants outside of such times; or
(ii) Any system operated by, or on behalf of, an OTC market maker or
exchange market maker that executes customer orders primarily against
the account of such market maker as principal, other than riskless
principal.
(32) Exchange market maker means any member of a national securities
exchange that is registered as a specialist or market maker pursuant to
the rules of such exchange.
(33) Exchange-traded security means any NMS security or class of NMS
securities listed and registered, or admitted to unlisted trading
privileges, on a national securities exchange; provided, however, that
securities not listed on any national securities exchange that are
traded pursuant to unlisted trading privileges are excluded.
(34) Executed at the quote means, for buy orders, execution at a
price equal to the national best offer at the time of order receipt and,
for sell orders, execution at a price equal to the national best bid at
the time of order receipt.
(35) Executed outside the quote means, for buy orders, execution at
a price higher than the national best offer at the time of order receipt
and, for sell orders, execution at a price lower than the national best
bid at the time of order receipt.
(36) Executed with price improvement means, for buy orders,
execution at a price lower than the national best offer at the time of
order receipt and, for sell orders, execution at a price higher than the
national best bid at the time of order receipt.
(37) Inside-the-quote limit order, at-the-quote limit order, and
near-the-quote limit order mean non-marketable buy orders with limit
prices that are, respectively, higher than, equal to, and lower by $0.10
or less than the national best bid at the time of order receipt, and
non-marketable sell orders with limit prices that are, respectively,
lower than, equal to, and higher by $0.10 or less than the national best
offer at the time of order receipt.
(38) Intermarket sweep order means a limit order for an NMS stock
that meets the following requirements:
(i) When routed to a trading center, the limit order is identified
as an intermarket sweep order; and
(ii) Simultaneously with the routing of the limit order identified
as an intermarket sweep order, one or more additional limit orders, as
necessary, are routed to execute against the full displayed size of any
protected bid, in the case of a limit order to sell, or the full
displayed size of any protected offer, in the case of a limit order to
buy, for the NMS stock with a price that is superior to the limit price
of the limit order identified as an intermarket sweep order. These
additional routed orders also must be marked as intermarket sweep
orders.
(39) Interrogation device means any securities information retrieval
system capable of displaying transaction reports, last sale data, or
quotations upon inquiry, on a current basis on a terminal or other
device.
(40) Joint self-regulatory organization plan means a plan as to
which two or more self-regulatory organizations, acting jointly, are
sponsors.
(41) Last sale data means any price or volume data associated with a
transaction.
(42) Listed equity security means any equity security listed and
registered, or admitted to unlisted trading privileges, on a national
securities exchange.
(43) Listed option means any option traded on a registered national
securities exchange or automated facility of a national securities
association.
(44) Make publicly available means posting on an Internet Web site
that is free and readily accessible to the public, furnishing a written
copy to customers on request without charge, and notifying customers at
least annually in writing that a written copy will be furnished on
request.
[[Page 55]]
(45) Manual quotation means any quotation other than an automated
quotation.
(46) Market center means any exchange market maker, OTC market
maker, alternative trading system, national securities exchange, or
national securities association.
(47) Marketable limit order means any buy order with a limit price
equal to or greater than the national best offer at the time of order
receipt, or any sell order with a limit price equal to or less than the
national best bid at the time of order receipt.
(48) Moving ticker means any continuous real-time moving display of
transaction reports or last sale data (other than a dynamic market
monitoring device) provided on an interrogation or other display device.
(49) Nasdaq security means any registered security listed on The
Nasdaq Stock Market, Inc.
(50) National best bid and national best offer means, with respect
to quotations for an NMS stock, the best bid and best offer for such
stock that are calculated and disseminated on a current and continuing
basis by a competing consolidator or calculated by a self-aggregator
and, for NMS securities other than NMS stocks, the best bid and best
offer for such security that are calculated and disseminated on a
current and continuing basis by a plan processor pursuant to an
effective national market system plan; provided, that in the event two
or more market centers transmit to the plan processor, a competing
consolidator or a self-aggregator identical bids or offers for an NMS
security, the best bid or best offer (as the case may be) shall be
determined by ranking all such identical bids or offers (as the case may
be) first by size (giving the highest ranking to the bid or offer
associated with the largest size), and then by time (giving the highest
ranking to the bid or offer received first in time).
(51) National market system plan means any joint self-regulatory
organization plan in connection with:
(i) The planning, development, operation or regulation of a national
market system (or a subsystem thereof) or one or more facilities
thereof; or
(ii) The development and implementation of procedures and/or
facilities designed to achieve compliance by self-regulatory
organizations and their members with any section of this Regulation NMS
and part 240, subpart A of this chapter promulgated pursuant to section
11A of the Act (15 U.S.C. 78k-1).
(52) National securities association means any association of
brokers and dealers registered pursuant to section 15A of the Act (15
U.S.C. 78o-3).
(53) National securities exchange means any exchange registered
pursuant to section 6 of the Act (15 U.S.C. 78f).
(54) NMS security means any security or class of securities for
which transaction reports are collected, processed, and made available
pursuant to an effective transaction reporting plan, or an effective
national market system plan for reporting transactions in listed
options.
(55) NMS stock means any NMS security other than an option.
(56) Non-directed order means any order from a customer other than a
directed order.
(57) Non-marketable limit order means any limit order other than a
marketable limit order.
(58) Odd-lot means an order for the purchase or sale of an NMS stock
in an amount less than a round lot.
(59) Odd-lot information means:
(i) Odd-lot transaction data disseminated pursuant to the effective
national market system plan or plans required under Sec. 242.603(b) as
of April 9, 2021; and
(ii) Odd-lots at a price greater than or equal to the national best
bid and less than or equal to the national best offer, aggregated at
each price level at each national securities exchange and national
securities association.
(60) Options class means all of the put option or call option series
overlying a security, as defined in section 3(a)(10) of the Act (15
U.S.C. 78c(a)(10)).
(61) Options series means the contracts in an options class that
have the same unit of trade, expiration date, and exercise price, and
other terms or conditions.
(62) Orders providing liquidity means orders that were executed
against after resting at a trading center.
[[Page 56]]
(63) Orders removing liquidity means orders that executed against
resting trading interest at a trading center.
(64) OTC market maker means any dealer that holds itself out as
being willing to buy from and sell to its customers, or others, in the
United States, an NMS stock for its own account on a regular or
continuous basis otherwise than on a national securities exchange in
amounts of less than block size.
(65) Participants, when used in connection with a national market
system plan, means any self-regulatory organization which has agreed to
act in accordance with the terms of the plan but which is not a
signatory of such plan.
(66) Payment for order flow has the meaning provided in Sec.
240.10b-10 of this chapter.
(67) Plan processor means any self-regulatory organization or
securities information processor acting as an exclusive processor in
connection with the development, implementation and/or operation of any
facility contemplated by an effective national market system plan.
(68) Primary listing exchange means, for each NMS stock, the
national securities exchange identified as the primary listing exchange
in the effective national market system plan or plans required under
Sec. 242.603(b).
(69) Profit-sharing relationship means any ownership or other type
of affiliation under which the broker or dealer, directly or indirectly,
may share in any profits that may be derived from the execution of non-
directed orders.
(70) Protected bid or protected offer means a quotation in an NMS
stock that:
(i) Is displayed by an automated trading center;
(ii) Is disseminated pursuant to an effective national market system
plan; and
(iii) Is an automated quotation that is the best bid or best offer
of a national securities exchange, or the best bid or best offer of a
national securities association.
(71) Protected quotation means a protected bid or a protected offer.
(72) Published aggregate quotation size means the aggregate
quotation size calculated by a national securities exchange and
displayed by a vendor on a terminal or other display device at the time
an order is presented for execution to a responsible broker or dealer.
(73) Published bid and published offer means the bid or offer of a
responsible broker or dealer for an NMS security communicated by it to
its national securities exchange or association pursuant to Sec.
242.602 and displayed by a vendor on a terminal or other display device
at the time an order is presented for execution to such responsible
broker or dealer.
(74) Published quotation size means the quotation size of a
responsible broker or dealer communicated by it to its national
securities exchange or association pursuant to Sec. 242.602 and
displayed by a vendor on a terminal or other display device at the time
an order is presented for execution to such responsible broker or
dealer.
(75) Quotation means a bid or an offer.
(76) Quotation size, when used with respect to a responsible
broker's or dealer's bid or offer for an NMS security, means:
(i) The number of shares (or units of trading) of that security
which such responsible broker or dealer has specified, for purposes of
dissemination to vendors, that it is willing to buy at the bid price or
sell at the offer price comprising its bid or offer, as either principal
or agent; or
(ii) In the event such responsible broker or dealer has not so
specified, a normal unit of trading for that NMS security.
(77) Regular trading hours means the time between 9:30 a.m. and 4:00
p.m. Eastern Time, or such other time as is set forth in the procedures
established pursuant to Sec. 242.605(a)(2).
(78) Regulatory data means:
(i) Information required to be collected or calculated by the
primary listing exchange for an NMS stock and provided to competing
consolidators and self-aggregators pursuant to the effective national
market system plan or plans required under Sec. 242.603(b), including,
at a minimum:
(A) Information regarding Short Sale Circuit Breakers pursuant to
Sec. 242.201;
(B) Information regarding Price Bands required pursuant to the Plan
to
[[Page 57]]
Address Extraordinary Market Volatility (LULD Plan);
(C) Information relating to regulatory halts or trading pauses (news
dissemination/pending, LULD, Market-Wide Circuit Breakers) and
reopenings or resumptions;
(D) The official opening and closing prices of the primary listing
exchange; and
(E) An indicator of the applicable round lot size.
(ii) Information required to be collected or calculated by the
national securities exchange or national securities association on which
an NMS stock is traded and provided to competing consolidators and self-
aggregators pursuant to the effective national market system plan or
plans required under Sec. 242.603(b), including, at a minimum:
(A) Whenever such national securities exchange or national
securities association receives a bid (offer) below (above) an NMS
stock's lower (upper) LULD price band, an appropriate regulatory data
flag identifying the bid (offer) as non-executable; and
(B) Other regulatory messages including subpenny execution and
trade-though exempt indicators.
(iii) For purposes of paragraph (b)(78)(i)(C) of this section, the
primary listing exchange that has the largest proportion of companies
included in the S&P 500 Index shall monitor the S&P 500 Index throughout
the trading day, determine whether a Level 1, Level 2, or Level 3
decline, as defined in self-regulatory organization rules related to
Market-Wide Circuit Breakers, has occurred, and immediately inform the
other primary listing exchanges of all such declines.
(79) Responsible broker or dealer means:
(i) When used with respect to bids or offers communicated on a
national securities exchange, any member of such national securities
exchange who communicates to another member on such national securities
exchange, at the location (or locations) or through the facility or
facilities designated by such national securities exchange for trading
in an NMS security a bid or offer for such NMS security, as either
principal or agent; provided, however, that, in the event two or more
members of a national securities exchange have communicated on or
through such national securities exchange bids or offers for an NMS
security at the same price, each such member shall be considered a
responsible broker or dealer for that bid or offer, subject to the rules
of priority and precedence then in effect on that national securities
exchange; and further provided, that for a bid or offer which is
transmitted from one member of a national securities exchange to another
member who undertakes to represent such bid or offer on such national
securities exchange as agent, only the last member who undertakes to
represent such bid or offer as agent shall be considered the responsible
broker or dealer for that bid or offer; and
(ii) When used with respect to bids and offers communicated by a
member of an association to a broker or dealer or a customer, the member
communicating the bid or offer (regardless of whether such bid or offer
is for its own account or on behalf of another person).
(80) Revised bid or offer means a market maker's bid or offer which
supersedes its published bid or published offer.
(81) Revised quotation size means a market maker's quotation size
which supersedes its published quotation size.
(82) Round lot means:
(i) For any NMS stock for which the prior calendar month's average
closing price on the primary listing exchange was $250.00 or less per
share, an order for the purchase or sale of an NMS stock of 100 shares;
(ii) For any NMS stock for which the prior calendar month's average
closing price on the primary listing exchange was $250.01 to $1,000.00
per share, an order for the purchase or sale of an NMS stock of 40
shares;
(iii) For any NMS stock for which the prior calendar month's average
closing price on the primary listing exchange was $1,000.01 to
$10,000.00 per share, an order for the purchase or sale of an NMS stock
of 10 shares;
(iv) For any NMS stock for which the prior calendar month's average
closing price on the primary listing exchange was $10,000.01 or more per
share, an
[[Page 58]]
order for the purchase or sale of an NMS stock of 1 share; and
(v) For any NMS stock for which the prior calendar month's average
closing price is not available, an order for the purchase or sale of an
NMS stock of 100 shares.
(83) Self-aggregator means a broker, dealer, national securities
exchange, national securities association, or investment adviser
registered with the Commission that receives information with respect to
quotations for and transactions in NMS stocks, including all data
necessary to generate consolidated market data, and generates
consolidated market data solely for internal use. A self-aggregator may
make consolidated market data available to its affiliates that are
registered with the Commission for their internal use. Except as
provided in the preceding sentence, a self-aggregator may not
disseminate or otherwise make available consolidated market data, or
components of consolidated market data, as provided in paragraph (b)(20)
of this section, to any person.
(84) Self-regulatory organization means any national securities
exchange or national securities association.
(85) Self-regulatory organization-specific program data means:
(i) Information related to retail liquidity programs specified by
the rules of national securities exchanges and disseminated pursuant to
the effective national market system plan or plans required under Sec.
242.603(b) as of April 9, 2021; and
(ii) Other self-regulatory organization-specific information with
respect to quotations for or transactions in NMS stocks as specified by
the effective national market system plan or plans required under Sec.
242.603(b).
(86) Specified persons, when used in connection with any
notification required to be provided pursuant to Sec. 242.602(a)(3) and
any election (or withdrawal thereof) permitted under Sec.
242.602(a)(5), means:
(i) Each vendor;
(ii) Each plan processor; and
(iii) The processor for the Options Price Reporting Authority (in
the case of a notification for a subject security which is a class of
securities underlying options admitted to trading on any national
securities exchange).
(87) Sponsor, when used in connection with a national market system
plan, means any self-regulatory organization which is a signatory to
such plan and has agreed to act in accordance with the terms of the
plan.
(88) SRO display-only facility means a facility operated by or on
behalf of a national securities exchange or national securities
association that displays quotations in a security, but does not execute
orders against such quotations or present orders to members for
execution.
(89) SRO trading facility means a facility operated by or on behalf
of a national securities exchange or a national securities association
that executes orders in a security or presents orders to members for
execution.
(90) Subject security means:
(i) With respect to a national securities exchange:
(A) Any exchange-traded security other than a security for which the
executed volume of such exchange, during the most recent calendar
quarter, comprised one percent or less of the aggregate trading volume
for such security as reported pursuant to an effective transaction
reporting plan or effective national market system plan; and
(B) Any other NMS security for which such exchange has in effect an
election, pursuant to Sec. 242.602(a)(5)(i), to collect, process, and
make available to a vendor bids, offers, quotation sizes, and aggregate
quotation sizes communicated on such exchange; and
(ii) With respect to a member of a national securities association:
(A) Any exchange-traded security for which such member acts in the
capacity of an OTC market maker unless the executed volume of such
member, during the most recent calendar quarter, comprised one percent
or less of the aggregate trading volume for such security as reported
pursuant to an effective transaction reporting plan or effective
national market system plan; and
(B) Any other NMS security for which such member acts in the
capacity of an OTC market maker and has in effect an election, pursuant
to
[[Page 59]]
Sec. 242.602(a)(5)(ii), to communicate to its association bids, offers,
and quotation sizes for the purpose of making such bids, offers, and
quotation sizes available to a vendor.
(91) Time of order execution means the time (to the second) that an
order was executed at any venue.
(92) Time of order receipt means the time (to the second) that an
order was received by a market center for execution.
(93) Time of the transaction has the meaning provided in Sec.
240.10b-10 of this chapter.
(94) Trade-through means the purchase or sale of an NMS stock during
regular trading hours, either as principal or agent, at a price that is
lower than a protected bid or higher than a protected offer.
(95) Trading center means a national securities exchange or national
securities association that operates an SRO trading facility, an
alternative trading system, an exchange market maker, an OTC market
maker, or any other broker or dealer that executes orders internally by
trading as principal or crossing orders as agent.
(96) Trading rotation means, with respect to an options class, the
time period on a national securities exchange during which:
(i) Opening, re-opening, or closing transactions in options series
in such options class are not yet completed; and
(ii) Continuous trading has not yet commenced or has not yet ended
for the day in options series in such options class.
(97) Transaction report means a report containing the price and
volume associated with a transaction involving the purchase or sale of
one or more round lots of a security.
(98) Transaction reporting association means any person authorized
to implement or administer any transaction reporting plan on behalf of
persons acting jointly under Sec. 242.601(a).
(99) Transaction reporting plan means any plan for collecting,
processing, making available or disseminating transaction reports with
respect to transactions in securities filed with the Commission pursuant
to, and meeting the requirements of, Sec. 242.601.
(100) Vendor means any securities information processor engaged in
the business of disseminating transaction reports, last sale data, or
quotations with respect to NMS securities to brokers, dealers, or
investors on a real-time or other current and continuing basis, whether
through an electronic communications network, moving ticker, or
interrogation device.
[70 FR 37620, June 29, 2005, as amended at 83 FR 58427, Nov. 19, 2018;
86 FR 18809, Apr. 9, 2021; 86 FR 29196, June 1, 2021]
Sec. 242.601 Dissemination of transaction reports and last sale
data with respect to transactions in NMS stocks.
(a) Filing and effectiveness of transaction reporting plans. (1)
Every national securities exchange shall file a transaction reporting
plan regarding transactions in listed equity and Nasdaq securities
executed through its facilities, and every national securities
association shall file a transaction reporting plan regarding
transactions in listed equity and Nasdaq securities executed by its
members otherwise than on a national securities exchange.
(2) Any transaction reporting plan, or any amendment thereto, filed
pursuant to this section shall be filed with the Commission, and
considered for approval, in accordance with the procedures set forth in
Sec. 242.608(a) and (b). Any such plan, or amendment thereto, shall
specify, at a minimum:
(i) The listed equity and Nasdaq securities or classes of such
securities for which transaction reports shall be required by the plan;
(ii) Reporting requirements with respect to transactions in listed
equity securities and Nasdaq securities, for any broker or dealer
subject to the plan;
(iii) The manner of collecting, processing, sequencing, making
available and disseminating transaction reports and last sale data
reported pursuant to such plan;
(iv) The manner in which such transaction reports reported pursuant
to such plan are to be consolidated with transaction reports from
national securities exchanges and national securities associations
reported pursuant to any other effective transaction reporting plan;
[[Page 60]]
(v) The applicable standards and methods which will be utilized to
ensure promptness of reporting, and accuracy and completeness of
transaction reports;
(vi) Any rules or procedures which may be adopted to ensure that
transaction reports or last sale data will not be disseminated in a
fraudulent or manipulative manner;
(vii) Specific terms of access to transaction reports made available
or disseminated pursuant to the plan; and
(viii) That transaction reports or last sale data made available to
any vendor for display on an interrogation device identify the
marketplace where each transaction was executed.
(3) No transaction reporting plan filed pursuant to this section, or
any amendment to an effective transaction reporting plan, shall become
effective unless approved by the Commission or otherwise permitted in
accordance with the procedures set forth in Sec. 242.608.
(b) Prohibitions and reporting requirements. (1) No broker or dealer
may execute any transaction in, or induce or attempt to induce the
purchase or sale of, any NMS stock:
(i) On or through the facilities of a national securities exchange
unless there is an effective transaction reporting plan with respect to
transactions in such security executed on or through such exchange
facilities; or
(ii) Otherwise than on a national securities exchange unless there
is an effective transaction reporting plan with respect to transactions
in such security executed otherwise than on a national securities
exchange by such broker or dealer.
(2) Every broker or dealer who is a member of a national securities
exchange or national securities association shall promptly transmit to
the exchange or association of which it is a member all information
required by any effective transaction reporting plan filed by such
exchange or association (either individually or jointly with other
exchanges and/or associations).
(c) Retransmission of transaction reports or last sale data.
Notwithstanding any provision of any effective transaction reporting
plan, no national securities exchange or national securities association
may, either individually or jointly, by rule, stated policy or practice,
transaction reporting plan or otherwise, prohibit, condition or
otherwise limit, directly or indirectly, the ability of any vendor to
retransmit, for display in moving tickers, transaction reports or last
sale data made available pursuant to any effective transaction reporting
plan; provided, however, that a national securities exchange or national
securities association may, by means of an effective transaction
reporting plan, condition such retransmission upon appropriate
undertakings to ensure that any charges for the distribution of
transaction reports or last sale data in moving tickers permitted by
paragraph (d) of this section are collected.
(d) Charges. Nothing in this section shall preclude any national
securities exchange or national securities association, separately or
jointly, pursuant to the terms of an effective transaction reporting
plan, from imposing reasonable, uniform charges (irrespective of
geographic location) for distribution of transaction reports or last
sale data.
(e) Appeals. The Commission may, in its discretion, entertain
appeals in connection with the implementation or operation of any
effective transaction reporting plan in accordance with the provisions
of Sec. 242.608(d).
(f) Exemptions. The Commission may exempt from the provisions of
this section, either unconditionally or on specified terms and
conditions, any national securities exchange, national securities
association, broker, dealer, or specified security if the Commission
determines that such exemption is consistent with the public interest,
the protection of investors and the removal of impediments to, and
perfection of the mechanisms of, a national market system.
Sec. 242.602 Dissemination of quotations in NMS securities.
(a) Dissemination requirements for national securities exchanges and
national securities associations. (1) Every national securities exchange
and national securities association shall establish and maintain
procedures and mechanisms for collecting bids, offers, quotation sizes,
and aggregate
[[Page 61]]
quotation sizes from responsible brokers or dealers who are members of
such exchange or association, processing such bids, offers, and sizes,
and making such bids, offers, and sizes available to vendors, as
follows:
(i) Each national securities exchange shall at all times such
exchange is open for trading, collect, process, and make available to
vendors the best bid, the best offer, and aggregate quotation sizes for
each subject security listed or admitted to unlisted trading privileges
which is communicated on any national securities exchange by any
responsible broker or dealer, but shall not include:
(A) Any bid or offer executed immediately after communication and
any bid or offer communicated by a responsible broker or dealer other
than an exchange market maker which is cancelled or withdrawn if not
executed immediately after communication; and
(B) Any bid or offer communicated during a period when trading in
that security has been suspended or halted, or prior to the commencement
of trading in that security on any trading day, on that exchange.
(ii) Each national securities association shall, at all times that
last sale information with respect to NMS securities is reported
pursuant to an effective transaction reporting plan, collect, process,
and make available to vendors the best bid, best offer, and quotation
sizes communicated otherwise than on an exchange by each member of such
association acting in the capacity of an OTC market maker for each
subject security and the identity of that member (excluding any bid or
offer executed immediately after communication), except during any
period when over-the-counter trading in that security has been
suspended.
(2) Each national securities exchange shall, with respect to each
published bid and published offer representing a bid or offer of a
member for a subject security, establish and maintain procedures for
ascertaining and disclosing to other members of that exchange, upon
presentation of orders sought to be executed by them in reliance upon
paragraph (b)(2) of this section, the identity of the responsible broker
or dealer who made such bid or offer and the quotation size associated
with it.
(3)(i) If, at any time a national securities exchange is open for
trading, such exchange determines, pursuant to rules approved by the
Commission pursuant to section 19(b)(2) of the Act (15 U.S.C.
78s(b)(2)), that the level of trading activities or the existence of
unusual market conditions is such that the exchange is incapable of
collecting, processing, and making available to vendors the data for a
subject security required to be made available pursuant to paragraph
(a)(1) of this section in a manner that accurately reflects the current
state of the market on such exchange, such exchange shall immediately
notify all specified persons of that determination. Upon such
notification, responsible brokers or dealers that are members of that
exchange shall be relieved of their obligation under paragraphs (b)(2)
and (c)(3) of this section and such exchange shall be relieved of its
obligations under paragraphs (a)(1) and (2) of this section for that
security; provided, however, that such exchange will continue, to the
maximum extent practicable under the circumstances, to collect, process,
and make available to vendors data for that security in accordance with
paragraph (a)(1) of this section.
(ii) During any period a national securities exchange, or any
responsible broker or dealer that is a member of that exchange, is
relieved of any obligation imposed by this section for any subject
security by virtue of a notification made pursuant to paragraph
(a)(3)(i) of this section, such exchange shall monitor the activity or
conditions which formed the basis for such notification and shall
immediately renotify all specified persons when that exchange is once
again capable of collecting, processing, and making available to vendors
the data for that security required to be made available pursuant to
paragraph (a)(1) of this section in a manner that accurately reflects
the current state of the market on such exchange. Upon such
renotification, any exchange or responsible broker or dealer which had
been relieved of any obligation imposed by this section as a consequence
of the
[[Page 62]]
prior notification shall again be subject to such obligation.
(4) Nothing in this section shall preclude any national securities
exchange or national securities association from making available to
vendors indications of interest or bids and offers for a subject
security at any time such exchange or association is not required to do
so pursuant to paragraph (a)(1) of this section.
(5)(i) Any national securities exchange may make an election for
purposes of the definition of subject security in Sec. 242.600(b)(90)
for any NMS security, by collecting, processing, and making available
bids, offers, quotation sizes, and aggregate quotation sizes in that
security; except that for any NMS security previously listed or admitted
to unlisted trading privileges on only one exchange and not traded by
any OTC market maker, such election shall be made by notifying all
specified persons, and shall be effective at the opening of trading on
the business day following notification.
(ii) Any member of a national securities association acting in the
capacity of an OTC market maker may make an election for purposes of the
definition of subject security in Sec. 242.600(b)(90) for any NMS
security, by communicating to its association bids, offers, and
quotation sizes in that security; except that for any other NMS security
listed or admitted to unlisted trading privileges on only one exchange
and not traded by any other OTC market maker, such election shall be
made by notifying its association and all specified persons, and shall
be effective at the opening of trading on the business day following
notification.
(iii) The election of a national securities exchange or member of a
national securities association for any NMS security pursuant to this
paragraph (a)(5) shall cease to be in effect if such exchange or member
ceases to make available or communicate bids, offers, and quotation
sizes in such security.
(b) Obligations of responsible brokers and dealers. (1) Each
responsible broker or dealer shall promptly communicate to its national
securities exchange or national securities association, pursuant to the
procedures established by that exchange or association, its best bids,
best offers, and quotation sizes for any subject security.
(2) Subject to the provisions of paragraph (b)(3) of this section,
each responsible broker or dealer shall be obligated to execute any
order to buy or sell a subject security, other than an odd-lot order,
presented to it by another broker or dealer, or any other person
belonging to a category of persons with whom such responsible broker or
dealer customarily deals, at a price at least as favorable to such buyer
or seller as the responsible broker's or dealer's published bid or
published offer (exclusive of any commission, commission equivalent or
differential customarily charged by such responsible broker or dealer in
connection with execution of any such order) in any amount up to its
published quotation size.
(3)(i) No responsible broker or dealer shall be obligated to execute
a transaction for any subject security as provided in paragraph (b)(2)
of this section to purchase or sell that subject security in an amount
greater than such revised quotation size if:
(A) Prior to the presentation of an order for the purchase or sale
of a subject security, a responsible broker or dealer has communicated
to its exchange or association, pursuant to paragraph (b)(1) of this
section, a revised quotation size; or
(B) At the time an order for the purchase or sale of a subject
security is presented, a responsible broker or dealer is in the process
of effecting a transaction in such subject security, and immediately
after the completion of such transaction, it communicates to its
exchange or association a revised quotation size, such responsible
broker or dealer shall not be obligated by paragraph (b)(2) of this
section to purchase or sell that subject security in an amount greater
than such revised quotation size.
(ii) No responsible broker or dealer shall be obligated to execute a
transaction for any subject security as provided in paragraph (b)(2) of
this section if:
(A) Before the order sought to be executed is presented, such
responsible broker or dealer has communicated to its exchange or
association pursuant to
[[Page 63]]
paragraph (b)(1) of this section, a revised bid or offer; or
(B) At the time the order sought to be executed is presented, such
responsible broker or dealer is in the process of effecting a
transaction in such subject security, and, immediately after the
completion of such transaction, such responsible broker or dealer
communicates to its exchange or association pursuant to paragraph (b)(1)
of this section, a revised bid or offer; provided, however, that such
responsible broker or dealer shall nonetheless be obligated to execute
any such order in such subject security as provided in paragraph (b)(2)
of this section at its revised bid or offer in any amount up to its
published quotation size or revised quotation size.
(4) Subject to the provisions of paragraph (a)(4) of this section:
(i) No national securities exchange or OTC market maker may make
available, disseminate or otherwise communicate to any vendor, directly
or indirectly, for display on a terminal or other display device any
bid, offer, quotation size, or aggregate quotation size for any NMS
security which is not a subject security with respect to such exchange
or OTC market maker; and
(ii) No vendor may disseminate or display on a terminal or other
display device any bid, offer, quotation size, or aggregate quotation
size from any national securities exchange or OTC market maker for any
NMS security which is not a subject security with respect to such
exchange or OTC market maker.
(5)(i) Entry of any priced order for an NMS security by an exchange
market maker or OTC market maker in that security into an electronic
communications network that widely disseminates such order shall be
deemed to be:
(A) A bid or offer under this section, to be communicated to the
market maker's exchange or association pursuant to this paragraph (b)
for at least the minimum quotation size that is required by the rules of
the market maker's exchange or association if the priced order is for
the account of a market maker, or the actual size of the order up to the
minimum quotation size required if the priced order is for the account
of a customer; and
(B) A communication of a bid or offer to a vendor for display on a
display device for purposes of paragraph (b)(4) of this section.
(ii) An exchange market maker or OTC market maker that has entered a
priced order for an NMS security into an electronic communications
network that widely disseminates such order shall be deemed to be in
compliance with paragraph (b)(5)(i)(A) of this section if the electronic
communications network:
(A)(1) Provides to a national securities exchange or national
securities association (or an exclusive processor acting on behalf of
one or more exchanges or associations) the prices and sizes of the
orders at the highest buy price and the lowest sell price for such
security entered in, and widely disseminated by, the electronic
communications network by exchange market makers and OTC market makers
for the NMS security, and such prices and sizes are included in the
quotation data made available by such exchange, association, or
exclusive processor to vendors pursuant to this section; and
(2) Provides, to any broker or dealer, the ability to effect a
transaction with a priced order widely disseminated by the electronic
communications network entered therein by an exchange market maker or
OTC market maker that is:
(i) Equivalent to the ability of any broker or dealer to effect a
transaction with an exchange market maker or OTC market maker pursuant
to the rules of the national securities exchange or national securities
association to which the electronic communications network supplies such
bids and offers; and
(ii) At the price of the highest priced buy order or lowest priced
sell order, or better, for the lesser of the cumulative size of such
priced orders entered therein by exchange market makers or OTC market
makers at such price, or the size of the execution sought by the broker
or dealer, for such security; or
(B) Is an alternative trading system that:
(1) Displays orders and provides the ability to effect transactions
with such orders under Sec. 242.301(b)(3); and
[[Page 64]]
(2) Otherwise is in compliance with Regulation ATS (Sec. 242.300
through Sec. 242.303).
(c) Transactions in listed options. (1) A national securities
exchange or national securities association:
(i) Shall not be required, under paragraph (a) of this section, to
collect from responsible brokers or dealers who are members of such
exchange or association, or to make available to vendors, the quotation
sizes and aggregate quotation sizes for listed options, if such exchange
or association establishes by rule and periodically publishes the
quotation size for which such responsible brokers or dealers are
obligated to execute an order to buy or sell an options series that is a
subject security at its published bid or offer under paragraph (b)(2) of
this section;
(ii) May establish by rule and periodically publish a quotation
size, which shall not be for less than one contract, for which
responsible brokers or dealers who are members of such exchange or
association are obligated under paragraph (b)(2) of this section to
execute an order to buy or sell a listed option for the account of a
broker or dealer that is in an amount different from the quotation size
for which it is obligated to execute an order for the account of a
customer; and
(iii) May establish and maintain procedures and mechanisms for
collecting from responsible brokers and dealers who are members of such
exchange or association, and making available to vendors, the quotation
sizes and aggregate quotation sizes in listed options for which such
responsible broker or dealer will be obligated under paragraph (b)(2) of
this section to execute an order from a customer to buy or sell a listed
option and establish by rule and periodically publish the size, which
shall not be less than one contract, for which such responsible brokers
or dealers are obligated to execute an order for the account of a broker
or dealer.
(2) If, pursuant to paragraph (c)(1) of this section, the rules of a
national securities exchange or national securities association do not
require its members to communicate to it their quotation sizes for
listed options, a responsible broker or dealer that is a member of such
exchange or association shall:
(i) Be relieved of its obligations under paragraph (b)(1) of this
section to communicate to such exchange or association its quotation
sizes for any listed option; and
(ii) Comply with its obligations under paragraph (b)(2) of this
section by executing any order to buy or sell a listed option, in an
amount up to the size established by such exchange's or association's
rules under paragraph (c)(1) of this section.
(3) Thirty second response. Each responsible broker or dealer,
within thirty seconds of receiving an order to buy or sell a listed
option in an amount greater than the quotation size established by a
national securities exchange's or national securities association's
rules pursuant to paragraph (c)(1) of this section, or its published
quotation size must:
(i) Execute the entire order; or
(ii)(A) Execute that portion of the order equal to at least:
(1) The quotation size established by a national securities
exchange's or national securities association's rules, pursuant to
paragraph (c)(1) of this section, to the extent that such exchange or
association does not collect and make available to vendors quotation
size and aggregate quotation size under paragraph (a) of this section;
or
(2) Its published quotation size; and
(B) Revise its bid or offer.
(4) Notwithstanding paragraph (c)(3) of this section, no responsible
broker or dealer shall be obligated to execute a transaction for any
listed option as provided in paragraph (b)(2) of this section if:
(i) Any of the circumstances in paragraph (b)(3) of this section
exist; or
(ii) The order for the purchase or sale of a listed option is
presented during a trading rotation in that listed option.
(d) Exemptions. The Commission may exempt from the provisions of
this section, either unconditionally or on specified terms and
conditions, any responsible broker or dealer, electronic communications
network, national securities exchange, or national securities
association if the Commission determines that such exemption is
consistent with the public interest, the
[[Page 65]]
protection of investors and the removal of impediments to and perfection
of the mechanism of a national market system.
[70 FR 37620, June 29, 20051997, as amended at 83 FR 58427, Nov. 19,
2018; 86 FR 18811, Apr. 9, 2021]
Sec. 242.603 Distribution, consolidation, and display of information
with respect to quotations for and transactions in NMS stocks.
(a) Distribution of information. (1) Any exclusive processor, or any
broker or dealer with respect to information for which it is the
exclusive source, that distributes information with respect to
quotations for or transactions in an NMS stock to a securities
information processor shall do so on terms that are fair and reasonable.
(2) Any national securities exchange, national securities
association, broker, or dealer that distributes information with respect
to quotations for or transactions in an NMS stock to a securities
information processor, broker, dealer, or other persons shall do so on
terms that are not unreasonably discriminatory.
(b) Dissemination of information. Every national securities exchange
on which an NMS stock is traded and national securities association
shall act jointly pursuant to one or more effective national market
system plans for the dissemination of consolidated market data. Every
national securities exchange on which an NMS stock is traded and
national securities association shall make available to all competing
consolidators and self-aggregators its information with respect to
quotations for and transactions in NMS stocks, including all data
necessary to generate consolidated market data, in the same manner and
using the same methods, including all methods of access and the same
format, as such national securities exchange or national securities
association makes available any information with respect to quotations
for and transactions in NMS stocks to any person.
(c) Display of information. (1) No securities information processor,
broker, or dealer shall provide, in a context in which a trading or
order-routing decision can be implemented, a display of any information
with respect to quotations for or transactions in an NMS stock without
also providing, in an equivalent manner, a consolidated display for such
stock.
(2) The provisions of paragraph (c)(1) of this section shall not
apply to a display of information on the trading floor or through the
facilities of a national securities exchange or to a display in
connection with the operation of a market linkage system implemented in
accordance with an effective national market system plan.
(d) Exemptions. The Commission, by order, may exempt from the
provisions of this section, either unconditionally or on specified terms
and conditions, any person, security, or item of information, or any
class or classes of persons, securities, or items of information, if the
Commission determines that such exemption is necessary or appropriate in
the public interest, and is consistent with the protection of investors.
[70 FR 37620, June 29, 2005, as amended at 86 FR 18811, Apr. 9, 2021]
Sec. 242.604 Display of customer limit orders.
(a) Specialists and OTC market makers. For all NMS stocks:
(1) Each member of a national securities exchange that is registered
by that exchange as a specialist, or is authorized by that exchange to
perform functions substantially similar to that of a specialist, shall
publish immediately a bid or offer that reflects:
(i) The price and the full size of each customer limit order held by
the specialist that is at a price that would improve the bid or offer of
such specialist in such security; and
(ii) The full size of each customer limit order held by the
specialist that:
(A) Is priced equal to the bid or offer of such specialist for such
security;
(B) Is priced equal to the national best bid or national best offer;
and
(C) Represents more than a de minimis change in relation to the size
associated with the specialist's bid or offer.
(2) Each registered broker or dealer that acts as an OTC market
maker shall publish immediately a bid or offer that reflects:
[[Page 66]]
(i) The price and the full size of each customer limit order held by
the OTC market maker that is at a price that would improve the bid or
offer of such OTC market maker in such security; and
(ii) The full size of each customer limit order held by the OTC
market maker that:
(A) Is priced equal to the bid or offer of such OTC market maker for
such security;
(B) Is priced equal to the national best bid or national best offer;
and
(C) Represents more than a de minimis change in relation to the size
associated with the OTC market maker's bid or offer.
(b) Exceptions. The requirements in paragraph (a) of this section
shall not apply to any customer limit order:
(1) That is executed upon receipt of the order.
(2) That is placed by a customer who expressly requests, either at
the time that the order is placed or prior thereto pursuant to an
individually negotiated agreement with respect to such customer's
orders, that the order not be displayed.
(3) That is an odd-lot order.
(4) That is a block size order, unless a customer placing such order
requests that the order be displayed.
(5) That is delivered immediately upon receipt to a national
securities exchange or national securities association-sponsored system,
or an electronic communications network that complies with the
requirements of Sec. 242.602(b)(5)(ii) with respect to that order.
(6) That is delivered immediately upon receipt to another exchange
member or OTC market maker that complies with the requirements of this
section with respect to that order.
(7) That is an ``all or none'' order.
(c) Exemptions. The Commission may exempt from the provisions of
this section, either unconditionally or on specified terms and
conditions, any responsible broker or dealer, electronic communications
network, national securities exchange, or national securities
association if the Commission determines that such exemption is
consistent with the public interest, the protection of investors and the
removal of impediments to and perfection of the mechanism of a national
market system.
Sec. 242.605 Disclosure of order execution information.
This section requires market centers to make available standardized,
monthly reports of statistical information concerning their order
executions. This information is presented in accordance with uniform
standards that are based on broad assumptions about order execution and
routing practices. The information will provide a starting point to
promote visibility and competition on the part of market centers and
broker-dealers, particularly on the factors of execution price and
speed. The disclosures required by this section do not encompass all of
the factors that may be important to investors in evaluating the order
routing services of a broker-dealer. In addition, any particular market
center's statistics will encompass varying types of orders routed by
different broker-dealers on behalf of customers with a wide range of
objectives. Accordingly, the statistical information required by this
section alone does not create a reliable basis to address whether any
particular broker-dealer failed to obtain the most favorable terms
reasonably available under the circumstances for customer orders.
(a) Monthly electronic reports by market centers. (1) Every market
center shall make available for each calendar month, in accordance with
the procedures established pursuant to paragraph (a)(2) of this section,
a report on the covered orders in NMS stocks that it received for
execution from any person. Such report shall be in electronic form;
shall be categorized by security, order type, and order size; and shall
include the following columns of information:
(i) For market orders, marketable limit orders, inside-the-quote
limit orders, at-the-quote limit orders, and near-the-quote limit
orders:
(A) The number of covered orders;
(B) The cumulative number of shares of covered orders;
(C) The cumulative number of shares of covered orders cancelled
prior to execution;
[[Page 67]]
(D) The cumulative number of shares of covered orders executed at
the receiving market center;
(E) The cumulative number of shares of covered orders executed at
any other venue;
(F) The cumulative number of shares of covered orders executed from
0 to 9 seconds after the time of order receipt;
(G) The cumulative number of shares of covered orders executed from
10 to 29 seconds after the time of order receipt;
(H) The cumulative number of shares of covered orders executed from
30 seconds to 59 seconds after the time of order receipt;
(I) The cumulative number of shares of covered orders executed from
60 seconds to 299 seconds after the time of order receipt;
(J) The cumulative number of shares of covered orders executed from
5 minutes to 30 minutes after the time of order receipt; and
(K) The average realized spread for executions of covered orders;
and
(ii) For market orders and marketable limit orders:
(A) The average effective spread for executions of covered orders;
(B) The cumulative number of shares of covered orders executed with
price improvement;
(C) For shares executed with price improvement, the share-weighted
average amount per share that prices were improved;
(D) For shares executed with price improvement, the share-weighted
average period from the time of order receipt to the time of order
execution;
(E) The cumulative number of shares of covered orders executed at
the quote;
(F) For shares executed at the quote, the share-weighted average
period from the time of order receipt to the time of order execution;
(G) The cumulative number of shares of covered orders executed
outside the quote;
(H) For shares executed outside the quote, the share-weighted
average amount per share that prices were outside the quote; and
(I) For shares executed outside the quote, the share-weighted
average period from the time of order receipt to the time of order
execution.
(2) Every national securities exchange on which NMS stocks are
traded and each national securities association shall act jointly in
establishing procedures for market centers to follow in making available
to the public the reports required by paragraph (a)(1) of this section
in a uniform, readily accessible, and usable electronic form. In the
event there is no effective national market system plan establishing
such procedures, market centers shall prepare their reports in a
consistent, usable, and machine-readable electronic format, and make
such reports available for downloading from an Internet Web site that is
free and readily accessible to the public. Every market center shall
keep such reports posted on an internet website that is free and readily
accessible to the public for a period of three years from the initial
date of posting on the internet website.
(3) A market center shall make available the report required by
paragraph (a)(1) of this section within one month after the end of the
month addressed in the report.
(b) Exemptions. The Commission may, by order upon application,
conditionally or unconditionally exempt any person, security, or
transaction, or any class or classes of persons, securities, or
transactions, from any provision or provisions of this section, if the
Commission determines that such exemption is necessary or appropriate in
the public interest, and is consistent with the protection of investors.
[70 FR 37620, June 29, 2005, as amended at 83 FR 58427, Nov. 19, 2018]
Sec. 242.606 Disclosure of order routing information.
(a) Quarterly report on order routing. (1) Every broker or dealer
shall make publicly available for each calendar quarter a report on its
routing of non-directed orders in NMS stocks that are submitted on a
held basis and of non-directed orders that are customer orders in NMS
securities that are option contracts during that quarter broken down by
calendar month and keep such report posted on an internet website that
is free and readily accessible to the public for a period of three years
from the initial date of posting on the
[[Page 68]]
internet website. Such report shall include a section for NMS stocks--
separated by securities that are included in the S&P 500 Index as of the
first day of that quarter and other NMS stocks--and a separate section
for NMS securities that are option contracts. Such report shall be made
available using the most recent versions of the XML schema and the
associated PDF renderer as published on the Commission's website for all
reports required by this section. Each section in a report shall include
the following information:
(i) The percentage of total orders for the section that were non-
directed orders, and the percentages of total non-directed orders for
the section that were market orders, marketable limit orders, non-
marketable limit orders, and other orders;
(ii) The identity of the ten venues to which the largest number of
total non-directed orders for the section were routed for execution and
of any venue to which five percent or more of non-directed orders were
routed for execution, the percentage of total non-directed orders for
the section routed to the venue, and the percentages of total non-
directed market orders, total non-directed marketable limit orders,
total non-directed non-marketable limit orders, and total non-directed
other orders for the section that were routed to the venue;
(iii) For each venue identified pursuant to paragraph (a)(1)(ii) of
this section, the net aggregate amount of any payment for order flow
received, payment from any profit-sharing relationship received,
transaction fees paid, and transaction rebates received, both as a total
dollar amount and per share, for each of the following non-directed
order types:
(A) Market orders;
(B) Marketable limit orders;
(C) Non-marketable limit orders; and
(D) Other orders.
(iv) A discussion of the material aspects of the broker's or
dealer's relationship with each venue identified pursuant to paragraph
(a)(1)(ii) of this section, including a description of any arrangement
for payment for order flow and any profit-sharing relationship and a
description of any terms of such arrangements, written or oral, that may
influence a broker's or dealer's order routing decision including, among
other things:
(A) Incentives for equaling or exceeding an agreed upon order flow
volume threshold, such as additional payments or a higher rate of
payment;
(B) Disincentives for failing to meet an agreed upon minimum order
flow threshold, such as lower payments or the requirement to pay a fee;
(C) Volume-based tiered payment schedules; and
(D) Agreements regarding the minimum amount of order flow that the
broker-dealer would send to a venue.
(2) A broker or dealer shall make the report required by paragraph
(a)(1) of this section publicly available within one month after the end
of the quarter addressed in the report.
(b) Customer requests for information on order routing. (1) Every
broker or dealer shall, on request of a customer, disclose to its
customer, for:
(i) Orders in NMS stocks that are submitted on a held basis;
(ii) Orders in NMS stocks that are submitted on a not held basis and
the broker or dealer is not required to provide the customer a report
under paragraph (b)(3) of this section; and
(iii) Orders in NMS securities that are option contracts, the
identity of the venue to which the customer's orders were routed for
execution in the six months prior to the request, whether the orders
were directed orders or non-directed orders, and the time of the
transactions, if any, that resulted from such orders. Such disclosure
shall be made available using the most recent versions of the XML schema
and the associated PDF renderer as published on the Commission's website
for all reports required by this section.
(2) A broker or dealer shall notify customers in writing at least
annually of the availability on request of the information specified in
paragraph (b)(1) of this section.
(3) Except as provided for in paragraphs (b)(4) and (5) of this
section, every broker or dealer shall, on request of a customer that
places, directly or indirectly, one or more orders in NMS stocks that
are submitted on a not held basis with the broker or dealer, disclose to
such customer within seven
[[Page 69]]
business days of receiving the request, a report on its handling of such
orders for that customer for the prior six months by calendar month.
Such report shall be made available using the most recent versions of
the XML schema and the associated PDF renderer as published on the
Commission's website for all reports required by this section. For
purposes of such report, the handling of a NMS stock order submitted by
a customer to a broker-dealer on a not held basis includes the handling
of all child orders derived from that order. Such report shall be
divided into two sections: One for directed orders and one for non-
directed orders. Each section of such report shall include, with respect
to such order flow sent by the customer to the broker or dealer, the
total number of shares sent to the broker or dealer by the customer
during the relevant period; the total number of shares executed by the
broker or dealer as principal for its own account; the total number of
orders exposed by the broker or dealer through an actionable indication
of interest; and the venue or venues to which orders were exposed by the
broker or dealer through an actionable indication of interest, provided
that, where applicable, a broker or dealer must disclose that it exposed
a customer's order through an actionable indication of interest to other
customers but need not disclose the identity of such customers. Each
section of such report also shall include the following columns of
information for each venue to which the broker or dealer routed such
orders for the customer, in the aggregate:
(i) Information on Order Routing.(A) Total shares routed;
(B) Total shares routed marked immediate or cancel;
(C) Total shares routed that were further routable; and
(D) Average order size routed.
(ii) Information on Order Execution. (A) Total shares executed;
(B) Fill rate (shares executed divided by the shares routed);
(C) Average fill size;
(D) Average net execution fee or rebate (cents per 100 shares,
specified to four decimal places);
(E) Total number of shares executed at the midpoint;
(F) Percentage of shares executed at the midpoint;
(G) Total number of shares executed that were priced on the side of
the spread more favorable to the order;
(H) Percentage of total shares executed that were priced at the side
of the spread more favorable to the order;
(I) Total number of shares executed that were priced on the side of
the spread less favorable to the order; and
(J) Percentage of total shares executed that were priced on the side
of the spread less favorable to the order.
(iii) Information on Orders that Provided Liquidity. (A) Total
number of shares executed of orders providing liquidity;
(B) Percentage of shares executed of orders providing liquidity;
(C) Average time between order entry and execution or cancellation,
for orders providing liquidity (in milliseconds); and
(D) Average net execution rebate or fee for shares of orders
providing liquidity (cents per 100 shares, specified to four decimal
places).
(iv) Information on Orders that Removed Liquidity. (A) Total number
of shares executed of orders removing liquidity;
(B) Percentage of shares executed of orders removing liquidity; and
(C) Average net execution fee or rebate for shares of orders
removing liquidity (cents per 100 shares, specified to four decimal
places).
(4) Except as provided below, no broker or dealer shall be required
to provide reports pursuant to paragraph (b)(3) of this section if the
percentage of shares of not held orders in NMS stocks the broker or
dealer received from its customers over the prior six calendar months
was less than five percent of the total shares in NMS stocks the broker
or dealer received from its customers during that time (the ``five
percent threshold'' for purposes of this paragraph). A broker or dealer
that equals or exceeds this five percent threshold shall be required
(subject to paragraph (b)(5) of this section) to provide reports
pursuant to paragraph (b)(3) of this section for at least six calendar
months (``Compliance Period'') regardless of the percentage of shares of
not held orders in NMS stocks the
[[Page 70]]
broker or dealer receives from its customers during the Compliance
Period. The Compliance Period shall begin the first calendar day of the
next calendar month after the broker or dealer equaled or exceeded the
five percent threshold, unless it is the first time the broker or dealer
has equaled or exceeded the five percent threshold, in which case the
Compliance Period shall begin the first calendar day four calendar
months later. A broker or dealer shall not be required to provide
reports pursuant to paragraph (b)(3) of this section for orders that the
broker or dealer did not receive during a Compliance Period. If, at any
time after the end of a Compliance Period, the percentage of shares of
not held orders in NMS stocks the broker or dealer received from its
customers was less than five percent of the total shares in NMS stocks
the broker or dealer received from its customers over the prior six
calendar months, the broker or dealer shall not be required to provide
reports pursuant to paragraph (b)(3) of this section, except for orders
that the broker or dealer received during the portion of a Compliance
Period that remains covered by paragraph (b)(3) of this section.
(5) No broker or dealer shall be subject to the requirements of
paragraph (b)(3) of this section with respect to a customer that traded
on average each month for the prior six months less than $1,000,000 of
notional value of not held orders in NMS stocks through the broker or
dealer.
(c) Exemptions. The Commission may, by order upon application,
conditionally or unconditionally exempt any person, security, or
transaction, or any class or classes of persons, securities, or
transactions, from any provision or provisions of this section, if the
Commission determines that such exemption is necessary or appropriate in
the public interest, and is consistent with the protection of investors.
[70 FR 37620, June 29, 2005, as amended at 83 FR 58427, Nov. 19, 2018]
Sec. 242.607 Customer account statements.
(a) No broker or dealer acting as agent for a customer may effect
any transaction in, induce or attempt to induce the purchase or sale of,
or direct orders for purchase or sale of, any NMS stock or a security
authorized for quotation on an automated inter-dealer quotation system
that has the characteristics set forth in section 17B of the Act (15
U.S.C. 78q-2), unless such broker or dealer informs such customer, in
writing, upon opening a new account and on an annual basis thereafter,
of the following:
(1) The broker's or dealer's policies regarding receipt of payment
for order flow from any broker or dealer, national securities exchange,
national securities association, or exchange member to which it routes
customers' orders for execution, including a statement as to whether any
payment for order flow is received for routing customer orders and a
detailed description of the nature of the compensation received; and
(2) The broker's or dealer's policies for determining where to route
customer orders that are the subject of payment for order flow absent
specific instructions from customers, including a description of the
extent to which orders can be executed at prices superior to the
national best bid and national best offer.
(b) Exemptions. The Commission, upon request or upon its own motion,
may exempt by rule or by order, any broker or dealer or any class of
brokers or dealers, security or class of securities from the
requirements of paragraph (a) of this section with respect to any
transaction or class of transactions, either unconditionally or on
specified terms and conditions, if the Commission determines that such
exemption is consistent with the public interest and the protection of
investors.
Sec. 242.608 Filing and amendment of national market system plans.
(a) Filing of national market system plans and amendments thereto.
(1) Any two or more self-regulatory organizations, acting jointly, may
file a national market system plan or may propose an amendment to an
effective national market system plan (``proposed amendment'') by
submitting the text of the plan or amendment to the Commission by email,
together with a statement of the purpose of such plan or
[[Page 71]]
amendment and, to the extent applicable, the documents and information
required by paragraphs (a)(4) and (5) of this section.
(2) The Commission may propose amendments to any effective national
market system plan by publishing the text thereof, together with a
statement of the purpose of such amendment, in accordance with the
provisions of paragraph (b) of this section.
(3) Self-regulatory organizations are authorized to act jointly in:
(i) Planning, developing, and operating any national market
subsystem or facility contemplated by a national market system plan;
(ii) Preparing and filing a national market system plan or any
amendment thereto; or
(iii) Implementing or administering an effective national market
system plan.
(4) Every national market system plan filed pursuant to this
section, or any amendment thereto, shall be accompanied by:
(i) Copies of all governing or constituent documents relating to any
person (other than a self-regulatory organization) authorized to
implement or administer such plan on behalf of its sponsors; and
(ii) To the extent applicable:
(A) A detailed description of the manner in which the plan or
amendment, and any facility or procedure contemplated by the plan or
amendment, will be implemented;
(B) A listing of all significant phases of development and
implementation (including any pilot phase) contemplated by the plan or
amendment, together with the projected date of completion of each phase;
(C) An analysis of the impact on competition of implementation of
the plan or amendment or of any facility contemplated by the plan or
amendment;
(D) A description of any written understandings or agreements
between or among plan sponsors or participants relating to
interpretations of the plan or conditions for becoming a sponsor or
participant in the plan; and
(E) In the case of a proposed amendment, a statement that such
amendment has been approved by the sponsors in accordance with the terms
of the plan.
(5) Every national market system plan, or any amendment thereto,
filed pursuant to this section shall include a description of the manner
in which any facility contemplated by the plan or amendment will be
operated. Such description shall include, to the extent applicable:
(i) The terms and conditions under which brokers, dealers, and/or
self-regulatory organizations will be granted or denied access
(including specific procedures and standards governing the granting or
denial of access);
(ii) The method by which any fees or charges collected on behalf of
all of the sponsors and/or participants in connection with access to, or
use of, any facility contemplated by the plan or amendment will be
determined and imposed (including any provision for distribution of any
net proceeds from such fees or charges to the sponsors and/or
participants) and the amount of such fees or charges;
(iii) The method by which, and the frequency with which, the
performance of any person acting as plan processor with respect to the
implementation and/or operation of the plan will be evaluated; and
(iv) The method by which disputes arising in connection with the
operation of the plan will be resolved.
(6) In connection with the selection of any person to act as plan
processor with respect to any facility contemplated by a national market
system plan (including renewal of any contract for any person to so
act), the sponsors shall file with the Commission a statement
identifying the person selected, describing the material terms under
which such person is to serve as plan processor, and indicating the
solicitation efforts, if any, for alternative plan processors, the
alternatives considered and the reasons for selection of such person.
(7) Any national market system plan (or any amendment thereto) which
is intended by the sponsors to satisfy a plan filing requirement
contained in any other section of this Regulation NMS and part 240,
subpart A of this chapter shall, in addition to compliance with this
section, also comply
[[Page 72]]
with the requirements of such other section.
(8)(i) A participant in an effective national market system plan
shall ensure that a current and complete version of the plan is posted
on a plan website or on a website designated by plan participants within
two business days after notification by the Commission of effectiveness
of the plan. Each participant in an effective national market system
plan shall ensure that such website is updated to reflect amendments to
such plan within two business days after the plan participants have been
notified by the Commission of its approval of a proposed amendment
pursuant to paragraph (b) of this section. If the amendment is not
effective for a certain period, the plan participants shall clearly
indicate the effective date in the relevant text of the plan. Each plan
participant also shall provide a link on its own website to the website
with the current version of the plan.
(ii) The plan participants shall ensure that any proposed amendments
filed pursuant to paragraph (a) of this section are posted on a plan
website or a designated website no later than two business days after
the filing of the proposed amendments with the Commission. If the plan
participants do not post a proposed amendment on a plan website or a
designated website on the same business day that they file such proposed
amendment with the Commission, then the plan participants shall inform
the Commission of the business day on which they posted such proposed
amendment on a plan website or a designated website. The plan
participants shall maintain any proposed amendment to the plan on a plan
website or a designated website until the Commission approves the plan
amendment and the plan participants update the website to reflect such
amendment or the plan participants withdraw the proposed amendment or
the plan participants are notified pursuant to paragraph (b)(1)(iii) of
this section that the proposed amendment is not filed in compliance with
requirements or the Commission disapproves the proposed amendment. If
the plan participants withdraw a proposed amendment or are notified
pursuant to paragraph (b)(1)(iii) of this section that a proposed
amendment is not filed in compliance with requirements or the Commission
disapproves a proposed amendment, the plan participants shall remove
such amendment from the plan website or designated website within two
business days of withdrawal, notification of non-compliant filing or
disapproval. Each plan participant shall provide a link to the website
with the current version of the plan.
(b) Effectiveness of national market system plans. (1) The
Commission shall publish notice of the filing of any national market
system plan, or any proposed amendment to any effective national market
system plan (including any amendment initiated by the Commission),
together with the terms of substance of the filing or a description of
the subjects and issues involved, and shall provide interested persons
an opportunity to submit written comments. No national market system
plan, or any amendment thereto, shall become effective unless approved
by the Commission or otherwise permitted in accordance with paragraph
(b)(3) of this section.
(i) Publication of national market system plans. The Commission
shall send the notice of the filing of a national market system plan to
the Federal Register for publication thereof under this paragraph (b)(1)
within 90 days of the business day on which such plan was filed with the
Commission pursuant to paragraph (a) of this section. If the Commission
fails to send the notice to the Federal Register for publication thereof
within such 90-day period, then the date of publication shall be deemed
to be the last day of such 90-day period.
(ii) Publication of proposed amendments. The Commission shall send
the notice of the filing of a proposed amendment to the Federal Register
for publication thereof under this paragraph (b)(1) within 15 days of
the business day on which such proposed amendment was posted on a plan
website or a website designated by plan participants pursuant to
paragraph (a) of this section after being filed with the Commission
pursuant to paragraph (a) of this section. If the Commission fails to
send the notice to the Federal
[[Page 73]]
Register for publication thereof within such 15-day period, then the
date of publication shall be deemed to be the business day on which such
website posting was made.
(iii) A national market system plan or proposed amendment has not
been filed with the Commission for purposes of this paragraph (b)(1) if,
not later than 7 business days after the business day of receipt by the
Commission, the Commission notifies the plan participants that the
filing of the national market system plan or proposed amendment does not
comply with paragraph (a) of this section or plan filing requirements in
other sections of Regulation NMS and part 240, subpart A of this
chapter, except that if the Commission determines that the plan or
amendment is unusually lengthy and is complex or raises novel regulatory
issues, the Commission shall inform the plan participants of such
determination not later than 7 business days after the business day of
receipt by the Commission and, for purposes of this paragraph (b)(1),
the filing of such plan or amendment has not been made with the
Commission if, not later than 21 days after the business day of receipt
by the Commission, the Commission notifies the plan participants that
the filing of such plan or amendment does not comply with paragraph (a)
of this section or plan filing requirements in other sections of
Regulation NMS and part 240, subpart A of this chapter.
(iv) For purposes of this section, a ``business day'' is any day
other than a Saturday, Sunday, Federal holiday, a day that the Office of
Personnel Management has announced that Federal agencies in the
Washington, DC area are closed to the public, a day on which the
Commission is subject to a Federal government shutdown or a day on which
the Commission's Washington, DC office is otherwise not open for regular
business; provided further, a filing received by the Commission or a
website posting made at or before 5:30 p.m. Eastern Standard Time or
Eastern Daylight Saving Time, whichever is currently in effect, on a
business day, shall be deemed received or made on that business day, and
a filing received by the Commission or a website posting made after 5:30
p.m. Eastern Standard Time or Eastern Daylight Saving Time, whichever is
currently in effect, shall be deemed received or made on the next
business day.
(2) The Commission shall approve a national market system plan or
proposed amendment to an effective national market system plan, with
such changes or subject to such conditions as the Commission may deem
necessary or appropriate, if it finds that such plan or amendment is
necessary or appropriate in the public interest, for the protection of
investors and the maintenance of fair and orderly markets, to remove
impediments to, and perfect the mechanisms of, a national market system,
or otherwise in furtherance of the purposes of the Act. The Commission
shall disapprove a national market system plan or proposed amendment if
it does not make such a finding. Approval or disapproval of a national
market system plan, or an amendment to an effective national market
system plan (other than an amendment initiated by the Commission), shall
be by order. Promulgation of an amendment to an effective national
market system plan initiated by the Commission shall be by rule.
(i) Within 90 days of the date of publication of notice of the
filing of a national market system plan or proposed amendment, or within
such longer period as to which the plan participants consent, the
Commission shall, by order, approve or disapprove the plan or amendment,
or institute proceedings to determine whether the plan or amendment
should be disapproved. Proceedings to determine whether the plan or
amendment should be disapproved will be conducted pursuant to 17 CFR
201.700 and 201.701. Such proceedings shall include notice of the
grounds for disapproval under consideration and opportunity for hearing
and shall be concluded within 180 days of the date of publication of
notice of the plan or amendment. At the conclusion of such proceedings
the Commission shall, by order, approve or disapprove the plan or
amendment. The time for conclusion of such proceedings may be extended
for up to 60 days (up to 240 days from the date of notice publication)
if the Commission determines that a longer period is appropriate and
[[Page 74]]
publishes the reasons for such determination or the plan participants
consent to the longer period.
(ii) The time for conclusion of proceedings to determine whether a
national market system plan or proposed amendment should be disapproved
may be extended for an additional period up to 60 days beyond the period
set forth in paragraph (b)(2)(i) of this section (up to 300 days from
the date of notice publication) if the Commission determines that a
longer period is appropriate and publishes the reasons for such
determination or the plan participants consent to the longer period.
(3) A proposed amendment may be put into effect upon filing with the
Commission if designated by the sponsors as:
(i) [Reserved]
(ii) Concerned solely with the administration of the plan, or
involving the governing or constituent documents relating to any person
(other than a self-regulatory organization) authorized to implement or
administer such plan on behalf of its sponsors; or
(iii) Involving solely technical or ministerial matters. At any time
within 60 days of the filing of any such amendment, the Commission may
summarily abrogate the amendment and require that such amendment be
refiled in accordance with paragraph (a)(1) of this section and reviewed
in accordance with paragraph (b)(2) of this section, if it appears to
the Commission that such action is necessary or appropriate in the
public interest, for the protection of investors, or the maintenance of
fair and orderly markets, to remove impediments to, and perfect the
mechanisms of, a national market system or otherwise in furtherance of
the purposes of the Act.
(4) Notwithstanding the provisions of paragraph (b)(1) of this
section, a proposed amendment may be put into effect summarily upon
publication of notice of such amendment, on a temporary basis not to
exceed 120 days, if the Commission finds that such action is necessary
or appropriate in the public interest, for the protection of investors
or the maintenance of fair and orderly markets, to remove impediments
to, and perfect the mechanisms of, a national market system or otherwise
in furtherance of the purposes of the Act.
(5) Any plan (or amendment thereto) in connection with:
(i) The planning, development, operation, or regulation of a
national market system (or a subsystem thereof) or one or more
facilities thereof; or
(ii) The development and implementation of procedures and/or
facilities designed to achieve compliance by self-regulatory
organizations and/or their members of any section of this Regulation NMS
(Sec. Sec. 242.600 through 242.612) and part 240, subpart A of this
chapter promulgated pursuant to section 11A of the Act (15 U.S.C. 78k-
1), approved by the Commission pursuant to section 11A of the Act (or
pursuant to any rule or regulation thereunder) prior to the effective
date of this section (either temporarily or permanently) shall be deemed
to have been filed and approved pursuant to this section and no
additional filing need be made by the sponsors with respect to such plan
or amendment; provided, however, that all terms and conditions
associated with any such approval (including time limitations) shall
continue to be applicable; provided, further, that any amendment to such
plan filed with or approved by the Commission on or after the effective
date of this section shall be subject to the provisions of, and
considered in accordance with the procedures specified in, this section.
(c) Compliance with terms of national market system plans. Each
self-regulatory organization shall comply with the terms of any
effective national market system plan of which it is a sponsor or a
participant. Each self-regulatory organization also shall, absent
reasonable justification or excuse, enforce compliance with any such
plan by its members and persons associated with its members.
(d) Appeals. The Commission may, in its discretion, entertain
appeals in connection with the implementation or operation of any
effective national market system plan as follows:
(1) Any action taken or failure to act by any person in connection
with an effective national market system plan (other than a prohibition
or limitation of access reviewable by the Commission pursuant to section
11A(b)(5) or
[[Page 75]]
section 19(d) of the Act (15 U.S.C. 78k-1(b)(5) or 78s(d))) shall be
subject to review by the Commission, on its own motion or upon
application by any person aggrieved thereby (including, but not limited
to, self-regulatory organizations, brokers, dealers, issuers, and
vendors), filed not later than 30 days after notice of such action or
failure to act or within such longer period as the Commission may
determine.
(2) Application to the Commission for review, or the institution of
review by the Commission on its own motion, shall not operate as a stay
of any such action unless the Commission determines otherwise, after
notice and opportunity for hearing on the question of a stay (which
hearing may consist only of affidavits or oral arguments).
(3) In any proceedings for review, if the Commission, after
appropriate notice and opportunity for hearing (which hearing may
consist solely of consideration of the record of any proceedings
conducted in connection with such action or failure to act and an
opportunity for the presentation of reasons supporting or opposing such
action or failure to act) and upon consideration of such other data,
views, and arguments as it deems relevant, finds that the action or
failure to act is in accordance with the applicable provisions of such
plan and that the applicable provisions are, and were, applied in a
manner consistent with the public interest, the protection of investors,
the maintenance of fair and orderly markets, and the removal of
impediments to, and the perfection of the mechanisms of a national
market system, the Commission, by order, shall dismiss the proceeding.
If the Commission does not make any such finding, or if it finds that
such action or failure to act imposes any burden on competition not
necessary or appropriate in furtherance of the purposes of the Act, the
Commission, by order, shall set aside such action and/or require such
action with respect to the matter reviewed as the Commission deems
necessary or appropriate in the public interest, for the protection of
investors, and the maintenance of fair and orderly markets, or to remove
impediments to, and perfect the mechanisms of, a national market system.
(e) Exemptions. The Commission may exempt from the provisions of
this section, either unconditionally or on specified terms and
conditions, any self-regulatory organization, member thereof, or
specified security, if the Commission determines that such exemption is
consistent with the public interest, the protection of investors, the
maintenance of fair and orderly markets and the removal of impediments
to, and perfection of the mechanisms of, a national market system.
[70 FR 37620, June 29, 2005; 71 FR 232, Jan. 4, 2006, as amended at 85
FR 65497, Oct. 15, 2020]
Sec. 242.609 Registration of securities information processors:
form of application and amendments.
(a) An application for the registration of a securities information
processor shall be filed on Form SIP (Sec. 249.1001 of this chapter) in
accordance with the instructions contained therein.
(b) If any information reported in items 1-13 or item 21 of Form SIP
or in any amendment thereto is or becomes inaccurate for any reason,
whether before or after the registration has been granted, the
securities information processor shall promptly file an amendment on
Form SIP correcting such information.
(c) The Commission, upon its own motion or upon application by any
securities information processor, may conditionally or unconditionally
exempt any securities information processor from any provision of the
rules or regulations adopted under section 11A(b) of the Act (15 U.S.C.
78k-1(b)).
(d) Every amendment filed pursuant to this section shall constitute
a ``report'' within the meaning of sections 17(a), 18(a) and 32(a) of
the Act (15 U.S.C. 78q(a), 78r(a), and 78ff(a)).
Sec. 242.610 Access to quotations.
(a) Quotations of SRO trading facility. A national securities
exchange or national securities association shall not impose unfairly
discriminatory terms that prevent or inhibit any person from obtaining
efficient access through a member of the national securities exchange or
national securities association to the quotations in an NMS stock
[[Page 76]]
displayed through its SRO trading facility.
(b) Quotations of SRO display-only facility. (1) Any trading center
that displays quotations in an NMS stock through an SRO display-only
facility shall provide a level and cost of access to such quotations
that is substantially equivalent to the level and cost of access to
quotations displayed by SRO trading facilities in that stock.
(2) Any trading center that displays quotations in an NMS stock
through an SRO display-only facility shall not impose unfairly
discriminatory terms that prevent or inhibit any person from obtaining
efficient access to such quotations through a member, subscriber, or
customer of the trading center.
(c) Fees for access to quotations. A trading center shall not
impose, nor permit to be imposed, any fee or fees for the execution of
an order against a protected quotation of the trading center or against
any other quotation of the trading center that is the best bid or best
offer of a national securities exchange, the best bid or best offer of
The Nasdaq Stock Market, Inc., or the best bid or best offer of a
national securities association other than the best bid or best offer of
The Nasdaq Stock Market, Inc. in an NMS stock that exceed or accumulate
to more than the following limits:
(1) If the price of a protected quotation or other quotation is
$1.00 or more, the fee or fees cannot exceed or accumulate to more than
$0.003 per share; or
(2) If the price of a protected quotation or other quotation is less
than $1.00, the fee or fees cannot exceed or accumulate to more than
0.3% of the quotation price per share.
(d) Locking or crossing quotations. Each national securities
exchange and national securities association shall establish, maintain,
and enforce written rules that:
(1) Require its members reasonably to avoid:
(i) Displaying quotations that lock or cross any protected quotation
in an NMS stock; and
(ii) Displaying manual quotations that lock or cross any quotation
in an NMS stock disseminated pursuant to an effective national market
system plan;
(2) Are reasonably designed to assure the reconciliation of locked
or crossed quotations in an NMS stock; and
(3) Prohibit its members from engaging in a pattern or practice of
displaying quotations that lock or cross any protected quotation in an
NMS stock, or of displaying manual quotations that lock or cross any
quotation in an NMS stock disseminated pursuant to an effective national
market system plan, other than displaying quotations that lock or cross
any protected or other quotation as permitted by an exception contained
in its rules established pursuant to paragraph (d)(1) of this section.
(e) Exemptions. The Commission, by order, may exempt from the
provisions of this section, either unconditionally or on specified terms
and conditions, any person, security, quotations, orders, or fees, or
any class or classes of persons, securities, quotations, orders, or
fees, if the Commission determines that such exemption is necessary or
appropriate in the public interest, and is consistent with the
protection of investors.
Sec. 242.611 Order protection rule.
(a) Reasonable policies and procedures. (1) A trading center shall
establish, maintain, and enforce written policies and procedures that
are reasonably designed to prevent trade-throughs on that trading center
of protected quotations in NMS stocks that do not fall within an
exception set forth in paragraph (b) of this section and, if relying on
such an exception, that are reasonably designed to assure compliance
with the terms of the exception.
(2) A trading center shall regularly surveil to ascertain the
effectiveness of the policies and procedures required by paragraph
(a)(1) of this section and shall take prompt action to remedy
deficiencies in such policies and procedures.
(b) Exceptions. (1) The transaction that constituted the trade-
through was effected when the trading center displaying the protected
quotation that was traded through was experiencing a failure, material
delay, or malfunction of its systems or equipment.
[[Page 77]]
(2) The transaction that constituted the trade-through was not a
``regular way'' contract.
(3) The transaction that constituted the trade-through was a single-
priced opening, reopening, or closing transaction by the trading center.
(4) The transaction that constituted the trade-through was executed
at a time when a protected bid was priced higher than a protected offer
in the NMS stock.
(5) The transaction that constituted the trade-through was the
execution of an order identified as an intermarket sweep order.
(6) The transaction that constituted the trade-through was effected
by a trading center that simultaneously routed an intermarket sweep
order to execute against the full displayed size of any protected
quotation in the NMS stock that was traded through.
(7) The transaction that constituted the trade-through was the
execution of an order at a price that was not based, directly or
indirectly, on the quoted price of the NMS stock at the time of
execution and for which the material terms were not reasonably
determinable at the time the commitment to execute the order was made.
(8) The trading center displaying the protected quotation that was
traded through had displayed, within one second prior to execution of
the transaction that constituted the trade-through, a best bid or best
offer, as applicable, for the NMS stock with a price that was equal or
inferior to the price of the trade-through transaction.
(9) The transaction that constituted the trade-through was the
execution by a trading center of an order for which, at the time of
receipt of the order, the trading center had guaranteed an execution at
no worse than a specified price (a ``stopped order''), where:
(i) The stopped order was for the account of a customer;
(ii) The customer agreed to the specified price on an order-by-order
basis; and
(iii) The price of the trade-through transaction was, for a stopped
buy order, lower than the national best bid in the NMS stock at the time
of execution or, for a stopped sell order, higher than the national best
offer in the NMS stock at the time of execution.
(c) Intermarket sweep orders. The trading center, broker, or dealer
responsible for the routing of an intermarket sweep order shall take
reasonable steps to establish that such order meets the requirements set
forth in Sec. 242.600(b)(38).
(d) Exemptions. The Commission, by order, may exempt from the
provisions of this section, either unconditionally or on specified terms
and conditions, any person, security, transaction, quotation, or order,
or any class or classes of persons, securities, quotations, or orders,
if the Commission determines that such exemption is necessary or
appropriate in the public interest, and is consistent with the
protection of investors.
[70 FR 37620, June 29, 2005, as amended at 83 FR 58429, Nov. 19, 2018;
86 FR 18811, Apr. 9, 2021]
Sec. 242.612 Minimum pricing increment.
(a) No national securities exchange, national securities
association, alternative trading system, vendor, or broker or dealer
shall display, rank, or accept from any person a bid or offer, an order,
or an indication of interest in any NMS stock priced in an increment
smaller than $0.01 if that bid or offer, order, or indication of
interest is priced equal to or greater than $1.00 per share.
(b) No national securities exchange, national securities
association, alternative trading system, vendor, or broker or dealer
shall display, rank, or accept from any person a bid or offer, an order,
or an indication of interest in any NMS stock priced in an increment
smaller than $0.0001 if that bid or offer, order, or indication of
interest is priced less than $1.00 per share.
(c) The Commission, by order, may exempt from the provisions of this
section, either unconditionally or on specified terms and conditions,
any person, security, quotation, or order, or any class or classes of
persons, securities, quotations, or orders, if the Commission determines
that such exemption is necessary or appropriate in the public interest,
and is consistent with the protection of investors.
[[Page 78]]
Sec. 242.613 Consolidated audit trail.
(a) Creation of a national market system plan governing a
consolidated audit trail. (1) Each national securities exchange and
national securities association shall jointly file on or before 270 days
from the date of publication of the Adopting Release in the Federal
Register a national market system plan to govern the creation,
implementation, and maintenance of a consolidated audit trail and
central repository as required by this section. The national market
system plan shall discuss the following considerations:
(i) The method(s) by which data will be reported to the central
repository including, but not limited to, the sources of such data and
the manner in which the central repository will receive, extract,
transform, load, and retain such data; and the basis for selecting such
method(s);
(ii) The time and method by which the data in the central repository
will be made available to regulators, in accordance with paragraph
(e)(1) of this section, to perform surveillance or analyses, or for
other purposes as part of their regulatory and oversight
responsibilities;
(iii) The reliability and accuracy of the data reported to and
maintained by the central repository throughout its lifecycle, including
transmission and receipt from market participants; data extraction,
transformation and loading at the central repository; data maintenance
and management at the central repository; and data access by regulators;
(iv) The security and confidentiality of the information reported to
the central repository;
(v) The flexibility and scalability of the systems used by the
central repository to collect, consolidate and store consolidated audit
trail data, including the capacity of the consolidated audit trail to
efficiently incorporate, in a cost-effective manner, improvements in
technology, additional capacity, additional order data, information
about additional securities or transactions, changes in regulatory
requirements, and other developments;
(vi) The feasibility, benefits, and costs of broker-dealers
reporting to the consolidated audit trail in a timely manner:
(A) The identity of all market participants (including broker-
dealers and customers) that are allocated NMS securities, directly or
indirectly, in a primary market transaction;
(B) The number of such securities each such market participant is
allocated; and
(C) The identity of the broker-dealer making each such allocation;
(vii) The detailed estimated costs for creating, implementing, and
maintaining the consolidated audit trail as contemplated by the national
market system plan, which estimated costs should specify:
(A) An estimate of the costs to the plan sponsors for establishing
and maintaining the central repository;
(B) An estimate of the costs to members of the plan sponsors,
initially and on an ongoing basis, for reporting the data required by
the national market system plan;
(C) An estimate of the costs to the plan sponsors, initially and on
an ongoing basis, for reporting the data required by the national market
system plan; and
(D) How the plan sponsors propose to fund the creation,
implementation, and maintenance of the consolidated audit trail,
including the proposed allocation of such estimated costs among the plan
sponsors, and between the plan sponsors and members of the plan
sponsors;
(viii) An analysis of the impact on competition, efficiency and
capital formation of creating, implementing, and maintaining of the
national market system plan;
(ix) A plan to eliminate existing rules and systems (or components
thereof) that will be rendered duplicative by the consolidated audit
trail, including identification of such rules and systems (or components
thereof); to the extent that any existing rules or systems related to
monitoring quotes, orders, and executions provide information that is
not rendered duplicative by the consolidated audit trail, an analysis
of:
(A) Whether the collection of such information remains appropriate;
[[Page 79]]
(B) If still appropriate, whether such information should continue
to be separately collected or should instead be incorporated into the
consolidated audit trail; and
(C) If no longer appropriate, how the collection of such information
could be efficiently terminated; the steps the plan sponsors propose to
take to seek Commission approval for the elimination of such rules and
systems (or components thereof); and a timetable for such elimination,
including a description of how the plan sponsors propose to phase in the
consolidated audit trail and phase out such existing rules and systems
(or components thereof);
(x) Objective milestones to assess progress toward the
implementation of the national market system plan;
(xi) The process by which the plan sponsors solicited views of their
members and other appropriate parties regarding the creation,
implementation, and maintenance of the consolidated audit trail, a
summary of the views of such members and other parties, and how the plan
sponsors took such views into account in preparing the national market
system plan; and
(xii) Any reasonable alternative approaches to creating,
implementing, and maintaining a consolidated audit trail that the plan
sponsors considered in developing the national market system plan
including, but not limited to, a description of any such alternative
approach; the relative advantages and disadvantages of each such
alternative, including an assessment of the alternative's costs and
benefits; and the basis upon which the plan sponsors selected the
approach reflected in the national market system plan.
(2) The national market system plan, or any amendment thereto, filed
pursuant to this section shall comply with the requirements in Sec.
242.608(a), if applicable, and be filed with the Commission pursuant to
Sec. 242.608.
(3) The national market system plan submitted pursuant to this
section shall require each national securities exchange and national
securities association to:
(i) Within two months after effectiveness of the national market
system plan jointly (or under the governance structure described in the
plan) select a person to be the plan processor;
(ii) Within four months after effectiveness of the national market
system plan synchronize their business clocks and require members of
each such exchange and association to synchronize their business clocks
in accordance with paragraph (d) of this section;
(iii) Within one year after effectiveness of the national market
system plan provide to the central repository the data specified in
paragraph (c) of this section;
(iv) Within fourteen months after effectiveness of the national
market system plan implement a new or enhanced surveillance system(s) as
required by paragraph (f) of this section;
(v) Within two years after effectiveness of the national market
system plan require members of each such exchange and association,
except those members that qualify as small broker-dealers as defined in
Sec. 240.0-10(c) of this chapter, to provide to the central repository
the data specified in paragraph (c) of this section; and
(vi) Within three years after effectiveness of the national market
system plan require members of each such exchange and association that
qualify as small broker-dealers as defined in Sec. 240.0-10(c) of this
chapter to provide to the central repository the data specified in
paragraph (c) of this section.
(4) Each national securities exchange and national securities
association shall be a sponsor of the national market system plan
submitted pursuant to this section and approved by the Commission.
(5) No national market system plan filed pursuant to this section,
or any amendment thereto, shall become effective unless approved by the
Commission or otherwise permitted in accordance with the procedures set
forth in Sec. 242.608. In determining whether to approve the national
market system plan, or any amendment thereto, and whether the national
market system plan or any amendment thereto is in the public interest
under Sec. 242.608(b)(2), the Commission shall consider the impact of
the national market system plan or amendment, as applicable, on
efficiency, competition, and capital formation.
[[Page 80]]
(b) Operation and administration of the national market system plan.
(1) The national market system plan submitted pursuant to this section
shall include a governance structure to ensure fair representation of
the plan sponsors, and administration of the central repository,
including the selection of the plan processor.
(2) The national market system plan submitted pursuant to this
section shall include a provision addressing the requirements for the
admission of new sponsors of the plan and the withdrawal of existing
sponsors from the plan.
(3) The national market system plan submitted pursuant to this
section shall include a provision addressing the percentage of votes
required by the plan sponsors to effectuate amendments to the plan.
(4) The national market system plan submitted pursuant to this
section shall include a provision addressing the manner in which the
costs of operating the central repository will be allocated among the
national securities exchanges and national securities associations that
are sponsors of the plan, including a provision addressing the manner in
which costs will be allocated to new sponsors to the plan.
(5) The national market system plan submitted pursuant to this
section shall require the appointment of a Chief Compliance Officer to
regularly review the operation of the central repository to assure its
continued effectiveness in light of market and technological
developments, and make any appropriate recommendations for enhancements
to the nature of the information collected and the manner in which it is
processed.
(6) The national market system plan submitted pursuant to this
section shall include a provision requiring the plan sponsors to provide
to the Commission, at least every two years after effectiveness of the
national market system plan, a written assessment of the operation of
the consolidated audit trail. Such document shall include, at a minimum:
(i) An evaluation of the performance of the consolidated audit trail
including, at a minimum, with respect to data accuracy (consistent with
paragraph (e)(6) of this section), timeliness of reporting,
comprehensiveness of data elements, efficiency of regulatory access,
system speed, system downtime, system security (consistent with
paragraph (e)(4) of this section), and other performance metrics to be
determined by the Chief Compliance Officer, along with a description of
such metrics;
(ii) A detailed plan, based on such evaluation, for any potential
improvements to the performance of the consolidated audit trail with
respect to any of the following: improving data accuracy; shortening
reporting timeframes; expanding data elements; adding granularity and
details regarding the scope and nature of Customer-IDs; expanding the
scope of the national market system plan to include new instruments and
new types of trading and order activities; improving the efficiency of
regulatory access; increasing system speed; reducing system downtime;
and improving performance under other metrics to be determined by the
Chief Compliance Officer;
(iii) An estimate of the costs associated with any such potential
improvements to the performance of the consolidated audit trail,
including an assessment of the potential impact on competition,
efficiency, and capital formation; and
(iv) An estimated implementation timeline for any such potential
improvements, if applicable.
(7) The national market system plan submitted pursuant to this
section shall include an Advisory Committee which shall function in
accordance with the provisions set forth in this paragraph (b)(7). The
purpose of the Advisory Committee shall be to advise the plan sponsors
on the implementation, operation, and administration of the central
repository.
(i) The national market system plan submitted pursuant to this
section shall set forth the term and composition of the Advisory
Committee, which composition shall include representatives of the member
firms of the plan sponsors.
(ii) Members of the Advisory Committee shall have the right to
attend any meetings of the plan sponsors, to
[[Page 81]]
receive information concerning the operation of the central repository,
and to provide their views to the plan sponsors; provided, however, that
the plan sponsors may meet without the Advisory Committee members in
executive session if, by affirmative vote of a majority of the plan
sponsors, the plan sponsors determine that such an executive session is
required.
(c) Data recording and reporting. (1) The national market system
plan submitted pursuant to this section shall provide for an accurate,
time-sequenced record of orders beginning with the receipt or
origination of an order by a member of a national securities exchange or
national securities association, and further documenting the life of the
order through the process of routing, modification, cancellation, and
execution (in whole or in part) of the order.
(2) The national market system plan submitted pursuant to this
section shall require each national securities exchange, national
securities association, and member to report to the central repository
the information required by paragraph (c)(7) of this section in a
uniform electronic format, or in a manner that would allow the central
repository to convert the data to a uniform electronic format, for
consolidation and storage.
(3) The national market system plan submitted pursuant to this
section shall require each national securities exchange, national
securities association, and member to record the information required by
paragraphs (c)(7)(i) through (v) of this section contemporaneously with
the reportable event. The national market system plan shall require that
information recorded pursuant to paragraphs (c)(7)(i) through (v) of
this section must be reported to the central repository by 8:00 a.m.
Eastern Time on the trading day following the day such information has
been recorded by the national securities exchange, national securities
association, or member. The national market system plan may accommodate
voluntary reporting prior to 8:00 a.m. Eastern Time, but shall not
impose an earlier reporting deadline on the reporting parties.
(4) The national market system plan submitted pursuant to this
section shall require each member of a national securities exchange or
national securities association to record and report to the central
repository the information required by paragraphs (c)(7)(vi) through
(viii) of this section by 8:00 a.m. Eastern Time on the trading day
following the day the member receives such information. The national
market system plan may accommodate voluntary reporting prior to 8:00
a.m. Eastern Time, but shall not impose an earlier reporting deadline on
the reporting parties.
(5) The national market system plan submitted pursuant to this
section shall require each national securities exchange and its members
to record and report to the central repository the information required
by paragraph (c)(7) of this section for each NMS security registered or
listed for trading on such exchange or admitted to unlisted trading
privileges on such exchange.
(6) The national market system plan submitted pursuant to this
section shall require each national securities association and its
members to record and report to the central repository the information
required by paragraph (c)(7) of this section for each NMS security for
which transaction reports are required to be submitted to the
association.
(7) The national market system plan submitted pursuant to this
section shall require each national securities exchange, national
securities association, and any member of such exchange or association
to record and electronically report to the central repository details
for each order and each reportable event, including, but not limited to,
the following information:
(i) For original receipt or origination of an order:
(A) Customer-ID(s) for each customer;
(B) The CAT-Order-ID;
(C) The CAT-Reporter-ID of the broker-dealer receiving or
originating the order;
(D) Date of order receipt or origination;
[[Page 82]]
(E) Time of order receipt or origination (using time stamps pursuant
to paragraph (d)(3) of this section); and
(F) Material terms of the order.
(ii) For the routing of an order, the following information:
(A) The CAT-Order-ID;
(B) Date on which the order is routed;
(C) Time at which the order is routed (using time stamps pursuant to
paragraph (d)(3) of this section);
(D) The CAT-Reporter-ID of the broker-dealer or national securities
exchange routing the order;
(E) The CAT-Reporter-ID of the broker-dealer, national securities
exchange, or national securities association to which the order is being
routed;
(F) If routed internally at the broker-dealer, the identity and
nature of the department or desk to which an order is routed; and
(G) Material terms of the order.
(iii) For the receipt of an order that has been routed, the
following information:
(A) The CAT-Order-ID;
(B) Date on which the order is received;
(C) Time at which the order is received (using time stamps pursuant
to paragraph (d)(3) of this section);
(D) The CAT-Reporter-ID of the broker-dealer, national securities
exchange, or national securities association receiving the order;
(E) The CAT-Reporter-ID of the broker-dealer or national securities
exchange routing the order; and
(F) Material terms of the order.
(iv) If the order is modified or cancelled, the following
information:
(A) The CAT-Order-ID;
(B) Date the modification or cancellation is received or originated;
(C) Time the modification or cancellation is received or originated
(using time stamps pursuant to paragraph (d)(3) of this section);
(D) Price and remaining size of the order, if modified;
(E) Other changes in material terms of the order, if modified; and
(F) The CAT-Reporter-ID of the broker-dealer or Customer-ID of the
person giving the modification or cancellation instruction.
(v) If the order is executed, in whole or part, the following
information:
(A) The CAT-Order-ID;
(B) Date of execution;
(C) Time of execution (using time stamps pursuant to paragraph
(d)(3) of this section);
(D) Execution capacity (principal, agency, riskless principal);
(E) Execution price and size;
(F) The CAT-Reporter-ID of the national securities exchange or
broker-dealer executing the order; and
(G) Whether the execution was reported pursuant to an effective
transaction reporting plan or the Plan for Reporting of Consolidated
Options Last Sale Reports and Quotation Information.
(vi) If the order is executed, in whole or part, the following
information:
(A) The account number for any subaccounts to which the execution is
allocated (in whole or part);
(B) The CAT-Reporter-ID of the clearing broker or prime broker, if
applicable; and
(C) The CAT-Order-ID of any contra-side order(s).
(vii) If the trade is cancelled, a cancelled trade indicator.
(viii) For original receipt or origination of an order, the
following information:
(A) Information of sufficient detail to identify the customer; and
(B) Customer account information.
(8) All plan sponsors and their members shall use the same Customer-
ID and CAT-Reporter-ID for each customer and broker-dealer.
(d) Clock synchronization and time stamps. The national market
system plan submitted pursuant to this section shall require:
(1) Each national securities exchange, national securities
association, and member of such exchange or association to synchronize
its business clocks that are used for the purposes of recording the date
and time of any reportable event that must be reported pursuant to this
section to the time maintained by the National Institute of Standards
and Technology, consistent with industry standards;
(2) Each national securities exchange and national securities
association to
[[Page 83]]
evaluate annually the clock synchronization standard to determine
whether it should be shortened, consistent with changes in industry
standards; and
(3) Each national securities exchange, national securities
association, and member of such exchange or association to utilize the
time stamps required by paragraph (c)(7) of this section, with at
minimum the granularity set forth in the national market system plan
submitted pursuant to this section, which shall reflect current industry
standards and be at least to the millisecond. To the extent that the
relevant order handling and execution systems of any national securities
exchange, national securities association, or member of such exchange or
association utilize time stamps in increments finer than the minimum
required by the national market system plan, the plan shall require such
national securities exchange, national securities association, or member
to utilize time stamps in such finer increments when providing data to
the central repository, so that all reportable events reported to the
central repository by any national securities exchange, national
securities association, or member can be accurately sequenced. The
national market system plan shall require the sponsors of the national
market system plan to annually evaluate whether industry standards have
evolved such that the required time stamp standard should be in finer
increments.
(e) Central repository. (1) The national market system plan
submitted pursuant to this section shall provide for the creation and
maintenance of a central repository. Such central repository shall be
responsible for the receipt, consolidation, and retention of all
information reported pursuant to paragraph (c)(7) of this section. The
central repository shall store and make available to regulators data in
a uniform electronic format, and in a form in which all events
pertaining to the same originating order are linked together in a manner
that ensures timely and accurate retrieval of the information required
by paragraph (c)(7) of this section for all reportable events for that
order.
(2) Each national securities exchange, national securities
association, and the Commission shall have access to the central
repository, including all systems operated by the central repository,
and access to and use of the data reported to and consolidated by the
central repository under paragraph (c) of this section, for the purpose
of performing its respective regulatory and oversight responsibilities
pursuant to the federal securities laws, rules, and regulations. The
national market system plan submitted pursuant to this section shall
provide that such access to and use of such data by each national
securities exchange, national securities association, and the Commission
for the purpose of performing its regulatory and oversight
responsibilities pursuant to the federal securities laws, rules, and
regulations shall not be limited.
(3) The national market system plan submitted pursuant to this
section shall include a provision requiring the creation and maintenance
by the plan processor of a method of access to the consolidated data
stored in the central repository that includes the ability to run
searches and generate reports.
(4) The national market system plan submitted pursuant to this
section shall include policies and procedures, including standards, to
be used by the plan processor to:
(i) Ensure the security and confidentiality of all information
reported to the central repository by requiring that:
(A) All plan sponsors and their employees, as well as all employees
of the central repository, agree to use appropriate safeguards to ensure
the confidentiality of such data and agree not to use such data for any
purpose other than surveillance and regulatory purposes, provided that
nothing in this paragraph (e)(4)(i)(A) shall be construed to prevent a
plan sponsor from using the data that it reports to the central
repository for regulatory, surveillance, commercial, or other purposes
as otherwise permitted by applicable law, rule, or regulation;
(B) Each plan sponsor adopt and enforce rules that:
(1) Require information barriers between regulatory staff and non-
regulatory staff with regard to access and
[[Page 84]]
use of data in the central repository; and
(2) Permit only persons designated by plan sponsors to have access
to the data in the central repository;
(C) The plan processor:
(1) Develop and maintain a comprehensive information security
program for the central repository, with dedicated staff, that is
subject to regular reviews by the Chief Compliance Officer;
(2) Have a mechanism to confirm the identity of all persons
permitted to access the data; and
(3) Maintain a record of all instances where such persons access the
data; and
(D) The plan sponsors adopt penalties for non-compliance with any
policies and procedures of the plan sponsors or central repository with
respect to information security.
(ii) Ensure the timeliness, accuracy, integrity, and completeness of
the data provided to the central repository pursuant to paragraph (c) of
this section; and
(iii) Ensure the accuracy of the consolidation by the plan processor
of the data provided to the central repository pursuant to paragraph (c)
of this section.
(5) The national market system plan submitted pursuant to this
section shall address whether there will be an annual independent
evaluation of the security of the central repository and:
(i) If so, provide a description of the scope of such planned
evaluation; and
(ii) If not, provide a detailed explanation of the alternative
measures for evaluating the security of the central repository that are
planned instead.
(6) The national market system plan submitted pursuant to this
section shall:
(i) Specify a maximum error rate to be tolerated by the central
repository for any data reported pursuant to paragraphs (c)(3) and
(c)(4) of this section; describe the basis for selecting such maximum
error rate; explain how the plan sponsors will seek to reduce such
maximum error rate over time; describe how the plan will seek to ensure
compliance with such maximum error rate and, in the event of
noncompliance, will promptly remedy the causes thereof;
(ii) Require the central repository to measure the error rate each
business day and promptly take appropriate remedial action, at a
minimum, if the error rate exceeds the maximum error rate specified in
the plan;
(iii) Specify a process for identifying and correcting errors in the
data reported to the central repository pursuant to paragraphs (c)(3)
and (c)(4) of this section, including the process for notifying the
national securities exchanges, national securities association, and
members who reported erroneous data to the central repository of such
errors, to help ensure that such errors are promptly corrected by the
reporting entity, and for disciplining those who repeatedly report
erroneous data; and
(iv) Specify the time by which data that has been corrected will be
made available to regulators.
(7) The national market system plan submitted pursuant to this
section shall require the central repository to collect and retain on a
current and continuing basis and in a format compatible with the
information consolidated and stored pursuant to paragraph (c)(7) of this
section:
(i) Information, including the size and quote condition, on the
national best bid and national best offer for each NMS security;
(ii) Transaction reports reported pursuant to an effective
transaction reporting plan filed with the Commission pursuant to, and
meeting the requirements of, Sec. 242.601; and
(iii) Last sale reports reported pursuant to the Plan for Reporting
of Consolidated Options Last Sale Reports and Quotation Information
filed with the Commission pursuant to, and meeting the requirements of,
Sec. 242.608.
(8) The national market system plan submitted pursuant to this
section shall require the central repository to retain the information
collected pursuant to paragraphs (c)(7) and (e)(7) of this section in a
convenient and usable standard electronic data format that is directly
available and searchable electronically without any manual intervention
for a period of not less than five years.
[[Page 85]]
(f) Surveillance. Every national securities exchange and national
securities association subject to this section shall develop and
implement a surveillance system, or enhance existing surveillance
systems, reasonably designed to make use of the consolidated information
contained in the consolidated audit trail.
(g) Compliance by members. (1) Each national securities exchange and
national securities association shall file with the Commission pursuant
to section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)) and Sec. 240.19b-4
of this chapter on or before 60 days from approval of the national
market system plan a proposed rule change to require its members to
comply with the requirements of this section and the national market
system plan approved by the Commission.
(2) Each member of a national securities exchange or national
securities association shall comply with all the provisions of any
approved national market system plan applicable to members.
(3) The national market system plan submitted pursuant to this
section shall include a provision requiring each national securities
exchange and national securities association to agree to enforce
compliance by its members with the provisions of any approved plan.
(4) The national market system plan submitted pursuant to this
section shall include a mechanism to ensure compliance with the
requirements of any approved plan by the members of a national
securities exchange or national securities association.
(h) Compliance by national securities exchanges and national
securities associations. (1) Each national securities exchange and
national securities association shall comply with the provisions of the
national market system plan approved by the Commission.
(2) Any failure by a national securities exchange or national
securities association to comply with the provisions of the national
market system plan approved by the Commission shall be considered a
violation of this section.
(3) The national market system plan submitted pursuant to this
section shall include a mechanism to ensure compliance by the sponsors
of the plan with the requirements of any approved plan. Such enforcement
mechanism may include penalties where appropriate.
(i) Other securities and other types of transactions. The national
market system plan submitted pursuant to this section shall include a
provision requiring each national securities exchange and national
securities association to jointly provide to the Commission within six
months after effectiveness of the national market system plan a document
outlining how such exchanges and associations could incorporate into the
consolidated audit trail information with respect to equity securities
that are not NMS securities, debt securities, primary market
transactions in equity securities that are not NMS securities, and
primary market transactions in debt securities, including details for
each order and reportable event that may be required to be provided,
which market participants may be required to provide the data, an
implementation timeline, and a cost estimate.
(j) Definitions. As used in this section:
(1) The term CAT-Order-ID shall mean a unique order identifier or
series of unique order identifiers that allows the central repository to
efficiently and accurately link all reportable events for an order, and
all orders that result from the aggregation or disaggregation of such
order.
(2) The term CAT-Reporter-ID shall mean, with respect to each
national securities exchange, national securities association, and
member of a national securities exchange or national securities
association, a code that uniquely and consistently identifies such
person for purposes of providing data to the central repository.
(3) The term customer shall mean:
(i) The account holder(s) of the account at a registered broker-
dealer originating the order; and
(ii) Any person from whom the broker-dealer is authorized to accept
trading instructions for such account, if different from the account
holder(s).
(4) The term customer account information shall include, but not be
limited
[[Page 86]]
to, account number, account type, customer type, date account opened,
and large trader identifier (if applicable).
(5) The term Customer-ID shall mean, with respect to a customer, a
code that uniquely and consistently identifies such customer for
purposes of providing data to the central repository.
(6) The term error rate shall mean the percentage of reportable
events collected by the central repository in which the data reported
does not fully and accurately reflect the order event that occurred in
the market.
(7) The term material terms of the order shall include, but not be
limited to, the NMS security symbol; security type; price (if
applicable); size (displayed and non-displayed); side (buy/sell); order
type; if a sell order, whether the order is long, short, short exempt;
open/close indicator; time in force (if applicable); if the order is for
a listed option, option type (put/call), option symbol or root symbol,
underlying symbol, strike price, expiration date, and open/close; and
any special handling instructions.
(8) The term order shall include:
(i) Any order received by a member of a national securities exchange
or national securities association from any person;
(ii) Any order originated by a member of a national securities
exchange or national securities association; or
(iii) Any bid or offer.
(9) The term reportable event shall include, but not be limited to,
the original receipt or origination, modification, cancellation,
routing, and execution (in whole or in part) of an order, and receipt of
a routed order.
[77 FR 45808, Aug. 1, 2012]
Sec. 242.614 Registration and responsibilities of competing consolidators.
(a) Competing consolidator registration--(1) Initial Form CC--(i)
Filing and effectiveness requirement. No person, other than a national
securities exchange or a national securities association:
(A) May receive directly, pursuant to an effective national market
system plan, from a national securities exchange or national securities
association information with respect to quotations for and transactions
in NMS stocks; and
(B) Generate a consolidated market data product for dissemination to
any person unless the person files with the Commission an initial Form
CC and the initial Form CC has become effective pursuant to paragraph
(a)(1)(v) of this section.
(ii) Electronic filing and submission. Any reports to the Commission
required under this section shall be filed electronically on Form CC (17
CFR 249.1002), include all information as prescribed in Form CC and the
instructions thereto, and contain an electronic signature as defined in
Sec. 240.19b-4(j) of this chapter.
(iii) Commission review period. The Commission may, by order, as
provided in paragraph (a)(1)(v)(B) of this section, declare an initial
Form CC filed by a competing consolidator ineffective no later than 90
calendar days from the date of filing with the Commission.
(iv) Withdrawal of initial Form CC due to inaccurate or incomplete
disclosures. During the review by the Commission of the initial Form CC,
if any information disclosed in the initial Form CC is or becomes
inaccurate or incomplete, the competing consolidator shall promptly
withdraw the initial Form CC and may refile an initial Form CC pursuant
to paragraph (a)(1) of this section.
(v) Effectiveness; ineffectiveness determination. (A) An initial
Form CC filed by a competing consolidator will become effective, unless
declared ineffective, no later than the expiration of the review period
provided in paragraph (a)(1)(iii) of this section and publication
pursuant to paragraph (b)(2)(i) of this section.
(B) The Commission shall, by order, declare an initial Form CC
ineffective if it finds, after notice and opportunity for hearing, that
such action is necessary or appropriate in the public interest, and is
consistent with the protection of investors. If the Commission declares
an initial Form CC ineffective, the competing consolidator shall be
prohibited from operating as a competing consolidator. An initial Form
CC declared ineffective does not prevent the competing consolidator from
subsequently filing a new Form CC.
(2) Form CC amendments. A competing consolidator shall amend a Form
CC:
[[Page 87]]
(i) Prior to the implementation of a material change to the pricing,
connectivity, or products offered (``material amendment''); and
(ii) No later than 30 calendar days after the end of each calendar
year to correct information that has become inaccurate or incomplete for
any reason and to provide an Annual Report as required under Form CC
(each a ``Form CC amendment'').
(3) Notice of cessation. A competing consolidator shall notice its
cessation of operations on Form CC at least 90 calendar days prior to
the date the competing consolidator will cease to operate as a competing
consolidator. The notice of cessation shall cause the Form CC to become
ineffective on the date designated by the competing consolidator.
(4) Date of filing. For purposes of filings made pursuant to this
section:
(i) The term business day shall have the same meaning as defined in
Sec. 240.19b-4(b)(2) of this chapter.
(ii) If the conditions of this section and Form CC are otherwise
satisfied, all filings submitted electronically on or before 5:30 p.m.
Eastern Standard Time or Eastern Daylight Saving Time, whichever is
currently in effect, on a business day, shall be deemed filed on that
business day, and all filings submitted after 5:30 p.m. Eastern Standard
Time or Eastern Daylight Saving Time, whichever is currently in effect,
shall be deemed filed on the next business day.
(b) Public disclosures. (1) Every Form CC filed pursuant to this
section shall constitute a ``report'' within the meaning of sections
11A, 17(a), 18(a), and 32(a) of the Act (15 U.S.C. 78k-1, 78q(a),
78r(a), and 78ff(a)), and any other applicable provisions of the Act.
(2) The Commission will make public via posting on the Commission's
website:
(i) Identification of each competing consolidator that has filed an
initial Form CC with the Commission and the date of filing;
(ii) Each effective initial Form CC, as amended;
(iii) Each order of ineffective initial Form CC;
(iv) Each Form CC amendment. The Commission will make public the
entirety of any Form CC amendment no later than 30 calendar days from
the date of filing thereof with the Commission; and
(v) Each notice of cessation.
(c) Posting of hyperlink to the Commission's website. Each competing
consolidator shall make public via posting on its website a direct URL
hyperlink to the Commission's website that contains the documents
enumerated in paragraphs (b)(2)(ii) through (v) of this section.
(d) Responsibilities of competing consolidators. Each competing
consolidator shall:
(1) Collect from each national securities exchange and national
securities association, either directly or indirectly, any information
with respect to quotations for and transactions in NMS stocks as
provided in Sec. 242.603(b) that is necessary to create a consolidated
market data product, as defined in Sec. 242.600(b)(20).
(2) Calculate and generate a consolidated market data product, as
defined in Sec. 242.600(b)(20), from the information collected pursuant
to paragraph (d)(1) of this section.
(3) Make a consolidated market data product, as defined in Sec.
242.600(b)(20), as timestamped as required by paragraph (d)(4) of this
section and including the national securities exchange and national
securities association data generation timestamp required to be provided
by the national securities exchange and national securities association
participants by paragraph (e)(2) of this section, available to
subscribers on a consolidated basis on terms that are not unreasonably
discriminatory.
(4) Timestamp the information collected pursuant to paragraph (d)(1)
of this section upon:
(i) Receipt from each national securities exchange and national
securities association;
(ii) Receipt of such information at its aggregation mechanism; and
(iii) Dissemination of a consolidated market data product to
subscribers.
(5) Within 15 calendar days after the end of each month, publish
prominently on its website monthly performance metrics, as defined by
the effective national market system plan(s) for NMS stocks, that shall
include at least
[[Page 88]]
the information in paragraphs (d)(5)(i) through (v) of this section. All
information must be publicly posted in downloadable files and must
remain free and accessible (without any encumbrances or restrictions) by
the general public on the website for a period of not less than three
years from the initial date of posting.
(i) Capacity statistics;
(ii) Message rate and total statistics;
(iii) System availability;
(iv) Network delay statistics; and
(v) Latency statistics for the following, with distribution
statistics up to the 99.99th percentile:
(A) When a national securities exchange or national securities
association sends an inbound message to a competing consolidator network
and when the competing consolidator network receives the inbound
message;
(B) When the competing consolidator network receives the inbound
message and when the competing consolidator network sends the
corresponding consolidated message to a subscriber; and
(C) When a national securities exchange or national securities
association sends an inbound message to a competing consolidator network
and when the competing consolidator network sends the corresponding
consolidated message to a subscriber.
(6) Within 15 calendar days after the end of each month, publish
prominently on its website the information in paragraphs (d)(6)(i)
through (v) of this section. All information must be publicly posted and
must remain free and accessible (without any encumbrances or
restrictions) by the general public on the website for a period of not
less than three years from the initial date of posting.
(i) Data quality issues;
(ii) System issues;
(iii) Any clock synchronization protocol utilized;
(iv) For the clocks used to generate the timestamps described in
paragraph (d)(4) of this section, the clock drift averages and peaks,
and the number of instances of clock drift greater than 100
microseconds; and
(v) Vendor alerts.
(7) Keep and preserve at least one copy of all documents, including
all correspondence, memoranda, papers, books, notices, accounts, and
such other records as shall be made or received by it in the course of
its business as such and in the conduct of its business. Competing
consolidators shall keep all such documents for a period of no less than
five years, the first two years in an easily accessible place.
(8) Upon request of any representative of the Commission, promptly
furnish to the possession of such representative copies of any documents
required to be kept and preserved by it.
(9) Each competing consolidator that is not required to comply with
the requirements of Sec. Sec. 242.1000 through 242.1007 regarding
systems compliance and integrity (Regulation SCI) shall comply with the
following:
(i) Definitions. For purposes of this paragraph (d)(9), the
following definitions shall apply:
Systems disruption means an event in a competing consolidator's
systems involved in the collection and consolidation of consolidated
market data, and dissemination of consolidated market data products,
that disrupts, or significantly degrades, the normal operation of such
systems.
Systems intrusion means any unauthorized entry into a competing
consolidator's systems involved in the collection and consolidation of
consolidated market data, and dissemination of consolidated market data
products.
(ii) Obligations relating to policies and procedures. (A)(1)
Establish, maintain, and enforce written policies and procedures
reasonably designed to ensure: That its systems involved in the
collection and consolidation of consolidated market data, and
dissemination of consolidated market data products have levels of
capacity, integrity, resiliency, availability, and security adequate to
maintain the competing consolidator's operational capability and promote
the maintenance of fair and orderly markets; and the prompt, accurate,
and reliable dissemination of consolidated market data products.
(2) Such policies and procedures shall be deemed to be reasonably
designed if they are consistent with current industry standards, which
shall be comprised of information technology practices that are widely
available to information technology professionals in the
[[Page 89]]
financial sector and issued by an authoritative body that is a U.S.
governmental entity or agency, association of U.S. governmental entities
or agencies, or widely recognized organization. Compliance with such
current industry standards, however, shall not be the exclusive means to
comply with the requirements of this paragraph (d)(9)(ii)(A);
(B) Periodically review the effectiveness of the policies and
procedures required by paragraph (d)(9)(ii)(A) of this section, and take
prompt action to remedy deficiencies in such policies and procedures;
and
(C) Establish, maintain, and enforce reasonably designed written
policies and procedures that include the criteria for identifying
responsible personnel, the designation and documentation of responsible
personnel, and escalation procedures to quickly inform responsible
personnel of potential systems disruptions and systems intrusions; and
periodically review the effectiveness of the policies and procedures,
and take prompt action to remedy deficiencies.
(iii) Systems disruptions or systems intrusions. (A) Upon
responsible personnel having a reasonable basis to conclude that a
systems disruption or systems intrusion has occurred, begin to take
appropriate corrective action which shall include, at a minimum,
mitigating potential harm to investors and market integrity resulting
from the event and devoting adequate resources to remedy the event as
soon as reasonably practicable.
(B) Promptly upon responsible personnel having a reasonable basis to
conclude that a systems disruption (other than a system disruption that
has had, or the competing consolidator reasonably estimates would have,
no or a de minimis impact on the competing consolidator's operations or
on market participants) has occurred, publicly disseminate information
relating to the event (including the system(s) affected and a summary
description); when known, promptly publicly disseminate additional
information relating to the event (including a detailed description, an
assessment of those potentially affected, a description of the progress
of corrective action and when the event has been or is expected to be
resolved); and until resolved, provide regular updates with respect to
such information.
(C) Concurrent with public dissemination of information relating to
a systems disruption pursuant to paragraph (d)(9)(iii)(B) of this
section, or promptly upon responsible personnel having a reasonable
basis to conclude that a systems intrusion (other than a system
intrusion that has had, or the competing consolidator reasonably
estimates would have, no or a de minimis impact on the competing
consolidator's operations or on market participants) has occurred,
provide the Commission notification and, until resolved, updates of such
event. Notifications required pursuant to this paragraph (d)(9)(iii)(C)
shall include information relating to the event (including the system(s)
affected and a summary description); when known, additional information
relating to the event (including a detailed description, an assessment
of those potentially affected, a description of the progress of
corrective action and when the event has been or is expected to be
resolved); and until resolved, regular updates with respect to such
information. Notifications relating to systems disruptions and systems
intrusions pursuant to this paragraph (d)(9)(iii)(C) shall be submitted
to the Commission on Form CC.
(iv) Coordinated testing. Participate in the industry- or sector-
wide coordinated testing of business recovery and disaster recovery
plans required of SCI entities pursuant to Sec. 242.1004(c).
(e) Amendment of the effective national market system plan(s) for
NMS stocks. The participants to the effective national market system
plan(s) for NMS stocks shall file with the Commission, pursuant to Sec.
242.608, an amendment that includes the following provisions within 150
calendar days from June 8, 2021:
(1) Conforming the effective national market system plan(s) for NMS
stocks to reflect provision of information with respect to quotations
for and transactions in NMS stocks that is necessary to generate
consolidated market
[[Page 90]]
data by the national securities exchange and national securities
association participants to competing consolidators and self-
aggregators;
(2) The application of timestamps by the national securities
exchange and national securities association participants on all
information with respect to quotations for and transactions in NMS
stocks that is necessary to generate consolidated market data, including
the time that such information was generated as applicable by the
national securities exchange or national securities association and the
time the national securities exchange or national securities association
made such information available to competing consolidators and self-
aggregators;
(3) Assessments of competing consolidator performance, including
speed, reliability, and cost of data provision and the provision of an
annual report of such assessment to the Commission, and the Commission
will make the annual report publicly available on the Commission's
website;
(4) The development, maintenance, and publication of a list that
identifies the primary listing exchange for each NMS stock; and
(5) The calculation and publication on a monthly basis of
consolidated market data gross revenues for NMS stocks as specified by:
(i) Listed on the New York Stock Exchange (NYSE);
(ii) Listed on Nasdaq; and
(iii) Listed on exchanges other than NYSE or Nasdaq.
[86 FR 18811, Apr. 9, 2021
Regulation SE--Registration and Regulation of Security-Based Swap
Execution Facilities
Source: 88 FR 87285, Dec. 15, 2023, unless otherwise noted.
Sec. 242.800 Scope.
The provisions of Sec. Sec. 242.800 through 242.835 shall apply to
every security-based swap execution facility that is registered or is
applying to become registered as a security-based swap execution
facility under section 3D of the Securities Exchange Act (``Act'').
Sec. 242.801 Applicable provisions.
A security-based swap execution facility shall comply with the
requirements of Sec. Sec. 242.800 through 242.835 and all other
applicable Commission rules, including any related definitions and
cross- referenced sections.
Sec. 242.802 Definitions.
The following terms, and any other terms defined within Sec. Sec.
242.800 through 242.835, are defined as follows solely for purposes of
Sec. Sec. 242.800 through 242.835:
Business day means the intraday period of time starting at 8:15 a.m.
and ending at 4:45 p.m. eastern standard time or eastern daylight saving
time, whichever is currently in effect in Washington, DC, on all days
except Saturdays, Sundays, and Federal holidays in Washington, DC.
Committee member means a member, or functional equivalent thereof,
of any committee of a security-based swap execution facility.
Correcting trade means a trade executed and submitted for clearing
to a registered clearing agency with the same terms and conditions as an
error trade other than any corrections to any operational or clerical
error and the time of execution.
Disciplinary committee means any person or committee of persons, or
any subcommittee thereof, that is authorized by a security-based swap
execution facility or SBS exchange to issue disciplinary charges, to
conduct disciplinary proceedings, to settle disciplinary charges, to
impose disciplinary sanctions, or to hear appeals thereof in cases
involving any violation of the rules of the security-based swap
execution facility or SBS exchange, except those cases where the person
or committee is authorized summarily to impose minor penalties for
violating rules regarding decorum, attire, the timely submission of
accurate records for clearing or verifying each day's transactions, or
other similar activities.
Dormant product means:
(1) Any security-based swap listed on security-based swap execution
facility that has no open interest and in which no trading has occurred
for a period of 12 complete calendar months following a certification
to, or approval by, the Commission; provided, however, that
[[Page 91]]
no security-based swap initially and originally certified to, or
approved by, the Commission within the preceding 36 complete calendar
months shall be considered to be a dormant product;
(2) Any security-based swap of a dormant security-based swap
execution facility; or
(3) Any security-based swap not otherwise a dormant product that a
security-based swap execution facility self-declares through
certification to be a dormant product.
Dormant rule means:
(1) Any rule of a security-based swap execution facility which
remains unimplemented for 12 consecutive calendar months following a
certification with, or an approval by, the Commission; or
(2) Any rule or rule amendment of a dormant security-based swap
execution facility.
Dormant security-based swap execution facility means a security-
based swap execution facility on which no trading has occurred for the
previous 12 consecutive calendar months; provided, however, that no
security-based swap execution facility shall be considered to be a
dormant security-based swap execution facility if its initial and
original Commission order of registration was issued within the
preceding 36 consecutive calendar months.
Electronic trading facility means a trading facility that operates
by means of an electronic or telecommunications network and maintains an
automated audit trail of bids, offers, and the matching orders or the
execution of transactions on the facility.
Emergency means any occurrence or circumstance that, in the opinion
of the governing board of a security-based swap execution facility, or a
person or persons duly authorized to issue such an opinion on behalf of
the governing board of the security-based swap execution facility under
circumstances and pursuant to procedures that are specified by rule,
requires immediate action and threatens or may threaten such things as
the fair and orderly trading in, or the liquidation of or delivery
pursuant to, any security-based swaps, including:
(1) Any manipulative or attempted manipulative activity;
(2) Any actual, attempted, or threatened corner, squeeze,
congestion, or undue concentration of positions;
(3) Any circumstances which may materially affect the performance of
security-based swaps or transactions, including failure of the payment
system or the bankruptcy or insolvency of any market participant;
(4) Any action taken by any governmental body, or any other
security-based swap execution facility, market, or facility which may
have a direct impact on trading or clearing and settlement; and
(5) Any other circumstance which may have a severe, adverse effect
upon the functioning of the security-based swap execution facility.
Employee means any person hired or otherwise employed on a salaried
or contract basis by a security-based swap execution facility, but does
not include:
(1) Any governing board member compensated by the security-based
swap execution facility solely for governing board activities; or
(2) Any committee member compensated by a security-based swap
execution facility solely for committee activities; or
(3) Any consultant hired by a security-based swap execution
facility.
Error trade means any trade executed on or subject to the rules of a
security-based swap execution facility that contains an operational or
clerical error.
Governing board means the board of directors of a security-based
swap execution facility, or for a security-based swap execution facility
whose organizational structure does not include a board of directors, a
body performing a function similar to a board of directors.
Governing board member means a member, or functional equivalent
thereof, of the governing board of a security-based swap execution
facility.
Member, with respect to a national securities exchange, has the same
meaning as in section 3(a)(3) of the Act. Member, with respect to a
security-based swap execution facility, means an individual,
association, partnership, corporation, or trust owning or holding
[[Page 92]]
a membership in, admitted to membership representation on, or having
trading privileges on the security-based swap execution facility.
Non-U.S. member means a member of a security-based swap execution
facility that is not a U.S. person.
Offsetting trade means a trade executed and submitted for clearing
to a registered clearing agency with terms and conditions that
economically reverse an error trade that was accepted for clearing.
Order book means an electronic trading facility, a trading facility,
or a trading system or platform in which all market participants in the
trading system or platform have the ability to enter multiple bids and
offers, observe or receive bids and offers entered by other market
participants, and transact on such bids and offers.
Oversight panel means any panel, or any subcommittee thereof,
authorized by a security-based swap execution facility or security-based
swap exchange (``SBS exchange'') to recommend or establish policies or
procedures with respect to the surveillance, compliance, rule
enforcement, or disciplinary responsibilities of the security-based swap
execution facility or SBS exchange.
Records has the meaning as in section 3(a)(37) of the Act (15 U.S.C.
78c(a)(37)).
Rule means any constitutional provision, article of incorporation,
bylaw, rule, regulation, resolution, interpretation, stated policy,
advisory, terms and conditions, trading protocol, agreement, or
instrument corresponding thereto, including those that authorize a
response or establish standards for responding to a specific emergency,
and any amendment or addition thereto or repeal thereof, made or issued
by a security-based swap execution facility or by the governing board
thereof or any committee thereof, in whatever form adopted.
SBS exchange means a national securities exchange that posts or
makes available for trading security-based swaps.
Security-based swap execution facility has the same meaning as in
section 3(a)(77) of the Act (15 U.S.C. 78c(a)(77)) but does not include
an entity that is registered with the Commission as a clearing agency
pursuant to section 17A of the Act (15 U.S.C. 78q-1) and limits its
security-based swap execution facility functions to operation of a
trading session that is designed to further the accuracy of end-of-day
valuations.
Senior officer means the chief executive officer or other equivalent
officer of a security-based swap execution facility.
Terms and conditions means any definition of the trading unit or the
specific asset underlying a security-based swap, description of the
payments to be exchanged under a security-based swap, specification of
cash settlement or delivery standards and procedures, and establishment
of buyers' and sellers' rights and obligations under the security-based
swap. Terms and conditions of a security-based swap include provisions
relating to the following:
(1) Identification of the major group, category, type, or class in
which the security-based swap falls (such as a credit or equity
security-based swap) and of any further sub-group, category, type, or
class that further describes the security-based swap;
(2) Notional amounts, quantity standards, or other unit size
characteristics;
(3) Any applicable premiums or discounts for delivery of a non-par
product;
(4) Trading hours and the listing of security-based swaps;
(5) Pricing basis for establishing the payment obligations under,
and mark-to-market value of, the security-based swap including, as
applicable, the accrual start dates, termination, or maturity dates,
and, for each leg of the security-based swap, the initial cash flow
components, spreads, and points, and the relevant indexes, prices,
rates, coupons, or other price reference measures;
(6) Any price limits, trading halts, or circuit breaker provisions,
and procedures for the establishment of daily settlement prices;
(7) Payment and reset frequency, day count conventions, business
calendars, and accrual features;
[[Page 93]]
(8) If physical delivery applies, delivery standards and procedures,
including fees related to delivery or the delivery process, alternatives
to delivery, and applicable penalties or sanctions for failure to
perform;
(9) If cash-settled, the definition, composition, calculation, and
revision of the cash settlement price, and the settlement currency;
(10) Payment or collection of option premiums or margins;
(11) Option exercise price, if it is constant, and method for
calculating the exercise price, if it is variable;
(12) Threshold prices for an option, the existence of which is
contingent upon those prices;
(13) Any restrictions or requirements for exercising an option; and
(14) Life cycle events.
Trading facility--(1) In general. The term trading facility means a
person or group of persons that constitutes, maintains, or provides a
physical or electronic facility or system in which multiple participants
have the ability to execute or trade agreements, contracts, or
transactions:
(i) By accepting bids or offers made by other participants that are
open to multiple participants in the facility or system; or
(ii) Through the interaction of multiple bids or multiple offers
within a system with a pre- determined non-discretionary automated trade
matching and execution algorithm.
(2) Exclusions. (i) The term trading facility does not include:
(A) A person or group of persons solely because the person or group
of persons constitutes, maintains, or provides an electronic facility or
system that enables participants to negotiate the terms of and enter
into bilateral transactions as a result of communications exchanged by
the parties and not from interaction of multiple bids and multiple
offers within a predetermined, nondiscretionary automated trade matching
and execution algorithm;
(B) A government securities dealer or government securities broker,
to the extent that the dealer or broker executes or trades agreements,
contracts, or transactions in government securities, or assists persons
in communicating about, negotiating, entering into, executing, or
trading an agreement, contract, or transaction in government securities
(as the terms government securities dealer, government securities
broker, and government securities are defined in section 3(a) of the
Act); or
(C) A facility on which bids and offers, and acceptances of bids and
offers effected on the facility, are not binding.
(ii) Any person, group of persons, dealer, broker, or facility
described in paragraphs (2)(i)(A) through (C) of this definition of
trading facility is excluded from the meaning of the term ``trading
facility'' without any prior specific approval, certification, or other
action by the Commission.
(3) Special rule. A person or group of persons that would not
otherwise constitute a trading facility shall not be considered to be a
trading facility solely as a result of the submission to a registered
clearing agency of transactions executed on or through the person or
group of persons.
U.S. person has the same meaning as in Sec. 240.3a71-3(a)(4) of
this chapter.
Note 1 to Sec. 242.802: The Commission has not yet adopted a
definition of ``block trade.''
Sec. 242.803 Requirements and procedures for registration.
(a) Requirements for registration. (1) Any person operating a
facility that offers a trading system or platform in which more than one
market participant has the ability to execute or trade security-based
swaps with more than one other market participant on the system or
platform shall register the facility as a security-based swap execution
facility under this section or as a national securities exchange
pursuant to section 6 of the Act.
(2) A security-based swap execution facility shall, at a minimum,
offer an order book.
(3) A security-based swap execution facility is not required to
provide an order book under this section for transactions defined in
Sec. 242.815(d)(2), (3), and (4) except that a security-based swap
execution facility must provide an order book under this section for
Required Transactions that are components of transactions defined in
[[Page 94]]
Sec. 242.815(d)(2), (3), and (4) when such Required Transactions are
not executed as components of transactions defined in Sec.
242.815(d)(2), (3), and (4).
(b) Procedures for full registration--(1) Request to register. An
entity requesting registration as a security-based swap execution
facility shall:
(i) File electronically a complete Form SBSEF (referenced in Sec.
249.1701), or any successor forms, and all information and documentation
described in such forms with the Commission using the EDGAR system and,
for the information specified in the Registration Instructions to Form
SBSEF, as an Interactive Data File in accordance with Sec. 232.405 of
this chapter; and
(ii) Provide to the Commission, upon the Commission's request, any
additional information and documentation necessary to review an
application.
(2) Request for confidential treatment. (i) An applicant requesting
registration as a security-based swap execution facility shall identify
with particularity any information in the application that will be
subject to a request for confidential treatment pursuant to Sec.
240.24b-2 of this chapter.
(ii) As set forth in Sec. 242.808, certain information provided in
an application shall be made publicly available.
(3) Amendment of application prior to full registration. An
applicant amending a pending application for registration as a security-
based swap execution facility or requesting an amendment to an order of
registration shall file an amended application electronically with the
Commission using the EDGAR system and, for the information specified in
the Registration Instructions to Form SBSEF, as an Interactive Data File
in accordance with Sec. 232.405 of this chapter.
(4) Effect of incomplete application. If an application is
incomplete pursuant to paragraph (b)(1) of this section, the Commission
shall notify the applicant that its application will not be deemed to
have been submitted for purposes of the Commission's review.
(5) Commission review period. The Commission shall approve or deny
an application for registration as a security-based swap execution
facility within 180 days of the filing of the application. If the
Commission notifies the person that its application is materially
incomplete and specifies the deficiencies in the application, the
running of the 180-day period shall be stayed from the time of such
notification until the application is resubmitted in completed form,
provided that the Commission shall have not less than 60 days to approve
or deny the application from the time the application is resubmitted in
completed form.
(6) Commission determination. (i) The Commission shall issue an
order granting registration upon a Commission determination, in its own
discretion, that the applicant has demonstrated compliance with the Act
and the Commission's rules applicable to security-based swap execution
facilities. If deemed appropriate, the Commission may issue an order
granting registration subject to conditions.
(ii) The Commission may issue an order denying registration upon a
Commission determination, in its own discretion, that the applicant has
not demonstrated compliance with the Act and the Commission's rules
applicable to security-based swap execution facilities. If the
Commission denies an application, it shall specify the grounds for the
denial.
(c) Reinstatement of dormant registration. A dormant security-based
swap execution facility may reinstate its registration under the
procedures of paragraph (b) of this section. The applicant may rely upon
previously submitted materials if such materials accurately describe the
dormant security-based swap execution facility's conditions at the time
that it applies for reinstatement of its registration.
(d) Request for transfer of registration. (1) A security-based swap
execution facility seeking to transfer its registration from its current
legal entity to a new legal entity as a result of a corporate change
shall file a request for approval to transfer such registration with the
Commission in the form and manner specified by the Commission.
(2) A request for transfer of registration shall be filed no later
than three months prior to the anticipated corporate change; or in the
event that the security-based swap execution facility could not have
known of the anticipated change three months prior to the
[[Page 95]]
anticipated change, as soon as it knows of such change.
(3) The request for transfer of registration shall include the
following:
(i) The underlying agreement that governs the corporate change;
(ii) A description of the corporate change, including the reason for
the change and its impact on the security-based swap execution facility,
including its governance and operations, and its impact on the rights
and obligations of members;
(iii) A discussion of the transferee's ability to comply with the
Act, including the core principles applicable to security-based swap
execution facilities and the Commission's rules thereunder;
(iv) The governing documents of the transferee, including, but not
limited to, articles of incorporation and bylaws;
(v) The transferee's rules marked to show changes from the current
rules of the security-based swap execution facility;
(vi) A representation by the transferee that it:
(A) Will be the surviving entity and successor-in-interest to the
transferor security-based swap execution facility and will retain and
assume, without limitation, all of the assets and liabilities of the
transferor;
(B) Will assume responsibility for complying with all applicable
provisions of the Act and the Commission's rules thereunder;
(C) Will assume, maintain, and enforce all rules implementing and
complying with the core principles applicable to security-based swap
execution facilities, including the adoption of the transferor's
rulebook, as amended in the request, and that any such amendments will
be submitted to the Commission pursuant to Sec. 242.806 or Sec.
242.807;
(D) Will comply with all regulatory responsibilities except if
otherwise indicated in the request, and will maintain and enforce all
regulatory programs; and
(E) Will notify members of all changes to the transferor's rulebook
prior to the transfer and will further notify members of the concurrent
transfer of the registration to the transferee upon Commission approval
and issuance of an order permitting this transfer.
(vii) A representation by the transferee that upon the transfer:
(A) It will assume responsibility for and maintain compliance with
core principles for all security-based swaps previously made available
for trading through the transferor, whether by certification or
approval; and
(B) None of the proposed rule changes will affect the rights and
obligations of any member.
(4) Upon review of a request for transfer of registration, the
Commission, as soon as practicable, shall issue an order either
approving or denying the request.
(e) Request for withdrawal of application for registration. An
applicant for registration as a security-based swap execution facility
may withdraw its application submitted pursuant to paragraph (b) of this
section by filing a withdrawal request electronically with the
Commission using the EDGAR system. Withdrawal of an application for
registration shall not affect any action taken or to be taken by the
Commission based upon actions, activities, or events occurring during
the time that the application was pending with the Commission.
(f) Request for vacation of registration. A security-based swap
execution facility may request that its registration be vacated by
filing a vacation request electronically with the Commission using the
EDGAR system at least 90 days prior to the date that the vacation is
requested to take effect. Upon receipt of such request, the Commission
shall promptly order the vacation to be effective upon the date named in
the request and send a copy of the request and its order to all other
security-based swap execution facilities, SBS exchanges, and registered
clearing agencies that clear security-based swaps. Vacation of
registration shall not affect any action taken or to be taken by the
Commission based upon actions, activities, or events occurring during
the time that the security-based swap execution facility was registered
by the Commission. From and after the date upon which the vacation
became effective the said security-based swap execution facility can
thereafter be
[[Page 96]]
registered again by applying to the Commission in the manner provided in
paragraph (b) of this section for an original application.
Sec. 242.804 Listing products for trading by certification.
(a) General. A security-based swap execution facility must comply
with the submission requirements of this section prior to listing a
product for trading that has not been approved under Sec. 242.805 or
that remains a dormant product subsequent to being submitted under this
section or approved under Sec. 242.805. A submission shall comply with
the following conditions:
(1) The security-based swap execution facility has filed its
submission electronically with the Commission using the EFFS system;
(2) The Commission has received the submission by the open of
business on the business day that is 10 business days preceding the
product's listing; and
(3) The submission includes:
(i) A copy of the submission cover sheet in accordance with the
instructions therein;
(ii) A copy of the product's rules, including all rules related to
its terms and conditions;
(iii) The intended listing date;
(iv) A certification by the security-based swap execution facility
that the product to be listed complies with the Act and the Commission's
rules thereunder;
(v) A concise explanation and analysis of the product and its
compliance with applicable provisions of the Act, including core
principles, and the Commission's rules thereunder. This explanation and
analysis shall either be accompanied by the documentation relied upon to
establish the basis for compliance with applicable law, or incorporate
information contained in such documentation, with appropriate citations
to data sources;
(vi) A certification that the security-based swap execution facility
posted a notice of pending product certification with the Commission and
a copy of the submission, concurrent with the filing of a submission
with the Commission, on the security-based swap execution facility's
website. Information that the security-based swap execution facility
seeks to keep confidential may be redacted from the documents published
on the security-based swap execution's website but must be republished
consistent with any determination made pursuant to Sec. 240.24b-2 of
this chapter; and
(vii) A request for confidential treatment, if appropriate, as
permitted under Sec. 240.24b-2 of this chapter.
(b) Additional information. If requested by Commission staff, a
security-based swap execution facility shall provide any additional
evidence, information, or data that demonstrates that the security-based
swap meets, initially or on a continuing basis, the requirements of the
Act or the Commission's rules or policies thereunder.
(c) Stay of certification of product--(1) General. The Commission
may stay the certification of a product submitted pursuant to paragraph
(a) of this section by issuing a notification informing the security-
based swap execution facility that the Commission is staying the
certification of the product on the grounds that the product presents
novel or complex issues that require additional time to analyze, the
product is accompanied by an inadequate explanation, or the product is
potentially inconsistent with the Act or the Commission's rules
thereunder. The Commission will have an additional 90 days from the date
of the notification to conduct the review.
(2) Public comment. The Commission shall provide a 30-day comment
period within the 90-day period in which the stay is in effect, as
described in paragraph (c)(1) of this section. The Commission shall
publish a notice of the 30-day comment period on the Commission's
website. Comments from the public shall be submitted as specified in
that notice.
(3) Expiration of a stay of certification of product. A product
subject to a stay pursuant to this paragraph shall become effective,
pursuant to the certification, at the expiration of the 90-day review
period described in paragraph (c)(1) of this section, unless the
Commission withdraws the stay prior to that time, or the Commission
notifies the security-based swap execution facility during the 90-day
time period
[[Page 97]]
that it objects to the proposed certification on the grounds that the
product is inconsistent with the Act or the Commission's rules.
Sec. 242.805 Voluntary submission of new products for Commission
review and approval.
(a) Request for approval. A security-based swap execution facility
may request that the Commission approve a new or dormant product prior
to listing the product for trading, or if a product was initially
submitted under Sec. 242.804, subsequent to listing the product for
trading. A submission requesting approval shall:
(1) Be filed electronically with the Commission using the EFFS
system;
(2) Include a copy of the submission cover sheet in accordance with
the instructions therein;
(3) Include a copy of the rules that set forth the security-based
swap's terms and conditions;
(4) Include an explanation and analysis of the product and its
compliance with applicable provisions of the Act, including the core
principles and the Commission's rules thereunder. This explanation and
analysis shall either be accompanied by the documentation relied upon to
establish the basis for compliance with the applicable law, or
incorporate information contained in such documentation, with
appropriate citations to data sources;
(5) Describe any agreements or contracts entered into with other
parties that enable the security-based swap execution facility to carry
out its responsibilities;
(6) Include, if appropriate, a request for confidential treatment as
permitted under Sec. 240.24b-2 of this chapter;
(7) Certify that the security-based swap execution facility posted a
notice of its request for Commission approval of the new product and a
copy of the submission, concurrent with the filing of a submission with
the Commission, on the security-based swap execution facility's website.
Information that the security-based swap execution facility seeks to
keep confidential may be redacted from the documents published on the
security-based swap execution facility's website but must be republished
consistent with any determination made pursuant to Sec. 240.24b-2 of
this chapter; and
(8) Include, if requested by Commission staff, additional evidence,
information, or data demonstrating that the security-based swap meets,
initially or on a continuing basis, the requirements of the Act, or
other requirement for registration under the Act, or the Commission's
rules or policies thereunder. The security-based swap execution facility
shall submit the requested information by the open of business on the
date that is two business days from the date of request by Commission
staff, or at the conclusion of such extended period agreed to by
Commission staff after timely receipt of a written request from the
security-based swap execution facility.
(b) Standard for review and approval. The Commission shall approve a
new product unless the terms and conditions of the product violate the
Act or the Commission's rules thereunder.
(c) Forty-five-day review. A product submitted for Commission
approval under this paragraph shall be deemed approved by the Commission
45 days after receipt by the Commission, or at the conclusion of an
extended period as provided under paragraph (d) of this section, unless
notified otherwise within the applicable period, if:
(1) The submission complies with the requirements of paragraph (a)
of this section; and
(2) The submitting security-based swap execution facility does not
amend the terms or conditions of the product or supplement the request
for approval, except as requested by the Commission or for correction of
typographical errors, renumbering, or other non-substantive revisions,
during that period. Any voluntary, substantive amendment by the
security-based swap execution facility will be treated as a new
submission under this section.
(d) Extension of time. The Commission may extend the 45-day review
period in paragraph (c) of this section for:
(1) An additional 45 days, if the product raises novel or complex
issues that require additional time to analyze, in which case the
Commission shall notify the security-based swap execution facility
within the initial 45-day review period and shall briefly describe the
[[Page 98]]
nature of the specific issue(s) for which additional time for review is
required; or
(2) Any extended review period to which the security-based swap
execution facility agrees in writing.
(e) Notice of non-approval. The Commission, at any time during its
review under this section, may notify the security-based swap execution
facility that it will not, or is unable to, approve the product. This
notification will briefly specify the nature of the issues raised and
the specific provision of the Act or the Commission's rules thereunder,
including the form or content requirements of paragraph (a) of this
section, that the product violates, appears to violate, or potentially
violates but which cannot be ascertained from the submission.
(f) Effect of non-approval. (1) Notification to a security-based
swap execution facility under paragraph (e) of this section of the
Commission's determination not to approve a product does not prejudice
the security-based swap execution facility from subsequently submitting
a revised version of the product for Commission approval, or from
submitting the product as initially proposed pursuant to a supplemented
submission.
(2) Notification to a security-based swap execution facility under
paragraph (e) of this section of the Commission's refusal to approve a
product shall be presumptive evidence that the security-based swap
execution facility may not truthfully certify under Sec. 242.804 that
the same, or substantially the same, product does not violate the Act or
the Commission's rules thereunder.
Sec. 242.806 Voluntary submission of rules for Commission review
and approval.
(a) Request for approval of rules. A security-based swap execution
facility may request that the Commission approve a new rule, rule
amendment, or dormant rule prior to implementation of the rule, or if
the request was initially submitted under Sec. 242.806 or Sec.
242.807, subsequent to implementation of the rule. A request for
approval shall:
(1) Be filed electronically with the Commission using the EFFS
system;
(2) Include a copy of the submission cover sheet in accordance with
the instructions therein;
(3) Set forth the text of the rule or rule amendment (in the case of
a rule amendment, deletions and additions must be indicated);
(4) Describe the proposed effective date of the rule or rule
amendment and any action taken or anticipated to be taken to adopt the
proposed rule by the security-based swap execution facility or by its
governing board or by any committee thereof, and cite the rules of the
security-based swap execution facility that authorize the adoption of
the proposed rule;
(5) Provide an explanation and analysis of the operation, purpose,
and effect of the proposed rule or rule amendment and its compliance
with applicable provisions of the Act, including the core principles
relating to security-based swap execution facilities and the
Commission's rules thereunder and, as applicable, a description of the
anticipated benefits to market participants or others, any potential
anticompetitive effects on market participants or others, and how the
rule fits into the security-based swap execution facility's framework of
regulation;
(6) Certify that the security-based swap execution facility posted a
notice of the pending rule with the Commission and a copy of the
submission, concurrent with the filing of a submission with the
Commission, on the security-based swap execution facility's website.
Information that the security-based swap execution facility seeks to
keep confidential may be redacted from the documents published on the
security-based swap execution facility's website but must be republished
consistent with any determination made pursuant to Sec. 240.24b-2 of
this chapter;
(7) Provide additional information which may be beneficial to the
Commission in analyzing the new rule or rule amendment. If a proposed
rule affects, directly or indirectly, the application of any other rule
of the security-based swap execution facility, the pertinent text of any
such rule must be set forth and the anticipated effect described;
[[Page 99]]
(8) Provide a brief explanation of any substantive opposing views
expressed to the security-based swap execution facility by governing
board or committee members, members of the security-based swap execution
facility, or market participants that were not incorporated into the
rule, or a statement that no such opposing views were expressed; and
(9) As appropriate, include a request for confidential treatment as
permitted under Sec. 240.24b-2 of this chapter.
(b) Standard for review and approval. The Commission shall approve a
new rule or rule amendment unless the rule or rule amendment is
inconsistent with the Act or the Commission's rules thereunder.
(c) Forty-five-day review. A rule or rule amendment submitted for
Commission approval under paragraph (a) of this section shall be deemed
approved by the Commission 45 days after receipt by the Commission, or
at the conclusion of such extended period as provided under paragraph
(d) of this section, unless the security-based swap execution facility
is notified otherwise within the applicable period, if:
(1) The submission complies with the requirements of paragraph (a)
of this section;
(2) The security-based swap execution facility does not amend the
proposed rule or supplement the submission, except as requested by the
Commission, during the pendency of the review period, other than for
correction of typographical errors, renumbering, or other non-
substantive revisions. Any amendment or supplementation not requested by
the Commission will be treated as the submission of a new filing under
this section.
(d) Extension of time for review. The Commission may further extend
the review period in paragraph (c) of this section for:
(1) An additional 45 days, if the proposed rule or rule amendment
raises novel or complex issues that require additional time for review
or is of major economic significance, the submission is incomplete, or
the requestor does not respond completely to Commission questions in a
timely manner, in which case the Commission shall notify the submitting
security-based swap execution facility within the initial 45-day review
period and shall briefly describe the nature of the specific issues for
which additional time for review shall be required; or
(2) Any period, beyond the additional 45 days provided in paragraph
(d)(1) of this section, to which the security-based swap execution
facility agrees in writing.
(e) Notice of non-approval. Any time during its review under this
section, the Commission may notify the security-based swap execution
facility that it will not, or is unable to, approve the new rule or rule
amendment. This notification will briefly specify the nature of the
issues raised and the specific provision of the Act or the Commission's
rules thereunder, including the form or content requirements of this
section, with which the new rule or rule amendment is inconsistent or
appears to be inconsistent with the Act or the Commission's rules
thereunder.
(f) Effect of non-approval. (1) Notification to a security-based
swap execution facility under paragraph (e) of this section does not
prevent the security-based swap execution facility from subsequently
submitting a revised version of the proposed rule or rule amendment for
Commission review and approval or from submitting the new rule or rule
amendment as initially proposed in a supplemented submission. The
revised submission will be reviewed without prejudice.
(2) Notification to a security-based swap execution facility under
paragraph (e) of this section of the Commission's determination not to
approve a proposed rule or rule amendment shall be presumptive evidence
that the security-based swap execution facility may not truthfully
certify the same, or substantially the same, proposed rule or rule
amendment under Sec. 242.807(a).
(g) Expedited approval. Notwithstanding the provisions of paragraph
(c) of this section, changes to a proposed rule or a rule amendment,
including changes to terms and conditions of a product that are
consistent with the Act and the Commission's rules thereunder, may be
approved by the Commission at such time and
[[Page 100]]
under such conditions as the Commission shall specify in the written
notification; provided, however, that the Commission may, at any time,
alter or revoke the applicability of such a notice to any particular
product or rule amendment.
Sec. 242.807 Self-certification of rules.
(a) Required certification. A security-based swap execution facility
shall comply with the following conditions prior to implementing any
rule--other than a rule delisting or withdrawing the certification of a
product with no open interest and submitted in compliance with
paragraphs (a)(1), (2), and (6) of this section--that has not obtained
Commission approval under Sec. 242.806, or that remains a dormant rule
subsequent to being submitted under this section or approved under Sec.
242.806.
(1) The security-based swap execution facility has filed its
submission electronically with the Commission using the EFFS system.
(2) The security-based swap execution facility has provided a
certification that it posted a notice of pending certification with the
Commission and a copy of the submission, concurrent with the filing of a
submission with the Commission, on the security-based swap execution
facility's website. Information that the security-based swap execution
facility seeks to keep confidential may be redacted from the documents
published on the security-based swap execution facility's website, but
it must be republished consistent with any determination made pursuant
to Sec. 240.24b-2 of this chapter.
(3) The Commission has received the submission not later than the
open of business on the business day that is 10 business days prior to
the security-based swap execution facility's implementation of the rule
or rule amendment.
(4) The Commission has not stayed the submission pursuant to Sec.
242.807(c).
(5) A new rule or rule amendment that establishes standards for
responding to an emergency shall be submitted pursuant to Sec.
242.807(a). A rule or rule amendment implemented under procedures of the
governing board to respond to an emergency shall, if practicable, be
filed with the Commission prior to implementation or, if not
practicable, be filed with the Commission at the earliest possible time
after implementation, but in no event more than 24 hours after
implementation. Any such submission shall be subject to the
certification and stay provisions of paragraphs (b) and (c) of this
section.
(6) The rule submission shall include:
(i) A copy of the submission cover sheet in accordance with the
instructions therein (in the case of a rule or rule amendment that
responds to an emergency, ``Emergency Rule Certification'' should be
noted in the description section of the submission cover sheet);
(ii) The text of the rule (in the case of a rule amendment,
deletions and additions must be indicated);
(iii) The date of intended implementation;
(iv) A certification by the security-based swap execution facility
that the rule complies with the Act and the Commission's rules
thereunder;
(v) A concise explanation and analysis of the operation, purpose,
and effect of the proposed rule or rule amendment and its compliance
with applicable provisions of the Act, including core principles
relating to security-based swap execution facilities and the
Commission's rules thereunder;
(vi) A brief explanation of any substantive opposing views expressed
to the security-based swap execution facility by governing board or
committee members, members of the security-based swap execution
facility, or market participants, that were not incorporated into the
rule, or a statement that no such opposing views were expressed; and
(vii) As appropriate, a request for confidential treatment pursuant
to the procedures provided in Sec. 240.24b-2 of this chapter.
(7) The security-based swap execution facility shall provide, if
requested by Commission staff, additional evidence, information, or data
that may be beneficial to the Commission in conducting a due diligence
assessment of the filing and the security-based swap execution
facility's compliance with any of the requirements of the Act or the
Commission's rules or policies thereunder.
[[Page 101]]
(b) Review by the Commission. The Commission shall have 10 business
days to review the new rule or rule amendment before the new rule or
rule amendment is deemed certified and can be made effective, unless the
Commission notifies the security-based swap execution facility during
the 10-business-day review period that it intends to issue a stay of the
certification under paragraph (c) of this section.
(c) Stay--(1) Stay of certification of new rule or rule amendment.
The Commission may stay the certification of a new rule or rule
amendment submitted pursuant to paragraph (a) of this section by issuing
a notification informing the security-based swap execution facility that
the Commission is staying the certification of the rule or rule
amendment on the grounds that the rule or rule amendment presents novel
or complex issues that require additional time to analyze, the rule or
rule amendment is accompanied by an inadequate explanation, or the rule
or rule amendment is potentially inconsistent with the Act or the
Commission's rules thereunder. The Commission will have an additional 90
days from the date of the notification to conduct the review.
(2) Public comment. The Commission shall provide a 30-day comment
period within the 90-day period in which the stay is in effect, as
described in paragraph (c)(1) of this section. The Commission shall
publish a notice of the 30-day comment period on the Commission website.
Comments from the public shall be submitted as specified in that notice.
(3) Expiration of a stay of certification of new rule or rule
amendment. A new rule or rule amendment subject to a stay pursuant to
this paragraph shall become effective, pursuant to the certification, at
the expiration of the 90-day review period described in paragraph (c)(1)
of this section, unless the Commission withdraws the stay prior to that
time, or the Commission notifies the security-based swap execution
facility during the 90-day time period that it objects to the proposed
certification on the grounds that the proposed rule or rule amendment is
inconsistent with the Act or the Commission's rules thereunder.
(d) Notification of rule amendments. Notwithstanding the rule
certification requirement of paragraph (a) of this section, a security-
based swap execution facility may place the following rules or rule
amendments into effect without certification to the Commission if the
following conditions are met:
(1) The security-based swap execution facility provides to the
Commission at least weekly a summary notice of all rule amendments made
effective pursuant to this paragraph during the preceding week. Such
notice must be labeled ``Weekly Notification of Rule Amendments'' and
need not be filed for weeks during which no such actions have been
taken. One copy of each such submission shall be furnished
electronically using the EFFS system; and
(2) The rule governs:
(i) Non-substantive revisions. Corrections of typographical errors,
renumbering, periodic routine updates to identifying information about
the security-based swap execution facility, and other such non-
substantive revisions of a product's terms and conditions that have no
effect on the economic characteristics of the product;
(ii) Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs, that:
(A) Total $1.00 or more per contract, and
(B) Are established by an independent third party or are unrelated
to delivery, trading, clearing, or dispute resolution.
(iii) Survey lists. Changes to lists of banks, brokers, dealers, or
other entities that provide price or cash market information to an
independent third party and that are incorporated by reference as
product terms;
(iv) Approved brands. Changes in lists of approved brands or
markings pursuant to previously certified or Commission approved
standards or criteria;
(v) Trading months. The initial listing of trading months, which may
qualify for implementation without notice pursuant to paragraph
(d)(3)(ii)(F) of this section, within the currently established cycle of
trading months; or
(vi) Minimum tick. Reductions in the minimum price fluctuation (or
``tick'').
[[Page 102]]
(3) Notification of rule amendments not required. Notwithstanding
the rule certification requirements of paragraph (a) of this section, a
security-based swap execution facility may place the following rules or
rule amendments into effect without certification or notice to the
Commission if the following conditions are met:
(i) The security-based swap execution facility maintains
documentation regarding all changes to rules; and
(ii) The rule governs:
(A) Transfer of membership or ownership. Procedures and forms for
the purchase, sale, or transfer of membership or ownership, but not
including qualifications for membership or ownership, any right or
obligation of membership or ownership, or dues or assessments;
(B) Administrative procedures. The organization and administrative
procedures of a security-based swap execution facility's governing
bodies such as a governing board, officers, and committees, but not
voting requirements, governing board, or committee composition
requirements or procedures, decision-making procedures, use or
disclosure of material non-public information gained through the
performance of official duties, or requirements relating to conflicts of
interest;
(C) Administration. The routine daily administration, direction, and
control of employees, requirements relating to gratuity and similar
funds, but not guaranty, reserves, or similar funds; declaration of
holidays; and changes to facilities housing the market, trading floor,
or trading area;
(D) Standards of decorum. Standards of decorum or attire or similar
provisions relating to admission to the floor, badges, or visitors, but
not the establishment of penalties for violations of such rules;
(E) Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs, that:
(1) Are less than $1.00; or
(2) Relate to matters such as dues, badges, telecommunication
services, booth space, real-time quotations, historical information,
publications, software licenses, or other matters that are
administrative in nature; and
(F) Trading months. The initial listing of trading months which are
within the currently established cycle of trading months.
Sec. 242.808 Availability of public information.
(a) The Commission shall make publicly available on its website the
following parts of an application to register as a security-based swap
execution facility, unless confidential treatment is obtained pursuant
to Sec. 240.24b-2 of this chapter:
(1) Transmittal letter and first page of the application cover
sheet;
(2) Exhibit C;
(3) Exhibit G;
(4) Exhibit L; and
(5) Exhibit M.
(b) The Commission shall make publicly available on its website,
unless confidential treatment is obtained pursuant to Sec. 240.24b-2 of
this chapter, a security-based swap execution facility's filing of new
products pursuant to the self-certification procedures of Sec. 242.804,
new products for Commission review and approval pursuant to Sec.
242.805, new rules and rule amendments for Commission review and
approval pursuant to Sec. 242.806, and new rules and rule amendments
pursuant to the self-certification procedures of Sec. 242.807.
(c) The terms and conditions of a product submitted to the
Commission pursuant to Sec. 242.804, Sec. 242.805, Sec. 242.806, or
Sec. 242.807 shall be made publicly available at the time of submission
unless confidential treatment is obtained pursuant to Sec. 240.24b-2 of
this chapter.
Sec. 242.809 Staying of certification and tolling of review period
pending jurisdictional determination.
(a) A product certification made by a security-based swap execution
facility pursuant to Sec. 242.804 shall be stayed, or the review period
for a product that has been submitted for Commission approval by a
security-based swap execution facility pursuant to Sec. 242.805 shall
be tolled, upon request for a joint interpretation of whether the
product is a swap, security-based swap, or mixed swap made pursuant to
Sec. 240.3a68-2 of this chapter by the security-based swap execution
facility, the Commission, or
[[Page 103]]
the Commodity Futures Trading Commission.
(b) The Commission shall provide the security-based swap execution
facility with a written notice of the stay or tolling pending issuance
of a joint interpretation.
(c) The stay shall be withdrawn, or the approval review period shall
resume, if a joint interpretation finding that the Commission has
jurisdiction over the product is issued.
Sec. 242.810 Product filings by security-based swap execution
facilities that are not yet registered and by dormant security-based
swap execution facilities.
(a) An applicant for registration as a security-based swap execution
facility may submit a security-based swap's terms and conditions prior
to listing the product as part of its application for registration.
(b) Any security-based swap terms and conditions or rules submitted
as part of a security-based swap execution facility's application for
registration shall be considered for approval by the Commission at the
time the Commission issues the security-based swap execution facility's
order of registration.
(c) After the Commission issues the order of registration, the
security-based swap execution facility shall submit a security-based
swap's terms and conditions, including amendments to such terms and
conditions, new rules, or rule amendments pursuant to the procedures in
Sec. Sec. 242.804, 242.805, 242.806, and 242.807.
(d) Any security-based swap terms and conditions or rules submitted
as part of an application to reinstate the registration of a dormant
security-based swap execution facility shall be considered for approval
by the Commission at the time the Commission approves the reinstatement
of registration of the dormant security-based swap execution facility.
Sec. 242.811 Information relating to security-based swap execution
facility compliance.
(a) Request for information. Upon the Commission's request, a
security-based swap execution facility shall file with the Commission
information related to its business as a security-based swap execution
facility in the form and manner, and within the timeframe, specified by
the Commission.
(b) Demonstration of compliance. Upon the Commission's request, a
security-based swap execution facility shall file with the Commission a
written demonstration, containing supporting data, information, and
documents, that it is in compliance with one or more core principles or
with its other obligations under the Act or the Commission's rules
thereunder, as the Commission specifies in its request. The security-
based swap execution facility shall file such written demonstration in
the form and manner, and within the timeframe, specified by the
Commission.
(c) Equity interest transfer--(1) Equity interest transfer
notification. A security-based swap execution facility shall file with
the Commission a notification of any transaction involving the direct or
indirect transfer of 50 percent or more of the equity interest in the
security-based swap execution facility. The Commission may, upon
receiving such notification, request supporting documentation of the
transaction.
(2) Timing of notification. The equity interest transfer notice
described in paragraph (c)(1) of this section shall be filed with the
Commission in a form and manner specified by the Commission at the
earliest possible time, but in no event later than the open of business
10 business days following the date upon which the security-based swap
execution facility enters into a firm obligation to transfer the equity
interest.
(3) Rule filing. Notwithstanding the foregoing, if any aspect of an
equity interest transfer described in paragraph (c)(1) of this section
requires a security-based swap execution facility to file a rule, the
security-based swap execution facility shall comply with the applicable
rule filing requirements of Sec. 242.806 or Sec. 242.807.
(4) Certification. Upon an equity interest transfer described in
paragraph (c)(1) of this section, the security-based swap execution
facility shall file with the Commission, in a form and manner specified
by the Commission, a certification that the security-based swap
[[Page 104]]
execution facility meets all of the requirements of section 3D of the
Act and the Commission rules thereunder, no later than two business days
following the date on which the equity interest of 50 percent or more
was acquired.
(d) Pending legal proceedings. (1) A security-based swap execution
facility shall submit to the Commission a copy of the complaint, any
dispositive or partially dispositive decision, any notice of appeal
filed concerning such decision, and such further documents as the
Commission may thereafter request filed in any material legal proceeding
to which the security-based swap execution facility is a party or its
property or assets is subject.
(2) A security-based swap execution facility shall submit to the
Commission a copy of the complaint, any dispositive or partially
dispositive decision, any notice of appeal filed concerning such
decision, and such further documents as the Commission may thereafter
request filed in any material legal proceeding instituted against any
officer, director, or other official of the security-based swap
execution facility from conduct in such person's capacity as an official
of the security-based swap execution facility and alleging violations
of:
(i) The Act or any rule, regulation, or order under the Act;
(ii) The constitution, bylaws, or rules of the security-based swap
execution facility; or
(iii) The applicable provisions of State law relating to the duties
of officers, directors, or other officials of business organizations.
(3) All documents required by this paragraph (d) to be submitted to
the Commission shall be submitted electronically in a form and manner
specified by the Commission within 10 days after the initiation of the
legal proceedings to which they relate, after the date of issuance, or
after receipt by the security-based swap execution facility of the
notice of appeal, as the case may be.
(4) For purposes of this paragraph (d), a ``material legal
proceeding'' includes but is not limited to actions involving alleged
violations of the Act or the Commission rules thereunder. However, a
legal proceeding is not ``material'' for the purposes of this rule if
the proceeding is not in a Federal or State court or if the Commission
is a party.
Sec. 242.812 Enforceability.
(a) A transaction entered into on or pursuant to the rules of a
security-based swap execution facility shall not be void, voidable,
subject to rescission, otherwise invalidated, or rendered unenforceable
as a result of a violation by the security-based swap execution facility
of the provisions of section 3D of the Act or the Commission's rules
thereunder.
(b) A security-based swap execution facility shall, as soon as
technologically practicable after the time of execution of a transaction
entered into on or pursuant to the rules of the facility, provide a
written record to each counterparty of all of the terms of the
transaction that were agreed to on the facility, which shall legally
supersede any previous agreement regarding such terms.
Sec. 242.813 Prohibited use of data collected for regulatory purposes.
A security-based swap execution facility shall not use for business
or marketing purposes any proprietary data or personal information it
collects or receives, from or on behalf of any person, for the purpose
of fulfilling its regulatory obligations; provided, however, that a
security-based swap execution facility may use such data or information
for business or marketing purposes if the person from whom it collects
or receives such data or information clearly consents to the security-
based swap execution facility's use of such data or information in such
manner. A security-based swap execution facility shall not condition
access to its market(s) or market services on a person's consent to the
security-based swap execution facility's use of proprietary data or
personal information for business or marketing purposes. A security-
based swap execution facility, where necessary for regulatory purposes,
may share such data or information with one or more security-based swap
execution facilities or national securities exchanges registered with
the Commission.
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Sec. 242.814 Entity operating both a national securities exchange
and security-based swap execution facility.
(a) An entity that intends to operate both a national securities
exchange and a security-based swap execution facility shall separately
register the two facilities pursuant to section 6 of the Act and Sec.
242.803, respectively.
(b) A national securities exchange shall, to the extent that the
exchange also operates a security-based swap execution facility and uses
the same electronic trade execution system for listing and executing
trades of security-based swaps on or through the exchange and the
facility, identify whether electronic trading of such security-based
swaps is taking place on or through the national securities exchange or
the security-based swap execution facility.
Sec. 242.815 Methods of execution for Required and Permitted
Transactions.
(a) Execution methods for Required Transactions--(1) Required
Transaction means any transaction involving a security-based swap that
is subject to the trade execution requirement in section 3C(h) of the
Act.
(2) Execution methods. (i) Each Required Transaction that is not a
block trade shall be executed on a security-based swap execution
facility in accordance with one of the following methods of execution,
except as provided in paragraph (d) or (e) of this section:
(A) An order book; or
(B) A request-for-quote system that operates in conjunction with an
order book.
(ii) In providing either one of the execution methods set forth in
paragraph (a)(2)(i)(A) or (B) of this section, a security-based swap
execution facility may for purposes of execution and communication use
any means of interstate commerce, including, but not limited to, the
mail, internet, email, and telephone, provided that the chosen execution
method satisfies the requirements for order books in Sec. 242.802 of
this chapter or in paragraph (a)(3) of this section for request-for-
quote systems.
(3) Request-for-quote system means a trading system or platform in
which a market participant transmits a request for a quote to buy or
sell a specific instrument to no less than three market participants in
the trading system or platform, to which all such market participants
may respond. The three market participants shall not be affiliates of or
controlled by the requester and shall not be affiliates of or controlled
by each other. A security-based swap execution facility that offers a
request-for-quote system in connection with Required Transactions shall
provide the following functionality:
(i) At the same time that the requester receives the first
responsive bid or offer, the security-based swap execution facility
shall communicate to the requester any firm bid or offer pertaining to
the same instrument resting on any of the security-based swap execution
facility's order books;
(ii) The security-based swap execution facility shall provide the
requester with the ability to execute against such firm resting bids or
offers along with any responsive orders; and
(iii) The security-based swap execution facility shall ensure that
its trading protocols provide each of its market participants with equal
priority in receiving requests for quotes and in transmitting and
displaying for execution responsive orders.
(b) Time delay requirement for Required Transactions on an order
book--(1) Time delay requirement. With regard to Required Transactions,
a security-based swap execution facility shall require that a broker or
dealer who seeks to either execute against its customer's order or
execute two of its customers' orders against each other through the
security-based swap execution facility's order book, following some form
of pre-arrangement or pre-negotiation of such orders, be subject to at
least a 15-second time delay between the entry of those two orders into
the order book, such that one side of the potential transaction is
disclosed and made available to other market participants before the
second side of the potential transaction, whether for the broker's or
dealer's own account or for a second customer, is submitted for
execution.
(2) Adjustment of time delay requirement. A security-based swap
execution facility may adjust the time period of
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the 15-second time delay requirement described in paragraph (b)(1) of
this section, based upon a security-based swap's liquidity or other
product-specific considerations; however, the time delay shall be set
for a sufficient period of time so that an order is exposed to the
market and other market participants have a meaningful opportunity to
execute against such order.
(c) Execution methods for Permitted Transactions. (1) Permitted
Transaction means any transaction not involving a security-based swap
that is subject to the trade execution requirement in section 3C(h) of
the Act.
(2) Execution methods. A security-based swap execution facility may
offer any method of execution for each Permitted Transaction.
(d) Exceptions to required methods of execution for package
transactions. (1) For purposes of this paragraph, a package transaction
consists of two or more component transactions executed between two or
more counterparties where:
(i) At least one component transaction is a Required Transaction;
(ii) Execution of each component transaction is contingent upon the
execution of all other component transactions; and
(iii) The component transactions are priced or quoted together as
one economic transaction with simultaneous or near-simultaneous
execution of all components.
(2) A Required Transaction that is executed as a component of a
package transaction that includes a component security-based swap that
is subject exclusively to the Commission's jurisdiction, but is not
subject to the clearing requirement under section 3C of the Act and is
not intended to be cleared, may be executed on a security-based swap
execution facility in accordance with paragraph (c)(2) of this section
as if it were a Permitted Transaction;
(3) A Required Transaction that is executed as a component of a
package transaction that includes a component that is not a security-
based swap may be executed on a security-based swap execution facility
in accordance with paragraph (c)(2) of this section as if it were a
Permitted Transaction. This provision shall not apply to:
(i) A Required Transaction that is executed as a component of a
package transaction in which all other non-security-based swap
components are U.S. Treasury securities;
(ii) A Required Transaction that is executed as a component of a
package transaction in which all other non-security-based swap
components are contracts for the purchase or sale of a commodity for
future delivery;
(iii) A Required Transaction that is executed as a component of a
package transaction in which all other non-security-based swap
components are agency mortgage-backed securities;
(iv) A Required Transaction that is executed as a component of a
package transaction that includes a component transaction that is the
issuance of a bond in a primary market; and
(v) A Required Transaction that is executed as a component of a
package transaction in which all other non-security-based swap
components are swaps that are subject to a trade execution requirement
under 17 CFR 37.9.
(4) A Required Transaction that is executed as a component of a
package transaction that includes a component security-based swap that
is not exclusively subject to the Commission's jurisdiction may be
executed on a security-based swap in accordance with paragraph (c)(2) of
this section as if it were a Permitted Transaction.
(e) Resolution of operational and clerical error trades. (1) A
security-based swap execution facility shall maintain rules and
procedures that facilitate the resolution of error trades. Such rules
shall be fair, transparent, and consistent; allow for timely resolution;
require members to provide prompt notice of an error trade--and, as
applicable, offsetting and correcting trades--to the security-based swap
execution facility; and permit members to:
(i) Execute a correcting trade, in accordance with paragraph (c)(2)
of this section, regardless of whether it is a Required or Permitted
Transaction, for an error trade that has been rejected from clearing as
soon as technologically practicable, but no later than one hour after a
registered clearing agency provides notice of the rejection; or
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(ii) Execute an offsetting trade and a correcting trade, in
accordance with paragraph (c)(2) of this section, regardless of whether
it is a Required or Permitted Transaction, for an error trade that was
accepted for clearing as soon as technologically practicable, but no
later than three days after the error trade was accepted for clearing at
a registered clearing agency.
(2) If a correcting trade is rejected from clearing, then the
security-based swap execution facility shall not allow the
counterparties to execute another correcting trade.
(f) Counterparty anonymity. (1) Except as otherwise required under
the Act or the Commission's rules thereunder, a security-based swap
execution facility shall not directly or indirectly, including through a
third-party service provider, disclose the identity of a counterparty to
a security-based swap that is executed anonymously and intended to be
cleared.
(2) A security-based swap execution facility shall establish and
enforce rules that prohibit any person from directly or indirectly,
including through a third-party service provider, disclosing the
identity of a counterparty to a security-based swap that is executed
anonymously and intended to be cleared.
(3) For purposes of paragraphs (f)(1) and (2) of this section,
``executed anonymously'' shall include a security-based swap that is
pre-arranged or pre-negotiated anonymously, including by a member of the
security-based swap execution facility.
(4) For a package transaction that includes a component transaction
that is not a security-based swap intended to be cleared, disclosing the
identity of a counterparty shall not violate paragraphs (f)(1) or (2) of
this section. For purposes of this paragraph (f), a ``package
transaction'' consists of two or more component transactions executed
between two or more counterparties where:
(i) Execution of each component transaction is contingent upon the
execution of all other component transactions; and
(ii) The component transactions are priced or quoted together as one
economic transaction with simultaneous or near-simultaneous execution of
all components.
(g) Transactions not accepted for clearing. A security-based swap
execution facility shall establish and enforce rules that provide that a
security-based swap that is intended to be cleared at the time of the
transaction, but is not accepted for clearing at a registered clearing
agency, shall be void ab initio.
Sec. 242.816 Trade execution requirement and exemptions therefrom.
(a) General--(1) Required submission. A security-based swap
execution facility that makes a security-based swap available to trade
in accordance with paragraph (b) of this section, shall submit to the
Commission its determination with respect to such security-based swap as
a rule, pursuant to the procedures under Sec. 242.806 or Sec. 242.807.
(2) Listing requirement. A security-based swap execution facility
that makes a security-based swap available to trade must demonstrate
that it lists or offers that security-based swap for trading on its
trading system or platform.
(b) Factors to consider. To make a security-based swap available to
trade for purposes of section 3C(h) of the Act, a security-based swap
execution facility shall consider, as appropriate, the following factors
with respect to such security-based swap:
(1) Whether there are ready and willing buyers and sellers;
(2) The frequency or size of transactions;
(3) The trading volume;
(4) The number and types of market participants;
(5) The bid/ask spread; or
(6) The usual number of resting firm or indicative bids and offers.
(c) Applicability. Upon a determination that a security-based swap
is available to trade on a security-based swap execution facility or
national securities exchange, all other security-based swap execution
facilities and SBS exchanges shall comply with the requirements of
section 3C(h) of the Act in listing or offering such security-based swap
for trading.
(d) Removal. The Commission may issue a determination that a
security-
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based swap is no longer available to trade upon determining that no
security-based swap execution facility or SBS exchange lists such
security-based swap for trading.
(e) Exemptions to trade execution requirement. (1) A security-based
swap transaction that is executed as a component of a package
transaction that also includes a component transaction that is the
issuance of a bond in a primary market is exempt from the trade
execution requirement in section 3C(h) of the Act. For purposes of
paragraph (e) of this section, a package transaction consists of two or
more component transactions executed between two or more counterparties
where:
(i) At least one component transaction is subject to the trade
execution requirement in section 3C(h) of the Act;
(ii) Execution of each component transaction is contingent upon the
execution of all other component transactions; and
(iii) The component transactions are priced or quoted together as
one economic transaction with simultaneous or near-simultaneous
execution of all components.
(2) Section 3C(h) of the Act does not apply to a security-based swap
transaction that qualifies for an exception under section 3C(g) of the
Act, or any exemption from the clearing requirement that is granted by
the Commission, for which the associated requirements are met.
(3)(i) Section 3C(h) of the Act does not apply to a security-based
swap transaction that is executed between counterparties that qualify as
``eligible affiliate counterparties,'' as defined below.
(ii) For purposes of this paragraph (e)(3), counterparties will be
``eligible affiliate counterparties'' if:
(A) One counterparty, directly or indirectly, holds a majority
ownership interest in the other counterparty, and the counterparty that
holds the majority interest in the other counterparty reports its
financial statements on a consolidated basis under Generally Accepted
Accounting Principles or International Financial Reporting Standards,
and such consolidated financial statements include the financial results
of the majority-owned counterparty; or
(B) A third party, directly or indirectly, holds a majority
ownership interest in both counterparties, and the third party reports
its financial statements on a consolidated basis under Generally
Accepted Accounting Principles or International Financial Reporting
Standards, and such consolidated financial statements include the
financial results of both of the counterparties.
(iii) For purposes of this paragraph (e)(3), a counterparty or third
party directly or indirectly holds a majority ownership interest if it
directly or indirectly holds a majority of the equity securities of an
entity, or the right to receive upon dissolution, or the contribution
of, a majority of the capital of a partnership.
Sec. 242.817 Trade execution compliance schedule.
(a) A security-based swap transaction shall be subject to the
requirements of section 3C(h) of the Act upon the later of:
(1) A determination by the Commission that the security-based swap
is required to be cleared as set forth in section 3C(a) or any later
compliance date that the Commission may establish as a term or condition
of such determination or following a stay and review of such
determination pursuant to section 3C(c) of the Act and Sec. 240.3Ca-1
of this chapter thereunder; and
(2) Thirty days after the available-to-trade determination
submission or certification for that security-based swap is,
respectively, deemed approved under Sec. 242.806 or deemed certified
under Sec. 242.807.
(b) Nothing in this section shall prohibit any counterparty from
complying voluntarily with the requirements of section 3C(h) of the Act
sooner than as provided in paragraph (a) of this section.
Sec. 242.818 Core Principle 1--Compliance with core principles.
(a) In general. To be registered, and maintain registration, as a
security-based swap execution facility, the security-based swap
execution facility shall
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comply with the core principles described in section 3D of the Act, and
any requirement that the Commission may impose by rule or regulation.
(b) Reasonable discretion of security-based swap execution facility.
Unless otherwise determined by the Commission, by rule or regulation, a
security-based swap execution facility described in paragraph (a) of
this section shall have reasonable discretion in establishing the manner
in which it complies with the core principles described in section 3D of
the Act.
Sec. 242.819 Core Principle 2--Compliance with rules.
(a) General. A security-based swap execution facility shall:
(1) Establish and enforce compliance with any rule established by
such security-based swap execution facility, including the terms and
conditions of the security-based swaps traded or processed on or through
the facility, and any limitation on access to the facility;
(2) Establish and enforce trading, trade processing, and
participation rules that will deter abuses and have the capacity to
detect, investigate, and enforce those rules, including means to provide
market participants with impartial access to the market and to capture
information that may be used in establishing whether rule violations
have occurred; and
(3) Establish rules governing the operation of the facility,
including rules specifying trading procedures to be used in entering and
executing orders traded or posted on the facility.
(b) Operation of security-based swap execution facility and
compliance with rules. (1) A security-based swap execution facility
shall establish rules governing the operation of the security-based swap
execution facility, including, but not limited to, rules specifying
trading procedures to be followed by members when entering and executing
orders traded or posted on the security-based swap execution facility.
(2) A security-based swap execution facility shall establish and
impartially enforce compliance with the rules of the security-based swap
execution facility, including, but not limited to:
(i) The terms and conditions of any security-based swaps traded or
processed on or through the security-based swap execution facility;
(ii) Access to the security-based swap execution facility;
(iii) Trade practice rules;
(iv) Audit trail requirements;
(v) Disciplinary rules; and
(vi) Mandatory trading requirements.
(c) Access requirements--(1) Impartial access to markets and market
services. A security-based swap execution facility shall provide any
eligible contract participant and any independent software vendor with
impartial access to its market(s) and market services, including any
indicative quote screens or any similar pricing data displays, provided
that the facility has:
(i) Criteria governing such access that are impartial, transparent,
and applied in a fair and non-discriminatory manner;
(ii) Procedures whereby eligible contract participants provide the
security-based swap execution facility with written or electronic
confirmation of their status as eligible contract participants, as
defined by the Act and Commission rules thereunder, prior to obtaining
access; and
(iii) Comparable fee structures for eligible contract participants
and independent software vendors receiving comparable access to, or
services from, the security-based swap execution facility.
(2) Jurisdiction. Prior to granting any eligible contract
participant access to its facilities, a security-based swap execution
facility shall require that the eligible contract participant consent to
its jurisdiction.
(3) Limitations on access. A security-based swap execution facility
shall establish and impartially enforce rules governing any decision to
allow, deny, suspend, or permanently bar an eligible contract
participant's access to the security-based swap execution facility,
including when a decision is made as part of a disciplinary or emergency
action taken by the security-based swap execution facility.
(4) Commission review with respect to a denial or limitation of
access to any service or a denial or conditioning of membership--(i) In
general. An application for
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review by the Commission may be filed by any person who is aggrieved by
a determination of a security-based swap execution facility with respect
to any final action with respect to a denial or limitation of access to
any service offered by the security-based swap execution facility or any
final action with respect to a denial or conditioning of membership, as
defined in Sec. 242.835(b)(2) of this chapter (Rule 835(b)(2)), in
accordance with Sec. 201.442 of this chapter (Rule of Practice 442).
(ii) Standard to govern Commission review. In reviewing such a
determination, if the Commission finds that the specific grounds on
which such denial, limitation, or conditioning is based exist in fact,
that such denial, limitation, or conditioning is in accordance with the
rules of the security-based swap execution facility, and that such rules
are, and were applied in a manner, consistent with the purposes of the
Exchange Act, the Commission, by order, shall dismiss the proceeding. If
the Commission does not make any such finding or if it finds that such
denial, limitation, or conditioning imposes any burden on competition
not necessary or appropriate in furtherance of the purposes of the
Exchange Act, the Commission, by order, shall set aside the action of
the security-based swap execution facility and require it to admit such
person to membership or participation or grant such person access to
services offered by the security-based swap execution facility.
(d) Rule enforcement program. A security-based swap execution
facility shall establish and enforce trading, trade processing, and
participation rules that will deter abuses and it shall have the
capacity to detect, investigate, and enforce those rules.
(1) Abusive trading practices prohibited. A security-based swap
execution facility shall prohibit abusive trading practices on its
markets by members. A security-based swap execution facility that
permits intermediation shall prohibit customer-related abuses including,
but not limited to, trading ahead of customer orders, trading against
customer orders, accommodation trading, and improper cross trading.
Specific trading practices that shall be prohibited include front-
running, wash trading, pre-arranged trading (except for transactions
approved by or certified to the Commission pursuant Sec. 242.806 or
Sec. 242.807, respectively), fraudulent trading, money passes, and any
other trading practices that a security-based swap execution facility
deems to be abusive. A security-based swap execution facility shall also
prohibit any other manipulative or disruptive trading practices
prohibited by the Act or by the Commission pursuant to Commission
regulation.
(2) Capacity to detect and investigate rule violations. A security-
based swap execution facility shall have arrangements and resources for
effective enforcement of its rules. Such arrangements shall include the
authority to collect information and documents on both a routine and
non-routine basis, including the authority to examine books and records
kept by the security-based swap execution facility's members and by
persons under investigation. A security-based swap execution facility's
arrangements and resources shall also facilitate the direct supervision
of the market and the analysis of data collected to determine whether a
rule violation has occurred.
(3) Compliance staff and resources. A security-based swap execution
facility shall establish and maintain sufficient compliance staff and
resources to ensure that it can conduct effective audit trail reviews,
trade practice surveillance, market surveillance, and real-time market
monitoring. The security-based swap execution facility's compliance
staff shall also be sufficient to address unusual market or trading
events as they arise, and to conduct and complete investigations in a
timely manner, as set forth in paragraph (d)(6) of this section.
(4) Automated trade surveillance system. A security-based swap
execution facility shall maintain an automated trade surveillance system
capable of detecting potential trade practice violations. The automated
trade surveillance system shall load and process daily orders and trades
no later than 24 hours after the completion of the trading day. The
automated trade surveillance system shall have the capability to detect
and flag specific trade execution patterns and trade anomalies;
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compute, retain, and compare trading statistics; reconstruct the
sequence of market activity; perform market analyses; and support system
users to perform in-depth analyses and ad hoc queries of trade-related
data.
(5) Real-time market monitoring. A security-based swap execution
facility shall conduct real-time market monitoring of all trading
activity on its system(s) or platform(s) to identify any market or
system anomalies. A security-based swap execution facility shall have
the authority to adjust trade prices or cancel trades when necessary to
mitigate market disrupting events caused by malfunctions in its
system(s) or platform(s) or errors in orders submitted by members. Any
trade price adjustments or trade cancellations shall be transparent to
the market and subject to standards that are clear, fair, and publicly
available.
(6) Investigations and investigation reports--(i) Procedures. A
security-based swap execution facility shall establish and maintain
procedures that require its compliance staff to conduct investigations
of possible rule violations. An investigation shall be commenced upon
the receipt of a request from Commission staff or upon the discovery or
receipt of information by the security-based swap execution facility
that indicates a reasonable basis for finding that a violation may have
occurred or will occur.
(ii) Timeliness. Each compliance staff investigation shall be
completed in a timely manner. Absent mitigating factors, a timely manner
is no later than 12 months after the date that an investigation is
opened. Mitigating factors that may reasonably justify an investigation
taking longer than 12 months to complete include the complexity of the
investigation, the number of firms or individuals involved as potential
wrongdoers, the number of potential violations to be investigated, and
the volume of documents and data to be examined and analyzed by
compliance staff.
(iii) Investigation reports when a reasonable basis exists for
finding a violation. Compliance staff shall submit a written
investigation report for disciplinary action in every instance in which
compliance staff determines from surveillance or from an investigation
that a reasonable basis exists for finding a rule violation. The
investigation report shall include the reason the investigation was
initiated; a summary of the complaint, if any; the relevant facts;
compliance staff's analysis and conclusions; and a recommendation as to
whether disciplinary action should be pursued.
(iv) Investigation reports when no reasonable basis exists for
finding a violation. If after conducting an investigation, compliance
staff determines that no reasonable basis exists for finding a rule
violation, it shall prepare a written report including the reason the
investigation was initiated; a summary of the complaint, if any; the
relevant facts; and compliance staff's analysis and conclusions.
(v) Warning letters. The rules of a security-based swap execution
facility may authorize its compliance staff to issue a warning letter to
a person or entity under investigation or to recommend that a
disciplinary panel take such an action. No more than one warning letter
may be issued to the same person or entity found to have committed the
same rule violation within a rolling 12-month period.
(e) Regulatory services provided by a third party--(1) Use of
regulatory service provider permitted. A security-based swap execution
facility may choose to contract with a registered futures association
(under section 17 of the Commodity Exchange Act), a board of trade
designated as a contract market (under section 5 of the Commodity
Exchange Act), a national securities exchange, a national securities
association, or another security-based swap execution facility (each a
``regulatory service provider''), for the provision of services to
assist in complying with the Act and Commission rules thereunder, as
approved by the Commission. A security-based swap execution facility
that chooses to contract with a regulatory service provider shall ensure
that such provider has the capacity and resources necessary to provide
timely and effective regulatory services, including adequate staff and
automated surveillance systems. A security-based swap execution facility
shall at all times remain responsible for the performance of any
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regulatory services received, for compliance with the security-based
swap execution facility's obligations under the Act and Commission rules
thereunder, and for the regulatory service provider's performance on its
behalf.
(2) Duty to supervise regulatory service provider. A security-based
swap execution facility that elects to use the service of a regulatory
service provider shall retain sufficient compliance staff to supervise
the quality and effectiveness of the regulatory services provided on its
behalf. Compliance staff of the security-based swap execution facility
shall hold regular meetings with the regulatory service provider to
discuss ongoing investigations, trading patterns, market participants,
and any other matters of regulatory concern. A security-based swap
execution facility shall also conduct periodic reviews of the adequacy
and effectiveness of services provided on its behalf. Such reviews shall
be documented carefully and made available to the Commission upon
request.
(3) Regulatory decisions required from the security-based swap
execution facility. A security-based swap execution facility that elects
to use the service of a regulatory service provider shall retain
exclusive authority in all substantive decisions made by its regulatory
service provider, including, but not limited to, decisions involving the
cancellation of trades, the issuance of disciplinary charges against
members, and denials of access to the trading platform for disciplinary
reasons. A security-based swap execution facility shall document any
instances where its actions differ from those recommended by its
regulatory service provider, including the reasons for the course of
action recommended by the regulatory service provider and the reasons
why the security-based swap execution facility chose a different course
of action.
(f) Audit trail. A security-based swap execution facility shall
establish procedures to capture and retain information that may be used
in establishing whether rule violations have occurred.
(1) Audit trail required. A security-based swap execution facility
shall capture and retain all audit trail data necessary to detect,
investigate, and prevent customer and market abuses. Such data shall be
sufficient to reconstruct all indications of interest, requests for
quotes, orders, and trades within a reasonable period of time and to
provide evidence of any violations of the rules of the security-based
swap execution facility. An acceptable audit trail shall also permit the
security-based swap execution facility to track a customer order from
the time of receipt through execution on the security-based swap
execution facility.
(2) Elements of an acceptable audit trail program--(i) Original
source documents. A security-based swap execution facility's audit trail
shall include original source documents. Original source documents
include unalterable, sequentially identified records on which trade
execution information is originally recorded, whether recorded manually
or electronically. Records for customer orders (whether filled,
unfilled, or cancelled, each of which shall be retained or
electronically captured) shall reflect the terms of the order, an
account identifier that relates back to the account's owner(s), the time
of order entry, and the time of trade execution. A security-based swap
execution facility shall require that all orders, indications of
interest, and requests for quotes be immediately captured in the audit
trail.
(ii) Transaction history database. A security-based swap execution
facility's audit trail program shall include an electronic transaction
history database. An adequate transaction history database shall include
a history of all indications of interest, requests for quotes, orders,
and trades entered into a security-based swap execution facility's
trading system or platform, including all order modifications and
cancellations. An adequate transaction history database shall also
include:
(A) All data that are input into the trade entry or matching system
for the transaction to match and clear;
(B) The customer type indicator code; and
(C) Timing and sequencing data adequate to reconstruct trading.
(iii) Electronic analysis capability. A security-based swap
execution facility's audit trail program shall include electronic
analysis capability with respect to all audit trail data in the
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transaction history database. Such electronic analysis capability shall
ensure that the security-based swap execution facility has the ability
to reconstruct indications of interest, requests for quotes, orders, and
trades, and identify possible trading violations with respect to both
customer and market abuse.
(iv) Safe-storage capability. A security-based swap execution
facility's audit trail program shall include the capability to safely
store all audit trail data retained in its transaction history database.
Such safe-storage capability shall include the capability to store all
data in the database in a manner that protects it from unauthorized
alteration, as well as from accidental erasure or other loss. Data shall
be retained in accordance with the recordkeeping requirements of Sec.
242.826 (Core Principle 9).
(3) Enforcement of audit trail requirements--(i) Annual audit trail
and recordkeeping reviews. A security-based swap execution facility
shall enforce its audit trail and recordkeeping requirements through at
least annual reviews of all members and persons and firms subject to the
security-based swap execution facility's recordkeeping rules to verify
their compliance with the security-based swap execution facility's audit
trail and recordkeeping requirements. Such reviews shall include, but
are not limited to, reviews of randomly selected samples of front-end
audit trail data for order routing systems; a review of the process by
which user identifications are assigned and user identification records
are maintained; a review of usage patterns associated with user
identifications to monitor for violations of user identification rules;
and reviews of account numbers and customer type indicator codes in
trade records to test for accuracy and improper use.
(ii) Enforcement program required. A security-based swap execution
facility shall establish a program for effective enforcement of its
audit trail and recordkeeping requirements. An effective program shall
identify members, persons, and firms subject to the security-based swap
execution facility's recordkeeping rules that have failed to maintain
high levels of compliance with such requirements, and impose meaningful
sanctions when deficiencies are found. Sanctions shall be sufficient to
deter recidivist behavior. No more than one warning letter shall be
issued to the same person or entity found to have committed the same
violation of audit trail or recordkeeping requirements within a rolling
12-month period.
(g) Disciplinary procedures and sanctions. A security-based swap
execution facility shall establish trading, trade processing, and
participation rules that will deter abuses and have the capacity to
enforce such rules through prompt and effective disciplinary action,
including suspension or expulsion of members that violate the rules of
the security-based swap execution facility.
(1) Enforcement staff. (i) A security-based swap execution facility
shall establish and maintain sufficient enforcement staff and resources
to effectively and promptly prosecute possible rule violations within
the disciplinary jurisdiction of the security-based swap execution
facility.
(ii) The enforcement staff of a security-based swap execution
facility shall not include members or other persons whose interests
conflict with their enforcement duties.
(iii) A member of the enforcement staff shall not operate under the
direction or control of any person or persons with trading privileges at
the security-based swap execution facility.
(iv) The enforcement staff of a security-based swap execution
facility may operate as part of the security-based swap execution
facility's compliance department.
(2) Disciplinary panels. A security-based swap execution facility
shall establish one or more disciplinary panels that are authorized to
fulfill their obligations under the rules of this section. Disciplinary
panels shall meet the composition requirements of Sec. 242.834(d), and
shall not include any members of the security-based swap execution
facility's compliance staff or any person involved in adjudicating any
other stage of the same proceeding.
(3) Notice of charges. If compliance staff authorized by a security-
based swap execution facility or disciplinary
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panel thereof determines that a reasonable basis exists for finding a
violation and adjudication is warranted, it shall direct that the person
or entity alleged to have committed the violation be served with a
notice of charges. A notice of charges shall adequately state the acts,
conduct, or practices in which the respondent is alleged to have
engaged; state the rule or rules alleged to have been violated (or about
to be violated); advise the respondent that it is entitled, upon
request, to a hearing on the charges; and prescribe the period within
which a hearing on the charges may be requested. If the rules of the
security-based swap execution facility so provide, a notice may also
advise:
(i) That failure to request a hearing within the period prescribed
in the notice, except for good cause, may be deemed a waiver of the
right to a hearing; and
(ii) That failure to answer or to deny expressly a charge may be
deemed to be an admission of such charge.
(4) Right to representation. Upon being served with a notice of
charges, a respondent shall have the right to be represented by legal
counsel or any other representative of its choosing in all succeeding
stages of the disciplinary process, except by any member of the
security-based swap execution facility's governing board or disciplinary
panel, any employee of the security-based swap execution facility, or
any person substantially related to the underlying investigations, such
as a material witness or respondent.
(5) Answer to charges. A respondent shall be given a reasonable
period of time to file an answer to a notice of charges. The rules of a
security-based swap execution facility governing the requirements and
timeliness of a respondent's answer to a notice of charges shall be
fair, equitable, and publicly available.
(6) Admission or failure to deny charges. The rules of a security-
based swap execution facility may provide that, if a respondent admits
or fails to deny any of the charges, a disciplinary panel may find that
the violations alleged in the notice of charges for which the respondent
admitted or failed to deny any of the charges have been committed. If
the security-based swap execution facility's rules so provide, then:
(i) The disciplinary panel may impose a sanction for each violation
found to have been committed;
(ii) The disciplinary panel shall promptly notify the respondent in
writing of any sanction to be imposed and shall advise the respondent
that the respondent may request a hearing on such sanction within the
period of time, which shall be stated in the notice; and
(iii) The rules of a security-based swap execution facility may
provide that, if a respondent fails to request a hearing within the
period of time stated in the notice, the respondent will be deemed to
have accepted the sanction.
(7) Denial of charges and right to hearing. Where a respondent has
requested a hearing on a charge that is denied, or on a sanction set by
the disciplinary panel, the respondent shall be given an opportunity for
a hearing in accordance with the rules of the security-based swap
execution facility.
(8) Settlement offers. (i) The rules of a security-based swap
execution facility may permit a respondent to submit a written offer of
settlement at any time after an investigation report is completed. The
disciplinary panel presiding over the matter may accept the offer of
settlement, but may not alter the terms of a settlement offer unless the
respondent agrees.
(ii) The rules of a security-based swap execution facility may
provide that, in its discretion, a disciplinary panel may permit the
respondent to accept a sanction without either admitting or denying the
rule violations upon which the sanction is based.
(iii) If an offer of settlement is accepted, the panel accepting the
offer shall issue a written decision specifying the rule violations it
has reason to believe were committed, including the basis or reasons for
the panel's conclusions, and any sanction to be imposed, which shall
include full customer restitution where customer harm is demonstrated,
except where the amount of restitution or to whom
[[Page 115]]
it should be provided cannot be reasonably determined. If an offer of
settlement is accepted without the agreement of the enforcement staff,
the decision shall adequately support the disciplinary panel's
acceptance of the settlement. Where applicable, the decision shall also
include a statement that the respondent has accepted the sanctions
imposed without either admitting or denying the rule violations.
(iv) The respondent may withdraw its offer of settlement at any time
before final acceptance by a disciplinary panel. If an offer is
withdrawn after submission, or is rejected by a disciplinary panel, the
respondent shall not be deemed to have made any admissions by reason of
the offer of settlement and shall not be otherwise prejudiced by having
submitted the offer of settlement.
(9) Hearings. A security-based swap execution facility shall adopt
rules that provide for the following minimum requirements for any
hearing:
(i) The hearing shall be fair, shall be conducted before members of
the disciplinary panel, and shall be promptly convened after reasonable
notice to the respondent. A security-based swap execution facility need
not apply the formal rules of evidence for a hearing; nevertheless, the
procedures for the hearing may not be so informal as to deny a fair
hearing;
(ii) No member of the disciplinary panel for the hearing may have a
financial, personal, or other direct interest in the matter under
consideration;
(iii) In advance of the hearing, the respondent shall be entitled to
examine all books, documents, or other evidence in the possession or
under the control of the security-based swap execution facility. The
security-based swap execution facility may withhold documents that are
privileged or constitute attorney work product; were prepared by an
employee of the security-based swap execution facility but will not be
offered in evidence in the disciplinary proceedings; may disclose a
technique or guideline used in examinations, investigations, or
enforcement proceedings; or disclose the identity of a confidential
source;
(iv) The security-based swap execution facility's enforcement and
compliance staffs shall be parties to the hearing, and the enforcement
staff shall present their case on those charges and sanctions that are
the subject of the hearing;
(v) The respondent shall be entitled to appear personally at the
hearing, to cross-examine any persons appearing as witnesses at the
hearing, to call witnesses, and to present such evidence as may be
relevant to the charges;
(vi) The security-based swap execution facility shall require
persons within its jurisdiction who are called as witnesses to
participate in the hearing and produce evidence. The security-based swap
execution facility shall make reasonable efforts to secure the presence
of all other persons called as witnesses whose testimony would be
relevant. The rules of a security-based swap execution facility may
provide that a sanction may be summarily imposed upon any person within
its jurisdiction whose actions impede the progress of a hearing; and
(vii) If the respondent has requested a hearing, a copy of the
hearing shall be made and shall become a part of the record of the
proceeding. The record shall not be required to be transcribed unless:
(A) The transcript is requested by Commission staff or the
respondent;
(B) The decision is appealed pursuant to the rules of the security-
based swap execution facility; or
(C) The decision is reviewed by the Commission pursuant to Sec.
201.442 of this chapter. In all other instances, a summary record of a
hearing is permitted.
(10) Decisions. Promptly following a hearing conducted in accordance
with the rules of the security-based swap execution facility, the
disciplinary panel shall render a written decision based upon the weight
of the evidence contained in the record of the proceeding and shall
provide a copy to the respondent. The decision shall include:
(i) The notice of charges or a summary of the charges;
(ii) The answer, if any, or a summary of the answer;
(iii) A summary of the evidence produced at the hearing or, where
appropriate, incorporation by reference of the investigation report;
[[Page 116]]
(iv) A statement of findings and conclusions with respect to each
charge and a complete explanation of the evidentiary and other basis for
such findings and conclusions with respect to each charge;
(v) An indication of each specific rule that the respondent was
found to have violated; and
(vi) A declaration of all sanctions imposed against the respondent,
including the basis for such sanctions and the effective date of such
sanctions.
(11) Emergency disciplinary actions. (i) A security-based swap
execution facility may impose a sanction, including suspension, or take
other summary action against a person or entity subject to its
jurisdiction upon a reasonable belief that such immediate action is
necessary to protect the best interest of the market place.
(ii) Any emergency disciplinary action shall be taken in accordance
with a security-based swap execution facility's procedures that provide
for the following:
(A) If practicable, a respondent should be served with a notice
before the action is taken, or otherwise at the earliest possible
opportunity. The notice shall state the action, briefly state the
reasons for the action, and state the effective time and date, and the
duration of the action.
(B) The respondent shall have the right to be represented by legal
counsel or any other representative of its choosing in all proceedings
subsequent to the emergency action taken. The respondent shall be given
the opportunity for a hearing as soon as reasonably practicable and the
hearing shall be conducted before the disciplinary panel pursuant to the
rules of the security-based swap execution facility.
(C) Promptly following the hearing, the security-based swap
execution facility shall render a written decision based upon the weight
of the evidence contained in the record of the proceeding and shall
provide a copy to the respondent. The decision shall include a
description of the summary action taken; the reasons for the summary
action; a summary of the evidence produced at the hearing; a statement
of findings and conclusions; a determination that the summary action
should be affirmed, modified, or reversed; and a declaration of any
action to be taken pursuant to the determination, and the effective date
and duration of such action.
(12) Right to appeal. The rules of a security-based swap execution
facility may permit the parties to a proceeding to appeal promptly an
adverse decision of a disciplinary panel in all or in certain classes of
cases. Such rules may require a party's notice of appeal to be in
writing and to specify the findings, conclusions, or sanctions to which
objection are taken. If the rules of a security-based swap execution
facility permit appeals, then both the respondent and the enforcement
staff shall have the opportunity to appeal and:
(i) The security-based swap execution facility shall establish an
appellate panel that is authorized to hear appeals. The rules of the
security-based swap execution facility may provide that the appellate
panel may, on its own initiative, order review of a decision by a
disciplinary panel within a reasonable period of time after the decision
has been rendered;
(ii) The composition of the appellate panel shall be consistent with
Sec. 242.834(d) and shall not include any members of the security-based
swap execution facility's compliance staff or any person involved in
adjudicating any other stage of the same proceeding. The rules of a
security-based swap execution facility shall provide for the appeal
proceeding to be conducted before all of the members of the appellate
panel or a panel thereof;
(iii) Except for good cause shown, the appeal or review shall be
conducted solely on the record before the disciplinary panel, the
written exceptions filed by the parties, and the oral or written
arguments of the parties; and
(iv) Promptly following the appeal or review proceeding, the
appellate panel shall issue a written decision and shall provide a copy
to the respondent. The decision issued by the appellate panel shall
adhere to all the requirements of paragraph (g)(10) of this section to
the extent that a different conclusion is reached from that issued by
the disciplinary panel.
(13) Disciplinary sanctions--(i) In general. All disciplinary
sanctions imposed
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by a security-based swap execution facility or its disciplinary panels
shall be commensurate with the violations committed and shall be clearly
sufficient to deter recidivism or similar violations by other members.
All disciplinary sanctions, including sanctions imposed pursuant to an
accepted settlement offer, shall take into account the respondent's
disciplinary history. In the event of demonstrated customer harm, any
disciplinary sanction shall also include full customer restitution,
except where the amount of restitution or to whom it should be provided
cannot be reasonably determined.
(ii) Summary fines for violations of rules regarding timely
submission of records. A security-based swap execution facility may
adopt a summary fine schedule for violations of rules relating to the
failure to timely submit accurate records required for clearing or
verifying each day's transactions. A security-based swap execution
facility may permit its compliance staff, or a designated panel of
security-based swap execution facility officials, to summarily impose
minor sanctions against persons within the security-based swap execution
facility's jurisdiction for violating such rules. A security-based swap
execution facility's summary fine schedule may allow for warning letters
to be issued for first-time violations or violators. If adopted, a
summary fine schedule shall provide for progressively larger fines for
recurring violations.
(14) Commission review of a disciplinary sanction--(i) In general.
An application for review by the Commission may be filed by any person
who is aggrieved by a determination of a security-based swap facility
with respect to any final disciplinary action, as defined in Sec.
242.835(b)(1) of this chapter (Rule 835(b)(1)), in accordance with Sec.
201.442 of this chapter (Rule of Practice 442).
(ii) Standard to govern Commission review. (A) In reviewing such a
determination, if the Commission finds that such person has engaged in
such acts or practices, or has omitted such acts, as the security-based
swap execution facility has found him to have engaged in or omitted,
that such acts or practices, or omissions to act, are in violation of
the Exchange Act, the rules or regulations thereunder, or the rules of
the security-based swap execution facility, and that such provisions
are, and were applied in a manner, consistent with the purposes of
Exchange Act, the Commission, by order, shall so declare and, as
appropriate, affirm the sanction imposed by the security-based swap
execution facility, modify the sanction in accordance with paragraph (C)
of this subsection, or remand to the security-based swap execution
facility for further proceedings; or
(B) if the Commission does not make any such finding it shall, by
order, set aside the sanction imposed by the security-based swap
execution facility and, if appropriate, remand to the security-based
swap execution facility for further proceedings.
(C) If the Commission, having due regard for the public interest and
the protection of investors, finds that a sanction imposed by a
security-based swap execution facility upon such person imposes any
burden on competition not necessary or appropriate in furtherance of the
purposes of the Exchange Act or is excessive or oppressive, the
Commission may cancel, reduce, or require the remission of such
sanction.
(h) Activities of security-based swap execution facility's
employees, governing board members, committee members, and consultants--
(1) Definitions. The following definitions shall apply only in this
paragraph (h):
(i) Covered interest, with respect to a security-based swap
execution facility, means:
(A) A security-based swap that trades on the security-based swap
execution facility;
(B) A security of an issuer that has issued a security that
underlies a security-based swap that is listed on that facility; or
(C) A derivative based on a security that falls within paragraph
(h)(1)(i)(B) of this section.
(ii) Pooled investment vehicle means an investment company
registered under the Investment Company Act of 1940 in which no covered
interest constitutes more than 10 percent of the investment company's
assets.
[[Page 118]]
(2) Required rules. A security-based swap execution facility must
maintain in effect rules which have been submitted to the Commission
pursuant to Sec. 242.806 or Sec. 242.807 that, at a minimum, prohibit
an employee of the security-based swap execution facility from:
(i) Trading, directly or indirectly, any covered interest; and
(ii) Disclosing to any other person any material, non-public
information which such employee obtains as a result of their employment
at the security-based swap execution facility, where such employee has
or should have a reasonable expectation that the information disclosed
may assist another person in trading any covered interest; provided,
however, that such rules shall not prohibit disclosures made in the
course of an employee's duties, or disclosures made to another security-
based swap execution facility, court of competent jurisdiction, or
representative of any agency or department of the Federal or State
government acting in their official capacity.
(3) Possible exemptions. A security-based swap execution facility
may adopt rules, which must be submitted to the Commission pursuant to
Sec. 242.806 or Sec. 242.807, which set forth circumstances under
which exemptions from the trading prohibition contained in paragraph
(h)(2)(i) of this section may be granted; such exemptions are to be
administered by the security-based swap execution facility on a case-by-
case basis. Specifically, such circumstances may include:
(i) Participation by an employee in a pooled investment vehicle
where the employee has no direct or indirect control with respect to
transactions executed for or on behalf of such vehicle;
(ii) Trading by an employee in a derivative based on a pooled
investment vehicle that falls within paragraph (h)(3)(i) of this
section;
(iii) Trading by an employee in a derivative based on an index in
which no covered interest constitutes more than 10 percent of the index;
and
(iv) Trading by an employee under circumstances enumerated by the
security-based swap execution facility in rules which the security-based
swap execution facility determines are not contrary to applicable law,
the public interest, or just and equitable principles of trade.
(4) Prohibited conduct. (i) No employee, governing board member,
committee member, or consultant of a security-based swap execution
facility shall:
(A) Trade for such person's own account, or for or on behalf of any
other account, in any covered interest on the basis of any material,
non-public information obtained through special access related to the
performance of such person's official duties as an employee, governing
board member, committee member, or consultant; or
(B) Disclose for any purpose inconsistent with the performance of
such person's official duties as an employee, governing board member,
committee member, or consultant any material, non-public information
obtained through special access related to the performance of such
duties.
(ii) No person shall trade for such person's own account, or for or
on behalf of any other account, in any covered interest on the basis of
any material, non-public information that such person knows was obtained
in violation of this paragraph (h)(4) from an employee, governing board
member, committee member, or consultant.
(i) Service on security-based swap execution facility governing
boards or committees by persons with disciplinary histories. (1) A
security-based swap execution facility shall maintain in effect rules
which have been submitted to the Commission pursuant to Sec. 242.806 or
Sec. 242.807 that render a person ineligible to serve on its
disciplinary committees, arbitration panels, oversight panels, or
governing board who:
(i) Was found within the prior three years by a final decision of a
security-based swap execution facility, a self-regulatory organization,
an administrative law judge, a court of competent jurisdiction, or the
Commission to have committed a disciplinary offense;
(ii) Entered into a settlement agreement with a security-based swap
execution facility, a court of competent jurisdiction, or the Commission
within the prior three years in which any of the findings or, in the
absence of such findings, any of the acts charged included a
disciplinary offense;
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(iii) Currently is suspended from trading on any security-based swap
execution facility, is suspended or expelled from membership with a
self-regulatory organization, is serving any sentence of probation, or
owes any portion of a fine imposed pursuant to:
(A) A finding by a final decision of a security-based swap execution
facility, a self-regulatory organization, an administrative law judge, a
court of competent jurisdiction, or the Commission that such person
committed a disciplinary offense; or
(B) A settlement agreement with a security-based swap execution
facility, a court of competent jurisdiction, or the Commission in which
any of the findings or, in the absence of such findings, any of the acts
charged included a disciplinary offense;
(iv) Currently is subject to an agreement with the Commission, a
security-based swap execution facility, or a self-regulatory
organization not to apply for registration with the Commission or
membership in any self-regulatory organization;
(v) Currently is subject to or has had imposed on him or her within
the prior three years a Commission registration revocation or suspension
in any capacity for any reason, or has been convicted within the prior
three years of any felony; or
(vi) Currently is subject to a denial, suspension, or
disqualification from serving on a disciplinary committee, arbitration
panel, or governing board of any security-based swap execution facility
or self-regulatory organization.
(2) No person may serve on a disciplinary committee, arbitration
panel, oversight panel or governing board of a security-based swap
execution facility if such person is subject to any of the conditions
listed in paragraphs (i)(1)(i) through (vi) of this section.
(3) A security-based swap execution facility shall submit to the
Commission a schedule listing all those rule violations which constitute
disciplinary offenses and, to the extent necessary to reflect revisions,
shall submit an amended schedule within 30 days of the end of each
calendar year. A security-based swap execution facility shall maintain
and keep current the schedule required by this section, and post the
schedule on the security-based swap execution facility's website so that
it is in a public place designed to provide notice to members and
otherwise ensure its availability to the general public.
(4) A security-based swap execution facility shall submit to the
Commission within 30 days of the end of each calendar year a certified
list of any persons who have been removed from its disciplinary
committees, arbitration panels, oversight panels, or governing board
pursuant to the requirements of this section during the prior year.
(5) Whenever a security-based swap execution facility finds by final
decision that a person has committed a disciplinary offense and such
finding makes such person ineligible to serve on that security-based
swap execution facility's disciplinary committees, arbitration panels,
oversight panels, or governing board, the security-based swap execution
facility shall inform the Commission of that finding and the length of
the ineligibility in a form and manner specified by the Commission.
(6) For purposes of this paragraph:
(i) Arbitration panel means any person or panel empowered by a
security-based swap execution facility to arbitrate disputes involving
the security-based swap execution facility's members or their customers.
(ii) Disciplinary offense means:
(A) Any violation of the rules of a security-based swap execution
facility, except a violation resulting in fines aggregating to less than
$5,000 within a calendar year involving:
(1) Decorum or attire;
(2) Financial requirements; or
(3) Reporting or recordkeeping;
(B) Any rule violation which involves fraud, deceit, or conversion
or results in a suspension or expulsion;
(C) Any violation of the Act or the Commission's rules thereunder;
or
(D) Any failure to exercise supervisory responsibility when such
failure is itself a violation of either the rules of the security-based
swap execution facility, the Act, or the Commission's rules thereunder.
(E) A disciplinary offense must arise out of a proceeding or action
which is
[[Page 120]]
brought by a security-based swap execution facility, the Commission, any
Federal or State agency, or other governmental body.
(iii) Final decision means:
(A) A decision of a security-based swap execution facility which
cannot be further appealed within the security-based swap execution
facility, is not subject to the stay of the Commission or a court of
competent jurisdiction, and has not been reversed by the Commission or
any court of competent jurisdiction; or
(B) Any decision by an administrative law judge, a court of
competent jurisdiction, or the Commission which has not been stayed or
reversed.
(j) Notification of final disciplinary action involving financial
harm to a customer. (1) Upon any final disciplinary action in which a
security-based swap execution facility finds that a member has committed
a rule violation that involved a transaction for a customer, whether
executed or not, and that resulted in financial harm to the customer:
(i) The security-based swap execution facility shall promptly
provide written notice of the disciplinary action to the member; and
(ii) The security-based swap execution facility shall have
established a rule pursuant to Sec. 242.806 or Sec. 242.807 that
requires a member that receives such a notice to promptly provide
written notice of the disciplinary action to the customer, as disclosed
on the member's books and records.
(2) A written notice required by paragraph (j)(1) of this section
must include the principal facts of the disciplinary action and a
statement that the security-based swap execution facility has found that
the member has committed a rule violation that involved a transaction
for the customer, whether executed or not, and that resulted in
financial harm to the customer.
(3) Solely for purposes of this paragraph (j):
(i) Customer means a person that utilizes an agent in connection
with trading on a security-based swap execution facility.
(ii) Final disciplinary action means any decision by or settlement
with a security-based swap execution facility in a disciplinary matter
which cannot be further appealed at the security-based swap execution
facility, is not subject to the stay of the Commission or a court of
competent jurisdiction, and has not been reversed by the Commission or
any court of competent jurisdiction.
(k) Designation of agent for non-U.S. member. (1) A security-based
swap execution facility that admits a non-U.S. person as a member shall
be deemed to be the agent of the non-U.S. member with respect to any
security-based swaps executed by the non-U.S. member. Service or
delivery of any communication issued by or on behalf of the Commission
to the security-based swap execution facility shall constitute valid and
effective service upon the non-U.S. member. The security-based swap
execution facility which has been served with, or to which there has
been delivered, a communication issued by or on behalf of the Commission
to a non-U.S. member shall transmit the communication promptly and in a
manner which is reasonable under the circumstances, or in a manner
specified by the Commission in the communication, to the non-U.S.
member.
(2) It shall be unlawful for a security-based swap execution
facility to permit a non-U.S. member to execute security-based swaps on
the facility unless the security-based swap execution facility prior
thereto informs the non-U.S. member in writing of the requirements of
this section.
(3) The requirements of paragraphs (k)(1) and (2) of this section
shall not apply if the non-U.S. member has duly executed and maintains
in effect a written agency agreement in compliance with this paragraph
with a person domiciled in the United States and has provided a copy of
the agreement to the security-based swap execution facility prior to
effecting any transaction on the security-based swap execution facility.
This agreement must authorize the person domiciled in the United States
to serve as the agent of the non-U.S. member for purposes of accepting
delivery and service of all communications issued by or on behalf of the
Commission to the non-U.S. member and must provide an address in the
United States where the agent will
[[Page 121]]
accept delivery and service of communications from the Commission. This
agreement must be filed with the Commission by the security-based swap
execution facility prior to permitting the non-U.S. member to effect any
transactions in security-based swaps. Such agreements shall be filed in
a manner specified by the Commission.
(4) A non-U.S. member shall notify the Commission immediately if the
written agency agreement is terminated, revoked, or is otherwise no
longer in effect. If the security-based swap execution facility knows or
should know that the agreement has expired, been terminated, or is no
longer in effect, the security-based swap execution facility shall
notify the Commission immediately.
Sec. 242.820 Core Principle 3--Security-based swaps not readily
susceptible to manipulation.
The security-based swap execution facility shall permit trading only
in security-based swaps that are not readily susceptible to
manipulation.
Sec. 242.821 Core Principle 4--Monitoring of trading and trade
processing.
(a) General. The security-based swap execution facility shall:
(1) Establish and enforce rules or terms and conditions defining, or
specifications detailing:
(i) Trading procedures to be used in entering and executing orders
traded on or through the facilities of the security-based swap execution
facility; and
(ii) Procedures for trade processing of security-based swaps on or
through the facilities of the security-based swap execution facility;
and
(2) Monitor trading in security-based swaps to prevent manipulation,
price distortion, and disruptions of the delivery or cash settlement
process through surveillance, compliance, and disciplinary practices and
procedures, including methods for conducting real-time monitoring of
trading and comprehensive and accurate trade reconstructions.
(b) Market oversight obligations. A security-based swap execution
facility shall:
(1) Collect and evaluate data on its members' market activity on an
ongoing basis in order to detect and prevent manipulation, price
distortions, and, where possible, disruptions of the physical-delivery
or cash-settlement process;
(2) Monitor and evaluate general market data in order to detect and
prevent manipulative activity that would result in the failure of the
market price to reflect the normal forces of supply and demand;
(3) Demonstrate an effective program for conducting real-time
monitoring of trading for the purpose of detecting and resolving
abnormalities. A security-based swap execution facility shall employ
automated alerts to detect abnormal price movements and unusual trading
volumes in real time and instances or threats of manipulation, price
distortion, and disruptions on at least a T + 1 basis. The T + 1
detection and analysis should incorporate any additional data that
becomes available on a T + 1 basis, including the trade reconstruction
data;
(4) Demonstrate the ability to comprehensively and accurately
reconstruct daily trading activity for the purpose of detecting
instances or threats of manipulation, price distortion, and disruptions;
and
(5) Have rules in place that allow it to intervene to prevent or
reduce market disruptions. Once a threatened or actual disruption is
detected, the security-based swap execution facility shall take steps to
prevent the market disruption or reduce its severity.
(c) Monitoring of physical-delivery security-based swaps. For
physical-delivery security-based swaps, the security-based swap
execution facility shall demonstrate that it:
(1) Monitors a security-based swap's terms and conditions as they
relate to the underlying asset market; and
(2) Monitors the availability of the supply of the asset specified
by the delivery requirements of the security-based swap.
(d) Additional requirements for cash-settled security-based swaps.
(1) For cash-settled security-based swaps, the security-based swap
execution facility shall demonstrate that it monitors the pricing of the
reference price used to determine cash flows or settlement.
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(2) For cash-settled security-based swaps listed on the security-
based swap execution facility where the reference price is formulated
and computed by the security-based swap execution facility, the
security-based swap execution facility shall demonstrate that it
monitors the continued appropriateness of its methodology for deriving
that price and shall promptly amend any methodologies that result, or
are likely to result, in manipulation, price distortions, or market
disruptions, or impose new methodologies to resolve the threat of
disruptions or distortions.
(3) For cash-settled security-based swaps listed on the security-
based swap execution facility where the reference price relies on a
third-party index or instrument, including an index or instrument traded
on another venue, the security-based swap execution facility shall
demonstrate that it monitors for pricing abnormalities in the index or
instrument used to calculate the reference price and shall conduct due
diligence to ensure that the reference price is not susceptible to
manipulation.
(e) Ability to obtain information. (1) A security-based swap
execution facility shall demonstrate that it has access to sufficient
information to assess whether trading in security-based swaps listed on
its market, in the index or instrument used as a reference price, or in
the underlying asset for its listed security-based swaps is being used
to affect prices on its market. The security-based swap execution
facility shall demonstrate that it can obtain position and trading
information directly from members that conduct substantial trading on
its facility or through an information-sharing agreement with other
venues or a third-party regulatory service provider. If the position and
trading information is not available directly from its members but is
available through information-sharing agreements with other trading
venues or a third-party regulatory service provider, the security-based
swap execution facility should cooperate in such information-sharing
agreements.
(2) A security-based swap execution facility shall have rules that
require its members to keep records of their trading, including records
of their activity in the underlying asset, and related derivatives
markets, and make such records available, upon request, to the security-
based swap execution facility or, if applicable, to its regulatory
service provider and the Commission. The security-based swap execution
facility may limit the application of this requirement to only those
members that conduct substantial trading on its facility.
(f) Risk controls for trading. A security-based swap execution
facility shall establish and maintain risk control mechanisms to prevent
and reduce the potential risk of market disruptions, including, but not
limited to, market restrictions that pause or halt trading under market
conditions prescribed by the security-based swap execution facility.
Such risk control mechanisms shall be designed to avoid market
disruptions without unduly interfering with that market's price
discovery function. The security-based swap execution facility may
choose from among controls that include: pre-trade limits on order size,
price collars or bands around the current price, message throttles,
daily price limits, and intraday position limits related to financial
risk to the clearing member, or design other types of controls, as well
as clear error-trade and order-cancellation policies. Within the
specific array of controls that are selected, the security-based swap
execution facility shall set the parameters for those controls, so that
the specific parameters are reasonably likely to serve the purpose of
preventing market disruptions and price distortions.
(g) Trade reconstruction. A security-based swap execution facility
shall have the ability to comprehensively and accurately reconstruct all
trading on its facility. All audit-trail data and reconstructions shall
be made available to the Commission in a form, manner, and time that is
acceptable to the Commission.
(h) Regulatory service provider. A security-based swap execution
facility shall comply with the rules in this section through a dedicated
regulatory department or by contracting with a regulatory service
provider pursuant to Sec. 242.819(e).
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Sec. 242.822 Core Principle 5--Ability to obtain information.
(a) General. The security-based swap execution facility shall:
(1) Establish and enforce rules that will allow the facility to
obtain any necessary information to perform any of the functions
described in section 3D of the Act;
(2) Provide the information to the Commission on request; and
(3) Have the capacity to carry out such international information-
sharing agreements as the Commission may require.
(b) Establish and enforce rules. A security-based swap execution
facility shall establish and enforce rules that will allow the security-
based swap execution facility to have the ability and authority to
obtain sufficient information to allow it to fully perform its
operational, risk management, governance, and regulatory functions and
any requirements under this section, including the capacity to carry out
international information-sharing agreements as the Commission may
require.
(c) Collection of information. A security-based swap execution
facility shall have rules that allow it to collect information on a
routine basis, allow for the collection of non-routine data from its
members, and allow for its examination of books and records kept by
members on its facility.
(d) Provide information to the Commission. A security-based swap
execution facility shall provide information in its possession to the
Commission upon request, in a form and manner specified by the
Commission.
(e) Information-sharing agreements. A security-based swap execution
facility shall share information with other regulatory organizations,
data repositories, and third-party data reporting services as required
by the Commission or as otherwise necessary and appropriate to fulfill
its regulatory and reporting responsibilities. Appropriate information-
sharing agreements can be established with such entities, or the
Commission can act in conjunction with the security-based swap execution
facility to carry out such information sharing.
Sec. 242.823 Core Principle 6--Financial integrity of transactions.
(a) General. The security-based swap execution facility shall
establish and enforce rules and procedures for ensuring the financial
integrity of security-based swaps entered on or through the facilities
of the security-based swap execution facility, including the clearance
and settlement of security-based swaps pursuant to section 3C(a)(1) of
the Act.
(b) Required clearing. Transactions executed on or through the
security-based swap execution facility that are required to be cleared
under section 3C(a)(1) of the Act or are voluntarily cleared by the
counterparties shall be cleared through a registered clearing agency or
a clearing agency that has obtained an exemption from clearing agency
registration to provide central counterparty services for security-based
swaps.
(c) General financial integrity. A security-based swap execution
facility shall provide for the financial integrity of its transactions:
(1) By establishing minimum financial standards for its members,
which shall, at a minimum, require that each member qualify as an
eligible contract participant;
(2) For transactions cleared by a registered clearing agency:
(i) By ensuring that the security-based swap execution facility has
the capacity to route transactions to the registered clearing agency in
a manner acceptable to the clearing agency for purposes of clearing; and
(ii) By coordinating with each registered clearing agency to which
it submits transactions for clearing, in the development of rules and
procedures to facilitate prompt and efficient transaction processing.
(d) Monitoring for financial soundness. A security-based swap
execution facility shall monitor its members to ensure that they
continue to qualify as eligible contract participants.
Sec. 242.824 Core Principle 7--Emergency authority.
(a) The security-based swap execution facility shall adopt rules to
provide for the exercise of emergency authority, in consultation or
cooperation
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with the Commission, as is necessary and appropriate, including the
authority to liquidate or transfer open positions in any security-based
swap or to suspend or curtail trading in a security-based swap.
(b) To comply with this core principle, a security-based swap
execution facility shall adopt rules that are reasonably designed to:
(1) Allow the security-based swap execution facility to intervene as
necessary to maintain markets with fair and orderly trading and to
prevent or address manipulation or disruptive trading practices, whether
the need for intervention arises exclusively from the security-based
swap execution facility's market or as part of a coordinated, cross-
market intervention;
(2) Have the flexibility and independence to address market
emergencies in an effective and timely manner consistent with the nature
of the emergency, as long as all such actions taken by the security-
based swap execution facility are made in good faith to protect the
integrity of the markets;
(3) Take market actions as may be directed by the Commission,
including, in situations where a security-based swap is traded on more
than one platform, emergency action to liquidate or transfer open
interest as directed, or agreed to, by the Commission or the
Commission's staff;
(4) Include procedures and guidelines for decision-making and
implementation of emergency intervention that avoid conflicts of
interest;
(5) Include alternate lines of communication and approval procedures
to address emergencies associated with real-time events; and
(6) Allow the security-based swap execution facility, to address
perceived market threats, to impose or modify position limits, impose or
modify price limits, impose or modify intraday market restrictions,
impose special margin requirements, order the liquidation or transfer of
open positions in any contract, order the fixing of a settlement price,
extend or shorten the expiration date or the trading hours, suspend or
curtail trading in any contract, transfer customer contracts and the
margin, or alter any contract's settlement terms or conditions, or, if
applicable, provide for the carrying out of such actions through its
agreements with its third-party provider of clearing or regulatory
services.
(c) A security-based swap execution facility shall promptly notify
the Commission of its exercise of emergency authority, explaining its
decision-making process, the reasons for using its emergency authority,
and how conflicts of interest were minimized, including the extent to
which the security-based swap execution facility considered the effect
of its emergency action on the underlying markets and on markets that
are linked or referenced to the contracts traded on its facility,
including similar markets on other trading venues. Information on all
regulatory actions carried out pursuant to a security-based swap
execution facility's emergency authority shall be included in a timely
submission of a certified rule pursuant to Sec. 242.807.
Sec. 242.825 Core Principle 8--Timely publication of trading information.
(a)(1) The security-based swap execution facility shall make public
timely information on price, trading volume, and other trading data on
security-based swaps to the extent prescribed by the Commission.
(2) The security-based swap execution facility shall be required to
have the capacity to electronically capture and transmit and disseminate
trade information with respect to transactions executed on or through
the facility.
(b) A security-based swap execution facility shall report security-
based swap transaction data as required by Sec. Sec. 242.900 through
242.909 (Regulation SBSR).
(c) A security-based swap execution facility shall make available a
``Daily Market Data Report'' containing the information required in
paragraphs (c)(1) and (2) of this section in a manner and timeframe
required by this section.
(1) Contents. The Daily Market Data Report of a security-based swap
execution facility for a business day shall contain the following
information for each tenor of each security-based swap traded on that
security-based swap execution facility during that business day:
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(i) The trade count (excluding error trades, correcting trades, and
offsetting trades);
(ii) The total notional amount traded (excluding error trades,
correcting trades, and offsetting trades);
(iii) The total notional amount of block trades, after such time as
the Commission adopts a definition of ``block trade'' in Sec. 242.802
of this chapter (Rule 802);
(iv) The opening and closing price;
(v) The price that is used for settlement purposes, if different
from the closing price; and
(vi) The lowest price of a sale or offer, whichever is lower, and
the highest price of a sale or bid, whichever is higher, that the
security-based swap execution facility reasonably determines accurately
reflects market conditions. Bids and offers vacated or withdrawn shall
not be used in making this determination. A bid is vacated if followed
by a higher bid or price and an offer is vacated if followed by a lower
offer or price.
(2) Additional information. A security-based swap execution facility
must record the following information with respect to security-based
swaps on that reporting market:
(i) The method used by the security-based swap execution facility in
determining nominal prices and settlement prices; and
(ii) If discretion is used by the security-based swap execution
facility in determining the opening and/or closing ranges or the
settlement prices, an explanation that certain discretion may be
employed by the security-based swap execution facility and a description
of the manner in which that discretion may be employed. Discretionary
authority must be noted explicitly in each case in which it is applied
(for example, by use of an asterisk or footnote).
(3) Form of publication. A security-based swap execution facility
shall publicly post the Daily Market Data Report on its website:
(i) In a downloadable and machine-readable format using the most
recent versions of the associated XML schema and PDF renderer as
published on the Commission's website;
(ii) Without fees or other charges;
(iii) Without any encumbrances on access or usage restrictions; and
(iv) Without requiring a user to agree to any terms before being
allowed to view or download the Daily Market Data Report, such as by
waiving any requirements of this paragraph (c)(3). Any such waiver
agreed to by a user shall be null and void.
(4) Timing of publication. A security-based swap execution facility
shall publish the Daily Market Data Report on its website as soon as
reasonably practicable on the next business day after the day to which
the information pertains, but in no event later than 7 a.m. on the next
business day.
(5) Duration. A security-based swap execution facility shall keep
each Daily Market Data Report available on its website in the same
location as all other Daily Market Data Reports for no less than one
year after the date of first publication.
Sec. 242.826 Core Principle 9--Recordkeeping and reporting.
(a) In general. (1) A security-based swap execution facility shall:
(i) Maintain records of all activities relating to the business of
the facility, including a complete audit trail, in a form and manner
acceptable to the Commission for a period of five years; and
(ii) Report to the Commission, in a form and manner acceptable to
the Commission, such information as the Commission determines to be
necessary or appropriate for the Commission to perform the duties of the
Commission under the Act.
(2) The Commission shall adopt data collection and reporting
requirements for security-based swap execution facilities that are
comparable to corresponding requirements for clearing agencies and
security-based swap data repositories.
(b) Required records. A security-based swap execution facility shall
keep full, complete, and systematic records, together with all pertinent
data and memoranda, of all activities relating to its business with
respect to security-based swaps. Such records shall include, without
limitation, the audit trail information required under Sec. 242.819(f)
and all other records that a
[[Page 126]]
security-based swap execution facility is required to create or obtain
under Sec. Sec. 242.800 through 242.835 (Regulation SE).
(c) Duration of retention. (1) A security-based swap execution
facility shall keep records of any security-based swap from the date of
execution until the termination, maturity, expiration, transfer,
assignment, or novation date of the transaction, and for a period of not
less than five years, the first two years in an easily accessible place,
after such date.
(2) A security-based swap execution facility shall keep each record
other than the records described in paragraph (c)(1) of this section for
a period of not less than five years, the first two years in an easily
accessible place, from the date on which the record was created.
(d) Record retention. (1) A security-based swap execution facility
shall retain all records in a form and manner that ensures the
authenticity and reliability of such records in accordance with the Act
and the Commission's rules thereunder.
(2) A security-based swap execution facility shall, upon request of
any representative of the Commission, promptly furnish to the
representative legible, true, complete, and current copies of any
records required to be kept and preserved pursuant to this section.
(3)(i) An electronic record shall be retained in a form and manner
that allows for prompt production at the request of any representative
of the Commission.
(ii) A security-based swap execution facility maintaining electronic
records shall establish appropriate systems and controls that ensure the
authenticity and reliability of electronic records, including, without
limitation:
(A) Systems that maintain the security, signature, and data as
necessary to ensure the authenticity of the information contained in
electronic records and to monitor compliance with the Act and the
Commission's rules thereunder;
(B) Systems that ensure that the security-based swap execution
facility is able to produce electronic records in accordance with this
section, and ensure the availability of such electronic records in the
event of an emergency or other disruption of the security-based swap
execution facility's electronic record retention systems; and
(C) The creation and maintenance of an up-to-date inventory that
identifies and describes each system that maintains information
necessary for accessing or producing electronic records.
(e) Record examination. All records required to be kept by a
security-based swap execution facility pursuant to this section are
subject to examination by any representative of the Commission pursuant
to section 17(b) of the Act (15 U.S.C. 78q).
(f) Records of non-U.S. members. A security-based swap execution
facility shall keep a record in permanent form, which shall show the
true name, address, and principal occupation or business of any non-U.S.
member that executes transactions on the facility. Upon request, the
security-based swap execution facility shall provide to the Commission
information regarding the name of any person guaranteeing such
transactions or exercising any control over the trading of such non-U.S.
member.
Sec. 242.827 Core Principle 10--Antitrust considerations.
Unless necessary or appropriate to achieve the purposes of the Act,
the security-based swap execution facility shall not:
(a) Adopt any rules or take any actions that result in any
unreasonable restraint of trade; or
(b) Impose any material anticompetitive burden on trading or
clearing.
Sec. 242.828 Core Principle 11--Conflicts of interest.
(a) The security-based swap execution facility shall:
(1) Establish and enforce rules to minimize conflicts of interest in
its decision-making process; and
(2) Establish a process for resolving the conflicts of interest.
(b) A security-based swap execution facility shall comply with the
requirements of Sec. 242.834.
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Sec. 242.829 Core Principle 12--Financial resources.
(a) In general. (1) The security-based swap execution facility shall
have adequate financial, operational, and managerial resources to
discharge each responsibility of the security-based swap execution
facility, as determined by the Commission.
(2) The financial resources of a security-based swap execution
facility shall be considered to be adequate if the value of the
financial resources:
(i) Enables the organization to meet its financial obligations to
its members notwithstanding a default by a member creating the largest
financial exposure for that organization in extreme but plausible market
conditions; and
(ii) Exceeds the total amount that would enable the security-based
swap execution facility to cover the operating costs of the security-
based swap execution facility for a one-year period, as calculated on a
rolling basis.
(b) General requirements. A security-based swap execution facility
shall maintain financial resources on an ongoing basis that are adequate
to enable it to comply with the core principles set forth in section 3D
of the Act and any applicable Commission rules. Financial resources
shall be considered adequate if their value exceeds the total amount
that would enable the security-based swap execution facility to cover
its projected operating costs necessary for the security-based swap
execution facility to comply with section 3D of the Act and applicable
Commission rules for a one-year period, as calculated on a rolling basis
pursuant to paragraph (e) of this section.
(c) Types of financial resources. Financial resources available to
satisfy the requirements of this section may include:
(1) The security-based swap execution facility's own capital,
meaning its assets minus its liabilities calculated in accordance with
generally accepted accounting principles in the United States; and
(2) Any other financial resource deemed acceptable by the
Commission.
(d) Liquidity of financial resources. The financial resources
allocated by a security-based swap execution facility to meet the
ongoing requirements of paragraph (b) of this section shall include
unencumbered, liquid financial assets (i.e., cash and/or highly liquid
securities) equal to at least the greater of three months of projected
operating costs, as calculated on a rolling basis, or the projected
costs needed to wind down the security-based swap execution facility's
operations, in each case as determined under paragraph (e) of this
section. If a security-based swap execution facility lacks sufficient
unencumbered, liquid financial assets to satisfy its obligations under
this section, the security-based swap execution facility may satisfy
this requirement by obtaining a committed line of credit or similar
facility in an amount at least equal to such deficiency.
(e) Computation of costs to meet financial resources requirement.
(1) A security-based swap execution facility shall, each fiscal quarter,
make a reasonable calculation of its projected operating costs and wind-
down costs in order to determine its applicable obligations under this
section. The security-based swap execution facility shall have
reasonable discretion in determining the methodologies used to compute
such amounts.
(i) Calculation of projected operating costs. A security-based swap
execution facility's calculation of its projected operating costs shall
be deemed reasonable if it includes all expenses necessary for the
security-based swap execution facility to comply with the core
principles set forth in section 3D of the Act and any applicable
Commission rules, and if the calculation is based on the security-based
swap execution facility's current level of business and business model,
taking into account any projected modification to its business model
(e.g., the addition or subtraction of business lines or operations or
other changes), and any projected increase or decrease in its level of
business over the next 12 months. A security-based swap execution
facility may exclude the following expenses (``excludable expenses'')
from its projected operating cost calculations:
(A) Costs attributable solely to sales, marketing, business
development, product development, or recruitment and any related travel,
entertainment, event, or conference costs;
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(B) Compensation and related taxes and benefits for personnel who
are not necessary to ensure that the security-based swap execution
facility is able to comply with the core principles set forth in section
3D of the Act and any applicable Commission rules;
(C) Costs for acquiring and defending patents and trademarks for
security-based swap execution facility products and related intellectual
property;
(D) Magazine, newspaper, and online periodical subscription fees;
(E) Tax preparation and audit fees;
(F) The variable commissions that a voice-based security-based swap
execution facility may pay to its trading specialists, calculated as a
percentage of transaction revenue generated by the voice-based security-
based swap execution facility; and
(G) Any non-cash costs, including depreciation and amortization.
(ii) Prorated expenses. A security-based swap execution facility's
calculation of its projected operating costs shall be deemed reasonable
if an expense is prorated and the security-based swap execution
facility:
(A) Maintains sufficient documentation that reasonably shows the
extent to which an expense is partially attributable to an excludable
expense;
(B) Identifies any prorated expense in the financial reports that it
submits to the Commission pursuant to paragraph (g) of this section; and
(C) Sufficiently explains why it prorated any expense. Common
allocation methodologies that may be used include actual use, headcount,
or square footage. A security-based swap execution facility may provide
documentation, such as copies of service agreements, other legal
documents, firm policies, audit statements, or allocation methodologies
to support its determination to prorate an expense.
(iii) Expenses allocated among affiliates. A security-based swap
execution facility's calculation of its projected operating costs shall
be deemed reasonable if it prorates any shared expense that the
security-based swap execution facility pays for, but only to the extent
that such shared expense is attributable to an affiliate and for which
the security-based swap execution facility is reimbursed. To prorate a
shared expense, the security-based swap execution facility shall:
(A) Maintain sufficient documentation that reasonably shows the
extent to which the shared expense is attributable to and paid for by
the security-based swap execution facility and/or affiliated entity. The
security-based swap execution facility may provide documentation, such
as copies of service agreements, other legal documents, firm policies,
audit statements, or allocation methodologies, that reasonably shows how
expenses are attributable to, and paid for by, the security-based swap
execution facility and/or its affiliated entities to support its
determination to prorate an expense;
(B) Identify any shared expense in the financial reports that it
submits to the Commission pursuant to paragraph (g) of this section; and
(C) Sufficiently explain why it prorated the shared expense.
(2) Notwithstanding any provision of paragraph (e)(1) of this
section, the Commission may review the methodologies and require changes
as appropriate.
(f) Valuation of financial resources. No less than each fiscal
quarter, a security-based swap execution facility shall compute the
current market value of each financial resource used to meet its
obligations under this section. Reductions in value to reflect market
and credit risk (``haircuts'') shall be applied as appropriate.
(g) Reporting to the Commission. (1) Each fiscal quarter, or at any
time upon Commission request, a security-based swap execution facility
shall provide a report to the Commission that includes:
(i) The amount of financial resources necessary to meet the
requirements of this section, computed in accordance with the
requirements of paragraph (e) of this section, and the market value of
each available financial resource, computed in accordance with the
requirements of paragraph (f) of this section; and
(ii) Financial statements, including the balance sheet, income
statement, and statement of cash flows of the security-based swap
execution facility.
(A) The financial statements shall be prepared in accordance with
generally
[[Page 129]]
accepted accounting principles in the United States, prepared in
English, and denominated in U.S. dollars.
(B) The financial statements of a security-based swap execution
facility that is not domiciled in the United States, and is not
otherwise required to prepare financial statements in accordance with
generally accepted accounting principles in the United States, may
satisfy the requirement in paragraph (g)(1)(ii)(A) of this section if
such financial statements are prepared in accordance with either
International Financial Reporting Standards issued by the International
Accounting Standards Board, or a comparable international standard as
the Commission may otherwise accept in its discretion.
(2) The calculations required by this paragraph (g) shall be made as
of the last business day of the security-based swap execution facility's
applicable fiscal quarter.
(3) With each report required under paragraph (g) of this section,
the security-based swap execution facility shall also provide the
Commission with sufficient documentation explaining the methodology used
to compute its financial requirements under this section. Such
documentation shall:
(i) Allow the Commission to reliably determine, without additional
requests for information, that the security-based swap execution
facility has made reasonable calculations pursuant to paragraph (e) of
this section; and
(ii) Include, at a minimum:
(A) A total list of all expenses, without any exclusion;
(B) All expenses and the corresponding amounts, if any, that the
security-based swap execution facility excluded or prorated when
determining its operating costs, calculated on a rolling basis, required
under this section, and the basis for any determination to exclude or
prorate any such expenses;
(C) Documentation demonstrating the existence of any committed line
of credit or similar facility relied upon for the purpose of meeting the
requirements of this section (e.g., copies of agreements establishing or
amending a credit facility or similar facility); and
(D) All costs that a security-based swap execution facility would
incur to wind down its operations, the projected amount of time for any
such wind-down period, and the basis of its determination for the
estimation of its costs and timing.
(4) The reports and supporting documentation required by this
section shall be filed not later than 40 calendar days after the end of
the security-based swap execution facility's first three fiscal
quarters, and not later than 90 calendar days after the end of the
security-based swap execution facility's fourth fiscal quarter, or at
such later time as the Commission may permit, in its discretion, upon
request by the security-based swap execution facility.
(5) A security-based swap execution facility shall provide notice to
the Commission no later than 48 hours after it knows or reasonably
should know that it no longer meets its obligations under paragraphs (b)
and (d) of this section.
(6) A security-based swap execution facility shall provide the
report and documentation required by this section to the Commission
electronically using the EDGAR system as an Interactive Data File in
accordance with Sec. 232.405 of this chapter.
Sec. 242.830 Core Principle 13--System safeguards.
(a) In general. The security-based swap execution facility shall:
(1) Establish and maintain a program of risk analysis and oversight
to identify and minimize sources of operational risk, through the
development of appropriate controls and procedures, and automated
systems, that:
(i) Are reliable and secure; and
(ii) Have adequate scalable capacity;
(2) Establish and maintain emergency procedures, backup facilities,
and a plan for disaster recovery that allow for:
(i) The timely recovery and resumption of operations; and
(ii) The fulfillment of the responsibilities and obligations of the
security-based swap execution facility; and
(3) Periodically conduct tests to verify that the backup resources
of the security-based swap execution facility are sufficient to ensure
continued:
[[Page 130]]
(i) Order processing and trade matching;
(ii) Price reporting;
(iii) Market surveillance; and
(iv) Maintenance of a comprehensive and accurate audit trail.
(b) Requirements. (1) A security-based swap execution facility's
program of risk analysis and oversight with respect to its operations
and automated systems shall address each of the following categories of
risk analysis and oversight:
(i) Enterprise risk management and governance. This category
includes, but is not limited to: Assessment, mitigation, and monitoring
of security and technology risk; security and technology capital
planning and investment; governing board and management oversight of
technology and security; information technology audit and controls
assessments; remediation of deficiencies; and any other elements of
enterprise risk management and governance included in generally accepted
best practices.
(ii) Information security. This category includes, but is not
limited to, controls relating to: Access to systems and data (including
least privilege, separation of duties, account monitoring, and control);
user and device identification and authentication; security awareness
training; audit log maintenance, monitoring, and analysis; media
protection; personnel security and screening; automated system and
communications protection (including network port control, boundary
defenses, and encryption); system and information integrity (including
malware defenses and software integrity monitoring); vulnerability
management; penetration testing; security incident response and
management; and any other elements of information security included in
generally accepted best practices.
(iii) Business continuity-disaster recovery planning and resources.
This category includes, but is not limited to: Regular, periodic testing
and review of business continuity-disaster recovery capabilities; the
controls and capabilities described in paragraphs (b)(3) and (10) of
this section; and any other elements of business continuity-disaster
recovery planning and resources included in generally accepted best
practices.
(iv) Capacity and performance planning. This category includes, but
is not limited to: Controls for monitoring the security-based swap
execution facility's systems to ensure adequate scalable capacity
(including testing, monitoring, and analysis of current and projected
future capacity and performance, and of possible capacity degradation
due to planned automated system changes); and any other elements of
capacity and performance planning included in generally accepted best
practices.
(v) Systems operations. This category includes, but is not limited
to: System maintenance; configuration management (including baseline
configuration, configuration change and patch management, least
functionality, and inventory of authorized and unauthorized devices and
software); event and problem response and management; and any other
elements of system operations included in generally accepted best
practices.
(vi) Systems development and quality assurance. This category
includes, but is not limited to: Requirements development; pre-
production and regression testing; change management procedures and
approvals; outsourcing and vendor management; training in secure coding
practices; and any other elements of systems development and quality
assurance included in generally accepted best practices.
(vii) Physical security and environmental controls. This category
includes, but is not limited to: Physical access and monitoring; power,
telecommunication, and environmental controls; fire protection; and any
other elements of physical security and environmental controls included
in generally accepted best practices.
(2) In addressing the categories of risk analysis and oversight
required under paragraph (b)(1) of this section, a security-based swap
execution facility shall follow generally accepted standards and best
practices with respect to the development, operation, reliability,
security, and capacity of automated systems.
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(3) A security-based swap execution facility shall maintain a
business continuity-disaster recovery plan and business continuity-
disaster recovery resources, emergency procedures, and back-up
facilities sufficient to enable timely recovery and resumption of its
operations and resumption of its ongoing fulfillment of its
responsibilities and obligations as a security-based swap execution
facility following any disruption of its operations. Such
responsibilities and obligations include, without limitation: Order
processing and trade matching; transmission of matched orders to a
registered clearing agency for clearing, where appropriate; price
reporting; market surveillance; and maintenance of a comprehensive audit
trail. A security-based swap execution facility's business continuity-
disaster recovery plan and resources generally should enable resumption
of trading and clearing of security-based swaps executed on or pursuant
to the rules of the security-based swap execution facility during the
next business day following the disruption. A security-based swap
execution facility shall update its business continuity-disaster
recovery plan and emergency procedures at a frequency determined by an
appropriate risk analysis, but at a minimum no less frequently than
annually.
(4) A security-based swap execution facility satisfies the
requirement to be able to resume its operations and resume its ongoing
fulfillment of its responsibilities and obligations during the next
business day following any disruption of its operations by maintaining
either:
(i) Infrastructure and personnel resources of its own that are
sufficient to ensure timely recovery and resumption of its operations
and resumption of its ongoing fulfillment of its responsibilities and
obligations as a security-based swap execution facility following any
disruption of its operations; or
(ii) Contractual arrangements with other security-based swap
execution facilities or disaster recovery service providers, as
appropriate, that are sufficient to ensure continued trading and
clearing of security-based swaps executed on the security-based swap
execution facility, and ongoing fulfillment of all of the security-based
swap execution facility's responsibilities and obligations with respect
to such security-based swaps, in the event that a disruption renders the
security-based swap execution facility temporarily or permanently unable
to satisfy this requirement on its own behalf.
(5) A security-based swap execution facility shall notify Commission
staff promptly of all:
(i) Electronic trading halts and material system malfunctions;
(ii) Cyber-security incidents or targeted threats that actually or
potentially jeopardize automated system operation, reliability,
security, or capacity; and
(iii) Activations of the security-based swap execution facility's
business continuity-disaster recovery plan.
(6) A security-based swap execution facility shall provide
Commission staff timely advance notice of all material:
(i) Planned changes to automated systems that may impact the
reliability, security, or adequate scalable capacity of such systems;
and
(ii) Planned changes to the security-based swap execution facility's
program of risk analysis and oversight.
(7) As part of a security-based swap execution facility's obligation
to produce books and records in accordance with Sec. 242.826 (Core
Principle 9), the security-based swap execution facility shall provide
to the Commission the following system-safeguards-related books and
records, promptly upon the request of any Commission representative:
(i) Current copies of its business continuity-disaster recovery
plans and other emergency procedures;
(ii) All assessments of its operational risks or system safeguards-
related controls;
(iii) All reports concerning system safeguards testing and
assessment required by this chapter, whether performed by independent
contractors or by employees of the security-based swap execution
facility; and
(iv) All other books and records requested by Commission staff in
connection with Commission oversight of system safeguards pursuant to
the Act or Commission rules, or in connection with Commission
maintenance of a current profile of the security-based
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swap execution facility's automated systems.
(v) Nothing in paragraph (b)(7) of this section shall be interpreted
as reducing or limiting in any way a security-based swap execution
facility's obligation to comply with Sec. 242.826 (Core Principle 9).
(8) A security-based swap execution facility shall conduct regular,
periodic, objective testing and review of its automated systems to
ensure that they are reliable, secure, and have adequate scalable
capacity. A security-based swap execution facility shall also conduct
regular, periodic testing and review of its business continuity-disaster
recovery capabilities. Such testing and review shall include, without
limitation, all of the types of testing set forth in this paragraph
(b)(8).
(i) Definitions. As used in this paragraph (b)(8):
Controls means the safeguards or countermeasures employed by the
security-based swap execution facility to protect the reliability,
security, or capacity of its automated systems or the confidentiality,
integrity, and availability of its data and information, and to enable
the security-based swap execution facility to fulfill its statutory and
regulatory responsibilities.
Controls testing means assessment of the security-based swap
execution facility's controls to determine whether such controls are
implemented correctly, are operating as intended, and are enabling the
security-based swap execution facility to meet the requirements of this
section.
Enterprise technology risk assessment means a written assessment
that includes, but is not limited to, an analysis of threats and
vulnerabilities in the context of mitigating controls. An enterprise
technology risk assessment identifies, estimates, and prioritizes risks
to security-based swap execution facility operations or assets, or to
market participants, individuals, or other entities, resulting from
impairment of the confidentiality, integrity, and availability of data
and information or the reliability, security, or capacity of automated
systems.
External penetration testing means attempts to penetrate the
security-based swap execution facility's automated systems from outside
the systems' boundaries to identify and exploit vulnerabilities. Methods
of conducting external penetration testing include, but are not limited
to, methods for circumventing the security features of an automated
system.
Internal penetration testing means attempts to penetrate the
security-based swap execution facility's automated systems from inside
the systems' boundaries, to identify and exploit vulnerabilities.
Methods of conducting internal penetration testing include, but are not
limited to, methods for circumventing the security features of an
automated system.
Security incident means a cybersecurity or physical security event
that actually jeopardizes or has a significant likelihood of
jeopardizing automated system operation, reliability, security, or
capacity, or the availability, confidentiality or integrity of data.
Security incident response plan means a written plan documenting the
security-based swap execution facility's policies, controls, procedures,
and resources for identifying, responding to, mitigating, and recovering
from security incidents, and the roles and responsibilities of its
management, staff, and independent contractors in responding to security
incidents. A security incident response plan may be a separate document
or a business continuity-disaster recovery plan section or appendix
dedicated to security incident response.
Security incident response plan testing means testing of a security-
based swap execution facility's security incident response plan to
determine the plan's effectiveness, identify its potential weaknesses or
deficiencies, enable regular plan updating and improvement, and maintain
organizational preparedness and resiliency with respect to security
incidents. Methods of conducting security incident response plan testing
may include, but are not limited to, checklist completion, walk-through
or table-top exercises, simulations, and comprehensive exercises.
Vulnerability testing means testing of a security-based swap
execution facility's automated systems to determine what information may
be discoverable through a reconnaissance analysis of
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those systems and what vulnerabilities may be present on those systems.
(ii) Vulnerability testing. A security-based swap execution facility
shall conduct vulnerability testing of a scope sufficient to satisfy the
requirements set forth in paragraph (b)(10) of this section.
(A) A security-based swap execution facility shall conduct such
vulnerability testing at a frequency determined by an appropriate risk
analysis.
(B) Such vulnerability testing shall include automated vulnerability
scanning, which shall follow generally accepted best practices.
(C) A security-based swap execution facility shall conduct
vulnerability testing by engaging independent contractors or by using
employees of the security-based swap execution facility who are not
responsible for development or operation of the systems or capabilities
being tested.
(iii) External penetration testing. A security-based swap execution
facility shall conduct external penetration testing of a scope
sufficient to satisfy the requirements set forth in paragraph (b)(10) of
this section.
(A) A security-based swap execution facility shall conduct such
external penetration testing at a frequency determined by an appropriate
risk analysis.
(B) A security-based swap execution facility shall conduct external
penetration testing by engaging independent contractors or by using
employees of the security-based swap execution facility who are not
responsible for development or operation of the systems or capabilities
being tested.
(iv) Internal penetration testing. A security-based swap execution
facility shall conduct internal penetration testing of a scope
sufficient to satisfy the requirements set forth in paragraph (b)(10) of
this section.
(A) A security-based swap execution facility shall conduct such
internal penetration testing at a frequency determined by an appropriate
risk analysis.
(B) A security-based swap execution facility shall conduct internal
penetration testing by engaging independent contractors, or by using
employees of the security-based swap execution facility who are not
responsible for development or operation of the systems or capabilities
being tested.
(v) Controls testing. A security-based swap execution facility shall
conduct controls testing of a scope sufficient to satisfy the
requirements set forth in paragraph (b)(10) of this section.
(A) A security-based swap execution facility shall conduct controls
testing, which includes testing of each control included in its program
of risk analysis and oversight, at a frequency determined by an
appropriate risk analysis. Such testing may be conducted on a rolling
basis.
(B) A security-based swap execution facility shall conduct controls
testing by engaging independent contractors or by using employees of the
security-based swap execution facility who are not responsible for
development or operation of the systems or capabilities being tested.
(vi) Security incident response plan testing. A security-based swap
execution facility shall conduct security incident response plan testing
sufficient to satisfy the requirements set forth in paragraph (b)(10) of
this section.
(A) A security-based swap execution facility shall conduct such
security incident response plan testing at a frequency determined by an
appropriate risk analysis.
(B) A security-based swap execution facility's security incident
response plan shall include, without limitation, the security-based swap
execution facility's definition and classification of security
incidents, its policies and procedures for reporting security incidents
and for internal and external communication and information sharing
regarding security incidents, and the hand-off and escalation points in
its security incident response process.
(C) A security-based swap execution facility may coordinate its
security incident response plan testing with other testing required by
this section or with testing of its other business continuity-disaster
recovery and crisis management plans.
(D) A security-based swap execution facility may conduct security
incident
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response plan testing by engaging independent contractors or by using
employees of the security-based swap execution facility.
(vii) Enterprise technology risk assessment. A security-based swap
execution facility shall conduct enterprise technology risk assessment
of a scope sufficient to satisfy the requirements set forth in paragraph
(b)(10) of this section.
(A) A security-based swap execution facility shall conduct
enterprise technology risk assessment at a frequency determined by an
appropriate risk analysis. A security-based swap execution facility that
has conducted an enterprise technology risk assessment that complies
with this section may conduct subsequent assessments by updating the
previous assessment.
(B) A security-based swap execution facility may conduct enterprise
technology risk assessments by using independent contractors or
employees of the security-based swap execution facility who are not
responsible for development or operation of the systems or capabilities
being assessed.
(9) To the extent practicable, a security-based swap execution
facility shall:
(i) Coordinate its business continuity-disaster recovery plan with
those of its members that it depends upon to provide liquidity, in a
manner adequate to enable effective resumption of activity in its
markets following a disruption causing activation of the security-based
swap execution facility's business continuity-disaster recovery plan;
(ii) Initiate and coordinate periodic, synchronized testing of its
business continuity- disaster recovery plan with those of members that
it depends upon to provide liquidity; and
(iii) Ensure that its business continuity-disaster recovery plan
takes into account the business continuity-disaster recovery plans of
its telecommunications, power, water, and other essential service
providers.
(10) The scope for all system safeguards testing and assessment
required by this section shall be broad enough to include the testing of
automated systems and controls that the security-based swap execution
facility's required program of risk analysis and oversight and its
current cybersecurity threat analysis indicate is necessary to identify
risks and vulnerabilities that could enable an intruder or unauthorized
user or insider to:
(i) Interfere with the security-based swap execution facility's
operations or with fulfillment of its statutory and regulatory
responsibilities;
(ii) Impair or degrade the reliability, security, or adequate
scalable capacity of the security-based swap execution facility's
automated systems;
(iii) Add to, delete, modify, exfiltrate, or compromise the
integrity of any data related to the security-based swap execution
facility's regulated activities; or
(iv) Undertake any other unauthorized action affecting the security-
based swap execution facility's regulated activities or the hardware or
software used in connection with those activities.
(11) Both the senior management and the governing board of a
security-based swap execution facility shall receive and review reports
setting forth the results of the testing and assessment required by this
section. A security-based swap execution facility shall establish and
follow appropriate procedures for the remediation of issues identified
through such review, as provided in paragraph (b)(12) of this section,
and for evaluation of the effectiveness of testing and assessment
protocols.
(12) A security-based swap execution facility shall identify and
document the vulnerabilities and deficiencies in its systems revealed by
the testing and assessment required by this section. The security-based
swap execution facility shall conduct and document an appropriate
analysis of the risks presented by such vulnerabilities and
deficiencies, to determine and document whether to remediate or accept
the associated risk. When the security-based swap execution facility
determines to remediate a vulnerability or deficiency, it must remediate
in a timely manner given the nature and magnitude of the associated
risk.
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Sec. 242.831 Core Principle 14--Designation of chief compliance officer.
(a)(1) In general. Each security-based swap execution facility shall
designate an individual to serve as a chief compliance officer.
(2) Duties. The chief compliance officer shall:
(i) Report directly to the board or to the senior officer of the
facility;
(ii) Review compliance with the core principles in this subsection;
(iii) In consultation with the board of the facility, a body
performing a function similar to that of a board, or the senior officer
of the facility, resolve any conflicts of interest that may arise;
(iv) Be responsible for establishing and administering the policies
and procedures required to be established pursuant to this section;
(v) Ensure compliance with the Act and the rules and regulations
issued under the Act, including rules prescribed by the Commission
pursuant to section 3D of the Act;
(vi) Establish procedures for the remediation of noncompliance
issues found during compliance office reviews, look backs, internal or
external audit findings, self-reported errors, or through validated
complaints; and
(vii) Establish and follow appropriate procedures for the handling,
management response, remediation, retesting, and closing of
noncompliance issues.
(3) Annual reports--(i) In general. In accordance with rules
prescribed by the Commission, the chief compliance officer shall
annually prepare and sign a report that contains a description of:
(A) The compliance of the security-based swap execution facility
with the Act; and
(B) The policies and procedures, including the code of ethics and
conflict of interest policies, of the security-based swap execution
facility.
(ii) [Reserved]
(4) Requirements. The chief compliance officer shall:
(i) Submit each report described in paragraph (a)(3) of this section
with the appropriate financial report of the security-based swap
execution facility that is required to be submitted to the Commission
pursuant to this section; and
(ii) Include in the report a certification that, under penalty of
law, the report is accurate and complete.
(b) Authority of chief compliance officer. (1) The position of chief
compliance officer shall carry with it the authority and resources to
develop, in consultation with the governing board or senior officer, the
policies and procedures of the security-based swap execution facility
and enforce such policies and procedures to fulfill the duties set forth
for chief compliance officers in the Act and the Commission's rules
thereunder.
(2) The chief compliance officer shall have supervisory authority
over all staff acting at the direction of the chief compliance officer.
(c) Qualifications of chief compliance officer. (1) The individual
designated to serve as chief compliance officer shall have the
background and skills appropriate for fulfilling the responsibilities of
the position.
(2) No individual that would be disqualified from serving on a
security-based swap execution facility's governing board or committees
pursuant to the criteria set forth in Sec. 242.819(i) may serve as a
chief compliance officer.
(3) In determining whether the background and skills of a potential
chief compliance officer are appropriate for fulfilling the
responsibilities of the role of the chief compliance officer, a
security-based swap execution facility has the discretion to base its
determination on the totality of the qualifications of the potential
chief compliance officer, including, but not limited to, compliance
experience, related career experience, training, potential conflicts of
interest, and any other relevant factors to the position.
(d) Appointment and removal of chief compliance officer. (1) Only
the governing board or the senior officer may appoint or remove the
chief compliance officer.
(2) The security-based swap execution facility shall notify the
Commission within two business days of the appointment or removal,
whether interim or permanent, of a chief compliance officer.
(e) Compensation of the chief compliance officer. The governing
board or the
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senior officer shall approve the compensation of the chief compliance
officer.
(f) Annual meeting with the chief compliance officer. The chief
compliance officer shall meet with the governing board or senior officer
of the security-based swap execution facility at least annually.
(g) Information requested of the chief compliance officer. The chief
compliance officer shall provide any information regarding the
regulatory program of the security-based swap execution facility as
requested by the governing board or the senior officer.
(h) Duties of chief compliance officer. The duties of the chief
compliance officer shall include, but are not limited to, the following:
(1) Overseeing and reviewing compliance of the security-based swap
execution facility with section 3D of the Act and the Commission rules
thereunder;
(2) Taking reasonable steps, in consultation with the governing
board or the senior officer of the security-based swap execution
facility, to resolve any material conflicts of interest that may arise,
including, but not limited to:
(i) Conflicts between business considerations and compliance
requirements;
(ii) Conflicts between business considerations and the requirement
that the security-based swap execution facility provide fair, open, and
impartial access as set forth in Sec. 242.819(c); and
(iii) Conflicts between a security-based swap execution facility's
management and members of the governing board;
(3) Establishing and administering written policies and procedures
reasonably designed to prevent violations of the Act and the rules of
the Commission;
(4) Taking reasonable steps to ensure compliance with the Act and
the rules of the Commission;
(5) Establishing procedures reasonably designed to handle, respond,
remediate, retest, and resolve noncompliance issues identified by the
chief compliance officer through any means, including any compliance
office review, look-back, internal or external audit finding, self-
reported error, or validated complaint;
(6) Establishing and administering a compliance manual designed to
promote compliance with the applicable laws, rules, and regulations and
a written code of ethics for the security-based swap execution facility
designed to prevent ethical violations and to promote honesty and
ethical conduct by personnel of the security-based swap execution
facility;
(7) Supervising the regulatory program of the security-based swap
execution facility with respect to trade practice surveillance; market
surveillance; real-time market monitoring; compliance with audit trail
requirements; enforcement and disciplinary proceedings; audits,
examinations, and other regulatory responsibilities (including taking
reasonable steps to ensure compliance with, if applicable, financial
integrity, financial reporting, sales practice, recordkeeping, and other
requirements); and
(8) Supervising the effectiveness and sufficiency of any regulatory
services provided to the security-based swap execution facility by a
regulatory service provider in accordance with Sec. 242.819(e).
(i) Preparation of annual compliance report. The chief compliance
officer shall, not less than annually, prepare and sign an annual
compliance report that covers the prior fiscal year. The report shall,
at a minimum, contain:
(1) A description and self-assessment of the effectiveness of the
written policies and procedures of the security-based swap execution
facility, including the code of ethics and conflict of interest
policies, to reasonably ensure compliance with the Act and applicable
Commission rules;
(2) Any material changes made to compliance policies and procedures
during the coverage period for the report and any areas of improvement
or recommended changes to the compliance program;
(3) A description of the financial, managerial, and operational
resources set aside for compliance with the Act and applicable
Commission rules;
(4) Any material non-compliance matters identified and an
explanation of the corresponding action taken to resolve such non-
compliance matters; and
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(5) A certification by the chief compliance officer that, to the
best of their knowledge and reasonable belief, and under penalty of law,
the annual compliance report is accurate and complete in all material
respects.
(j) Submission of annual compliance report and related matters--(1)
Furnishing the annual compliance report prior to submission to the
Commission. Prior to submission to the Commission, the chief compliance
officer shall provide the annual compliance report for review to the
governing board or, in the absence of a governing board, to the senior
officer. Members of the governing board and the senior officer shall not
require the chief compliance officer to make any changes to the report.
(2) Submission of annual compliance report to the Commission. The
annual compliance report shall be submitted electronically to the
Commission using the EDGAR system as an Interactive Data File in
accordance with Sec. 232.405 of this chapter not later than 90 calendar
days after the end of the security-based swap execution facility's
fiscal year. The security-based swap execution facility shall
concurrently file the annual compliance report with the fourth-quarter
financial report pursuant to Sec. 242.829(g).
(3) Amendments to annual compliance report. (i) Promptly upon
discovery of any material error or omission made in a previously filed
annual compliance report, the chief compliance officer shall file an
amendment with the Commission to correct the material error or omission.
The chief compliance officer shall submit the amended annual compliance
report to the governing board, or in the absence of a governing board,
to the senior officer, pursuant to paragraph (j)(1) of this section.
(ii) An amendment shall contain the certification required under
paragraph (i)(5) of this section.
(4) Request for extension. A security-based swap execution facility
may request an extension of time to file its annual compliance report
from the Commission. Reasonable and valid requests for extensions of the
filing deadline may be granted at the discretion of the Commission.
(k) Recordkeeping. A security-based swap execution facility shall
maintain all records demonstrating compliance with the duties of the
chief compliance officer and the preparation and submission of annual
compliance reports consistent with Sec. 242.826 (Core Principle 9).
Sec. 242.832 Application of the trade execution requirement to
cross-border security-based swap transactions.
(a) The trade execution requirement set forth in section 3C(h) of
the Act shall not apply in connection with a security-based swap unless
at least one counterparty to the security-based swap is a ``covered
person'' as defined in paragraph (b) of this section.
(b) A ``covered person'' means, with respect to a particular
security-based swap, any person that is:
(1) A U.S. person;
(2) A non-U.S. person whose performance under a security-based swap
is guaranteed by a U.S. person; or
(3) A non-U.S. person who, in connection with its security-based
swap dealing activity, uses U.S. personnel located in a U.S. branch or
office, or personnel of an agent of such non-U.S. person located in a
U.S. branch or office, to arrange, negotiate, or execute a transaction.
Sec. 242.833 Cross-border exemptions.
(a) Exemptions for foreign trading venues for security-based swaps.
An application for an order for exemptive relief under section 36(a)(1)
of the Act (15 U.S.C. 78mm(a)(1)) relating to the registration status
under the Act of a foreign trading venue for security-based swaps that
has one or more members who are covered persons, as defined in Sec.
242.832, with respect to security-based swaps transacted on that venue
may state that the application also is submitted pursuant to this
paragraph (a). In such case, the Commission will consider the submission
as an application to exempt the foreign trading venue, with respect to
its providing a market place for security-based swaps, from:
(1) The definition of ``exchange'' in section 3(a)(1) of the Act (15
U.S.C. 78c(a)(1));
(2) The definition of ``security-based swap execution facility'' in
section 3(a)(77) of the Act (15 U.S.C. 78c(a)(77));
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(3) The definition of ``broker'' in section 3(a)(4) of the Act (15
U.S.C. 78c(a)(4)); and
(4) Section 3D(a)(1) of the Act (15 U.S.C. 78c-4(a)(1)).
(b) Exemptions relating to the trade execution requirement. (1) An
application for an order for exemptive relief under section 36(a)(1) of
the Act (15 U.S.C. 78mm(a)(1)) relating to the application of the trade
execution requirement in section 3C(h) of the Act (15 U.S.C. 78c-3(h))
to security-based swaps executed on a foreign trading venue, may state
that the application also is submitted pursuant to this paragraph (b).
(2) When considering an application under section 36 of the Act (15
U.S.C. 78mm) and this paragraph (b), the Commission may consider:
(i) The extent to which the security-based swaps traded in the
foreign jurisdiction covered by the request are subject to a trade
execution requirement comparable to that in section 3C(h) of the Act (15
U.S.C. 78c-3(h)) and the Commission's rules thereunder;
(ii) The extent to which trading venues in the foreign jurisdiction
covered by the request are subject to regulation and supervision
comparable to that under the Act, including section 3D of the Act (15
U.S.C. 78c-4), and the Commission's rules thereunder;
(iii) Whether the foreign trading venue or venues where covered
persons, as defined in Sec. 242.832, intend to trade security-based
swaps have received an exemption order contemplated by paragraph (a) of
this section; and
(iv) Any other factor that the Commission believes is relevant for
assessing whether the exemption is in the public interest and consistent
with the protection of investors.
Sec. 242.834 Mitigation of conflicts of interest of security-based
swap execution facilities and certain exchanges.
(a) Definitions. For purposes of this section:
Family relationship of a person means the person's spouse, former
spouse, parent, stepparent, child, stepchild, sibling, stepbrother,
stepsister, grandparent, grandchild, uncle, aunt, nephew, niece, or in-
law.
Major disciplinary committee means a committee of persons who are
authorized by a security-based swap execution facility to conduct
disciplinary hearings, to settle disciplinary charges, to impose
disciplinary sanctions, or to hear appeals thereof in cases involving
any violation of the rules of the security-based swap execution facility
except those which:
(i) Are related to decorum or attire, financial requirements, or
reporting or recordkeeping; and
(ii) Do not involve fraud, deceit, or conversion.
Member's affiliated firm is a firm in which the member is a
principal or an employee.
Named party in interest means a person or entity that is identified
by name as a subject of any matter being considered by a governing
board, disciplinary committee, or oversight panel.
Significant action includes any of the following types of actions or
rule changes by a security-based swap execution facility or SBS exchange
that can be implemented without the Commission's prior approval:
(i) Any actions or rule changes which address an emergency; and
(ii) Any changes in margin levels that are designed to respond to
extraordinary market conditions such as an actual or attempted corner,
squeeze, congestion, or undue concentration of positions, or that
otherwise are likely to have a substantial effect on prices in any
contract traded or cleared at such security-based swap execution
facility or SBS exchange; but does not include any rule not submitted
for prior Commission approval because such rule is unrelated to the
terms and conditions of any security-based swap traded at such security-
based swap execution facility or SBS exchange.
(b) Ownership and voting limitations. Each security-based swap
execution facility and SBS exchange shall not permit any of its members,
either alone or together with any officer, principal, or employee of the
member, to:
(1) Own, directly or indirectly, 20 percent or more of any class of
voting securities or of other voting interest in the security-based swap
execution facility or SBS exchange; or
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(2) Directly or indirectly vote, cause the voting of, or give any
consent or proxy with respect to the voting of, any interest that
exceeds 20 percent of the voting power of any class of securities or of
other ownership interest in the security-based swap execution facility
or SBS exchange.
(3) The ownership and voting limitations in paragraphs (b)(1) and
(2) of this section shall not apply to an SBSEF that has, pursuant to
Sec. 242.819(e), entered into an agreement with a registered futures
association or a national securities association for the provision of
regulatory services that encompass, at a minimum, real-time market
monitoring under Sec. 242.819(d)(5) and investigations and
investigation reports under Sec. 242.819(d)(6).
(c) Enforcement of limitations. The rules of each security-based
swap execution facility and SBS exchange must be reasonably designed,
and have an effective mechanism, to:
(1) Deny effect to the portion of any voting interest held by a
member in excess of the limitations in paragraph (b) of this section;
(2) Compel a member who possesses a voting interest in excess of the
limitations in paragraph (b) of this section to divest enough of that
voting interest to come within those limitations; and
(3) Obtain information relating to its ownership and voting
interests owned or controlled, directly or indirectly, by its members.
(d) Disciplinary committees and hearing panels. Each security-based
swap execution facility and SBS exchange shall ensure that its
disciplinary processes preclude any member, or group or class of its
members, from dominating or exercising disproportionate influence on the
disciplinary process. Each major disciplinary committee or hearing panel
thereof shall include sufficient different groups or classes of its
members so as to ensure fairness and to prevent special treatment or
preference for any person or member in the conduct of the
responsibilities of the committee or panel.
(e) Governing board composition. Each security-based swap execution
facility and SBS exchange shall ensure that:
(1) Twenty percent or more of the persons who are eligible to vote
routinely on matters being considered by the governing board (excluding
those members who are eligible to vote only in the case of a tie vote by
the governing board) are:
(i) Knowledgeable of security-based swap trading or financial
regulation, or otherwise capable of contributing to governing board
deliberations;
(ii) Not members of the security-based swap execution facility or
SBS exchange;
(iii) Not salaried employees of the security-based swap execution
facility or SBS exchange;
(iv) Not primarily performing services for the security-based swap
execution facility or SBS exchange in a capacity other than as a member
of the governing board; and
(v) Not officers, principals, or employees of a firm which holds a
membership at the security-based swap execution facility or SBS
exchange, either in its own name or through an employee on behalf of the
firm; and
(2) The membership of the governing board includes a diversity of
groups or classes of its members. The security-based swap execution
facility or SBS exchange must be able to demonstrate that the board
membership fairly represents the diversity of interests at such
security-based swap execution facility or SBS exchange and is otherwise
consistent with the composition requirements of this section.
(f) Providing information about the board to the Commission. Each
security-based swap execution facility and SBS exchange shall submit to
the Commission, within 30 days after each governing board election, a
list of the governing board's members, the groups or classes of its
members that they represent, and how the composition of the governing
board otherwise meets the requirements of this section.
(g) Voting by interested members of governing boards and various
committees of security-based swap execution facilities and SBS
exchanges--(1) Rules required. Each security-based swap execution
facility and SBS exchange shall maintain in effect rules to address the
avoidance of conflicts of interest in the execution of its regulatory
functions. Such rules must provide for the following:
[[Page 140]]
(i) Relationship with named party in interest--(A) Nature of
relationship. A member of a governing board, disciplinary committee, or
oversight panel of a security-based swap execution facility or SBS
exchange must abstain from such body's deliberations and voting on any
matter involving a named party in interest where such member:
(1) Is a named party in interest;
(2) Is an employer, employee, or fellow employee of a named party in
interest;
(3) Has any other significant, ongoing business relationship with a
named party in interest, not including relationships limited to
executing security-based swaps opposite of each other or to clearing
security-based swaps through the same clearing member; or
(4) Has a family relationship with a named party in interest.
(B) Disclosure of relationship. Prior to the consideration of any
matter involving a named party in interest, each member of a governing
board, disciplinary committee, or oversight panel of a security-based
swap execution facility or SBS exchange must disclose to the appropriate
staff of the security-based swap execution facility or SBS exchange
whether they have one of the relationships listed in paragraph
(g)(1)(i)(A) of this section with a named party in interest.
(C) Procedure for determination. Each security-based swap execution
facility and SBS exchange must establish procedures for determining
whether any member of its governing board, disciplinary committees, or
oversight committees is subject to a conflicts restriction in any matter
involving a named party in interest. Taking into consideration the
exigency of the committee action, such determinations should be based
upon:
(1) Information provided by the member pursuant to paragraph
(g)(1)(i)(B) of this section; and
(2) Any other source of information that is held by and reasonably
available to the security-based swap execution facility or SBS exchange.
(ii) Financial interest in a significant action--(A) Nature of
interest. A member of the governing board, disciplinary committee, or
oversight panel of a security-based swap execution facility or SBS
exchange must abstain from such body's deliberations and voting on any
significant action if the member knowingly has a direct and substantial
financial interest in the result of the vote based upon either exchange
or non-exchange positions that could reasonably be expected to be
affected by the action.
(B) Disclosure of interest. Prior to the consideration of any
significant action, each member of a governing board, disciplinary
committee, or oversight panel of a security-based swap execution
facility or SBS exchange must disclose to the appropriate staff of the
security-based swap execution facility or SBS exchange the position
information referred to in paragraph (g)(1)(ii)(C) of this section that
is known to them. This requirement does not apply to members who choose
to abstain from deliberations and voting on the subject significant
action.
(C) Procedure for determination. Each security-based swap execution
facility and SBS exchange must establish procedures for determining
whether any member of its governing board, disciplinary committees, or
oversight committees is subject to a conflicts restriction under this
section in any significant action. Such determination must include a
review of any positions, whether maintained at that security-based swap
execution facility, SBS exchange, or elsewhere, held in the member's
personal accounts or the proprietary accounts of the member's affiliated
firm that the security-based swap execution facility or SBS exchange
reasonably expects could be affected by the significant action.
(D) Bases for determination. Taking into consideration the exigency
of the significant action, such determinations should be based upon:
(1) Information provided by the member with respect to positions
pursuant to paragraph (f)(2)(ii)(B) of this section; and
(2) Any other source of information that is held by and reasonably
available to the security-based swap execution facility or SBS exchange.
(iii) Participation in deliberations. (A) Under the rules required
by this section, a governing board, disciplinary
[[Page 141]]
committee, or oversight panel of a security-based swap execution
facility or SBS exchange may permit a member to participate in
deliberations prior to a vote on a significant action for which they
otherwise would be required to abstain, pursuant to paragraph (g)(1)(ii)
of this section, if such participation would be consistent with the
public interest and the member recuses from voting on such action.
(B) In making a determination as to whether to permit a member to
participate in deliberations on a significant action for which they
otherwise would be required to abstain, the deliberating body shall
consider the following factors:
(1) Whether the member's participation in deliberations is necessary
for the deliberating body to achieve a quorum in the matter; and
(2) Whether the member has unique or special expertise, knowledge,
or experience in the matter under consideration.
(C) Prior to any determination pursuant to paragraph (g)(1)(iii)(A)
of this section, the deliberating body must fully consider the position
information which is the basis for the member's direct and substantial
financial interest in the result of a vote on a significant action
pursuant to paragraph (g)(1)(ii) of this section.
(iv) Documentation of determination. The governing boards,
disciplinary committees, and oversight panels of each security-based
swap execution facility and SBS exchange must reflect in their minutes
or otherwise document that the conflicts determination procedures
required by this section have been followed. Such records also must
include:
(A) The names of all members who attended the meeting in person or
who otherwise were present by electronic means;
(B) The name of any members who voluntarily recused themselves or
were required to abstain from deliberations and/or voting on a matter
and the reason for the recusal or abstention, if stated; and
(C) Information on the position information that was reviewed for
each member.
(h) Rules required. (1) A security-based swap execution facility
shall maintain in effect rules to comply with this section that have
been submitted to the Commission pursuant to Sec. 242.806 or Sec.
242.807.
(2) An SBS exchange shall maintain in effect rules to comply with
this section that have been submitted to the Commission pursuant to
Sec. 240.19b-4 of this chapter.
Sec. 242.835 Notice to Commission by security-based swap execution
facility of final disciplinary action or denial or limitation of access.
(a) If a security-based swap execution facility issues a final
disciplinary action against a member, or takes final action with respect
to a denial or conditioning membership, or takes final action with
respect to a denial or limitation of access of a person to any services
offered by the security-based swap execution facility, the security-
based swap execution facility shall file a notice of such action with
the Commission within 30 days and serve a copy on the affected person.
(b) For purposes of paragraph (a) of this section:
(1) A disciplinary action shall not be considered ``final'' unless:
(i) The affected person has exhausted their administrative remedies
at the security-based swap execution facility; and
(ii) The disciplinary action is not a summary action permitted under
Sec. 242.819(g)(13)(ii).
(2) A disposition of a matter with respect to a denial or
conditioning of membership, or a denial or limitation of access shall
not be considered ``final'' unless such person has exhausted their
administrative remedies at the security-based swap execution facility
with respect to such matter.
(c) A notice required by paragraph (a) of this section shall provide
the following information:
(1) The name of the member and its last known address, as reflected
in the security-based swap execution facility's records;
(2) The name of the person, committee, or other organizational unit
of
[[Page 142]]
the security-based swap execution facility that initiated the
disciplinary action or access restriction;
(3) In the case of a final disciplinary action:
(i) A description of the acts or practices, or omissions to act,
upon which the sanction is based, including, as appropriate, the
specific rules that the security-based swap execution facility has found
to have been violated;
(ii) A statement describing the respondent's answer to the charges;
and
(iii) A statement of the sanction imposed and the reasons therefor;
(4) In the case of a final action with respect to a denial or
conditioning of membership, or a denial or limitation of access:
(i) The financial or operating difficulty of the member or
prospective member (as the case may be) upon which the security-based
swap execution facility determined that the member or prospective member
could not be permitted to do, or continue to do, business with safety to
investors, creditors, other members, or the security-based swap
execution facility;
(ii) The pertinent failure to meet qualification requirements or
other prerequisites for membership or access and the basis upon which
the security-based swap execution facility determined that the person
concerned could not be permitted to have membership or access with
safety to investors, creditors, other members, or the security-based
swap execution facility; or
(iii) The default of any delivery of funds or securities to a
clearing agency by the member;
(5) The effective date of the final disciplinary action, or final
action with respect to a denial or conditioning of membership, or a
denial or limitation of access; and
(6) Any other information that the security-based swap execution
facility may deem relevant.
Regulation SBSR--Regulatory Reporting and Public Dissemination of
Security-Based Swap Information
Source: 80 FR 14728, Mar. 19, 2015, unless otherwise noted.
Sec. 242.900 Definitions.
Terms used in Sec. Sec. 242.900 through 242.909 that appear in
Section 3 of the Exchange Act (15 U.S.C. 78c) have the same meaning as
in Section 3 of the Exchange Act and the rules or regulations
thereunder. In addition, for purposes of Regulation SBSR (Sec. Sec.
242.900 through 242.909), the following definitions shall apply:
(a) Affiliate means any person that, directly or indirectly,
controls, is controlled by, or is under common control with, a person.
(b) Asset class means those security-based swaps in a particular
broad category, including, but not limited to, credit derivatives and
equity derivatives.
(c) [Reserved].
(d) Branch ID means the UIC assigned to a branch or other
unincorporated office of a participant.
(e) Broker ID means the UIC assigned to a person acting as a broker
for a participant.
(f) Business day means a day, based on U.S. Eastern Time, other than
a Saturday, Sunday, or a U.S. federal holiday.
(g) Clearing transaction means a security-based swap that has a
registered clearing agency as a direct counterparty.
(h) Control means, for purposes of Sec. Sec. 242.900 through
242.909, the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, or otherwise. A
person is presumed to control another person if the person:
(1) Is a director, general partner or officer exercising executive
responsibility (or having similar status or functions);
(2) Directly or indirectly has the right to vote 25 percent or more
of a class of voting securities or has the power to sell or direct the
sale of 25 percent or more of a class of voting securities; or
(3) In the case of a partnership, has the right to receive, upon
dissolution, or has contributed, 25 percent or more of the capital.
[[Page 143]]
(i) Counterparty means a person that is a direct counterparty or
indirect counterparty of a security-based swap.
(j) Counterparty ID means the UIC assigned to a counterparty to a
security-based swap.
(k) Direct counterparty means a person that is a primary obligor on
a security-based swap.
(l) Direct electronic access has the same meaning as in Sec.
240.13n-4(a)(5) of this chapter.
(m) Exchange Act means the Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.), as amended.
(n) Execution agent ID means the UIC assigned to any person other
than a broker or trader that facilitates the execution of a security-
based swap on behalf of a direct counterparty.
(o) Foreign branch has the same meaning as in Sec. 240.3a71-3(a)(1)
of this chapter.
(p) Indirect counterparty means a guarantor of a direct
counterparty's performance of any obligation under a security-based swap
such that the direct counterparty on the other side can exercise rights
of recourse against the indirect counterparty in connection with the
security-based swap; for these purposes a direct counterparty has rights
of recourse against a guarantor on the other side if the direct
counterparty has a conditional or unconditional legally enforceable
right, in whole or in part, to receive payments from, or otherwise
collect from, the guarantor in connection with the security-based swap.
(q) Life cycle event means, with respect to a security-based swap,
any event that would result in a change in the information reported to a
registered security-based swap data repository under Sec. 242.901(c),
(d), or (i), including: An assignment or novation of the security-based
swap; a partial or full termination of the security-based swap; a change
in the cash flows originally reported; for a security-based swap that is
not a clearing transaction, any change to the title or date of any
master agreement, collateral agreement, margin agreement, or any other
agreement incorporated by reference into the security-based swap
contract; or a corporate action affecting a security or securities on
which the security-based swap is based (e.g., a merger, dividend, stock
split, or bankruptcy). Notwithstanding the above, a life cycle event
shall not include the scheduled expiration of the security-based swap, a
previously described and anticipated interest rate adjustment (such as a
quarterly interest rate adjustment), or other event that does not result
in any change to the contractual terms of the security-based swap.
(r) Non-mandatory report means any information provided to a
registered security-based swap data repository by or on behalf of a
counterparty other than as required by Sec. Sec. 242.900 through
242.909.
(s) Non-U.S. person means a person that is not a U.S. person.
(t) Parent means a legal person that controls a participant.
(u) Participant, with respect to a registered security-based swap
data repository, means:
(1) A counterparty, that meets the criteria of Sec. 242.908(b), of
a security-based swap that is reported to that registered security-based
swap data repository to satisfy an obligation under Sec. 242.901(a);
(2) A platform that reports a security-based swap to that registered
security-based swap data repository to satisfy an obligation under Sec.
242.901(a);
(3) A registered clearing agency that is required to report to that
registered security-based swap data repository whether or not it has
accepted a security-based swap for clearing pursuant to Sec.
242.901(e)(1)(ii); or
(4) A registered broker-dealer (including a registered security-
based swap execution facility) that is required to report a security-
based swap to that registered security-based swap data repository by
Sec. 242.901(a).
(v) Platform means a national securities exchange or security-based
swap execution facility that is registered or exempt from registration.
(w) Platform ID means the UIC assigned to a platform on which a
security-based swap is executed.
(x) Post-trade processor means any person that provides affirmation,
confirmation, matching, reporting, or clearing services for a security-
based swap transaction.
[[Page 144]]
(y) Pre-enactment security-based swap means any security-based swap
executed before July 21, 2010 (the date of enactment of the Dodd-Frank
Act (Pub. L. 111-203, H.R. 4173)), the terms of which had not expired as
of that date.
(z) Price means the price of a security-based swap transaction,
expressed in terms of the commercial conventions used in that asset
class.
(aa) Product means a group of security-based swap contracts each
having the same material economic terms except those relating to price
and size.
(bb) Product ID means the UIC assigned to a product.
(cc) Publicly disseminate means to make available through the
Internet or other electronic data feed that is widely accessible and in
machine-readable electronic format.
(dd) [Reserved].
(ee) Registered clearing agency means a person that is registered
with the Commission as a clearing agency pursuant to section 17A of the
Exchange Act (15 U.S.C. 78q-1) and any rules or regulations thereunder.
(ff) Registered security-based swap data repository means a person
that is registered with the Commission as a security-based swap data
repository pursuant to section 13(n) of the Exchange Act (15 U.S.C.
78m(n)) and any rules or regulations thereunder.
(gg) Reporting side means the side of a security-based swap
identified by Sec. 242.901(a)(2).
(hh) Side means a direct counterparty and any guarantor of that
direct counterparty's performance who meets the definition of indirect
counterparty in connection with the security-based swap.
(ii) Time of execution means the point at which the counterparties
to a security-based swap become irrevocably bound under applicable law.
(jj) Trader ID means the UIC assigned to a natural person who
executes one or more security-based swaps on behalf of a direct
counterparty.
(kk) Trading desk means, with respect to a counterparty, the
smallest discrete unit of organization of the participant that purchases
or sells security-based swaps for the account of the participant or an
affiliate thereof.
(ll) Trading desk ID means the UIC assigned to the trading desk of a
participant.
(mm) Transaction ID means the UIC assigned to a specific security-
based swap transaction.
(nn) Transitional security-based swap means a security-based swap
executed on or after July 21, 2010, and before the first date on which
trade-by-trade reporting of security-based swaps in that asset class to
a registered security-based swap data repository is required pursuant to
Sec. Sec. 242.900 through 242.909.
(oo) Ultimate parent means a legal person that controls a
participant and that itself has no parent.
(pp) Ultimate parent ID means the UIC assigned to an ultimate parent
of a participant.
(qq) Unique Identification Code or UIC means a unique identification
code assigned to a person, unit of a person, product, or transaction.
(rr) United States has the same meaning as in Sec. 240.3a71-3(a)(5)
of this chapter.
(ss) U.S. person has the same meaning as in Sec. 240.3a71-3(a)(4)
of this chapter.
(tt) Widely accessible, as used in paragraph (cc) of this section,
means widely available to users of the information on a non-fee basis.
[80 FR 14728, Mar. 19, 2015, as amended at 81 FR 53653, Aug. 12, 2016]
Sec. 242.901 Reporting obligations.
(a) Assigning reporting duties. A security-based swap, including a
security-based swap that results from the allocation, termination,
novation, or assignment of another security-based swap, shall be
reported as follows:
(1) Platform-executed security-based swaps that will be submitted to
clearing. If a security-based swap is executed on a platform and will be
submitted to clearing, the platform on which the transaction was
executed shall report to a registered security-based swap data
repository the counterparty ID or the execution agent ID of each direct
counterparty, as applicable, and the information set forth in paragraph
(c) of this section (except that, with respect to paragraph (c)(5) of
this section, the
[[Page 145]]
platform need indicate only if both direct counterparties are registered
security-based swap dealers) and paragraphs (d)(9) and (10) of this
section.
(2) All other security-based swaps. For all security-based swaps
other than platform-executed security-based swaps that will be submitted
to clearing, the reporting side shall provide the information required
by Sec. Sec. 242.900 through 242.909 to a registered security-based
swap data repository. The reporting side shall be determined as follows:
(i) Clearing transactions. For a clearing transaction, the reporting
side is the registered clearing agency that is a counterparty to the
transaction.
(ii) Security-based swaps other than clearing transactions. (A) If
both sides of the security-based swap include a registered security-
based swap dealer, the sides shall select the reporting side.
(B) If only one side of the security-based swap includes a
registered security-based swap dealer, that side shall be the reporting
side.
(C) If both sides of the security-based swap include a registered
major security-based swap participant, the sides shall select the
reporting side.
(D) If one side of the security-based swap includes a registered
major security-based swap participant and the other side includes
neither a registered security-based swap dealer nor a registered major
security-based swap participant, the side including the registered major
security-based swap participant shall be the reporting side.
(E) If neither side of the security-based swap includes a registered
security-based swap dealer or registered major security-based swap
participant:
(1) If both sides include a U.S. person, the sides shall select the
reporting side.
(2) If one side includes a non-U.S. person that falls within Sec.
242.908(b)(5) or a U.S. person and the other side includes a non-U.S.
person that falls within Sec. 242.908(b)(5), the sides shall select the
reporting side.
(3) If one side includes only non-U.S. persons that do not fall
within Sec. 242.908(b)(5) and the other side includes a non-U.S. person
that falls within Sec. 242.908(b)(5) or a U.S. person, the side
including a non-U.S. person that falls within Sec. 242.908(b)(5) or a
U.S. person shall be the reporting side.
(4) If neither side includes a U.S. person and neither side includes
a non-U.S. person that falls within Sec. 242.908(b)(5) but the
security-based swap is effected by or through a registered broker-dealer
(including a registered security-based swap execution facility), the
registered broker-dealer (including a registered security-based swap
execution facility) shall report the counterparty ID or the execution
agent ID of each direct counterparty, as applicable, and the information
set forth in paragraph (c) of this section (except that, with respect to
paragraph (c)(5) of this section, the registered broker-dealer
(including a registered security-based swap execution facility) need
indicate only if both direct counterparties are registered security-
based swap dealers) and paragraphs (d)(9) and (10) of this section.
(3) Notification to registered clearing agency. A person who, under
paragraph (a)(1) or (a)(2)(ii) of this section, has a duty to report a
security-based swap that has been submitted to clearing at a registered
clearing agency shall promptly provide that registered clearing agency
with the transaction ID of the submitted security-based swap and the
identity of the registered security-based swap data repository to which
the transaction will be reported or has been reported.
(b) Alternate recipient of security-based swap information. If there
is no registered security-based swap data repository that will accept
the report required by Sec. 242.901(a), the person required to make
such report shall instead provide the required information to the
Commission.
(c) Primary trade information. The reporting side shall report the
following information within the timeframe specified in paragraph (j) of
this section:
(1) The product ID, if available. If the security-based swap has no
product ID, or if the product ID does not include the following
information, the reporting side shall report:
(i) Information that identifies the security-based swap, including
the asset class of the security-based swap and the specific underlying
reference
[[Page 146]]
asset(s), reference issuer(s), or reference index;
(ii) The effective date;
(iii) The scheduled termination date;
(iv) The terms of any standardized fixed or floating rate payments,
and the frequency of any such payments; and
(v) If the security-based swap is customized to the extent that the
information provided in paragraphs (c)(1)(i) through (iv) of this
section does not provide all of the material information necessary to
identify such customized security-based swap or does not contain the
data elements necessary to calculate the price, a flag to that effect;
(2) The date and time, to the second, of execution, expressed using
Coordinated Universal Time (UTC);
(3) The price, including the currency in which the price is
expressed and the amount(s) and currenc(ies) of any up-front payments;
(4) The notional amount(s) and the currenc(ies) in which the
notional amount(s) is expressed;
(5) If both sides of the security-based swap include a registered
security-based swap dealer, an indication to that effect;
(6) Whether the direct counterparties intend that the security-based
swap will be submitted to clearing; and
(7) If applicable, any flags pertaining to the transaction that are
specified in the policies and procedures of the registered security-
based swap data repository to which the transaction will be reported.
(d) Secondary trade information. In addition to the information
required under paragraph (c) of this section, for each security-based
swap for which it is the reporting side, the reporting side shall report
the following information within the timeframe specified in paragraph
(j) of this section:
(1) The counterparty ID or the execution agent ID of each
counterparty, as applicable;
(2) As applicable, the branch ID, broker ID, execution agent ID,
trader ID, and trading desk ID of the direct counterparty on the
reporting side;
(3) To the extent not provided pursuant to paragraph (c)(1) of this
section, the terms of any fixed or floating rate payments, or otherwise
customized or non-standard payment streams, including the frequency and
contingencies of any such payments;
(4) For a security-based swap that is not a clearing transaction and
that will not be allocated after execution, the title and date of any
master agreement, collateral agreement, margin agreement, or any other
agreement incorporated by reference into the security-based swap
contract;
(5) To the extent not provided pursuant to paragraph (c) of this
section or other provisions of this paragraph (d), any additional data
elements included in the agreement between the counterparties that are
necessary for a person to determine the market value of the transaction;
(6) If applicable, and to the extent not provided pursuant to
paragraph (c) of this section, the name of the clearing agency to which
the security-based swap will be submitted for clearing;
(7) If the direct counterparties do not intend to submit the
security-based swap to clearing, whether they have invoked the exception
in Section 3C(g) of the Exchange Act (15 U.S.C. 78c-3(g));
(8) To the extent not provided pursuant to the other provisions of
this paragraph (d), if the direct counterparties do not submit the
security-based swap to clearing, a description of the settlement terms,
including whether the security-based swap is cash-settled or physically
settled, and the method for determining the settlement value;
(9) The platform ID, if applicable, or if a registered broker-dealer
(including a registered security-based swap execution facility) is
required to report the security-based swap by Sec.
242.901(a)(2)(ii)(E)(4), the broker ID of that registered broker-dealer
(including a registered security-based swap execution facility); and
(10) If the security-based swap arises from the allocation,
termination, novation, or assignment of one or more existing security-
based swaps, the transaction ID of the allocated, terminated, assigned,
or novated security-based swap(s), except in the case of a clearing
transaction that results from the netting or compression of other
clearing transactions.
[[Page 147]]
(e) Reporting of life cycle events. (1)(i) Generally. A life cycle
event, and any adjustment due to a life cycle event, that results in a
change to information previously reported pursuant to paragraph (c),
(d), or (i) of this section shall be reported by the reporting side,
except that the reporting side shall not report whether or not a
security-based swap has been accepted for clearing.
(ii) Acceptance for clearing. A registered clearing agency shall
report whether or not it has accepted a security-based swap for
clearing.
(2) All reports of life cycle events and adjustments due to life
cycle events shall, within the timeframe specified in paragraph (j) of
this section, be reported to the entity to which the original security-
based swap transaction will be reported or has been reported and shall
include the transaction ID of the original transaction.
(f) Time stamping incoming information. A registered security-based
swap data repository shall time stamp, to the second, its receipt of any
information submitted to it pursuant to paragraph (c), (d), (e), or (i)
of this section.
(g) Assigning transaction ID. A registered security-based swap data
repository shall assign a transaction ID to each security-based swap, or
establish or endorse a methodology for transaction IDs to be assigned by
third parties.
(h) Format of reported information. A person having a duty to report
shall electronically transmit the information required under this
section in a format required by the registered security-based swap data
repository to which it reports.
(i) Reporting of pre-enactment and transitional security-based
swaps. With respect to any pre-enactment security-based swap or
transitional security-based swap in a particular asset class, and to the
extent that information about such transaction is available, the
reporting side shall report all of the information required by
paragraphs (c) and (d) of this section to a registered security-based
swap data repository that accepts security-based swaps in that asset
class and indicate whether the security-based swap was open as of the
date of such report.
(j) Interim timeframe for reporting. The reporting timeframe for
paragraphs (c) and (d) of this section shall be 24 hours after the time
of execution (or acceptance for clearing in the case of a security-based
swap that is subject to regulatory reporting and public dissemination
solely by operation of Sec. 242.908(a)(1)(ii)), or, if 24 hours after
the time of execution or acceptance, as applicable, would fall on a day
that is not a business day, by the same time on the next day that is a
business day. The reporting timeframe for paragraph (e) of this section
shall be 24 hours after the occurrence of the life cycle event or the
adjustment due to the life cycle event.
Appendix to 17 CFR 242.901 Reports Regarding the Establishment of Block
Thresholds and Reporting Delays for Regulatory Reporting of Security-
Based Swap Transaction Data
This appendix sets forth guidelines applicable to reports that the
Commission has directed its staff to make in connection with the
determination of block thresholds and reporting delays for security-
based swap transaction data. The Commission intends to use these reports
to inform its specification of the criteria for determining what
constitutes a large notional security-based swap transaction (block
trade) for particular markets and contracts; and the appropriate time
delay for reporting large notional security-based swap transactions
(block trades) to the public in order to implement regulatory
requirements under Section 13 of the Act (15 U.S.C. 78m). In producing
these reports, the staff shall consider security-based swap data
collected by the Commission pursuant to other Title VII rules, as well
as any other applicable information as the staff may determine to be
appropriate for its analysis.
(a) Report topics. As appropriate, based on the availability of data
and information, the reports should address the following topics for
each asset class:
(1) Price impact. In connection with the Commission's obligation to
specify criteria for determining what constitutes a block trade and the
appropriate reporting delay for block trades, the report generally
should assess the effect of notional amount and observed reporting delay
on price impact of trades in the security-based swap market.
(2) Hedging. In connection with the Commission's obligation to
specify criteria for determining what constitutes a block trade and the
appropriate reporting delay for block trades, the report generally
should consider potential relationships between observed reporting
delays and the incidence and cost of
[[Page 148]]
hedging large trades in the security-based swap market, and whether
these relationships differ for interdealer trades and dealer to customer
trades.
(3) Price efficiency. In connection with the Commission's obligation
to specify criteria for determining what constitutes a block trade and
the appropriate reporting delay for block trades, the report generally
should assess the relationship between reporting delays and the speed
with which transaction information is impounded into market prices,
estimating this relationship for trades of different notional amounts.
(4) Other topics. Any other analysis of security-based swap data and
information, such as security-based swap market liquidity and price
volatility, that the Commission or the staff deem relevant to the
specification of:
(i) The criteria for determining what constitutes a large notional
security-based swap transaction (block trade) for particular markets and
contracts; and
(ii) The appropriate time delay for reporting large notional
security-based swap transactions (block trades).
(b) Timing of reports. Each report shall be complete no later than
two years following the initiation of public dissemination of security-
based swap transaction data by the first registered SDR in that asset
class.
(c) Public comment on the report. Following completion of the
report, the report shall be published in the Federal Register for public
comment.
[80 FR 14728, Mar. 19, 2015, as amended at 81 FR 53653, Aug. 12, 2016]
Sec. 242.902 Public dissemination of transaction reports.
(a) General. Except as provided in paragraph (c) of this section, a
registered security-based swap data repository shall publicly
disseminate a transaction report of a security-based swap, or a life
cycle event or adjustment due to a life cycle event, immediately upon
receipt of information about the security-based swap, or upon re-opening
following a period when the registered security-based swap data
repository was closed. The transaction report shall consist of all the
information reported pursuant to Sec. 242.901(c), plus any condition
flags contemplated by the registered security-based swap data
repository's policies and procedures that are required by Sec. 242.907.
(b) [Reserved].
(c) Non-disseminated information. A registered security-based swap
data repository shall not disseminate:
(1) The identity of any counterparty to a security-based swap;
(2) With respect to a security-based swap that is not cleared at a
registered clearing agency and that is reported to the registered
security-based swap data repository, any information disclosing the
business transactions and market positions of any person;
(3) Any information regarding a security-based swap reported
pursuant to Sec. 242.901(i);
(4) Any non-mandatory report;
(5) Any information regarding a security-based swap that is required
to be reported pursuant to Sec. Sec. 242.901 and 242.908(a)(1) but is
not required to be publicly disseminated pursuant to Sec.
242.908(a)(2);
(6) Any information regarding a clearing transaction that arises
from the acceptance of a security-based swap for clearing by a
registered clearing agency or that results from netting other clearing
transactions;
(7) Any information regarding the allocation of a security-based
swap; or
(8) Any information regarding a security-based swap that has been
rejected from clearing or rejected by a prime broker if the original
transaction report has not yet been publicly disseminated.
(d) Temporary restriction on other market data sources. No person
shall make available to one or more persons (other than a counterparty
or a post-trade processor) transaction information relating to a
security-based swap before the primary trade information about the
security-based swap is sent to a registered security-based swap data
repository.
[80 FR 14728, Mar. 19, 2015, as amended at 81 FR 53654, Aug. 12, 2016]
Sec. 242.903 Coded information.
(a) If an internationally recognized standards-setting system that
imposes fees and usage restrictions on persons that obtain UICs for
their own usage that are fair and reasonable and not unreasonably
discriminatory and that meets the criteria of paragraph (b) of this
section is recognized by the Commission and has assigned a UIC to a
person, unit of a person, or product (or
[[Page 149]]
has endorsed a methodology for assigning transaction IDs), the
registered security-based swap data repository shall employ that UIC (or
methodology for assigning transaction IDs). If no such system has been
recognized by the Commission, or a recognized system has not assigned a
UIC to a particular person, unit of a person, or product (or has not
endorsed a methodology for assigning transaction IDs), the registered
security-based swap data repository shall assign a UIC to that person,
unit of person, or product using its own methodology (or endorse a
methodology for assigning transaction IDs). If the Commission has
recognized such a system that assigns UICs to persons, each participant
of a registered security-based swap data repository shall obtain a UIC
from or through that system for identifying itself, and each participant
that acts as a guarantor of a direct counterparty's performance of any
obligation under a security-based swap that is subject to Sec.
242.908(a) shall, if the direct counterparty has not already done so,
obtain a UIC for identifying the direct counterparty from or through
that system, if that system permits third-party registration without a
requirement to obtain prior permission of the direct counterparty.
(b) A registered security-based swap data repository may permit
information to be reported pursuant to Sec. 242.901, and may publicly
disseminate that information pursuant to Sec. 242.902, using codes in
place of certain data elements, provided that the information necessary
to interpret such codes is widely available to users of the information
on a non-fee basis.
Sec. 242.904 Operating hours of registered security-based swap data
repositories.
A registered security-based swap data repository shall have systems
in place to continuously receive and disseminate information regarding
security-based swaps pursuant to Sec. Sec. 242.900 through 242.909,
subject to the following exceptions:
(a) A registered security-based swap data repository may establish
normal closing hours during periods when, in its estimation, the U.S.
market and major foreign markets are inactive. A registered security-
based swap data repository shall provide reasonable advance notice to
participants and to the public of its normal closing hours.
(b) A registered security-based swap data repository may declare, on
an ad hoc basis, special closing hours to perform system maintenance
that cannot wait until normal closing hours. A registered security-based
swap data repository shall, to the extent reasonably possible under the
circumstances, avoid scheduling special closing hours during periods
when, in its estimation, the U.S. market and major foreign markets are
most active; and provide reasonable advance notice of its special
closing hours to participants and to the public.
(c) During normal closing hours, and to the extent reasonably
practicable during special closing hours, a registered security-based
swap data repository shall have the capability to receive and hold in
queue information regarding security-based swaps that has been reported
pursuant to Sec. Sec. 242.900 through 242.909.
(d) When a registered security-based swap data repository re-opens
following normal closing hours or special closing hours, it shall
disseminate transaction reports of security-based swaps held in queue,
in accordance with the requirements of Sec. 242.902.
(e) If a registered security-based swap data repository could not
receive and hold in queue transaction information that was required to
be reported pursuant to Sec. Sec. 242.900 through 242.909, it must
immediately upon re-opening send a message to all participants that it
has resumed normal operations. Thereafter, any participant that had an
obligation to report information to the registered security-based swap
data repository pursuant to Sec. Sec. 242.900 through 242.909, but
could not do so because of the registered security-based swap data
repository's inability to receive and hold in queue data, must promptly
report the information to the registered security-based swap data
repository.
Sec. 242.905 Correction of errors in security-based swap information.
(a) Duty to correct. Any counterparty or other person having a duty
to report a security-based swap that discovers an
[[Page 150]]
error in information previously reported pursuant to Sec. Sec. 242.900
through 242.909 shall correct such error in accordance with the
following procedures:
(1) If a person that was not the reporting side for a security-based
swap transaction discovers an error in the information reported with
respect to such security-based swap, that person shall promptly notify
the person having the duty to report the security-based swap of the
error; and
(2) If the person having the duty to report a security-based swap
transaction discovers an error in the information reported with respect
to a security-based swap, or receives notification from a counterparty
of an error, such person shall promptly submit to the entity to which
the security-based swap was originally reported an amended report
pertaining to the original transaction report. If the person having the
duty to report reported the initial transaction to a registered
security-based swap data repository, such person shall submit an amended
report to the registered security-based swap data repository in a manner
consistent with the policies and procedures contemplated by Sec.
242.907(a)(3).
(b) Duty of security-based swap data repository to correct. A
registered security-based swap data repository shall:
(1) Upon discovery of an error or receipt of a notice of an error,
verify the accuracy of the terms of the security-based swap and,
following such verification, promptly correct the erroneous information
regarding such security-based swap contained in its system; and
(2) If such erroneous information relates to a security-based swap
that the registered security-based swap data repository previously
disseminated and falls into any of the categories of information
enumerated in Sec. 242.901(c), publicly disseminate a corrected
transaction report of the security-based swap promptly following
verification of the trade by the counterparties to the security-based
swap, with an indication that the report relates to a previously
disseminated transaction.
[80 FR 14728, Mar. 19, 2015, as amended at 81 FR 53654, Aug. 12, 2016]
Sec. 242.906 Other duties of participants.
(a) Identifying missing UIC information. A registered security-based
swap data repository shall identify any security-based swap reported to
it for which the registered security-based swap data repository does not
have the counterparty ID and (if applicable) the broker ID, branch ID,
execution agent ID, trading desk ID, and trader ID of each direct
counterparty. Once a day, the registered security-based swap data
repository shall send a report to each participant of the registered
security-based swap data repository or, if applicable, an execution
agent, identifying, for each security-based swap to which that
participant is a counterparty, the security-based swap(s) for which the
registered security-based swap data repository lacks counterparty ID and
(if applicable) broker ID, branch ID, execution agent ID, trading desk
ID, and trader ID. A participant of a registered security-based swap
data repository that receives such a report shall provide the missing
information with respect to its side of each security-based swap
referenced in the report to the registered security-based swap data
repository within 24 hours.
(b) Duty to provide ultimate parent and affiliate information. Each
participant of a registered security-based swap data repository that is
not a platform, a registered clearing agency, an externally managed
investment vehicle, or a registered broker-dealer (including a
registered security-based swap execution facility) that becomes a
participant solely as a result of making a report to satisfy an
obligation under Sec. 242.901(a)(2)(ii)(E)(4) shall provide to the
registered security-based swap data repository information sufficient to
identify its ultimate parent(s) and any affiliate(s) of the participant
that also are participants of the registered security-based swap data
repository, using ultimate parent IDs and counterparty IDs. Any such
participant shall promptly notify the registered security-based swap
data repository of any changes to that information.
(c) Policies and procedures to support reporting compliance. Each
participant of a registered security-based swap data repository that is
a registered security-based swap dealer, registered
[[Page 151]]
major security-based swap participant, registered clearing agency,
platform, or registered broker-dealer (including a registered security-
based swap execution facility) that becomes a participant solely as a
result of making a report to satisfy an obligation under Sec.
242.901(a)(2)(ii)(E)(4) shall establish, maintain, and enforce written
policies and procedures that are reasonably designed to ensure that it
complies with any obligations to report information to a registered
security-based swap data repository in a manner consistent with
Sec. Sec. 242.900 through 242.909. Each such participant shall review
and update its policies and procedures at least annually.
[81 FR 53654, Aug. 12, 2016]
Sec. 242.907 Policies and procedures of registered security-based
swap data repositories.
(a) General policies and procedures. With respect to the receipt,
reporting, and dissemination of data pursuant to Sec. Sec. 242.900
through 242.909, a registered security-based swap data repository shall
establish and maintain written policies and procedures:
(1) That enumerate the specific data elements of a security-based
swap that must be reported, which shall include, at a minimum, the data
elements specified in Sec. 242.901(c) and (d);
(2) That specify one or more acceptable data formats (each of which
must be an open-source structured data format that is widely used by
participants), connectivity requirements, and other protocols for
submitting information;
(3) For specifying procedures for reporting life cycle events and
corrections to previously submitted information, making corresponding
updates or corrections to transaction records, and applying an
appropriate flag to the transaction report to indicate that the report
is an error correction required to be disseminated by Sec.
242.905(b)(2), or is a life cycle event, or any adjustment due to a life
cycle event, required to be disseminated by Sec. 242.902(a);
(4) For:
(i) Identifying characteristic(s) of a security-based swap, or
circumstances associated with the execution or reporting of the
security-based swap, that could, in the fair and reasonable estimation
of the registered security-based swap data repository, cause a person
without knowledge of these characteristic(s) or circumstance(s), to
receive a distorted view of the market;
(ii) Establishing flags to denote such characteristic(s) or
circumstance(s);
(iii) Directing participants that report security-based swaps to
apply such flags, as appropriate, in their reports to the registered
security-based swap data repository; and
(iv) Applying such flags:
(A) To disseminated reports to help to prevent a distorted view of
the market; or
(B) In the case of a transaction referenced in Sec. 242.902(c), to
suppress the report from public dissemination entirely, as appropriate;
(5) For assigning UICs in a manner consistent with Sec. 242.903;
and
(6) For periodically obtaining from each participant other than a
platform, registered clearing agency, externally managed investment
vehicle, or registered broker-dealer (including a registered security-
based swap execution facility) that becomes a participant solely as a
result of making a report to satisfy an obligation under Sec.
242.901(a)(2)(ii)(E)(4) information that identifies the participant's
ultimate parent(s) and any participant(s) with which the participant is
affiliated, using ultimate parent IDs and counterparty IDs.
(b) [Reserved].
(c) Public availability of policies and procedures. A registered
security-based swap data repository shall make the policies and
procedures required by Sec. Sec. 242.900 through 242.909 publicly
available on its Web site.
(d) Updating of policies and procedures. A registered security-based
swap data repository shall review, and update as necessary, the policies
and procedures required by Sec. Sec. 242.900 through 242.909 at least
annually. Such policies and procedures shall indicate the date on which
they were last reviewed.
(e) A registered security-based swap data repository shall provide
to the Commission, upon request, information or reports related to the
timeliness, accuracy, and completeness of data reported to it pursuant
to Sec. Sec. 242.900
[[Page 152]]
through 242.909 and the registered security-based swap data repository's
policies and procedures thereunder.
[80 FR 14728, Mar. 19, 2015, as amended at 81 FR 53655, Aug. 12, 2016]
Sec. 242.908 Cross-border matters.
(a) Application of Regulation SBSR to cross-border transactions. (1)
A security-based swap shall be subject to regulatory reporting and
public dissemination if:
(i) There is a direct or indirect counterparty that is a U.S. person
on either or both sides of the transaction;
(ii) The security-based swap is accepted for clearing by a clearing
agency having its principal place of business in the United States;
(iii) The security-based swap is executed on a platform having its
principal place of business in the United States;
(iv) The security-based swap is effected by or through a registered
broker-dealer (including a registered security-based swap execution
facility); or
(v) The transaction is connected with a non-U.S. person's security-
based swap dealing activity and is arranged, negotiated, or executed by
personnel of such non-U.S. person located in a U.S. branch or office, or
by personnel of an agent of such non-U.S. person located in a U.S.
branch or office.
(2) A security-based swap that is not included within paragraph
(a)(1) of this section shall be subject to regulatory reporting but not
public dissemination if there is a direct or indirect counterparty on
either or both sides of the transaction that is a registered security-
based swap dealer or a registered major security-based swap participant.
(b) Limitation on obligations. Notwithstanding any other provision
of Sec. Sec. 242.900 through 242.909, a person shall not incur any
obligation under Sec. Sec. 242.900 through 242.909 unless it is:
(1) A U.S. person;
(2) A registered security-based swap dealer or registered major
security-based swap participant;
(3) A platform;
(4) A registered clearing agency; or
(5) A non-U.S. person that, in connection with such person's
security-based swap dealing activity, arranged, negotiated, or executed
the security-based swap using its personnel located in a U.S. branch or
office, or using personnel of an agent located in a U.S. branch or
office.
(c) Substituted compliance--(1) General. Compliance with the
regulatory reporting and public dissemination requirements in sections
13(m) and 13A of the Act (15 U.S.C. 78m(m) and 78m-1), and the rules and
regulations thereunder, may be satisfied by compliance with the rules of
a foreign jurisdiction that is the subject of a Commission order
described in paragraph (c)(2) of this section, provided that at least
one of the direct counterparties to the security-based swap is either a
non-U.S. person or a foreign branch.
(2) Procedure. (i) The Commission may, conditionally or
unconditionally, by order, make a substituted compliance determination
regarding regulatory reporting and public dissemination of security-
based swaps with respect to a foreign jurisdiction if that
jurisdiction's requirements for the regulatory reporting and public
dissemination of security-based swaps are comparable to otherwise
applicable requirements. The Commission may, conditionally or
unconditionally, by order, make a substituted compliance determination
regarding regulatory reporting of security-based swaps that are subject
to Sec. 242.908(a)(2) with respect to a foreign jurisdiction if that
jurisdiction's requirements for the regulatory reporting of security-
based swaps are comparable to otherwise applicable requirements.
(ii) A party that potentially would comply with requirements under
Sec. Sec. 242.900 through 242.909 pursuant to a substituted compliance
order or any foreign financial regulatory authority or authorities
supervising such a person's security-based swap activities may file an
application, pursuant to the procedures set forth in Sec. 240.0-13 of
this chapter, requesting that the Commission make a substituted
compliance determination regarding regulatory reporting and public
dissemination with respect to a foreign jurisdiction the rules of which
also would require reporting and public dissemination of those security-
based swaps.
[[Page 153]]
(iii) In making such a substituted compliance determination, the
Commission shall take into account such factors as the Commission
determines are appropriate, such as the scope and objectives of the
relevant foreign regulatory requirements, as well as the effectiveness
of the supervisory compliance program administered, and the enforcement
authority exercised, by the foreign financial regulatory authority to
support oversight of its regulatory reporting and public dissemination
system for security-based swaps. The Commission shall not make such a
substituted compliance determination unless it finds that:
(A) The data elements that are required to be reported pursuant to
the rules of the foreign jurisdiction are comparable to those required
to be reported pursuant to Sec. 242.901;
(B) The rules of the foreign jurisdiction require the security-based
swap to be reported and publicly disseminated in a manner and a
timeframe comparable to those required by Sec. Sec. 242.900 through
242.909 (or, in the case of transactions that are subject to Sec.
242.908(a)(2) but not to Sec. 242.908(a)(1), the rules of the foreign
jurisdiction require the security-based swap to be reported in a manner
and a timeframe comparable to those required by Sec. Sec. 242.900
through 242.909);
(C) The Commission has direct electronic access to the security-
based swap data held by a trade repository or foreign regulatory
authority to which security-based swaps are reported pursuant to the
rules of that foreign jurisdiction; and
(D) Any trade repository or foreign regulatory authority in the
foreign jurisdiction that receives and maintains required transaction
reports of security-based swaps pursuant to the laws of that foreign
jurisdiction is subject to requirements regarding data collection and
maintenance; systems capacity, integrity, resiliency, availability, and
security; and recordkeeping that are comparable to the requirements
imposed on security-based swap data repositories by the Commission's
rules and regulations.
(iv) Before issuing a substituted compliance order pursuant to this
section, the Commission shall have entered into memoranda of
understanding and/or other arrangements with the relevant foreign
financial regulatory authority or authorities under such foreign
financial regulatory system addressing supervisory and enforcement
cooperation and other matters arising under the substituted compliance
determination.
(v) The Commission may, on its own initiative, modify or withdraw
such order at any time, after appropriate notice and opportunity for
comment.
[80 FR 14728, Mar. 19, 2015, as amended at 81 FR 53655, Aug. 12, 2016]
Sec. 242.909 Registration of security-based swap data repository as
a securities information processor.
A registered security-based swap data repository shall also register
with the Commission as a securities information processor on Form SDR
(Sec. 249.1500 of this chapter).
Regulation SCI_Systems Compliance and Integrity
Source: 79 FR 72436, Dec. 5, 2014, unless otherwise noted.
Sec. 242.1000 Definitions.
For purposes of Regulation SCI (Sec. Sec. 242.1000 through
242.1007), the following definitions shall apply:
Critical SCI systems means any SCI systems of, or operated by or on
behalf of, an SCI entity that:
(1) Directly support functionality relating to:
(i) Clearance and settlement systems of clearing agencies;
(ii) Openings, reopenings, and closings on the primary listing
market;
(iii) Trading halts;
(iv) Initial public offerings;
(v) The provision of market data by a plan processor; or
(vi) Exclusively-listed securities; or
(2) Provide functionality to the securities markets for which the
availability of alternatives is significantly limited or nonexistent and
without which there would be a material impact on fair and orderly
markets.
Electronic signature has the meaning set forth in Sec. 240.19b-4(j)
of this chapter.
Exempt clearing agency subject to ARP means an entity that has
received from the Commission an exemption from
[[Page 154]]
registration as a clearing agency under Section 17A of the Act, and
whose exemption contains conditions that relate to the Commission's
Automation Review Policies (ARP), or any Commission regulation that
supersedes or replaces such policies.
Indirect SCI systems means any systems of, or operated by or on
behalf of, an SCI entity that, if breached, would be reasonably likely
to pose a security threat to SCI systems.
Major SCI event means an SCI event that has had, or the SCI entity
reasonably estimates would have:
(1) Any impact on a critical SCI system; or
(2) A significant impact on the SCI entity's operations or on market
participants.
Plan processor has the meaning set forth in Sec. 242.600(b)(67).
Responsible SCI personnel means, for a particular SCI system or
indirect SCI system impacted by an SCI event, such senior manager(s) of
the SCI entity having responsibility for such system, and their
designee(s).
SCI alternative trading system or SCI ATS means an alternative
trading system, as defined in Sec. 242.300(a), which during at least
four of the preceding six calendar months:
(1) Had with respect to NMS stocks:
(i) Five percent (5%) or more in any single NMS stock, and one-
quarter percent (0.25%) or more in all NMS stocks, of the average daily
dollar volume reported by applicable transaction reporting plans; or
(ii) One percent (1%) or more in all NMS stocks of the average daily
dollar volume reported by applicable transaction reporting plans; or
(2) Had with respect to equity securities that are not NMS stocks
and for which transactions are reported to a self-regulatory
organization, five percent (5%) or more of the average daily dollar
volume as calculated by the self-regulatory organization to which such
transactions are reported;
(3) Provided, however, that such SCI ATS shall not be required to
comply with the requirements of Regulation SCI until six months after
satisfying any of paragraphs (1) or (2) of this definition, as
applicable, for the first time.
SCI competing consolidator means:
(1) Any competing consolidator, as defined in Sec. 242.600, which,
during at least four of the preceding six calendar months, accounted for
five percent (5%) or more of consolidated market data gross revenue paid
to the effective national market system plan or plans required under
Sec. 242.603(b), for NMS stocks:
(i) Listed on the New York Stock Exchange LLC;
(ii) Listed on The Nasdaq Stock Market LLC; or
(iii) Listed on exchanges other than the New York Stock Exchange LLC
or The Nasdaq Stock Market LLC, as reported by such plan or plans
pursuant to the terms thereof.
(2) Provided, however, that such SCI competing consolidator shall
not be required to comply with the requirements of this section and
Sec. Sec. 242.1001 through 242.1007 (Regulation SCI) until six months
after satisfying any of paragraph (1) of this definition, as applicable,
for the first time; and
(3) Provided, however, that such SCI competing consolidator shall
not be required to comply with the requirements of Regulation SCI prior
to one year after the compliance date for Sec. 242.614(d)(3).
SCI entity means an SCI self-regulatory organization, SCI
alternative trading system, plan processor, exempt clearing agency
subject to ARP, or SCI competing consolidator.
SCI event means an event at an SCI entity that constitutes:
(1) A systems disruption;
(2) A systems compliance issue; or
(3) A systems intrusion.
SCI review means a review, following established procedures and
standards, that is performed by objective personnel having appropriate
experience to conduct reviews of SCI systems and indirect SCI systems,
and which review contains:
(1) A risk assessment with respect to such systems of an SCI entity;
and
(2) An assessment of internal control design and effectiveness of
its SCI systems and indirect SCI systems to include logical and physical
security controls, development processes, and information technology
governance, consistent with industry standards.
[[Page 155]]
SCI self-regulatory organization or SCI SRO means any national
securities exchange, registered securities association, or registered
clearing agency, or the Municipal Securities Rulemaking Board; provided
however, that for purposes of this section, the term SCI self-regulatory
organization shall not include an exchange that is notice registered
with the Commission pursuant to 15 U.S.C. 78f(g) or a limited purpose
national securities association registered with the Commission pursuant
to 15 U.S.C. 78o-3(k).
SCI systems means all computer, network, electronic, technical,
automated, or similar systems of, or operated by or on behalf of, an SCI
entity that, with respect to securities, directly support trading,
clearance and settlement, order routing, market data, market regulation,
or market surveillance.
Senior management means, for purposes of Rule 1003(b), an SCI
entity's Chief Executive Officer, Chief Technology Officer, Chief
Information Officer, General Counsel, and Chief Compliance Officer, or
the equivalent of such employees or officers of an SCI entity.
Systems compliance issue means an event at an SCI entity that has
caused any SCI system of such entity to operate in a manner that does
not comply with the Act and the rules and regulations thereunder or the
entity's rules or governing documents, as applicable.
Systems disruption means an event in an SCI entity's SCI systems
that disrupts, or significantly degrades, the normal operation of an SCI
system.
Systems intrusion means any unauthorized entry into the SCI systems
or indirect SCI systems of an SCI entity.
[79 FR 72436, Dec. 5, 2014, as amended at 80 FR 81454, Dec. 30, 2015; 83
FR 58429, Nov. 19, 2018; 86 FR 18814, Apr. 9, 2021]
Sec. 242.1001 Obligations related to policies and procedures of
SCI entities.
(a) Capacity, integrity, resiliency, availability, and security. (1)
Each SCI entity shall establish, maintain, and enforce written policies
and procedures reasonably designed to ensure that its SCI systems and,
for purposes of security standards, indirect SCI systems, have levels of
capacity, integrity, resiliency, availability, and security, adequate to
maintain the SCI entity's operational capability and promote the
maintenance of fair and orderly markets.
(2) Policies and procedures required by paragraph (a)(1) of this
section shall include, at a minimum:
(i) The establishment of reasonable current and future technological
infrastructure capacity planning estimates;
(ii) Periodic capacity stress tests of such systems to determine
their ability to process transactions in an accurate, timely, and
efficient manner;
(iii) A program to review and keep current systems development and
testing methodology for such systems;
(iv) Regular reviews and testing, as applicable, of such systems,
including backup systems, to identify vulnerabilities pertaining to
internal and external threats, physical hazards, and natural or manmade
disasters;
(v) Business continuity and disaster recovery plans that include
maintaining backup and recovery capabilities sufficiently resilient and
geographically diverse and that are reasonably designed to achieve next
business day resumption of trading and two-hour resumption of critical
SCI systems following a wide-scale disruption;
(vi) Standards that result in such systems being designed,
developed, tested, maintained, operated, and surveilled in a manner that
facilitates the successful collection, processing, and dissemination of
market data; and
(vii) Monitoring of such systems to identify potential SCI events.
(3) Each SCI entity shall periodically review the effectiveness of
the policies and procedures required by this paragraph (a), and take
prompt action to remedy deficiencies in such policies and procedures.
(4) For purposes of this paragraph (a), such policies and procedures
shall be deemed to be reasonably designed if they are consistent with
current SCI industry standards, which shall be comprised of information
technology practices that are widely available to information technology
professionals in the financial sector and issued by an authoritative
body that is a U.S. governmental entity or agency, association of U.S.
governmental entities or agencies, or widely recognized organization.
Compliance with such current
[[Page 156]]
SCI industry standards, however, shall not be the exclusive means to
comply with the requirements of this paragraph (a).
(b) Systems compliance. (1) Each SCI entity shall establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure that its SCI systems operate in a manner that
complies with the Act and the rules and regulations thereunder and the
entity's rules and governing documents, as applicable.
(2) Policies and procedures required by paragraph (b)(1) of this
section shall include, at a minimum:
(i) Testing of all SCI systems and any changes to SCI systems prior
to implementation;
(ii) A system of internal controls over changes to SCI systems;
(iii) A plan for assessments of the functionality of SCI systems
designed to detect systems compliance issues, including by responsible
SCI personnel and by personnel familiar with applicable provisions of
the Act and the rules and regulations thereunder and the SCI entity's
rules and governing documents; and
(iv) A plan of coordination and communication between regulatory and
other personnel of the SCI entity, including by responsible SCI
personnel, regarding SCI systems design, changes, testing, and controls
designed to detect and prevent systems compliance issues.
(3) Each SCI entity shall periodically review the effectiveness of
the policies and procedures required by this paragraph (b), and take
prompt action to remedy deficiencies in such policies and procedures.
(4) Safe harbor from liability for individuals. Personnel of an SCI
entity shall be deemed not to have aided, abetted, counseled, commanded,
caused, induced, or procured the violation by an SCI entity of this
paragraph (b) if the person:
(i) Has reasonably discharged the duties and obligations incumbent
upon such person by the SCI entity's policies and procedures; and
(ii) Was without reasonable cause to believe that the policies and
procedures relating to an SCI system for which such person was
responsible, or had supervisory responsibility, were not established,
maintained, or enforced in accordance with this paragraph (b) in any
material respect.
(c) Responsible SCI personnel. (1) Each SCI entity shall establish,
maintain, and enforce reasonably designed written policies and
procedures that include the criteria for identifying responsible SCI
personnel, the designation and documentation of responsible SCI
personnel, and escalation procedures to quickly inform responsible SCI
personnel of potential SCI events.
(2) Each SCI entity shall periodically review the effectiveness of
the policies and procedures required by paragraph (c)(1) of this
section, and take prompt action to remedy deficiencies in such policies
and procedures.
Sec. 242.1002 Obligations related to SCI events.
(a) Corrective action. Upon any responsible SCI personnel having a
reasonable basis to conclude that an SCI event has occurred, each SCI
entity shall begin to take appropriate corrective action which shall
include, at a minimum, mitigating potential harm to investors and market
integrity resulting from the SCI event and devoting adequate resources
to remedy the SCI event as soon as reasonably practicable.
(b) Commission notification and recordkeeping of SCI events. Each
SCI entity shall:
(1) Upon any responsible SCI personnel having a reasonable basis to
conclude that an SCI event has occurred, notify the Commission of such
SCI event immediately;
(2) Within 24 hours of any responsible SCI personnel having a
reasonable basis to conclude that the SCI event has occurred, submit a
written notification pertaining to such SCI event to the Commission,
which shall be made on a good faith, best efforts basis and include:
(i) A description of the SCI event, including the system(s)
affected; and
(ii) To the extent available as of the time of the notification: The
SCI entity's current assessment of the types and number of market
participants potentially affected by the SCI event; the potential impact
of the SCI event on the market; a description of the steps the SCI
entity has taken, is taking, or
[[Page 157]]
plans to take, with respect to the SCI event; the time the SCI event was
resolved or timeframe within which the SCI event is expected to be
resolved; and any other pertinent information known by the SCI entity
about the SCI event;
(3) Until such time as the SCI event is resolved and the SCI
entity's investigation of the SCI event is closed, provide updates
pertaining to such SCI event to the Commission on a regular basis, or at
such frequency as reasonably requested by a representative of the
Commission, to correct any materially incorrect information previously
provided, or when new material information is discovered, including but
not limited to, any of the information listed in paragraph (b)(2)(ii) of
this section;
(4)(i)(A) If an SCI event is resolved and the SCI entity's
investigation of the SCI event is closed within 30 calendar days of the
occurrence of the SCI event, then within five business days after the
resolution of the SCI event and closure of the investigation regarding
the SCI event, submit a final written notification pertaining to such
SCI event to the Commission containing the information required in
paragraph (b)(4)(ii) of this section.
(B)(1) If an SCI event is not resolved or the SCI entity's
investigation of the SCI event is not closed within 30 calendar days of
the occurrence of the SCI event, then submit an interim written
notification pertaining to such SCI event to the Commission within 30
calendar days after the occurrence of the SCI event containing the
information required in paragraph (b)(4)(ii) of this section, to the
extent known at the time.
(2) Within five business days after the resolution of such SCI event
and closure of the investigation regarding such SCI event, submit a
final written notification pertaining to such SCI event to the
Commission containing the information required in paragraph (b)(4)(ii)
of this section.
(ii) Written notifications required by paragraph (b)(4)(i) of this
section shall include:
(A) A detailed description of: The SCI entity's assessment of the
types and number of market participants affected by the SCI event; the
SCI entity's assessment of the impact of the SCI event on the market;
the steps the SCI entity has taken, is taking, or plans to take, with
respect to the SCI event; the time the SCI event was resolved; the SCI
entity's rule(s) and/or governing document(s), as applicable, that
relate to the SCI event; and any other pertinent information known by
the SCI entity about the SCI event;
(B) A copy of any information disseminated pursuant to paragraph (c)
of this section by the SCI entity to date regarding the SCI event to any
of its members or participants; and
(C) An analysis of parties that may have experienced a loss, whether
monetary or otherwise, due to the SCI event, the number of such parties,
and an estimate of the aggregate amount of such loss.
(5) The requirements of paragraphs (b)(1) through (4) of this
section shall not apply to any SCI event that has had, or the SCI entity
reasonably estimates would have, no or a de minimis impact on the SCI
entity's operations or on market participants. For such events, each SCI
entity shall:
(i) Make, keep, and preserve records relating to all such SCI
events; and
(ii) Submit to the Commission a report, within 30 calendar days
after the end of each calendar quarter, containing a summary description
of such systems disruptions and systems intrusions, including the SCI
systems and, for systems intrusions, indirect SCI systems, affected by
such systems disruptions and systems intrusions during the applicable
calendar quarter.
(c) Dissemination of SCI events. (1) Each SCI entity shall:
(i) Promptly after any responsible SCI personnel has a reasonable
basis to conclude that an SCI event that is a systems disruption or
systems compliance issue has occurred, disseminate the following
information about such SCI event:
(A) The system(s) affected by the SCI event; and
(B) A summary description of the SCI event; and
(ii) When known, promptly further disseminate the following
information about such SCI event:
[[Page 158]]
(A) A detailed description of the SCI event;
(B) The SCI entity's current assessment of the types and number of
market participants potentially affected by the SCI event; and
(C) A description of the progress of its corrective action for the
SCI event and when the SCI event has been or is expected to be resolved;
and
(iii) Until resolved, provide regular updates of any information
required to be disseminated under paragraphs (c)(1)(i) and (ii) of this
section.
(2) Each SCI entity shall, promptly after any responsible SCI
personnel has a reasonable basis to conclude that a SCI event that is a
systems intrusion has occurred, disseminate a summary description of the
systems intrusion, including a description of the corrective action
taken by the SCI entity and when the systems intrusion has been or is
expected to be resolved, unless the SCI entity determines that
dissemination of such information would likely compromise the security
of the SCI entity's SCI systems or indirect SCI systems, or an
investigation of the systems intrusion, and documents the reasons for
such determination.
(3) The information required to be disseminated under paragraphs
(c)(1) and (2) of this section promptly after any responsible SCI
personnel has a reasonable basis to conclude that an SCI event has
occurred, shall be promptly disseminated by the SCI entity to those
members or participants of the SCI entity that any responsible SCI
personnel has reasonably estimated may have been affected by the SCI
event, and promptly disseminated to any additional members or
participants that any responsible SCI personnel subsequently reasonably
estimates may have been affected by the SCI event; provided, however,
that for major SCI events, the information required to be disseminated
under paragraphs (c)(1) and (2) of this section shall be promptly
disseminated by the SCI entity to all of its members or participants.
(4) The requirements of paragraphs (c)(1) through (3) of this
section shall not apply to:
(i) SCI events to the extent they relate to market regulation or
market surveillance systems; or
(ii) Any SCI event that has had, or the SCI entity reasonably
estimates would have, no or a de minimis impact on the SCI entity's
operations or on market participants.
Sec. 242.1003 Obligations related to systems changes; SCI review.
(a) Systems changes. Each SCI entity shall:
(1) Within 30 calendar days after the end of each calendar quarter,
submit to the Commission a report describing completed, ongoing, and
planned material changes to its SCI systems and the security of indirect
SCI systems, during the prior, current, and subsequent calendar
quarters, including the dates or expected dates of commencement and
completion. An SCI entity shall establish reasonable written criteria
for identifying a change to its SCI systems and the security of indirect
SCI systems as material and report such changes in accordance with such
criteria.
(2) Promptly submit a supplemental report notifying the Commission
of a material error in or material omission from a report previously
submitted under this paragraph (a).
(b) SCI review. Each SCI entity shall:
(1) Conduct an SCI review of the SCI entity's compliance with
Regulation SCI not less than once each calendar year; provided, however,
that:
(i) Penetration test reviews of the network, firewalls, and
production systems shall be conducted at a frequency of not less than
once every three years; and
(ii) Assessments of SCI systems directly supporting market
regulation or market surveillance shall be conducted at a frequency
based upon the risk assessment conducted as part of the SCI review, but
in no case less than once every three years; and
(2) Submit a report of the SCI review required by paragraph (b)(1)
of this section to senior management of the SCI entity for review no
more than 30 calendar days after completion of such SCI review; and
(3) Submit to the Commission, and to the board of directors of the
SCI entity
[[Page 159]]
or the equivalent of such board, a report of the SCI review required by
paragraph (b)(1) of this section, together with any response by senior
management, within 60 calendar days after its submission to senior
management of the SCI entity.
Sec. 242.1004 SCI entity business continuity and disaster recovery
plans testing requirements for members or participants.
With respect to an SCI entity's business continuity and disaster
recovery plans, including its backup systems, each SCI entity shall:
(a) Establish standards for the designation of those members or
participants that the SCI entity reasonably determines are, taken as a
whole, the minimum necessary for the maintenance of fair and orderly
markets in the event of the activation of such plans;
(b) Designate members or participants pursuant to the standards
established in paragraph (a) of this section and require participation
by such designated members or participants in scheduled functional and
performance testing of the operation of such plans, in the manner and
frequency specified by the SCI entity, provided that such frequency
shall not be less than once every 12 months; and
(c) Coordinate the testing of such plans on an industry- or sector-
wide basis with other SCI entities.
Sec. 242.1005 Recordkeeping requirements related to compliance with
Regulation SCI.
(a) An SCI SRO shall make, keep, and preserve all documents relating
to its compliance with Regulation SCI as prescribed in Sec. 240.17a-1
of this chapter.
(b) An SCI entity that is not an SCI SRO shall:
(1) Make, keep, and preserve at least one copy of all documents,
including correspondence, memoranda, papers, books, notices, accounts,
and other such records, relating to its compliance with Regulation SCI,
including, but not limited to, records relating to any changes to its
SCI systems and indirect SCI systems;
(2) Keep all such documents for a period of not less than five
years, the first two years in a place that is readily accessible to the
Commission or its representatives for inspection and examination; and
(3) Upon request of any representative of the Commission, promptly
furnish to the possession of such representative copies of any documents
required to be kept and preserved by it pursuant to paragraphs (b)(1)
and (2) of this section.
(c) Upon or immediately prior to ceasing to do business or ceasing
to be registered under the Securities Exchange Act of 1934, an SCI
entity shall take all necessary action to ensure that the records
required to be made, kept, and preserved by this section shall be
accessible to the Commission and its representatives in the manner
required by this section and for the remainder of the period required by
this section.
Sec. 242.1006 Electronic filing and submission.
(a) Except with respect to notifications to the Commission made
pursuant to Sec. 242.1002(b)(1) or updates to the Commission made
pursuant to paragraph Sec. 242.1002(b)(3), any notification, review,
description, analysis, or report to the Commission required to be
submitted under Regulation SCI shall be filed electronically on Form SCI
(Sec. 249.1900 of this chapter), include all information as prescribed
in Form SCI and the instructions thereto, and contain an electronic
signature; and
(b) The signatory to an electronically filed Form SCI shall manually
sign a signature page or document, in the manner prescribed by Form SCI,
authenticating, acknowledging, or otherwise adopting his or her
signature that appears in typed form within the electronic filing. Such
document shall be executed before or at the time Form SCI is
electronically filed and shall be retained by the SCI entity in
accordance with Sec. 242.1005.
Sec. 242.1007 Requirements for service bureaus.
If records required to be filed or kept by an SCI entity under
Regulation SCI are prepared or maintained by a service bureau or other
recordkeeping service on behalf of the SCI entity, the SCI entity shall
ensure that the records are
[[Page 160]]
available for review by the Commission and its representatives by
submitting a written undertaking, in a form acceptable to the
Commission, by such service bureau or other recordkeeping service,
signed by a duly authorized person at such service bureau or other
recordkeeping service. Such a written undertaking shall include an
agreement by the service bureau to permit the Commission and its
representatives to examine such records at any time or from time to time
during business hours, and to promptly furnish to the Commission and its
representatives true, correct, and current electronic files in a form
acceptable to the Commission or its representatives or hard copies of
any or all or any part of such records, upon request, periodically, or
continuously and, in any case, within the same time periods as would
apply to the SCI entity for such records. The preparation or maintenance
of records by a service bureau or other recordkeeping service shall not
relieve an SCI entity from its obligation to prepare, maintain, and
provide the Commission and its representatives access to such records.
PART 243_REGULATION FD--Table of Contents
Sec.
243.100 General rule regarding selective disclosure.
243.101 Definitions.
243.102 No effect on antifraud liability.
243.103 No effect on Exchange Act reporting status.
Authority: 15 U.S.C. 78c, 78i, 78j, 78m, 78o, 78w, 78mm, and 80a-29,
unless otherwise noted.
Source: 65 FR 51738, Aug. 24, 2000, unless otherwise noted.
Sec. 243.100 General rule regarding selective disclosure.
(a) Whenever an issuer, or any person acting on its behalf,
discloses any material nonpublic information regarding that issuer or
its securities to any person described in paragraph (b)(1) of this
section, the issuer shall make public disclosure of that information as
provided in Sec. 243.101(e):
(1) Simultaneously, in the case of an intentional disclosure; and
(2) Promptly, in the case of a non-intentional disclosure.
(b)(1) Except as provided in paragraph (b)(2) of this section,
paragraph (a) of this section shall apply to a disclosure made to any
person outside the issuer:
(i) Who is a broker or dealer, or a person associated with a broker
or dealer, as those terms are defined in Section 3(a) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a));
(ii) Who is an investment adviser, as that term is defined in
Section 202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C.
80b-2(a)(11)); an institutional investment manager, as that term is
defined in Section 13(f)(6) of the Securities Exchange Act of 1934 (15
U.S.C. 78m(f)(6)), that filed a report on Form 13F (17 CFR 249.325) with
the Commission for the most recent quarter ended prior to the date of
the disclosure; or a person associated with either of the foregoing. For
purposes of this paragraph, a ``person associated with an investment
adviser or institutional investment manager'' has the meaning set forth
in Section 202(a)(17) of the Investment Advisers Act of 1940 (15 U.S.C.
80b-2(a)(17)), assuming for these purposes that an institutional
investment manager is an investment adviser;
(iii) Who is an investment company, as defined in Section 3 of the
Investment Company Act of 1940 (15 U.S.C. 80a-3), or who would be an
investment company but for Section 3(c)(1) (15 U.S.C. 80a-3(c)(1)) or
Section 3(c)(7) (15 U.S.C. 80a-3(c)(7)) thereof, or an affiliated person
of either of the foregoing. For purposes of this paragraph, ``affiliated
person'' means only those persons described in Section 2(a)(3)(C), (D),
(E), and (F) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(3)(C), (D), (E), and (F)), assuming for these purposes that a
person who would be an investment company but for Section 3(c)(1) (15
U.S.C. 80a-3(c)(1)) or Section 3(c)(7) (15 U.S.C. 80a-3(c)(7)) of the
Investment Company Act of 1940 is an investment company; or
(iv) Who is a holder of the issuer's securities, under circumstances
in which it is reasonably foreseeable that the person will purchase or
sell the issuer's
[[Page 161]]
securities on the basis of the information.
(2) Paragraph (a) of this section shall not apply to a disclosure
made:
(i) To a person who owes a duty of trust or confidence to the issuer
(such as an attorney, investment banker, or accountant);
(ii) To a person who expressly agrees to maintain the disclosed
information in confidence;
(iii) In connection with a securities offering registered under the
Securities Act, other than an offering of the type described in any of
Rule 415(a)(1)(i) through (vi) under the Securities Act (Sec.
230.415(a)(1)(i) through (vi) of this chapter) (except an offering of
the type described in Rule 415(a)(1)(i) under the Securities Act (Sec.
230.415(a)(1)(i) of this chapter) also involving a registered offering,
whether or not underwritten, for capital formation purposes for the
account of the issuer (unless the issuer's offering is being registered
for the purpose of evading the requirements of this section)), if the
disclosure is by any of the following means:
(A) A registration statement filed under the Securities Act,
including a prospectus contained therein;
(B) A free writing prospectus used after filing of the registration
statement for the offering or a communication falling within the
exception to the definition of prospectus contained in clause (a) of
section 2(a)(10) of the Securities Act;
(C) Any other Section 10(b) prospectus;
(D) A notice permitted by Rule 135 under the Securities Act (Sec.
230.135 of this chapter);
(E) A communication permitted by Rule 134 under the Securities Act
(Sec. 230.134 of this chapter); or
(F) An oral communication made in connection with the registered
securities offering after filing of the registration statement for the
offering under the Securities Act.
[65 FR 51738, Aug. 24, 2000, as amended at 70 FR 44829, Aug. 3, 2005; 74
FR 63865, Dec. 4, 2009; 75 FR 61051, Oct. 4, 2010; 76 FR 71877, Nov. 21,
2011]
Sec. 243.101 Definitions.
This section defines certain terms as used in Regulation FD
(Sec. Sec. 243.100-243.103).
(a) Intentional. A selective disclosure of material nonpublic
information is ``intentional'' when the person making the disclosure
either knows, or is reckless in not knowing, that the information he or
she is communicating is both material and nonpublic.
(b) Issuer. An ``issuer'' subject to this regulation is one that has
a class of securities registered under Section 12 of the Securities
Exchange Act of 1934 (15 U.S.C. 78l), or is required to file reports
under Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(d)), including any closed-end investment company (as defined in
Section 5(a)(2) of the Investment Company Act of 1940) (15 U.S.C. 80a-
5(a)(2)), but not including any other investment company or any foreign
government or foreign private issuer, as those terms are defined in Rule
405 under the Securities Act (Sec. 230.405 of this chapter).
(c) Person acting on behalf of an issuer. ``Person acting on behalf
of an issuer'' means any senior official of the issuer (or, in the case
of a closed-end investment company, a senior official of the issuer's
investment adviser), or any other officer, employee, or agent of an
issuer who regularly communicates with any person described in Sec.
243.100(b)(1)(i), (ii), or (iii), or with holders of the issuer's
securities. An officer, director, employee, or agent of an issuer who
discloses material nonpublic information in breach of a duty of trust or
confidence to the issuer shall not be considered to be acting on behalf
of the issuer.
(d) Promptly. ``Promptly'' means as soon as reasonably practicable
(but in no event after the later of 24 hours or the commencement of the
next day's trading on the New York Stock Exchange) after a senior
official of the issuer (or, in the case of a closed-end investment
company, a senior official of the issuer's investment adviser) learns
that there has been a non-intentional disclosure by the issuer or person
acting on behalf of the issuer of information that the senior official
knows, or is reckless in not knowing, is both material and nonpublic.
[[Page 162]]
(e) Public disclosure. (1) Except as provided in paragraph (e)(2) of
this section, an issuer shall make the ``public disclosure'' of
information required by Sec. 243.100(a) by furnishing to or filing with
the Commission a Form 8-K (17 CFR 249.308) disclosing that information.
(2) An issuer shall be exempt from the requirement to furnish or
file a Form 8-K if it instead disseminates the information through
another method (or combination of methods) of disclosure that is
reasonably designed to provide broad, non-exclusionary distribution of
the information to the public.
(f) Senior official. ``Senior official'' means any director,
executive officer (as defined in Sec. 240.3b-7 of this chapter),
investor relations or public relations officer, or other person with
similar functions.
(g) Securities offering. For purposes of Sec. 243.100(b)(2)(iv):
(1) Underwritten offerings. A securities offering that is
underwritten commences when the issuer reaches an understanding with the
broker-dealer that is to act as managing underwriter and continues until
the later of the end of the period during which a dealer must deliver a
prospectus or the sale of the securities (unless the offering is sooner
terminated);
(2) Non-underwritten offerings. A securities offering that is not
underwritten:
(i) If covered by Rule 415(a)(1)(x) (Sec. 230.415(a)(1)(x) of this
chapter), commences when the issuer makes its first bona fide offer in a
takedown of securities and continues until the later of the end of the
period during which each dealer must deliver a prospectus or the sale of
the securities in that takedown (unless the takedown is sooner
terminated);
(ii) If a business combination as defined in Rule 165(f)(1) (Sec.
230.165(f)(1) of this chapter), commences when the first public
announcement of the transaction is made and continues until the
completion of the vote or the expiration of the tender offer, as
applicable (unless the transaction is sooner terminated);
(iii) If an offering other than those specified in paragraphs (a)
and (b) of this section, commences when the issuer files a registration
statement and continues until the later of the end of the period during
which each dealer must deliver a prospectus or the sale of the
securities (unless the offering is sooner terminated).
Sec. 243.102 No effect on antifraud liability.
No failure to make a public disclosure required solely by Sec.
243.100 shall be deemed to be a violation of Rule 10b-5 (17 CFR 240.10b-
5) under the Securities Exchange Act.
Sec. 243.103 No effect on Exchange Act reporting status.
A failure to make a public disclosure required solely by Sec.
243.100 shall not affect whether:
(a) For purposes of Forms S-3 (17 CFR 239.13), S-8 (17 CFR 239.16b)
and SF-3 (17 CFR 239.45) under the Securities Act of 1933 (15 U.S.C. 77a
et seq.), or Form N-2 (17 CFR 239.14 and 274.11a-1) under the Securities
Act of 1933 (15 U.S.C. 77a et seq.) and the Investment Company Act of
1940 (15 U.S.C. 80a-1 et seq.), an issuer is deemed to have filed all
the material required to be filed pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) or where
applicable, has made those filings in a timely manner; or
(b) There is adequate current public information about the issuer
for purposes of Sec. 230.144(c) of this chapter (Rule 144(c)).
[65 FR 51738, Aug. 24, 2000, as amended at 79 FR 57344, Sept. 24, 2014;
85 FR 33360, June 1, 2020]
PART 244_REGULATION G--Table of Contents
Sec.
244.100 General rules regarding disclosure of non-GAAP financial
measures.
244.101 Definitions.
244.102 No effect on antifraud liability.
Authority: 15 U.S.C. 7261, 78c, 78i, 78j, 78m, 78o, 78w, 78mm, and
80a-29
Source: 68 FR 4832, Jan. 30, 2003, unless otherwise noted.
Sec. 244.100 General rules regarding disclosure of non-GAAP financial
measures.
(a) Whenever a registrant, or person acting on its behalf, publicly
discloses
[[Page 163]]
material information that includes a non-GAAP financial measure, the
registrant must accompany that non-GAAP financial measure with:
(1) A presentation of the most directly comparable financial measure
calculated and presented in accordance with Generally Accepted
Accounting Principles (GAAP); and
(2) A reconciliation (by schedule or other clearly understandable
method), which shall be quantitative for historical non-GAAP measures
presented, and quantitative, to the extent available without
unreasonable efforts, for forward-looking information, of the
differences between the non-GAAP financial measure disclosed or released
with the most comparable financial measure or measures calculated and
presented in accordance with GAAP identified in paragraph (a)(1) of this
section.
(b) A registrant, or a person acting on its behalf, shall not make
public a non-GAAP financial measure that, taken together with the
information accompanying that measure and any other accompanying
discussion of that measure, contains an untrue statement of a material
fact or omits to state a material fact necessary in order to make the
presentation of the non-GAAP financial measure, in light of the
circumstances under which it is presented, not misleading.
(c) This section shall not apply to a disclosure of a non-GAAP
financial measure that is made by or on behalf of a registrant that is a
foreign private issuer if the following conditions are satisfied:
(1) The securities of the registrant are listed or quoted on a
securities exchange or inter-dealer quotation system outside the United
States;
(2) The non-GAAP financial measure is not derived from or based on a
measure calculated and presented in accordance with generally accepted
accounting principles in the United States; and
(3) The disclosure is made by or on behalf of the registrant outside
the United States, or is included in a written communication that is
released by or on behalf of the registrant outside the United States.
(d) This section shall not apply to a non-GAAP financial measure
included in disclosure relating to a proposed business combination, the
entity resulting therefrom or an entity that is a party thereto, if the
disclosure is contained in a communication that is subject to Sec.
230.425 of this chapter, Sec. 240.14a-12 or Sec. 240.14d-2(b)(2) of
this chapter or Sec. 229.1015 of this chapter.
Notes to Sec. 244.100: 1. If a non-GAAP financial measure is made
public orally, telephonically, by Web cast, by broadcast, or by similar
means, the requirements of paragraphs (a)(1)(i) and (a)(1)(ii) of this
section will be satisfied if:
(i) The required information in those paragraphs is provided on the
registrant's Web site at the time the non-GAAP financial measure is made
public; and
(ii) The location of the web site is made public in the same
presentation in which the non-GAAP financial measure is made public.
2. The provisions of paragraph (c) of this section shall apply
notwithstanding the existence of one or more of the following
circumstances:
(i) A written communication is released in the United States as well
as outside the United States, so long as the communication is released
in the United States contemporaneously with or after the release outside
the United States and is not otherwise targeted at persons located in
the United States;
(ii) Foreign journalists, U.S. journalists or other third parties
have access to the information;
(iii) The information appears on one or more web sites maintained by
the registrant, so long as the web sites, taken together, are not
available exclusively to, or targeted at, persons located in the United
States; or
(iv) Following the disclosure or release of the information outside
the United States, the information is included in a submission by the
registrant to the Commission made under cover of a Form 6-K.
Sec. 244.101 Definitions.
This section defines certain terms as used in Regulation G
(Sec. Sec. 244.100 through 244.102).
(a)(1) Non-GAAP financial measure. A non-GAAP financial measure is a
numerical measure of a registrant's historical or future financial
performance, financial position or cash flows that:
(i) Excludes amounts, or is subject to adjustments that have the
effect of excluding amounts, that are included in the most directly
comparable measure calculated and presented in accordance with GAAP in
the statement of income, balance sheet or statement of
[[Page 164]]
cash flows (or equivalent statements) of the issuer; or
(ii) Includes amounts, or is subject to adjustments that have the
effect of including amounts, that are excluded from the most directly
comparable measure so calculated and presented.
(2) A non-GAAP financial measure does not include operating and
other financial measures and ratios or statistical measures calculated
using exclusively one or both of:
(i) Financial measures calculated in accordance with GAAP; and
(ii) Operating measures or other measures that are not non-GAAP
financial measures.
(3) A non-GAAP financial measure does not include financial measures
required to be disclosed by GAAP, Commission rules, or a system of
regulation of a government or governmental authority or self-regulatory
organization that is applicable to the registrant.
(b) GAAP. GAAP refers to generally accepted accounting principles in
the United States, except that:
(1) In the case of foreign private issuers whose primary financial
statements are prepared in accordance with non-U.S. generally accepted
accounting principles, GAAP refers to the principles under which those
primary financial statements are prepared; and
(2) In the case of foreign private issuers that include a non-GAAP
financial measure derived from a measure calculated in accordance with
U.S. generally accepted accounting principles, GAAP refers to U.S.
generally accepted accounting principles for purposes of the application
of the requirements of Regulation G to the disclosure of that measure.
(c) Registrant. A registrant subject to this regulation is one that
has a class of securities registered under Section 12 of the Securities
Exchange Act of 1934 (15 U.S.C. 78l), or is required to file reports
under Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(d)), excluding any investment company registered under Section 8 of
the Investment Company Act of 1940 (15 U.S.C. 80a-8).
(d) United States. United States means the United States of America,
its territories and possessions, any State of the United States, and the
District of Columbia.
Sec. 244.102 No effect on antifraud liability.
Neither the requirements of this Regulation G (17 CFR 244.100
through 244.102) nor a person's compliance or non-compliance with the
requirements of this Regulation shall in itself affect any person's
liability under Section 10(b) (15 U.S.C. 78j(b)) of the Securities
Exchange Act of 1934 or Sec. 240.10b-5 of this chapter.
PART 245_REGULATION BLACKOUT TRADING RESTRICTION--Table of Contents
[Regulation BTR--Blackout Trading Restriction]
Sec.
245.100 Definitions.
245.101 Prohibition of insider trading during pension fund blackout
periods.
245.102 Exceptions to definition of blackout period.
245.103 Issuer right of recovery; right of action by equity security
owner.
245.104 Notice.
Authority: 15 U.S.C. 78w(a), unless otherwise noted.
Sections 245.100-245.104 are also issued under secs. 3(a) and
306(a), Pub. L. 107-204, 116 Stat. 745.
Source: 68 FR 4355, Jan. 28, 2003, unless otherwise noted.
Sec. 245.100 Definitions.
As used in Regulation BTR (Sec. Sec. 245.100 through 245.104),
unless the context otherwise requires:
(a) The term acquired in connection with service or employment as a
director or executive officer, when applied to a director or executive
officer, means that he or she acquired, directly or indirectly, an
equity security:
(1) At a time when he or she was a director or executive officer,
under a compensatory plan, contract, authorization or arrangement,
including, but not limited to, an option, warrants or rights plan, a
pension, retirement or deferred compensation plan or a bonus, incentive
or profit-sharing plan (whether or not set forth in any formal plan
document), including a compensatory plan, contract, authorization or
[[Page 165]]
arrangement with a parent, subsidiary or affiliate;
(2) At a time when he or she was a director or executive officer, as
a result of any transaction or business relationship described in
paragraph (a) of Item 404 of Regulation S-K (Sec. 229.404 of this
chapter) or, in the case of a foreign private issuer, Item 7.B of Form
20-F (Sec. 249.220f of this chapter) (but without application of the
disclosure thresholds of such provisions), to the extent that he or she
has a pecuniary interest (as defined in paragraph (l) of this section)
in the equity securities;
(3) At a time when he or she was a director or executive officer, as
directors' qualifying shares or other securities that he or she must
hold to satisfy minimum ownership requirements or guidelines for
directors or executive officers;
(4) Prior to becoming, or while, a director or executive officer
where the equity security was acquired as a direct or indirect
inducement to service or employment as a director or executive officer;
or
(5) Prior to becoming, or while, a director or executive officer
where the equity security was received as a result of a business
combination in respect of an equity security of an entity involved in
the business combination that he or she had acquired in connection with
service or employment as a director or executive officer of such entity.
(b) Except as provided in Sec. 245.102, the term blackout period:
(1) With respect to the equity securities of any issuer (other than
a foreign private issuer), means any period of more than three
consecutive business days during which the ability to purchase, sell or
otherwise acquire or transfer an interest in any equity security of such
issuer held in an individual account plan is temporarily suspended by
the issuer or by a fiduciary of the plan with respect to not fewer than
50% of the participants or beneficiaries located in the United States
and its territories and possessions under all individual account plans
(as defined in paragraph (j) of this section) maintained by the issuer
that permit participants or beneficiaries to acquire or hold equity
securities of the issuer;
(2) With respect to the equity securities of any foreign private
issuer (as defined in Sec. 240.3b-4(c) of this chapter), means any
period of more than three consecutive business days during which both:
(i) The conditions of paragraph (b)(1) of this section are met; and
(ii)(A) The number of participants and beneficiaries located in the
United States and its territories and possessions subject to the
temporary suspension exceeds 15% of the total number of employees of the
issuer and its consolidated subsidiaries; or
(B) More than 50,000 participants and beneficiaries located in the
United States and its territories and possessions are subject to the
temporary suspension.
(3) In determining the individual account plans (as defined in
paragraph (j) of this section) maintained by an issuer for purposes of
this paragraph (b):
(i) The rules under section 414(b), (c), (m) and (o) of the Internal
Revenue Code (26 U.S.C. 414(b), (c), (m) and (o)) are to be applied; and
(ii) An individual account plan that is maintained outside of the
United States primarily for the benefit of persons substantially all of
whom are nonresident aliens (within the meaning of section 104(b)(4) of
the Employee Retirement Income Security Act of 1974 (29 U.S.C.
1003(b)(4))) is not to be considered.
(4) In determining the number of participants and beneficiaries in
an individual account plan (as defined in paragraph (j) of this section)
maintained by an issuer:
(i) The determination may be made as of any date within the 12-month
period preceding the beginning date of the temporary suspension in
question; provided that if there has been a significant change in the
number of participants or beneficiaries in an individual account plan
since the date selected, the determination for such plan must be made as
of the most recent practicable date that reflects such change; and
(ii) The determination may be made without regard to overlapping
plan participation.
[[Page 166]]
(c)(1) The term director has, except as provided in paragraph (c)(2)
of this section, the meaning set forth in section 3(a)(7) of the
Exchange Act (15 U.S.C. 78c(a)(7)).
(2) In the case of a foreign private issuer (as defined in Sec.
240.3b-4(c) of this chapter), the term director means an individual
within the definition set forth in section 3(a)(7) of the Exchange Act
who is a management employee of the issuer.
(d) The term derivative security has the meaning set forth in Sec.
240.16a-1(c) of this chapter.
(e) The term equity security has the meaning set forth in section
3(a)(11) of the Exchange Act (15 U.S.C. 78c(a)(11)) and Sec. 240.3a11-1
of this chapter.
(f) The term equity security of the issuer means any equity security
or derivative security relating to an issuer, whether or not issued by
that issuer.
(g) The term Exchange Act means the Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.).
(h)(1) The term executive officer has, except as provided in
paragraph (h)(2) of this section, the meaning set forth in Sec.
240.16a-1(f) of this chapter.
(2) In the case of a foreign private issuer (as defined in Sec.
240.3b-4(c) of this chapter), the term executive officer means the
principal executive officer or officers, the principal financial officer
or officers and the principal accounting officer or officers of the
issuer.
(i) The term exempt security has the meaning set forth in section
3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)).
(j) The term individual account plan means a pension plan which
provides for an individual account for each participant and for benefits
based solely upon the amount contributed to the participant's account,
and any income, expenses, gains and losses, and any forfeitures of
accounts of other participants which may be allocated to such
participant's account, except that such term does not include a one-
participant retirement plan (within the meaning of section 101(i)(8)(B)
of the Employee Retirement Income Security Act of 1974 (29 U.S.C.
1021(i)(8)(B))), nor does it include a pension plan in which
participation is limited to directors of the issuer.
(k) The term issuer means an issuer (as defined in section 3(a)(8)
of the Exchange Act (15 U.S.C. 78c(a)(8))), the securities of which are
registered under section 12 of the Exchange Act (15 U.S.C. 78l) or that
is required to file reports under section 15(d) of the Exchange Act (15
U.S.C. 78o(d)) or that files or has filed a registration statement that
has not yet become effective under the Securities Act of 1933 (15 U.S.C.
77a et seq.) and that it has not withdrawn.
(l) The term pecuniary interest has the meaning set forth in Sec.
240.16a-1(a)(2)(i) of this chapter and the term indirect pecuniary
interest has the meaning set forth in Sec. 240.16a-1(a)(2)(ii) of this
chapter. Section 240.16a-1(a)(2)(iii) of this chapter also shall apply
to determine pecuniary interest for purposes of this regulation.
[68 FR 4355, Jan. 28, 2003, as amended at 71 FR 53263, Sept. 8, 2006]
Sec. 245.101 Prohibition of insider trading during pension fund
blackout periods.
(a) Except to the extent otherwise provided in paragraph (c) of this
section, it is unlawful under section 306(a)(1) of the Sarbanes-Oxley
Act of 2002 (15 U.S.C. 7244(a)(1)) for any director or executive officer
of an issuer of any equity security (other than an exempt security),
directly or indirectly, to purchase, sell or otherwise acquire or
transfer any equity security of the issuer (other than an exempt
security) during any blackout period with respect to such equity
security, if such director or executive officer acquires or previously
acquired such equity security in connection with his or her service or
employment as a director or executive officer.
(b) For purposes of section 306(a)(1) of the Sarbanes-Oxley Act of
2002, any sale or other transfer of an equity security of the issuer
during a blackout period will be treated as a transaction involving an
equity security ``acquired in connection with service or employment as a
director or executive officer'' (as defined in Sec. 245.100(a)) to the
extent that the director or executive officer has a pecuniary interest
(as defined in
[[Page 167]]
Sec. 245.100(l)) in such equity security, unless the director or
executive officer establishes by specific identification of securities
that the transaction did not involve an equity security ``acquired in
connection with service or employment as a director or executive
officer.'' To establish that the equity security was not so acquired, a
director or executive officer must identify the source of the equity
securities and demonstrate that he or she has utilized the same specific
identification for any purpose related to the transaction (such as tax
reporting and any applicable disclosure and reporting requirements).
(c) The following transactions are exempt from section 306(a)(1) of
the Sarbanes-Oxley Act of 2002:
(1) Any acquisition of equity securities resulting from the
reinvestment of dividends in, or interest on, equity securities of the
same issuer if the acquisition is made pursuant to a plan providing for
the regular reinvestment of dividends or interest and the plan provides
for broad-based participation, does not discriminate in favor of
employees of the issuer and operates on substantially the same terms for
all plan participants;
(2) Any purchase or sale of equity securities of the issuer pursuant
to a contract, instruction or written plan entered into by the director
or executive officer that satisfies the affirmative defense conditions
of Sec. 240.10b5-1(c) of this chapter; provided that the director or
executive officer did not enter into or modify the contract, instruction
or written plan during the blackout period (as defined in Sec.
245.100(b)) in question, or while aware of the actual or approximate
beginning or ending dates of that blackout period (whether or not the
director or executive officer received notice of the blackout period as
required by Section 306(a)(6) of the Sarbanes-Oxley Act of 2002 (15
U.S.C. 7244(a)(6)));
(3) Any purchase or sale of equity securities, other than a
Discretionary Transaction (as defined in Sec. 240.16b-3(b)(1) of this
chapter), pursuant to a Qualified Plan (as defined in Sec. 240.16b-
3(b)(4) of this chapter), an Excess Benefit Plan (as defined in Sec.
240.16b-3(b)(2) of this chapter) or a Stock Purchase Plan (as defined in
Sec. 240.16b-3(b)(5) of this chapter) (or, in the case of a foreign
private issuer, pursuant to an employee benefit plan that either (i) has
been approved by the taxing authority of a foreign jurisdiction, or (ii)
is eligible for preferential treatment under the tax laws of a foreign
jurisdiction because the plan provides for broad-based employee
participation); provided that a Discretionary Transaction that meets the
conditions of paragraph (c)(2) of this section also shall be exempt;
(4) Any grant or award of an option, stock appreciation right or
other equity compensation pursuant to a plan that, by its terms:
(i) Permits directors or executive officers to receive grants or
awards; and
(ii) Either:
(A) States the amount and price of securities to be awarded to
designated directors and executive officers or categories of directors
and executive officers (though not necessarily to others who may
participate in the plan) and specifies the timing of awards to directors
and executive officers; or
(B) Sets forth a formula that determines the amount, price and
timing, using objective criteria (such as earnings of the issuer, value
of the securities, years of service, job classification, and
compensation levels);
(5) Any exercise, conversion or termination of a derivative security
that the director or executive officer did not write or acquire during
the blackout period (as defined in Sec. 245.100(b)) in question, or
while aware of the actual or approximate beginning or ending dates of
that blackout period (whether or not the director or executive officer
received notice of the blackout period as required by Section 306(a)(6)
of the Sarbanes-Oxley Act of 2002); and either:
(i) The derivative security, by its terms, may be exercised,
converted or terminated only on a fixed date, with no discretionary
provision for earlier exercise, conversion or termination; or
(ii) The derivative security is exercised, converted or terminated
by a counterparty and the director or executive officer does not
exercise any influence on the counterparty with respect to whether or
when to exercise, convert or terminate the derivative security;
[[Page 168]]
(6) Any acquisition or disposition of equity securities involving a
bona fide gift or a transfer by will or the laws of descent and
distribution;
(7) Any acquisition or disposition of equity securities pursuant to
a domestic relations order, as defined in the Internal Revenue Code or
Title I of the Employment Retirement Income Security Act of 1974, or the
rules thereunder;
(8) Any sale or other disposition of equity securities compelled by
the laws or other requirements of an applicable jurisdiction;
(9) Any acquisition or disposition of equity securities in
connection with a merger, acquisition, divestiture or similar
transaction occurring by operation of law;
(10) The increase or decrease in the number of equity securities
held as a result of a stock split or stock dividend applying equally to
all securities of that class, including a stock dividend in which equity
securities of a different issuer are distributed; and the acquisition of
rights, such as shareholder or pre-emptive rights, pursuant to a pro
rata grant to all holders of the same class of equity securities; and
(11) Any acquisition or disposition of an asset-backed security, as
defined in Sec. 229.1101 of this chapter.
[70 FR 1623, Jan. 7, 2005]
Sec. 245.102 Exceptions to definition of blackout period.
The term ``blackout period,'' as defined in Sec. 245.100(b), does
not include:
(a) A regularly scheduled period in which participants and
beneficiaries may not purchase, sell or otherwise acquire or transfer an
interest in any equity security of an issuer, if a description of such
period, including its frequency and duration and the plan transactions
to be suspended or otherwise affected, is:
(1) Incorporated into the individual account plan or included in the
documents or instruments under which the plan operates; and
(2) Disclosed to an employee before he or she formally enrolls, or
within 30 days following formal enrollment, as a participant under the
individual account plan or within 30 days after the adoption of an
amendment to the plan. For purposes of this paragraph (a)(2), the
disclosure may be provided in any graphic form that is reasonably
accessible to the employee; or
(b) Any trading suspension described in Sec. 245.100(b) that is
imposed in connection with a corporate merger, acquisition, divestiture
or similar transaction involving the plan or plan sponsor, the principal
purpose of which is to permit persons affiliated with the acquired or
divested entity to become participants or beneficiaries, or to cease to
be participants or beneficiaries, in an individual account plan;
provided that the persons who become participants or beneficiaries in an
individual account plan are not able to participate in the same class of
equity securities after the merger, acquisition, divestiture or similar
transaction as before the transaction.
Sec. 245.103 Issuer right of recovery; right of action by equity
security owner.
(a) Recovery of profits. Section 306(a)(2) of the Sarbanes-Oxley Act
of 2002 (15 U.S.C. 7244(a)(2)) provides that any profit realized by a
director or executive officer from any purchase, sale or other
acquisition or transfer of any equity security of an issuer in violation
of section 306(a)(1) of that Act (15 U.S.C. 7244(a)(1)) will inure to
and be recoverable by the issuer, regardless of any intention on the
part of the director or executive officer in entering into the
transaction.
(b) Actions to recover profit. Section 306(a)(2) of the Sarbanes-
Oxley Act of 2002 provides that an action to recover profit may be
instituted at law or in equity in any court of competent jurisdiction by
the issuer, or by the owner of any equity security of the issuer in the
name and on behalf of the issuer if the issuer fails or refuses to bring
such action within 60 days after the date of request, or fails
diligently to prosecute the action thereafter, except that no such suit
may be brought more than two years after the date on which such profit
was realized.
(c) Measurement of profit. (1) In determining the profit recoverable
in an action undertaken pursuant to section 306(a)(2) of the Sarbanes-
Oxley Act of 2002 from a transaction that involves a
[[Page 169]]
purchase, sale or other acquisition or transfer (other than a grant,
exercise, conversion or termination of a derivative security) in
violation of section 306(a)(1) of that Act of an equity security of an
issuer that is registered pursuant to section 12(b) or 12(g) of the
Exchange Act (15 U.S.C. 78l(b) or (g)) and listed on a national
securities exchange or listed in an automated inter-dealer quotation
system of a national securities association, profit (including any loss
avoided) may be measured by comparing the difference between the amount
paid or received for the equity security on the date of the transaction
during the blackout period and the average market price of the equity
security calculated over the first three trading days after the ending
date of the blackout period.
(2) In determining the profit recoverable in an action undertaken
pursuant to section 306(a)(2) of the Sarbanes-Oxley Act of 2002 from a
transaction that is not described in paragraph (c)(1) of this section,
profit (including any loss avoided) may be measured in a manner that is
consistent with the objective of identifying the amount of any gain
realized or loss avoided by a director or executive officer as a result
of a transaction taking place in violation of section 306(a)(1) of that
Act during the blackout period as opposed to taking place outside of
such blackout period.
(3) The terms of this section do not limit in any respect the
authority of the Commission to seek or determine remedies as the result
of a transaction taking place in violation of section 306(a)(1) of the
Sarbanes-Oxley Act.
Sec. 245.104 Notice.
(a) In any case in which a director or executive officer is subject
to section 306(a)(1) of the Sarbanes-Oxley Act of 2002 (15 U.S.C.
7244(a)(1)) in connection with a blackout period (as defined in Sec.
245.100(b)) with respect to any equity security, the issuer of the
equity security must timely notify each director or officer and the
Commission of the blackout period.
(b) For purposes of this section:
(1) The notice must include:
(i) The reason or reasons for the blackout period;
(ii) A description of the plan transactions to be suspended during,
or otherwise affected by, the blackout period;
(iii) A description of the class of equity securities subject to the
blackout period;
(iv) The length of the blackout period by reference to:
(A) The actual or expected beginning date and ending date of the
blackout period; or
(B) The calendar week during which the blackout period is expected
to begin and the calendar week during which the blackout period is
expected to end, provided that the notice to directors and executive
officers describes how, during such week or weeks, a director or
executive officer may obtain, without charge, information as to whether
the blackout period has begun or ended; and provided further that the
notice to the Commission describes how, during the blackout period and
for a period of two years after the ending date of the blackout period,
a security holder or other interested person may obtain, without charge,
the actual beginning and ending dates of the blackout period.
(C) For purposes of this paragraph (b)(1)(iv), a calendar week means
a seven-day period beginning on Sunday and ending on Saturday; and
(v) The name, address and telephone number of the person designated
by the issuer to respond to inquiries about the blackout period, or, in
the absence of such a designation, the issuer's human resources director
or person performing equivalent functions.
(2) (i) Notice to an affected director or executive officer will be
considered timely if the notice described in paragraph (b)(1) of this
section is provided (in graphic form that is reasonably accessible to
the recipient):
(A) No later than five business days after the issuer receives the
notice required by section 101(i)(2)(E) of the Employment Retirement
Income Security Act of 1974 (29 U.S.C. 1021(i)(2)(E)); or
(B) If no such notice is received by the issuer, a date that is at
least 15 calendar days before the actual or expected beginning date of
the blackout period.
[[Page 170]]
(ii) Notwithstanding paragraph (b)(2)(i) of this section, the
requirement to give advance notice will not apply in any case in which
the inability to provide advance notice of the blackout period is due to
events that were unforeseeable to, or circumstances that were beyond the
reasonable control of, the issuer, and the issuer reasonably so
determines in writing. Determinations described in the preceding
sentence must be dated and signed by an authorized representative of the
issuer. In any case in which this exception to the advance notice
requirement applies, the issuer must provide the notice described in
paragraph (b)(1) of this section, as well as a copy of the written
determination, to all affected directors and executive officers as soon
as reasonably practicable.
(iii) If there is a subsequent change in the beginning or ending
dates of the blackout period as provided in the notice to directors and
executive officers under paragraph (b)(2)(i) of this section, an issuer
must provide directors and executive officers with an updated notice
explaining the reasons for the change in the date or dates and
identifying all material changes in the information contained in the
prior notice. The updated notice is required to be provided as soon as
reasonably practicable, unless such notice in advance of the termination
of a blackout period is impracticable.
(3) Notice to the Commission will be considered timely if:
(i) The issuer, except as provided in paragraph (b)(3)(ii) of this
section, files a current report on Form 8-K (Sec. 249.308 of this
chapter) within the time prescribed for filing the report under the
instructions for the form; or
(ii) In the case of a foreign private issuer (as defined in Sec.
240.3b-4(c) of this chapter), the issuer includes the information set
forth in paragraph (b)(1) of this section in the first annual report on
Form 20-F (Sec. 249.220f of this chapter) or 40-F (Sec. 249.240f of
this chapter) required to be filed after the receipt of the notice of a
blackout period required by 29 CFR 2520.101-3(c) within the time
prescribed for filing the report under the instructions for the form or
in an earlier filed report on Form 6-K (Sec. 249.306).
(iii) If there is a subsequent change in the beginning or ending
dates of the blackout period as provided in the notice to the Commission
under paragraph (b)(3)(i) of this section, an issuer must file a current
report on Form 8-K containing the updated beginning or ending dates of
the blackout period, explaining the reasons for the change in the date
or dates and identifying all material changes in the information
contained in the prior report. The updated notice is required to be
provided as soon as reasonably practicable.
PART 246_CREDIT RISK RETENTION--Table of Contents
Subpart A_Authority, Purpose, Scope and Definitions
Sec.
246.1 [Reserved]
246.2 Definitions.
Subpart B_Credit Risk Retention
246.3 Base risk retention requirement.
246.4 Standard risk retention.
246.5 Revolving pool securitizations.
246.6 Eligible ABCP conduits.
246.7 Commercial mortgage-backed securities.
246.8 Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation ABS.
246.9 Open market CLOs.
246.10 Qualified tender option bonds.
Subpart C_Transfer of Risk Retention
246.11 Allocation of risk retention to an originator.
246.12 Hedging, transfer and financing prohibitions.
Subpart D_Exceptions and Exemptions
246.13 Exemption for qualified residential mortgages.
246.14 Definitions applicable to qualifying commercial loans, commercial
real estate loans, and automobile loans.
246.15 Qualifying commercial loans, commercial real estate loans, and
automobile loans.
246.16 Underwriting standards for qualifying commercial loans.
246.17 Underwriting standards for qualifying CRE loans.
246.18 Underwriting standards for qualifying automobile loans.
246.19 General exemptions.
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246.20 Safe harbor for certain foreign-related transactions.
246.21 Additional exemptions.
246.22 Periodic review of the QRM definition, exempted three-to-four
unit residential mortgage loans, and community-focused
residential mortgage exemption.
Authority: 15 U.S.C. 77g, 77j, 77s, 77z-3, 78c, 78m, 78o, 78o-11,
78w, 78mm.
Source: 79 FR 77740, Dec. 24, 2014, unless otherwise noted.
Subpart A_Authority, Purpose, Scope and Definitions
Sec. 246.1 Purpose, scope, and authority.
(a) Authority and purpose. This part (Regulation RR) is issued by
the Securities and Exchange Commission (``Commission'') jointly with the
Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency,
and, in the case of the securitization of any residential mortgage
asset, together with the Secretary of Housing and Urban Development and
the Federal Housing Finance Agency, pursuant to Section 15G of the
Securities Exchange Act of 1934 (15 U.S.C. 78o-11). The Commission also
is issuing this part pursuant to its authority under Sections 7, 10,
19(a), and 28 of the Securities Act and Sections 3, 13, 15, 23, and 36
of the Exchange Act. This part requires securitizers to retain an
economic interest in a portion of the credit risk for any asset that the
securitizer, through the issuance of an asset-backed security,
transfers, sells, or conveys to a third party. This part specifies the
permissible types, forms, and amounts of credit risk retention, and
establishes certain exemptions for securitizations collateralized by
assets that meet specified underwriting standards or otherwise qualify
for an exemption.
(b) The authority of the Commission under this part shall be in
addition to the authority of the Commission to otherwise enforce the
federal securities laws, including, without limitation, the antifraud
provisions of the securities laws.
[79 FR 77766, Dec. 24, 2014]
Sec. 246.2 Definitions.
For purposes of this part, the following definitions apply:
ABS interest means:
(1) Any type of interest or obligation issued by an issuing entity,
whether or not in certificated form, including a security, obligation,
beneficial interest or residual interest (other than an uncertificated
regular interest in a REMIC that is held by another REMIC, where both
REMICs are part of the same structure and a single REMIC in that
structure issues ABS interests to investors, or a non-economic residual
interest issued by a REMIC), payments on which are primarily dependent
on the cash flows of the collateral owned or held by the issuing entity;
and
(2) Does not include common or preferred stock, limited liability
interests, partnership interests, trust certificates, or similar
interests that:
(i) Are issued primarily to evidence ownership of the issuing
entity; and
(ii) The payments, if any, on which are not primarily dependent on
the cash flows of the collateral held by the issuing entity; and
(3) Does not include the right to receive payments for services
provided by the holder of such right, including servicing, trustee
services and custodial services.
Affiliate of, or a person affiliated with, a specified person means
a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common
control with, the person specified.
Appropriate Federal banking agency has the same meaning as in
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
Asset means a self-liquidating financial asset (including but not
limited to a loan, lease, mortgage, or receivable).
Asset-backed security has the same meaning as in section 3(a)(79) of
the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(79)).
Collateral means, with respect to any issuance of ABS interests, the
assets that provide the cash flow and the servicing assets that support
such cash flow for the ABS interests irrespective of the legal structure
of issuance, including security interests in assets or other property of
the issuing entity,
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fractional undivided property interests in the assets or other property
of the issuing entity, or any other property interest in or rights to
cash flow from such assets and related servicing assets. Assets or other
property collateralize an issuance of ABS interests if the assets or
property serve as collateral for such issuance.
Commercial real estate loan has the same meaning as in Sec. 246.14.
Commission means the Securities and Exchange Commission.
Control including the terms ``controlling,'' ``controlled by'' and
``under common control with'':
(1) Means the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of a person,
whether through the ownership of voting securities, by contract, or
otherwise.
(2) Without limiting the foregoing, a person shall be considered to
control another person if the first person:
(i) Owns, controls or holds with power to vote 25 percent or more of
any class of voting securities of the other person; or
(ii) Controls in any manner the election of a majority of the
directors, trustees or persons performing similar functions of the other
person.
Credit risk means:
(1) The risk of loss that could result from the failure of the
borrower in the case of a securitized asset, or the issuing entity in
the case of an ABS interest in the issuing entity, to make required
payments of principal or interest on the asset or ABS interest on a
timely basis;
(2) The risk of loss that could result from bankruptcy, insolvency,
or a similar proceeding with respect to the borrower or issuing entity,
as appropriate; or
(3) The effect that significant changes in the underlying credit
quality of the asset or ABS interest may have on the market value of the
asset or ABS interest.
Creditor has the same meaning as in 15 U.S.C. 1602(g).
Depositor means:
(1) The person that receives or purchases and transfers or sells the
securitized assets to the issuing entity;
(2) The sponsor, in the case of a securitization transaction where
there is not an intermediate transfer of the assets from the sponsor to
the issuing entity; or
(3) The person that receives or purchases and transfers or sells the
securitized assets to the issuing entity in the case of a securitization
transaction where the person transferring or selling the securitized
assets directly to the issuing entity is itself a trust.
Eligible horizontal residual interest means, with respect to any
securitization transaction, an ABS interest in the issuing entity:
(1) That is an interest in a single class or multiple classes in the
issuing entity, provided that each interest meets, individually or in
the aggregate, all of the requirements of this definition;
(2) With respect to which, on any payment date or allocation date on
which the issuing entity has insufficient funds to satisfy its
obligation to pay all contractual interest or principal due, any
resulting shortfall will reduce amounts payable to the eligible
horizontal residual interest prior to any reduction in the amounts
payable to any other ABS interest, whether through loss allocation,
operation of the priority of payments, or any other governing
contractual provision (until the amount of such ABS interest is reduced
to zero); and
(3) That, with the exception of any non-economic REMIC residual
interest, has the most subordinated claim to payments of both principal
and interest by the issuing entity.
Eligible horizontal cash reserve account means an account meeting
the requirements of Sec. 246.4(b).
Eligible vertical interest means, with respect to any securitization
transaction, a single vertical security or an interest in each class of
ABS interests in the issuing entity issued as part of the securitization
transaction that constitutes the same proportion of each such class.
Federal banking agencies means the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, and the
Federal Deposit Insurance Corporation.
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GAAP means generally accepted accounting principles as used in the
United States.
Issuing entity means, with respect to a securitization transaction,
the trust or other entity:
(1) That owns or holds the pool of assets to be securitized; and
(2) In whose name the asset-backed securities are issued.
Majority-owned affiliate of a person means an entity (other than the
issuing entity) that, directly or indirectly, majority controls, is
majority controlled by or is under common majority control with, such
person. For purposes of this definition, majority control means
ownership of more than 50 percent of the equity of an entity, or
ownership of any other controlling financial interest in the entity, as
determined under GAAP.
Originator means a person who:
(1) Through an extension of credit or otherwise, creates an asset
that collateralizes an asset-backed security; and
(2) Sells the asset directly or indirectly to a securitizer or
issuing entity.
REMIC has the same meaning as in 26 U.S.C. 860D.
Residential mortgage means:
(1) A transaction that is a covered transaction as defined in Sec.
1026.43(b) of Regulation Z (12 CFR 1026.43(b)(1));
(2) Any transaction that is exempt from the definition of ``covered
transaction'' under Sec. 1026.43(a) of Regulation Z (12 CFR
1026.43(a)); and
(3) Any other loan secured by a residential structure that contains
one to four units, whether or not that structure is attached to real
property, including an individual condominium or cooperative unit and,
if used as a residence, a mobile home or trailer.
Retaining sponsor means, with respect to a securitization
transaction, the sponsor that has retained or caused to be retained an
economic interest in the credit risk of the securitized assets pursuant
to subpart B of this part.
Securitization transaction means a transaction involving the offer
and sale of asset-backed securities by an issuing entity.
Securitized asset means an asset that:
(1) Is transferred, sold, or conveyed to an issuing entity; and
(2) Collateralizes the ABS interests issued by the issuing entity.
Securitizer means, with respect to a securitization transaction,
either:
(1) The depositor of the asset-backed securities (if the depositor
is not the sponsor); or
(2) The sponsor of the asset-backed securities.
Servicer means any person responsible for the management or
collection of the securitized assets or making allocations or
distributions to holders of the ABS interests, but does not include a
trustee for the issuing entity or the asset-backed securities that makes
allocations or distributions to holders of the ABS interests if the
trustee receives such allocations or distributions from a servicer and
the trustee does not otherwise perform the functions of a servicer.
Servicing assets means rights or other assets designed to assure the
servicing or timely distribution of proceeds to ABS interest holders and
rights or other assets that are related or incidental to purchasing or
otherwise acquiring and holding the issuing entity's securitized assets.
Servicing assets include amounts received by the issuing entity as
proceeds of securitized assets, including proceeds of rights or other
assets, whether as remittances by obligors or as other recoveries.
Single vertical security means, with respect to any securitization
transaction, an ABS interest entitling the sponsor to a specified
percentage of the amounts paid on each class of ABS interests in the
issuing entity (other than such single vertical security).
Sponsor means a person who organizes and initiates a securitization
transaction by selling or transferring assets, either directly or
indirectly, including through an affiliate, to the issuing entity.
State has the same meaning as in Section 3(a)(16) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(16)).
United States or U.S. means the United States of America, including
its territories and possessions, any State of the United States, and the
District of Columbia.
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Wholly-owned affiliate means a person (other than an issuing entity)
that, directly or indirectly, wholly controls, is wholly controlled by,
or is wholly under common control with, another person. For purposes of
this definition, ``wholly controls'' means ownership of 100 percent of
the equity of an entity.
Subpart B_Credit Risk Retention
Sec. 246.3 Base risk retention requirement.
(a) Base risk retention requirement. Except as otherwise provided in
this part, the sponsor of a securitization transaction (or majority-
owned affiliate of the sponsor) shall retain an economic interest in the
credit risk of the securitized assets in accordance with any one of
Sec. Sec. 246.4 through 246.10. Credit risk in securitized assets
required to be retained and held by any person for purposes of
compliance with this part, whether a sponsor, an originator, an
originator-seller, or a third-party purchaser, except as otherwise
provided in this part, may be acquired and held by any of such person's
majority-owned affiliates (other than an issuing entity).
(b) Multiple sponsors. If there is more than one sponsor of a
securitization transaction, it shall be the responsibility of each
sponsor to ensure that at least one of the sponsors of the
securitization transaction (or at least one of their majority-owned or
wholly-owned affiliates, as applicable) retains an economic interest in
the credit risk of the securitized assets in accordance with any one of
Sec. Sec. 246.4, 246.5, 246.8, 246.9, or 246.10.
Sec. 246.4 Standard risk retention.
(a) General requirement. Except as provided in Sec. Sec. 246.5
through 246.10, the sponsor of a securitization transaction must retain
an eligible vertical interest or eligible horizontal residual interest,
or any combination thereof, in accordance with the requirements of this
section.
(1) If the sponsor retains only an eligible vertical interest as its
required risk retention, the sponsor must retain an eligible vertical
interest in a percentage of not less than 5 percent.
(2) If the sponsor retains only an eligible horizontal residual
interest as its required risk retention, the amount of the interest must
equal at least 5 percent of the fair value of all ABS interests in the
issuing entity issued as a part of the securitization transaction,
determined using a fair value measurement framework under GAAP.
(3) If the sponsor retains both an eligible vertical interest and an
eligible horizontal residual interest as its required risk retention,
the percentage of the fair value of the eligible horizontal residual
interest and the percentage of the eligible vertical interest must equal
at least five.
(4) The percentage of the eligible vertical interest, eligible
horizontal residual interest, or combination thereof retained by the
sponsor must be determined as of the closing date of the securitization
transaction.
(b) Option to hold base amount in eligible horizontal cash reserve
account. In lieu of retaining all or any part of an eligible horizontal
residual interest under paragraph (a) of this section, the sponsor may,
at closing of the securitization transaction, cause to be established
and funded, in cash, an eligible horizontal cash reserve account in the
amount equal to the fair value of such eligible horizontal residual
interest or part thereof, provided that the account meets all of the
following conditions:
(1) The account is held by the trustee (or person performing similar
functions) in the name and for the benefit of the issuing entity;
(2) Amounts in the account are invested only in cash and cash
equivalents; and
(3) Until all ABS interests in the issuing entity are paid in full,
or the issuing entity is dissolved:
(i) Amounts in the account shall be released only to:
(A) Satisfy payments on ABS interests in the issuing entity on any
payment date on which the issuing entity has insufficient funds from any
source to satisfy an amount due on any ABS interest; or
(B) Pay critical expenses of the trust unrelated to credit risk on
any payment date on which the issuing entity
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has insufficient funds from any source to pay such expenses and:
(1) Such expenses, in the absence of available funds in the eligible
horizontal cash reserve account, would be paid prior to any payments to
holders of ABS interests; and
(2) Such payments are made to parties that are not affiliated with
the sponsor; and
(ii) Interest (or other earnings) on investments made in accordance
with paragraph (b)(2) of this section may be released once received by
the account.
(c) Disclosures. A sponsor relying on this section shall provide, or
cause to be provided, to potential investors, under the caption ``Credit
Risk Retention'', a reasonable period of time prior to the sale of the
asset-backed securities in the securitization transaction the following
disclosures in written form and within the time frames set forth in this
paragraph (c):
(1) Horizontal interest. With respect to any eligible horizontal
residual interest held under paragraph (a) of this section, a sponsor
must disclose:
(i) A reasonable period of time prior to the sale of an asset-backed
security issued in the same offering of ABS interests,
(A) The fair value (expressed as a percentage of the fair value of
all of the ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS interests are issued, as applicable)) of the eligible horizontal
residual interest that the sponsor expects to retain at the closing of
the securitization transaction. If the specific prices, sizes, or rates
of interest of each tranche of the securitization are not available, the
sponsor must disclose a range of fair values (expressed as a percentage
of the fair value of all of the ABS interests issued in the
securitization transaction and dollar amount (or corresponding amount in
the foreign currency in which the ABS interests are issued, as
applicable)) of the eligible horizontal residual interest that the
sponsor expects to retain at the close of the securitization transaction
based on a range of bona fide estimates or specified prices, sizes, or
rates of interest of each tranche of the securitization. A sponsor
disclosing a range of fair values based on a range of bona fide
estimates or specified prices, sizes or rates of interest of each
tranche of the securitization must also disclose the method by which it
determined any range of prices, tranche sizes, or rates of interest.
(B) A description of the material terms of the eligible horizontal
residual interest to be retained by the sponsor;
(C) A description of the valuation methodology used to calculate the
fair values or range of fair values of all classes of ABS interests,
including any portion of the eligible horizontal residual interest
retained by the sponsor;
(D) All key inputs and assumptions or a comprehensive description of
such key inputs and assumptions that were used in measuring the
estimated total fair value or range of fair values of all classes of ABS
interests, including the eligible horizontal residual interest to be
retained by the sponsor.
(E) To the extent applicable to the valuation methodology used, the
disclosure required in paragraph (c)(1)(i)(D) of this section shall
include, but should not be limited to, quantitative information about
each of the following:
(1) Discount rates;
(2) Loss given default (recovery);
(3) Prepayment rates;
(4) Default rates;
(5) Lag time between default and recovery; and
(6) The basis of forward interest rates used.
(F) The disclosure required in paragraphs (c)(1)(i)(C) and (D) of
this section shall include, at a minimum, descriptions of all inputs and
assumptions that either could have a material impact on the fair value
calculation or would be material to a prospective investor's ability to
evaluate the sponsor's fair value calculations. To the extent the
disclosure required in this paragraph (c)(1) includes a description of a
curve or curves, the description shall include a description of the
methodology that was used to derive each curve and a description of any
aspects or features of each curve that could materially impact the fair
value calculation or the ability of a prospective
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investor to evaluate the sponsor's fair value calculation. To the extent
a sponsor uses information about the securitized assets in its
calculation of fair value, such information shall not be as of a date
more than 60 days prior to the date of first use with investors;
provided that for a subsequent issuance of ABS interests by the same
issuing entity with the same sponsor for which the securitization
transaction distributes amounts to investors on a quarterly or less
frequent basis, such information shall not be as of a date more than 135
days prior to the date of first use with investors; provided further,
that the balance or value (in accordance with the transaction documents)
of the securitized assets may be increased or decreased to reflect
anticipated additions or removals of assets the sponsor makes or expects
to make between the cut-off date or similar date for establishing the
composition of the asset pool collateralizing such asset-backed security
and the closing date of the securitization.
(G) A summary description of the reference data set or other
historical information used to develop the key inputs and assumptions
referenced in paragraph (c)(1)(i)(D) of this section, including loss
given default and default rates;
(ii) A reasonable time after the closing of the securitization
transaction:
(A) The fair value (expressed as a percentage of the fair value of
all of the ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS are issued, as applicable)) of the eligible horizontal residual
interest the sponsor retained at the closing of the securitization
transaction, based on actual sale prices and finalized tranche sizes;
(B) The fair value (expressed as a percentage of the fair value of
all of the ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS are issued, as applicable)) of the eligible horizontal residual
interest that the sponsor is required to retain under this section; and
(C) To the extent the valuation methodology or any of the key inputs
and assumptions that were used in calculating the fair value or range of
fair values disclosed prior to sale and required under paragraph
(c)(1)(i) of this section materially differs from the methodology or key
inputs and assumptions used to calculate the fair value at the time of
closing, descriptions of those material differences.
(iii) If the sponsor retains risk through the funding of an eligible
horizontal cash reserve account:
(A) The amount to be placed (or that is placed) by the sponsor in
the eligible horizontal cash reserve account at closing, and the fair
value (expressed as a percentage of the fair value of all of the ABS
interests issued in the securitization transaction and dollar amount (or
corresponding amount in the foreign currency in which the ABS interests
are issued, as applicable)) of the eligible horizontal residual interest
that the sponsor is required to fund through the eligible horizontal
cash reserve account in order for such account, together with other
retained interests, to satisfy the sponsor's risk retention requirement;
(B) A description of the material terms of the eligible horizontal
cash reserve account; and
(C) The disclosures required in paragraphs (c)(1)(i) and (ii) of
this section.
(2) Vertical interest. With respect to any eligible vertical
interest retained under paragraph (a) of this section, the sponsor must
disclose:
(i) A reasonable period of time prior to the sale of an asset-backed
security issued in the same offering of ABS interests,
(A) The form of the eligible vertical interest;
(B) The percentage that the sponsor is required to retain as a
vertical interest under this section; and
(C) A description of the material terms of the vertical interest and
the amount that the sponsor expects to retain at the closing of the
securitization transaction.
(ii) A reasonable time after the closing of the securitization
transaction, the amount of the vertical interest the sponsor retained at
closing, if that amount is materially different from
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the amount disclosed under paragraph (c)(2)(i) of this section.
(d) Record maintenance. A sponsor must retain the certifications and
disclosures required in paragraphs (a) and (c) of this section in its
records and must provide the disclosure upon request to the Commission
and its appropriate Federal banking agency, if any, until three years
after all ABS interests are no longer outstanding.
Sec. 246.5 Revolving pool securitizations.
(a) Definitions. For purposes of this section, the following
definitions apply:
Revolving pool securitization means an issuing entity that is
established to issue on multiple issuance dates more than one series,
class, subclass, or tranche of asset-backed securities that are
collateralized by a common pool of securitized assets that will change
in composition over time, and that does not monetize excess interest and
fees from its securitized assets.
Seller's interest means an ABS interest or ABS interests:
(1) Collateralized by the securitized assets and servicing assets
owned or held by the issuing entity, other than the following that are
not considered a component of seller's interest:
(i) Servicing assets that have been allocated as collateral only for
a specific series in connection with administering the revolving pool
securitization, such as a principal accumulation or interest reserve
account; and
(ii) Assets that are not eligible under the terms of the
securitization transaction to be included when determining whether the
revolving pool securitization holds aggregate securitized assets in
specified proportions to aggregate outstanding investor ABS interests
issued; and
(2) That is pari passu with each series of investor ABS interests
issued, or partially or fully subordinated to one or more series in
identical or varying amounts, with respect to the allocation of all
distributions and losses with respect to the securitized assets prior to
early amortization of the revolving securitization (as specified in the
securitization transaction documents); and
(3) That adjusts for fluctuations in the outstanding principal
balance of the securitized assets in the pool.
(b) General requirement. A sponsor satisfies the risk retention
requirements of Sec. 246.3 with respect to a securitization transaction
for which the issuing entity is a revolving pool securitization if the
sponsor maintains a seller's interest of not less than 5 percent of the
aggregate unpaid principal balance of all outstanding investor ABS
interests in the issuing entity.
(c) Measuring the seller's interest. In measuring the seller's
interest for purposes of meeting the requirements of paragraph (b) of
this section:
(1) The unpaid principal balance of the securitized assets for the
numerator of the 5 percent ratio shall not include assets of the types
excluded from the definition of seller's interest in paragraph (a) of
this section;
(2) The aggregate unpaid principal balance of outstanding investor
ABS interests in the denominator of the 5 percent ratio may be reduced
by the amount of funds held in a segregated principal accumulation
account for the repayment of outstanding investor ABS interests, if:
(i) The terms of the securitization transaction documents prevent
funds in the principal accumulation account from being applied for any
purpose other than the repayment of the unpaid principal of outstanding
investor ABS interests; and
(ii) Funds in that account are invested only in the types of assets
in which funds held in an eligible horizontal cash reserve account
pursuant to Sec. 246.4 are permitted to be invested;
(3) If the terms of the securitization transaction documents set
minimum required seller's interest as a proportion of the unpaid
principal balance of outstanding investor ABS interests for one or more
series issued, rather than as a proportion of the aggregate outstanding
investor ABS interests in all outstanding series combined, the
percentage of the seller's interest for each such series must, when
combined with the percentage of any minimum seller's interest set by
reference to the aggregate outstanding investor ABS interests, equal at
least 5 percent;
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(4) The 5 percent test must be determined and satisfied at the
closing of each issuance of ABS interests to investors by the issuing
entity, and
(i) At least monthly at a seller's interest measurement date
specified under the securitization transaction documents, until no ABS
interest in the issuing entity is held by any person not a wholly-owned
affiliate of the sponsor; or
(ii) If the revolving pool securitization fails to meet the 5
percent test as of any date described in paragraph (c)(4)(i) of this
section, and the securitization transaction documents specify a cure
period, the 5 percent test must be determined and satisfied within the
earlier of the cure period, or one month after the date described in
paragraph (c)(4)(i).
(d) Measuring outstanding investor ABS interests. In measuring the
amount of outstanding investor ABS interests for purposes of this
section, ABS interests held for the life of such ABS interests by the
sponsor or its wholly-owned affiliates may be excluded.
(e) Holding and retention of the seller's interest; legacy trusts.
(1) Notwithstanding Sec. 246.12(a), the seller's interest, and any
offsetting horizontal retention interest retained pursuant to paragraph
(g) of this section, must be retained by the sponsor or by one or more
wholly-owned affiliates of the sponsor, including one or more depositors
of the revolving pool securitization.
(2) If one revolving pool securitization issues collateral
certificates representing a beneficial interest in all or a portion of
the securitized assets held by that securitization to another revolving
pool securitization, which in turn issues ABS interests for which the
collateral certificates are all or a portion of the securitized assets,
a sponsor may satisfy the requirements of paragraphs (b) and (c) of this
section by retaining the seller's interest for the assets represented by
the collateral certificates through either of the revolving pool
securitizations, so long as both revolving pool securitizations are
retained at the direction of the same sponsor or its wholly-owned
affiliates.
(3) If the sponsor retains the seller's interest associated with the
collateral certificates at the level of the revolving pool
securitization that issues those collateral certificates, the proportion
of the seller's interest required by paragraph (b) of this section
retained at that level must equal the proportion that the principal
balance of the securitized assets represented by the collateral
certificates bears to the principal balance of the securitized assets in
the revolving pool securitization that issues the ABS interests, as of
each measurement date required by paragraph (c) of this section.
(f) Offset for pool-level excess funding account. The 5 percent
seller's interest required on each measurement date by paragraph (c) of
this section may be reduced on a dollar-for-dollar basis by the balance,
as of such date, of an excess funding account in the form of a
segregated account that:
(1) Is funded in the event of a failure to meet the minimum seller's
interest requirements or other requirement to maintain a minimum balance
of securitized assets under the securitization transaction documents by
distributions otherwise payable to the holder of the seller's interest;
(2) Is invested only in the types of assets in which funds held in a
horizontal cash reserve account pursuant to Sec. 246.4 are permitted to
be invested; and
(3) In the event of an early amortization, makes payments of amounts
held in the account to holders of investor ABS interests in the same
manner as payments to holders of investor ABS interests of amounts
received on securitized assets.
(g) Combined seller's interests and horizontal interest retention.
The 5 percent seller's interest required on each measurement date by
paragraph (c) of this section may be reduced to a percentage lower than
5 percent to the extent that, for all series of investor ABS interests
issued after the applicable effective date of this Sec. 246.5, the
sponsor, or notwithstanding Sec. 246.12(a) a wholly-owned affiliate of
the sponsor, retains, at a minimum, a corresponding percentage of the
fair value of ABS interests issued in each series, in the form of one or
more of the horizontal residual interests meeting the requirements of
paragraphs (h) or (i).
[[Page 179]]
(h) Residual ABS interests in excess interest and fees. The sponsor
may take the offset described in paragraph (g) of this section for a
residual ABS interest in excess interest and fees, whether certificated
or uncertificated, in a single or multiple classes, subclasses, or
tranches, that meets, individually or in the aggregate, the requirements
of this paragraph (h);
(1) Each series of the revolving pool securitization distinguishes
between the series' share of the interest and fee cash flows and the
series' share of the principal repayment cash flows from the securitized
assets collateralizing the revolving pool securitization, which may
according to the terms of the securitization transaction documents,
include not only the series' ratable share of such cash flows but also
excess cash flows available from other series;
(2) The residual ABS interest's claim to any part of the series'
share of the interest and fee cash flows for any interest payment period
is subordinated to all accrued and payable interest due on the payment
date to more senior ABS interests in the series for that period, and
further reduced by the series' share of losses, including defaults on
principal of the securitized assets collateralizing the revolving pool
securitization (whether incurred in that period or carried over from
prior periods) to the extent that such payments would have been included
in amounts payable to more senior interests in the series;
(3) The revolving pool securitization continues to revolve, with one
or more series, classes, subclasses, or tranches of asset-backed
securities that are collateralized by a common pool of assets that
change in composition over time; and
(4) For purposes of taking the offset described in paragraph (g) of
this section, the sponsor determines the fair value of the residual ABS
interest in excess interest and fees, and the fair value of the series
of outstanding investor ABS interests to which it is subordinated and
supports using the fair value measurement framework under GAAP, as of:
(i) The closing of the securitization transaction issuing the
supported ABS interests; and
(ii) The seller's interest measurement dates described in paragraph
(c)(4) of this section, except that for these periodic determinations
the sponsor must update the fair value of the residual ABS interest in
excess interest and fees for the numerator of the percentage ratio, but
may at the sponsor's option continue to use the fair values determined
in (h)(4)(i) for the outstanding investor ABS interests in the
denominator.
(i) Offsetting eligible horizontal residual interest. The sponsor
may take the offset described in paragraph (g) of this section for ABS
interests that would meet the definition of eligible horizontal residual
interests in Sec. 246.2 but for the sponsor's simultaneous holding of
subordinated seller's interests, residual ABS interests in excess
interests and fees, or a combination of the two, if:
(1) The sponsor complies with all requirements of paragraphs (b)
through (e) of this section for its holdings of subordinated seller's
interest, and paragraph (h) for its holdings of residual ABS interests
in excess interests and fees, as applicable;
(2) For purposes of taking the offset described in paragraph (g) of
this section, the sponsor determines the fair value of the eligible
horizontal residual interest as a percentage of the fair value of the
outstanding investor ABS interests in the series supported by the
eligible horizontal residual interest, determined using the fair value
measurement framework under GAAP:
(i) As of the closing of the securitization transaction issuing the
supported ABS interests; and
(ii) Without including in the numerator of the percentage ratio any
fair value based on:
(A) The subordinated seller's interest or residual ABS interest in
excess interest and fees;
(B) the interest payable to the sponsor on the eligible horizontal
residual interest, if the sponsor is including the value of residual ABS
interest in excess interest and fees pursuant to paragraph (h) of this
section in taking the offset in paragraph (g) of this section; and,
[[Page 180]]
(C) the principal payable to the sponsor on the eligible horizontal
residual interest, if the sponsor is including the value of the seller's
interest pursuant to paragraphs (b) through (f) of this section and
distributions on that seller's interest are available to reduce charge-
offs that would otherwise be allocated to reduce principal payable to
the offset eligible horizontal residual interest.
(j) Specified dates. A sponsor using data about the revolving pool
securitization's collateral, or ABS interests previously issued, to
determine the closing-date percentage of a seller's interest, residual
ABS interest in excess interest and fees, or eligible horizontal
residual interest pursuant to this Sec. 246.5 may use such data
prepared as of specified dates if:
(1) The sponsor describes the specified dates in the disclosures
required by paragraph (k) of this section; and
(2) The dates are no more than 60 days prior to the date of first
use with investors of disclosures required for the interest by paragraph
(k) of this section, or for revolving pool securitizations that make
distributions to investors on a quarterly or less frequent basis, no
more than 135 days prior to the date of first use with investors of such
disclosures.
(k) Disclosure and record maintenance. (1) Disclosure. A sponsor
relying on this section shall provide, or cause to be provided, to
potential investors, under the caption ``Credit Risk Retention'' the
following disclosure in written form and within the time frames set
forth in this paragraph (k):
(i) A reasonable period of time prior to the sale of an asset-backed
security, a description of the material terms of the seller's interest,
and the percentage of the seller's interest that the sponsor expects to
retain at the closing of the securitization transaction, measured in
accordance with the requirements of this Sec. 246.5, as a percentage of
the aggregate unpaid principal balance of all outstanding investor ABS
interests issued, or as a percentage of the aggregate unpaid principal
balance of outstanding investor ABS interests for one or more series
issued, as required by the terms of the securitization transaction;
(ii) A reasonable time after the closing of the securitization
transaction, the amount of seller's interest the sponsor retained at
closing, if that amount is materially different from the amount
disclosed under paragraph (k)(1)(i) of this section; and
(iii) A description of the material terms of any horizontal residual
interests offsetting the seller's interest in accordance with paragraphs
(g), (h), and (i) of this section; and
(iv) Disclosure of the fair value of those horizontal residual
interests retained by the sponsor for the series being offered to
investors and described in the disclosures, as a percentage of the fair
value of the outstanding investor ABS interests issued, described in the
same manner and within the same timeframes required for disclosure of
the fair values of eligible horizontal residual interests specified in
Sec. 246.4(c).
(2) Adjusted data. Disclosures required by this paragraph (k) to be
made a reasonable period of time prior to the sale of an asset-backed
security of the amount of seller's interest, residual ABS interest in
excess interest and fees, or eligible horizontal residual interest may
include adjustments to the amount of securitized assets for additions or
removals the sponsor expects to make before the closing date and
adjustments to the amount of outstanding investor ABS interests for
expected increases and decreases of those interests under the control of
the sponsor.
(3) Record maintenance. A sponsor must retain the disclosures
required in paragraph (k)(1) of this section in its records and must
provide the disclosure upon request to the Commission and its
appropriate Federal banking agency, if any, until three years after all
ABS interests are no longer outstanding.
(l) Early amortization of all outstanding series. A sponsor that
organizes a revolving pool securitization that relies on this Sec.
246.5 to satisfy the risk retention requirements of Sec. 246.3, does
not violate the requirements of this part if its seller's interest falls
below the level required by Sec. 246. 5 after the revolving pool
securitization commences early amortization, pursuant to the terms of
the securitization
[[Page 181]]
transaction documents, of all series of outstanding investor ABS
interests, if:
(1) The sponsor was in full compliance with the requirements of this
section on all measurement dates specified in paragraph (c) of this
section prior to the commencement of early amortization;
(2) The terms of the seller's interest continue to make it pari
passu with or subordinate in identical or varying amounts to each series
of outstanding investor ABS interests issued with respect to the
allocation of all distributions and losses with respect to the
securitized assets;
(3) The terms of any horizontal interest relied upon by the sponsor
pursuant to paragraph (g) to offset the minimum seller's interest amount
continue to require the interests to absorb losses in accordance with
the terms of paragraph (h) or (i) of this section, as applicable; and
(4) The revolving pool securitization issues no additional ABS
interests after early amortization is initiated to any person not a
wholly-owned affiliate of the sponsor, either at the time of issuance or
during the amortization period.
Sec. 246.6 Eligible ABCP conduits.
(a) Definitions. For purposes of this section, the following
additional definitions apply:
100 percent liquidity coverage means an amount equal to the
outstanding balance of all ABCP issued by the conduit plus any accrued
and unpaid interest without regard to the performance of the ABS
interests held by the ABCP conduit and without regard to any credit
enhancement.
ABCP means asset-backed commercial paper that has a maturity at the
time of issuance not exceeding 397 days, exclusive of days of grace, or
any renewal thereof the maturity of which is likewise limited.
ABCP conduit means an issuing entity with respect to ABCP.
Eligible ABCP conduit means an ABCP conduit, provided that:
(1) The ABCP conduit is bankruptcy remote or otherwise isolated for
insolvency purposes from the sponsor of the ABCP conduit and from any
intermediate SPV;
(2) The ABS interests acquired by the ABCP conduit are:
(i) ABS interests collateralized solely by assets originated by an
originator-seller and by servicing assets;
(ii) Special units of beneficial interest (or similar ABS interests)
in a trust or special purpose vehicle that retains legal title to leased
property underlying leases originated by an originator-seller that were
transferred to an intermediate SPV in connection with a securitization
collateralized solely by such leases and by servicing assets;
(iii) ABS interests in a revolving pool securitization
collateralized solely by assets originated by an originator-seller and
by servicing assets; or
(iv) ABS interests described in paragraph (2)(i), (ii), or (iii) of
this definition that are collateralized, in whole or in part, by assets
acquired by an originator-seller in a business combination that
qualifies for business combination accounting under GAAP, and, if
collateralized in part, the remainder of such assets are assets
described in paragraph (2)(i), (ii), or (iii) of this definition; and
(v) Acquired by the ABCP conduit in an initial issuance by or on
behalf of an intermediate SPV:
(A) Directly from the intermediate SPV,
(B) From an underwriter of the ABS interests issued by the
intermediate SPV, or
(C) From another person who acquired the ABS interests directly from
the intermediate SPV;
(3) The ABCP conduit is collateralized solely by ABS interests
acquired from intermediate SPVs as described in paragraph (2) of this
definition and servicing assets; and
(4) A regulated liquidity provider has entered into a legally
binding commitment to provide 100 percent liquidity coverage (in the
form of a lending facility, an asset purchase agreement, a repurchase
agreement, or other similar arrangement) to all the ABCP issued by the
ABCP conduit by lending to, purchasing ABCP issued by, or purchasing
assets from, the ABCP conduit in the event that funds are required to
repay maturing ABCP issued by the ABCP conduit. With respect to the 100
percent liquidity coverage, in the event
[[Page 182]]
that the ABCP conduit is unable for any reason to repay maturing ABCP
issued by the issuing entity, the liquidity provider shall be obligated
to pay an amount equal to any shortfall, and the total amount that may
be due pursuant to the 100 percent liquidity coverage shall be equal to
100 percent of the amount of the ABCP outstanding at any time plus
accrued and unpaid interest (amounts due pursuant to the required
liquidity coverage may not be subject to credit performance of the ABS
interests held by the ABCP conduit or reduced by the amount of credit
support provided to the ABCP conduit and liquidity support that only
funds performing loans or receivables or performing ABS interests does
not meet the requirements of this section).
Intermediate SPV means a special purpose vehicle that:
(1) (i) Is a direct or indirect wholly-owned affiliate of the
originator-seller; or
(ii) Has nominal equity owned by a trust or corporate service
provider that specializes in providing independent ownership of special
purpose vehicles, and such trust or corporate service provider is not
affiliated with any other transaction parties;
(2) Is bankruptcy remote or otherwise isolated for insolvency
purposes from the eligible ABCP conduit and from each originator-seller
and each majority-owned affiliate in each case that, directly or
indirectly, sells or transfers assets to such intermediate SPV;
(3) Acquires assets from the originator-seller that are originated
by the originator-seller or acquired by the originator-seller in the
acquisition of a business that qualifies for business combination
accounting under GAAP or acquires ABS interests issued by another
intermediate SPV of the originator-seller that are collateralized solely
by such assets; and
(4) Issues ABS interests collateralized solely by such assets, as
applicable.
Originator-seller means an entity that originates assets and sells
or transfers those assets, directly or through a majority-owned
affiliate, to an intermediate SPV, and includes (except for the purposes
of identifying the sponsorship and affiliation of an intermediate SPV
pursuant to this Sec. 246.6) any affiliate of the originator-seller
that, directly or indirectly, majority controls, is majority controlled
by or is under common majority control with, the originator-seller. For
purposes of this definition, majority control means ownership of more
than 50 percent of the equity of an entity, or ownership of any other
controlling financial interest in the entity, as determined under GAAP.
Regulated liquidity provider means:
(1) A depository institution (as defined in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813));
(2) A bank holding company (as defined in 12 U.S.C. 1841), or a
subsidiary thereof;
(3) A savings and loan holding company (as defined in 12 U.S.C.
1467a), provided all or substantially all of the holding company's
activities are permissible for a financial holding company under 12
U.S.C. 1843(k), or a subsidiary thereof; or
(4) A foreign bank whose home country supervisor (as defined in
Sec. 211.21 of the Federal Reserve Board's Regulation K (12 CFR
211.21)) has adopted capital standards consistent with the Capital
Accord of the Basel Committee on Banking Supervision, as amended, and
that is subject to such standards, or a subsidiary thereof.
(b) In general. An ABCP conduit sponsor satisfies the risk retention
requirement of Sec. 246.3 with respect to the issuance of ABCP by an
eligible ABCP conduit in a securitization transaction if, for each ABS
interest the ABCP conduit acquires from an intermediate SPV:
(1) An originator-seller of the intermediate SPV retains an economic
interest in the credit risk of the assets collateralizing the ABS
interest acquired by the eligible ABCP conduit in the amount and manner
required under Sec. 246.4 or Sec. 246.5; and
(2) The ABCP conduit sponsor:
(i) Approves each originator-seller permitted to sell or transfer
assets, directly or indirectly, to an intermediate SPV from which an
eligible ABCP conduit acquires ABS interests;
[[Page 183]]
(ii) Approves each intermediate SPV from which an eligible ABCP
conduit is permitted to acquire ABS interests;
(iii) Establishes criteria governing the ABS interests, and the
securitized assets underlying the ABS interests, acquired by the ABCP
conduit;
(iv) Administers the ABCP conduit by monitoring the ABS interests
acquired by the ABCP conduit and the assets supporting those ABS
interests, arranging for debt placement, compiling monthly reports, and
ensuring compliance with the ABCP conduit documents and with the ABCP
conduit's credit and investment policy; and
(v) Maintains and adheres to policies and procedures for ensuring
that the requirements in this paragraph (b) of this section have been
met.
(c) Originator-seller compliance with risk retention. The use of the
risk retention option provided in this section by an ABCP conduit
sponsor does not relieve the originator-seller that sponsors ABS
interests acquired by an eligible ABCP conduit from such originator-
seller's obligation to comply with its own risk retention obligations
under this part.
(d) Disclosures--(1) Periodic disclosures to investors. An ABCP
conduit sponsor relying upon this section shall provide, or cause to be
provided, to each purchaser of ABCP, before or contemporaneously with
the first sale of ABCP to such purchaser and at least monthly
thereafter, to each holder of commercial paper issued by the ABCP
conduit, in writing, each of the following items of information, which
shall be as of a date not more than 60 days prior to date of first use
with investors:
(i) The name and form of organization of the regulated liquidity
provider that provides liquidity coverage to the eligible ABCP conduit,
including a description of the material terms of such liquidity
coverage, and notice of any failure to fund.
(ii) With respect to each ABS interest held by the ABCP conduit:
(A) The asset class or brief description of the underlying
securitized assets;
(B) The standard industrial category code (SIC Code) for the
originator-seller that will retain (or has retained) pursuant to this
section an interest in the securitization transaction; and
(C) A description of the percentage amount of risk retention
pursuant to the rule by the originator-seller, and whether it is in the
form of an eligible horizontal residual interest, vertical interest, or
revolving pool securitization seller's interest, as applicable.
(2) Disclosures to regulators regarding originator-sellers. An ABCP
conduit sponsor relying upon this section shall provide, or cause to be
provided, upon request, to the Commission and its appropriate Federal
banking agency, if any, in writing, all of the information required to
be provided to investors in paragraph (d)(1) of this section, and the
name and form of organization of each originator-seller that will retain
(or has retained) pursuant to this section an interest in the
securitization transaction.
(e) Sale or transfer of ABS interests between eligible ABCP
conduits. At any time, an eligible ABCP conduit that acquired an ABS
interest in accordance with the requirements set forth in this section
may transfer, and another eligible ABCP conduit may acquire, such ABS
interest, if the following conditions are satisfied:
(1) The sponsors of both eligible ABCP conduits are in compliance
with this section; and
(2) The same regulated liquidity provider has entered into one or
more legally binding commitments to provide 100 percent liquidity
coverage to all the ABCP issued by both eligible ABCP conduits.
(f) Duty to comply. (1) The ABCP conduit sponsor shall be
responsible for compliance with this section.
(2) An ABCP conduit sponsor relying on this section:
(i) Shall maintain and adhere to policies and procedures that are
reasonably designed to monitor compliance by each originator-seller
which is satisfying a risk retention obligation in respect of ABS
interests acquired by an eligible ABCP conduit with the requirements of
paragraph (b)(1) of this section; and
(ii) In the event that the ABCP conduit sponsor determines that an
originator-seller no longer complies with
[[Page 184]]
the requirements of paragraph (b)(1) of this section, shall:
(A) Promptly notify the holders of the ABCP, and upon request, the
Commission and its appropriate Federal banking agency, if any, in
writing of:
(1) The name and form of organization of any originator-seller that
fails to retain risk in accordance with paragraph (b)(1) of this section
and the amount of ABS interests issued by an intermediate SPV of such
originator-seller and held by the ABCP conduit;
(2) The name and form of organization of any originator-seller that
hedges, directly or indirectly through an intermediate SPV, its risk
retention in violation of paragraph (b)(1) of this section and the
amount of ABS interests issued by an intermediate SPV of such
originator-seller and held by the ABCP conduit; and
(3) Any remedial actions taken by the ABCP conduit sponsor or other
party with respect to such ABS interests; and
(B) Take other appropriate steps pursuant to the requirements of
paragraphs (b)(2)(iv) and (v) of this section which may include, as
appropriate, curing any breach of the requirements in this section, or
removing from the eligible ABCP conduit any ABS interest that does not
comply with the requirements in this section.
Sec. 246.7 Commercial mortgage-backed securities.
(a) Definitions. For purposes of this section, the following
definition shall apply:
Special servicer means, with respect to any securitization of
commercial real estate loans, any servicer that, upon the occurrence of
one or more specified conditions in the servicing agreement, has the
right to service one or more assets in the transaction.
(b) Third-party purchaser. A sponsor may satisfy some or all of its
risk retention requirements under Sec. 246.3 with respect to a
securitization transaction if a third party (or any majority-owned
affiliate thereof) purchases and holds for its own account an eligible
horizontal residual interest in the issuing entity in the same form,
amount, and manner as would be held by the sponsor under Sec. 246.4 and
all of the following conditions are met:
(1) Number of third-party purchasers. At any time, there are no more
than two third-party purchasers of an eligible horizontal residual
interest. If there are two third-party purchasers, each third-party
purchaser's interest must be pari passu with the other third-party
purchaser's interest.
(2) Composition of collateral. The securitization transaction is
collateralized solely by commercial real estate loans and servicing
assets.
(3) Source of funds. (i) Each third-party purchaser pays for the
eligible horizontal residual interest in cash at the closing of the
securitization transaction.
(ii) No third-party purchaser obtains financing, directly or
indirectly, for the purchase of such interest from any other person that
is a party to, or an affiliate of a party to, the securitization
transaction (including, but not limited to, the sponsor, depositor, or
servicer other than a special servicer affiliated with the third-party
purchaser), other than a person that is a party to the transaction
solely by reason of being an investor.
(4) Third-party review. Each third-party purchaser conducts an
independent review of the credit risk of each securitized asset prior to
the sale of the asset-backed securities in the securitization
transaction that includes, at a minimum, a review of the underwriting
standards, collateral, and expected cash flows of each commercial real
estate loan that is collateral for the asset-backed securities.
(5) Affiliation and control rights. (i) Except as provided in
paragraph (b)(5)(ii) of this section, no third-party purchaser is
affiliated with any party to the securitization transaction (including,
but not limited to, the sponsor, depositor, or servicer) other than
investors in the securitization transaction.
(ii) Notwithstanding paragraph (b)(5)(i) of this section, a third-
party purchaser may be affiliated with:
(A) The special servicer for the securitization transaction; or
(B) One or more originators of the securitized assets, as long as
the assets originated by the affiliated originator or originators
collectively comprise
[[Page 185]]
less than 10 percent of the unpaid principal balance of the securitized
assets included in the securitization transaction at the cut-off date or
similar date for establishing the composition of the securitized assets
collateralizing the asset-backed securities issued pursuant to the
securitization transaction.
(6) Operating Advisor. The underlying securitization transaction
documents shall provide for the following:
(i) The appointment of an operating advisor (the Operating Advisor)
that:
(A) Is not affiliated with other parties to the securitization
transaction;
(B) Does not directly or indirectly have any financial interest in
the securitization transaction other than in fees from its role as
Operating Advisor; and
(C) Is required to act in the best interest of, and for the benefit
of, investors as a collective whole;
(ii) Standards with respect to the Operating Advisor's experience,
expertise and financial strength to fulfill its duties and
responsibilities under the applicable transaction documents over the
life of the securitization transaction;
(iii) The terms of the Operating Advisor's compensation with respect
to the securitization transaction;
(iv) When the eligible horizontal residual interest has been reduced
by principal payments, realized losses, and appraisal reduction amounts
(which reduction amounts are determined in accordance with the
applicable transaction documents) to a principal balance of 25 percent
or less of its initial principal balance, the special servicer for the
securitized assets must consult with the Operating Advisor in connection
with, and prior to, any material decision in connection with its
servicing of the securitized assets, including, without limitation:
(A) Any material modification of, or waiver with respect to, any
provision of a loan agreement (including a mortgage, deed of trust, or
other security agreement);
(B) Foreclosure upon or comparable conversion of the ownership of a
property; or
(C) Any acquisition of a property.
(v) The Operating Advisor shall have adequate and timely access to
information and reports necessary to fulfill its duties under the
transaction documents, including all reports made available to holders
of ABS interests and third-party purchasers, and shall be responsible
for:
(A) Reviewing the actions of the special servicer;
(B) Reviewing all reports provided by the special servicer to the
issuing entity or any holder of ABS interests;
(C) Reviewing for accuracy and consistency with the transaction
documents calculations made by the special servicer; and
(D) Issuing a report to investors (including any third-party
purchasers) and the issuing entity on a periodic basis concerning:
(1) Whether the Operating Advisor believes, in its sole discretion
exercised in good faith, that the special servicer is operating in
compliance with any standard required of the special servicer in the
applicable transaction documents; and
(2) Which, if any, standards the Operating Advisor believes, in its
sole discretion exercised in good faith, the special servicer has failed
to comply.
(vi)(A) The Operating Advisor shall have the authority to recommend
that the special servicer be replaced by a successor special servicer if
the Operating Advisor determines, in its sole discretion exercised in
good faith, that:
(1) The special servicer has failed to comply with a standard
required of the special servicer in the applicable transaction
documents; and
(2) Such replacement would be in the best interest of the investors
as a collective whole; and
(B) If a recommendation described in paragraph (b)(6)(vi)(A) of this
section is made, the special servicer shall be replaced upon the
affirmative vote of a majority of the outstanding principal balance of
all ABS interests voting on the matter, with a minimum of a quorum of
ABS interests voting on the matter. For purposes of such vote, the
applicable transaction documents shall specify the quorum and may not
specify a quorum of more than the holders of 20 percent of the
outstanding principal balance of all ABS interests in the issuing
entity, with such quorum including at least three ABS interest
[[Page 186]]
holders that are not affiliated with each other.
(7) Disclosures. The sponsor provides, or causes to be provided, to
potential investors a reasonable period of time prior to the sale of the
asset-backed securities as part of the securitization transaction and,
upon request, to the Commission and its appropriate Federal banking
agency, if any, the following disclosure in written form under the
caption ``Credit Risk Retention'':
(i) The name and form of organization of each initial third-party
purchaser that acquired an eligible horizontal residual interest at the
closing of a securitization transaction;
(ii) A description of each initial third-party purchaser's
experience in investing in commercial mortgage-backed securities;
(iii) Any other information regarding each initial third-party
purchaser or each initial third-party purchaser's retention of the
eligible horizontal residual interest that is material to investors in
light of the circumstances of the particular securitization transaction;
(iv) The fair value (expressed as a percentage of the fair value of
all of the ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS interests are issued, as applicable)) of the eligible horizontal
residual interest that will be retained (or was retained) by each
initial third-party purchaser, as well as the amount of the purchase
price paid by each initial third-party purchaser for such interest;
(v) The fair value (expressed as a percentage of the fair value of
all of the ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS interests are issued, as applicable)) of the eligible horizontal
residual interest in the securitization transaction that the sponsor
would have retained pursuant to Sec. 246.4 if the sponsor had relied on
retaining an eligible horizontal residual interest in that section to
meet the requirements of Sec. 246.3 with respect to the transaction;
(vi) A description of the material terms of the eligible horizontal
residual interest retained by each initial third-party purchaser,
including the same information as is required to be disclosed by
sponsors retaining horizontal interests pursuant to Sec. 246.4;
(vii) The material terms of the applicable transaction documents
with respect to the Operating Advisor, including without limitation:
(A) The name and form of organization of the Operating Advisor;
(B) A description of any material conflict of interest or material
potential conflict of interest between the Operating Advisor and any
other party to the transaction;
(C) The standards required by paragraph (b)(6)(ii) of this section
and a description of how the Operating Advisor satisfies each of the
standards; and
(D) The terms of the Operating Advisor's compensation under
paragraph (b)(6)(iii) of this section; and
(viii) The representations and warranties concerning the securitized
assets, a schedule of any securitized assets that are determined not to
comply with such representations and warranties, and what factors were
used to make the determination that such securitized assets should be
included in the pool notwithstanding that the securitized assets did not
comply with such representations and warranties, such as compensating
factors or a determination that the exceptions were not material.
(8) Hedging, transfer and pledging--(i) General rule. Except as set
forth in paragraph (b)(8)(ii) of this section, each third-party
purchaser and its affiliates must comply with the hedging and other
restrictions in Sec. 246.12 as if it were the retaining sponsor with
respect to the securitization transaction and had acquired the eligible
horizontal residual interest pursuant to Sec. 246.4; provided that, the
hedging and other restrictions in Sec. 246.12 shall not apply on or
after the date that each CRE loan (as defined in Sec. 246.14) that
serves as collateral for outstanding ABS interests has been defeased.
For purposes of this section, a loan is deemed to be defeased if:
[[Page 187]]
(A) cash or cash equivalents of the types permitted for an eligible
horizontal cash reserve account pursuant to Sec. 246.4 whose maturity
corresponds to the remaining debt service obligations, have been pledged
to the issuing entity as collateral for the loan and are in such amounts
and payable at such times as necessary to timely generate cash
sufficient to make all remaining debt service payments due on such loan;
and
(B) the issuing entity has an obligation to release its lien on the
loan.
(ii) Exceptions--(A) Transfer by initial third-party purchaser or
sponsor. An initial third-party purchaser that acquired an eligible
horizontal residual interest at the closing of a securitization
transaction in accordance with this section, or a sponsor that acquired
an eligible horizontal residual interest at the closing of a
securitization transaction in accordance with this section, may, on or
after the date that is five years after the date of the closing of the
securitization transaction, transfer that interest to a subsequent
third-party purchaser that complies with paragraph (b)(8)(ii)(C) of this
section. The initial third-party purchaser shall provide the sponsor
with complete identifying information for the subsequent third-party
purchaser.
(B) Transfer by subsequent third-party purchaser. At any time, a
subsequent third-party purchaser that acquired an eligible horizontal
residual interest pursuant to this section may transfer its interest to
a different third-party purchaser that complies with paragraph
(b)(8)(ii)(C) of this section. The transferring third-party purchaser
shall provide the sponsor with complete identifying information for the
acquiring third-party purchaser.
(C) Requirements applicable to subsequent third-party purchasers. A
subsequent third-party purchaser is subject to all of the requirements
of paragraphs (b)(1), (b)(3) through (5), and (b)(8) of this section
applicable to third-party purchasers, provided that obligations under
paragraphs (b)(1), (b)(3) through (5), and (b)(8) of this section that
apply to initial third-party purchasers at or before the time of closing
of the securitization transaction shall apply to successor third-party
purchasers at or before the time of the transfer of the eligible
horizontal residual interest to the successor third-party purchaser.
(c) Duty to comply. (1) The retaining sponsor shall be responsible
for compliance with this section by itself and for compliance by each
initial or subsequent third-party purchaser that acquired an eligible
horizontal residual interest in the securitization transaction.
(2) A sponsor relying on this section:
(i) Shall maintain and adhere to policies and procedures to monitor
each third-party purchaser's compliance with the requirements of
paragraphs (b)(1), (b)(3) through (5), and (b)(8) of this section; and
(ii) In the event that the sponsor determines that a third-party
purchaser no longer complies with one or more of the requirements of
paragraphs (b)(1), (b)(3) through (5), or (b)(8) of this section, shall
promptly notify, or cause to be notified, the holders of the ABS
interests issued in the securitization transaction of such noncompliance
by such third-party purchaser.
Sec. 246.8 Federal National Mortgage Association and Federal Home
Loan Mortgage Corporation ABS.
(a) In general. A sponsor satisfies its risk retention requirement
under this part if the sponsor fully guarantees the timely payment of
principal and interest on all ABS interests issued by the issuing entity
in the securitization transaction and is:
(1) The Federal National Mortgage Association or the Federal Home
Loan Mortgage Corporation operating under the conservatorship or
receivership of the Federal Housing Finance Agency pursuant to section
1367 of the Federal Housing Enterprises Financial Safety and Soundness
Act of 1992 (12 U.S.C. 4617) with capital support from the United
States; or
(2) Any limited-life regulated entity succeeding to the charter of
either the Federal National Mortgage Association or the Federal Home
Loan Mortgage Corporation pursuant to section 1367(i) of the Federal
Housing Enterprises Financial Safety and Soundness Act of 1992 (12
U.S.C. 4617(i)), provided that
[[Page 188]]
the entity is operating with capital support from the United States.
(b) Certain provisions not applicable. The provisions of Sec.
246.12(b), (c), and (d) shall not apply to a sponsor described in
paragraph (a)(1) or (2) of this section, its affiliates, or the issuing
entity with respect to a securitization transaction for which the
sponsor has retained credit risk in accordance with the requirements of
this section.
(c) Disclosure. A sponsor relying on this section shall provide to
investors, in written form under the caption ``Credit Risk Retention''
and, upon request, to the Federal Housing Finance Agency and the
Commission, a description of the manner in which it has met the credit
risk retention requirements of this part.
Sec. 246.9 Open market CLOs.
(a) Definitions. For purposes of this section, the following
definitions shall apply:
CLO means a special purpose entity that:
(i) Issues debt and equity interests, and
(ii) Whose assets consist primarily of loans that are securitized
assets and servicing assets.
CLO-eligible loan tranche means a term loan of a syndicated facility
that meets the criteria set forth in paragraph (c) of this section.
CLO manager means an entity that manages a CLO, which entity is
registered as an investment adviser under the Investment Advisers Act of
1940, as amended (15 U.S.C. 80b-1 et seq.), or is an affiliate of such a
registered investment adviser and itself is managed by such registered
investment adviser.
Commercial borrower means an obligor under a corporate credit
obligation (including a loan).
Initial loan syndication transaction means a transaction in which a
loan is syndicated to a group of lenders.
Lead arranger means, with respect to a CLO-eligible loan tranche, an
institution that:
(i) Is active in the origination, structuring and syndication of
commercial loan transactions (as defined in Sec. 246.14) and has played
a primary role in the structuring, underwriting and distribution on the
primary market of the CLO-eligible loan tranche.
(ii) Has taken an allocation of the funded portion of the syndicated
credit facility under the terms of the transaction that includes the
CLO-eligible loan tranche of at least 20 percent of the aggregate
principal balance at origination, and no other member (or members
affiliated with each other) of the syndication group that funded at
origination has taken a greater allocation; and
(iii) Is identified in the applicable agreement governing the CLO-
eligible loan tranche; represents therein to the holders of the CLO-
eligible loan tranche and to any holders of participation interests in
such CLO-eligible loan tranche that such lead arranger satisfies the
requirements of paragraph (i) of this definition and, at the time of
initial funding of the CLO-eligible tranche, will satisfy the
requirements of paragraph (ii) of this definition; further represents
therein (solely for the purpose of assisting such holders to determine
the eligibility of such CLO-eligible loan tranche to be held by an open
market CLO) that in the reasonable judgment of such lead arranger, the
terms of such CLO-eligible loan tranche are consistent with the
requirements of paragraphs (c)(2) and (3) of this section; and covenants
therein to such holders that such lead arranger will fulfill the
requirements of paragraph (c)(1) of this section.
Open market CLO means a CLO:
(i) Whose assets consist of senior, secured syndicated loans
acquired by such CLO directly from the sellers thereof in open market
transactions and of servicing assets,
(ii) That is managed by a CLO manager, and
(iii) That holds less than 50 percent of its assets, by aggregate
outstanding principal amount, in loans syndicated by lead arrangers that
are affiliates of the CLO or the CLO manager or originated by
originators that are affiliates of the CLO or the CLO manager.
Open market transaction means:
(i) Either an initial loan syndication transaction or a secondary
market transaction in which a seller offers senior, secured syndicated
loans to prospective purchasers in the loan market
[[Page 189]]
on market terms on an arm's length basis, which prospective purchasers
include, but are not limited to, entities that are not affiliated with
the seller, or
(ii) A reverse inquiry from a prospective purchaser of a senior,
secured syndicated loan through a dealer in the loan market to purchase
a senior, secured syndicated loan to be sourced by the dealer in the
loan market.
Secondary market transaction means a purchase of a senior, secured
syndicated loan not in connection with an initial loan syndication
transaction but in the secondary market.
Senior, secured syndicated loan means a loan made to a commercial
borrower that:
(i) Is not subordinate in right of payment to any other obligation
for borrowed money of the commercial borrower,
(ii) Is secured by a valid first priority security interest or lien
in or on specified collateral securing the commercial borrower's
obligations under the loan, and
(iii) The value of the collateral subject to such first priority
security interest or lien, together with other attributes of the obligor
(including, without limitation, its general financial condition, ability
to generate cash flow available for debt service and other demands for
that cash flow), is adequate (in the commercially reasonable judgment of
the CLO manager exercised at the time of investment) to repay the loan
and to repay all other indebtedness of equal seniority secured by such
first priority security interest or lien in or on the same collateral,
and the CLO manager certifies, on or prior to each date that it acquires
a loan constituting part of a new CLO-eligible tranche, that it has
policies and procedures to evaluate the likelihood of repayment of loans
acquired by the CLO and it has followed such policies and procedures in
evaluating each CLO-eligible loan tranche.
(b) In general. A sponsor satisfies the risk retention requirements
of Sec. 246.3 with respect to an open market CLO transaction if:
(1) The open market CLO does not acquire or hold any assets other
than CLO-eligible loan tranches that meet the requirements of paragraph
(c) of this section and servicing assets;
(2) The governing documents of such open market CLO require that, at
all times, the assets of the open market CLO consist of senior, secured
syndicated loans that are CLO-eligible loan tranches and servicing
assets;
(3) The open market CLO does not invest in ABS interests or in
credit derivatives other than hedging transactions that are servicing
assets to hedge risks of the open market CLO;
(4) All purchases of CLO-eligible loan tranches and other assets by
the open market CLO issuing entity or through a warehouse facility used
to accumulate the loans prior to the issuance of the CLO's ABS interests
are made in open market transactions on an arms-length basis;
(5) The CLO manager of the open market CLO is not entitled to
receive any management fee or gain on sale at the time the open market
CLO issues its ABS interests.
(c) CLO-eligible loan tranche. To qualify as a CLO-eligible loan
tranche, a term loan of a syndicated credit facility to a commercial
borrower must have the following features:
(1) A minimum of 5 percent of the face amount of the CLO-eligible
loan tranche is retained by the lead arranger thereof until the earliest
of the repayment, maturity, involuntary and unscheduled acceleration,
payment default, or bankruptcy default of such CLO-eligible loan
tranche, provided that such lead arranger complies with limitations on
hedging, transferring and pledging in Sec. 246.12 with respect to the
interest retained by the lead arranger.
(2) Lender voting rights within the credit agreement and any
intercreditor or other applicable agreements governing such CLO-eligible
loan tranche are defined so as to give holders of the CLO-eligible loan
tranche consent rights with respect to, at minimum, any material waivers
and amendments of such applicable documents, including but not limited
to, adverse changes to the calculation or payments of amounts due to the
holders of the CLO-eligible tranche, alterations to pro rata
[[Page 190]]
provisions, changes to voting provisions, and waivers of conditions
precedent; and
(3) The pro rata provisions, voting provisions, and similar
provisions applicable to the security associated with such CLO-eligible
loan tranches under the CLO credit agreement and any intercreditor or
other applicable agreements governing such CLO-eligible loan tranches
are not materially less advantageous to the holder(s) of such CLO-
eligible tranche than the terms of other tranches of comparable
seniority in the broader syndicated credit facility.
(d) Disclosures. A sponsor relying on this section shall provide, or
cause to be provided, to potential investors a reasonable period of time
prior to the sale of the asset-backed securities in the securitization
transaction and at least annually with respect to the information
required by paragraph (d)(1) of this section and, upon request, to the
Commission and its appropriate Federal banking agency, if any, the
following disclosure in written form under the caption ``Credit Risk
Retention'':
(1) Open market CLOs. A complete list of every asset held by an open
market CLO (or before the CLO's closing, in a warehouse facility in
anticipation of transfer into the CLO at closing), including the
following information:
(i) The full legal name, Standard Industrial Classification (SIC)
category code, and legal entity identifier (LEI) issued by a utility
endorsed or otherwise governed by the Global LEI Regulatory Oversight
Committee or the Global LEI Foundation (if an LEI has been obtained by
the obligor) of the obligor of the loan or asset;
(ii) The full name of the specific loan tranche held by the CLO;
(iii) The face amount of the entire loan tranche held by the CLO,
and the face amount of the portion thereof held by the CLO;
(iv) The price at which the loan tranche was acquired by the CLO;
and
(v) For each loan tranche, the full legal name of the lead arranger
subject to the sales and hedging restrictions of Sec. 246.12; and
(2) CLO manager. The full legal name and form of organization of the
CLO manager.
Sec. 246.10 Qualified tender option bonds.
(a) Definitions. For purposes of this section, the following
definitions shall apply:
Municipal security or municipal securities shall have the same
meaning as the term ``municipal securities'' in Section 3(a)(29) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(29)) and any rules
promulgated pursuant to such section.
Qualified tender option bond entity means an issuing entity with
respect to tender option bonds for which each of the following applies:
(i) Such entity is collateralized solely by servicing assets and by
municipal securities that have the same municipal issuer and the same
underlying obligor or source of payment (determined without regard to
any third-party credit enhancement), and such municipal securities are
not subject to substitution.
(ii) Such entity issues no securities other than:
(A) A single class of tender option bonds with a preferred variable
return payable out of capital that meets the requirements of paragraph
(b) of this section, and
(B) One or more residual equity interests that, in the aggregate,
are entitled to all remaining income of the issuing entity.
(C) The types of securities referred to in paragraphs (ii)(A) and
(B) of this definition must constitute asset-backed securities.
(iii) The municipal securities held as assets by such entity are
issued in compliance with Section 103 of the Internal Revenue Code of
1986, as amended (the ``IRS Code'', 26 U.S.C. 103), such that the
interest payments made on those securities are excludable from the gross
income of the owners under Section 103 of the IRS Code.
(iv) The terms of all of the securities issued by the entity are
structured so that all holders of such securities who are eligible to
exclude interest received on such securities will be able to exclude
that interest from gross income pursuant to Section 103 of the IRS Code
[[Page 191]]
or as ``exempt-interest dividends'' pursuant to Section 852(b)(5) of the
IRS Code (26 U.S.C. 852(b)(5)) in the case of regulated investment
companies under the Investment Company Act of 1940, as amended.
(v) Such entity has a legally binding commitment from a regulated
liquidity provider as defined in Sec. 246.6(a), to provide a 100
percent guarantee or liquidity coverage with respect to all of the
issuing entity's outstanding tender option bonds.
(vi) Such entity qualifies for monthly closing elections pursuant to
IRS Revenue Procedure 2003-84, as amended or supplemented from time to
time.
Tender option bond means a security which has features which entitle
the holders to tender such bonds to the issuing entity for purchase at
any time upon no more than 397 days' notice, for a purchase price equal
to the approximate amortized cost of the security, plus accrued
interest, if any, at the time of tender.
(b) Risk retention options. Notwithstanding anything in this
section, the sponsor with respect to an issuance of tender option bonds
may retain an eligible vertical interest or eligible horizontal residual
interest, or any combination thereof, in accordance with the
requirements of Sec. 246.4. In order to satisfy its risk retention
requirements under this section, the sponsor with respect to an issuance
of tender option bonds by a qualified tender option bond entity may
retain:
(1) An eligible vertical interest or an eligible horizontal residual
interest, or any combination thereof, in accordance with the
requirements of Sec. 246.4; or
(2) An interest that meets the requirements set forth in paragraph
(c) of this section; or
(3) A municipal security that meets the requirements set forth in
paragraph (d) of this section; or
(4) Any combination of interests and securities described in
paragraphs (b)(1) through (b)(3) of this section such that the sum of
the percentages held in each form equals at least five.
(c) Tender option termination event. The sponsor with respect to an
issuance of tender option bonds by a qualified tender option bond entity
may retain an interest that upon issuance meets the requirements of an
eligible horizontal residual interest but that upon the occurrence of a
``tender option termination event'' as defined in Section 4.01(5) of IRS
Revenue Procedure 2003-84, as amended or supplemented from time to time
will meet the requirements of an eligible vertical interest.
(d) Retention of a municipal security outside of the qualified
tender option bond entity. The sponsor with respect to an issuance of
tender option bonds by a qualified tender option bond entity may satisfy
its risk retention requirements under this Section by holding municipal
securities from the same issuance of municipal securities deposited in
the qualified tender option bond entity, the face value of which
retained municipal securities is equal to 5 percent of the face value of
the municipal securities deposited in the qualified tender option bond
entity.
(e) Disclosures. The sponsor shall provide, or cause to be provided,
to potential investors a reasonable period of time prior to the sale of
the asset-backed securities as part of the securitization transaction
and, upon request, to the Commission and its appropriate Federal banking
agency, if any, the following disclosure in written form under the
caption ``Credit Risk Retention'':
(1) The name and form of organization of the qualified tender option
bond entity;
(2) A description of the form and subordination features of such
retained interest in accordance with the disclosure obligations in Sec.
246.4(c);
(3) To the extent any portion of the retained interest is claimed by
the sponsor as an eligible horizontal residual interest (including any
interest held in compliance with Sec. 246.10(c)), the fair value of
that interest (expressed as a percentage of the fair value of all of the
ABS interests issued in the securitization transaction and as a dollar
amount);
(4) To the extent any portion of the retained interest is claimed by
the sponsor as an eligible vertical interest (including any interest
held in compliance with Sec. 246.10(c)), the percentage of ABS
interests issued represented by the eligible vertical interest; and
[[Page 192]]
(5) To the extent any portion of the retained interest claimed by
the sponsor is a municipal security held outside of the qualified tender
option bond entity, the name and form of organization of the qualified
tender option bond entity, the identity of the issuer of the municipal
securities, the face value of the municipal securities deposited into
the qualified tender option bond entity, and the face value of the
municipal securities retained by the sponsor or its majority-owned
affiliates and subject to the transfer and hedging prohibition.
(f) Prohibitions on Hedging and Transfer. The prohibitions on
transfer and hedging set forth in Sec. 246.12, apply to any interests
or municipal securities retained by the sponsor with respect to an
issuance of tender option bonds by a qualified tender option bond entity
pursuant to of this section.
Subpart C_Transfer of Risk Retention
Sec. 246.11 Allocation of risk retention to an originator.
(a) In general. A sponsor choosing to retain an eligible vertical
interest or an eligible horizontal residual interest (including an
eligible horizontal cash reserve account), or combination thereof under
Sec. 246.4, with respect to a securitization transaction may offset the
amount of its risk retention requirements under Sec. 246.4 by the
amount of the eligible interests, respectively, acquired by an
originator of one or more of the securitized assets if:
(1) At the closing of the securitization transaction:
(i) The originator acquires the eligible interest from the sponsor
and retains such interest in the same manner and proportion (as between
horizontal and vertical interests) as the sponsor under Sec. 246.4, as
such interest was held prior to the acquisition by the originator;
(ii) The ratio of the percentage of eligible interests acquired and
retained by the originator to the percentage of eligible interests
otherwise required to be retained by the sponsor pursuant to Sec.
246.4, does not exceed the ratio of:
(A) The unpaid principal balance of all the securitized assets
originated by the originator; to
(B) The unpaid principal balance of all the securitized assets in
the securitization transaction;
(iii) The originator acquires and retains at least 20 percent of the
aggregate risk retention amount otherwise required to be retained by the
sponsor pursuant to Sec. 246.4; and
(iv) The originator purchases the eligible interests from the
sponsor at a price that is equal, on a dollar-for-dollar basis, to the
amount by which the sponsor's required risk retention is reduced in
accordance with this section, by payment to the sponsor in the form of:
(A) Cash; or
(B) A reduction in the price received by the originator from the
sponsor or depositor for the assets sold by the originator to the
sponsor or depositor for inclusion in the pool of securitized assets.
(2) Disclosures. In addition to the disclosures required pursuant to
Sec. 246.4(c), the sponsor provides, or causes to be provided, to
potential investors a reasonable period of time prior to the sale of the
asset-backed securities as part of the securitization transaction and,
upon request, to the Commission and its appropriate Federal banking
agency, if any, in written form under the caption ``Credit Risk
Retention'', the name and form of organization of any originator that
will acquire and retain (or has acquired and retained) an interest in
the transaction pursuant to this section, including a description of the
form and amount (expressed as a percentage and dollar amount (or
corresponding amount in the foreign currency in which the ABS interests
are issued, as applicable)) and nature (e.g., senior or subordinated) of
the interest, as well as the method of payment for such interest under
paragraph (a)(1)(iv) of this section.
(3) Hedging, transferring and pledging. The originator and each of
its affiliates complies with the hedging and other restrictions in Sec.
246.12 with respect to the interests retained by the originator pursuant
to this section as if it were the retaining sponsor and was required
[[Page 193]]
to retain the interest under subpart B of this part.
(b) Duty to comply. (1) The retaining sponsor shall be responsible
for compliance with this section.
(2) A retaining sponsor relying on this section:
(i) Shall maintain and adhere to policies and procedures that are
reasonably designed to monitor the compliance by each originator that is
allocated a portion of the sponsor's risk retention obligations with the
requirements in paragraphs (a)(1) and (3) of this section; and
(ii) In the event the sponsor determines that any such originator no
longer complies with any of the requirements in paragraphs (a)(1) and
(3) of this section, shall promptly notify, or cause to be notified, the
holders of the ABS interests issued in the securitization transaction of
such noncompliance by such originator.
Sec. 246.12 Hedging, transfer and financing prohibitions.
(a) Transfer. Except as permitted by Sec. 246.7(b)(8), and subject
to Sec. 246.5, a retaining sponsor may not sell or otherwise transfer
any interest or assets that the sponsor is required to retain pursuant
to subpart B of this part to any person other than an entity that is and
remains a majority-owned affiliate of the sponsor and each such
majority-owned affiliate shall be subject to the same restrictions.
(b) Prohibited hedging by sponsor and affiliates. A retaining
sponsor and its affiliates may not purchase or sell a security, or other
financial instrument, or enter into an agreement, derivative or other
position, with any other person if:
(1) Payments on the security or other financial instrument or under
the agreement, derivative, or position are materially related to the
credit risk of one or more particular ABS interests that the retaining
sponsor (or any of its majority-owned affiliates) is required to retain
with respect to a securitization transaction pursuant to subpart B of
this part or one or more of the particular securitized assets that
collateralize the asset-backed securities issued in the securitization
transaction; and
(2) The security, instrument, agreement, derivative, or position in
any way reduces or limits the financial exposure of the sponsor (or any
of its majority-owned affiliates) to the credit risk of one or more of
the particular ABS interests that the retaining sponsor (or any of its
majority-owned affiliates) is required to retain with respect to a
securitization transaction pursuant to subpart B of this part or one or
more of the particular securitized assets that collateralize the asset-
backed securities issued in the securitization transaction.
(c) Prohibited hedging by issuing entity. The issuing entity in a
securitization transaction may not purchase or sell a security or other
financial instrument, or enter into an agreement, derivative or
position, with any other person if:
(1) Payments on the security or other financial instrument or under
the agreement, derivative or position are materially related to the
credit risk of one or more particular ABS interests that the retaining
sponsor for the transaction (or any of its majority-owned affiliates) is
required to retain with respect to the securitization transaction
pursuant to subpart B of this part; and
(2) The security, instrument, agreement, derivative, or position in
any way reduces or limits the financial exposure of the retaining
sponsor (or any of its majority-owned affiliates) to the credit risk of
one or more of the particular ABS interests that the sponsor (or any of
its majority-owned affiliates) is required to retain pursuant to subpart
B of this part.
(d) Permitted hedging activities. The following activities shall not
be considered prohibited hedging activities under paragraph (b) or (c)
of this section:
(1) Hedging the interest rate risk (which does not include the
specific interest rate risk, known as spread risk, associated with the
ABS interest that is otherwise considered part of the credit risk) or
foreign exchange risk arising from one or more of the particular ABS
interests required to be retained by the sponsor (or any of its
majority-owned affiliates) under subpart B of this part or one or more
of the
[[Page 194]]
particular securitized assets that underlie the asset-backed securities
issued in the securitization transaction; or
(2) Purchasing or selling a security or other financial instrument
or entering into an agreement, derivative, or other position with any
third party where payments on the security or other financial instrument
or under the agreement, derivative, or position are based, directly or
indirectly, on an index of instruments that includes asset-backed
securities if:
(i) Any class of ABS interests in the issuing entity that were
issued in connection with the securitization transaction and that are
included in the index represents no more than 10 percent of the dollar-
weighted average (or corresponding weighted average in the currency in
which the ABS interests are issued, as applicable) of all instruments
included in the index; and
(ii) All classes of ABS interests in all issuing entities that were
issued in connection with any securitization transaction in which the
sponsor (or any of its majority-owned affiliates) is required to retain
an interest pursuant to subpart B of this part and that are included in
the index represent, in the aggregate, no more than 20 percent of the
dollar-weighted average (or corresponding weighted average in the
currency in which the ABS interests are issued, as applicable) of all
instruments included in the index.
(e) Prohibited non-recourse financing. Neither a retaining sponsor
nor any of its affiliates may pledge as collateral for any obligation
(including a loan, repurchase agreement, or other financing transaction)
any ABS interest that the sponsor is required to retain with respect to
a securitization transaction pursuant to subpart B of this part unless
such obligation is with full recourse to the sponsor or affiliate,
respectively.
(f) Duration of the hedging and transfer restrictions--(1) General
rule. Except as provided in paragraph (f)(2) of this section, the
prohibitions on sale and hedging pursuant to paragraphs (a) and (b) of
this section shall expire on or after the date that is the latest of:
(i) The date on which the total unpaid principal balance (if
applicable) of the securitized assets that collateralize the
securitization transaction has been reduced to 33 percent of the total
unpaid principal balance of the securitized assets as of the cut-off
date or similar date for establishing the composition of the securitized
assets collateralizing the asset-backed securities issued pursuant to
the securitization transaction;
(ii) The date on which the total unpaid principal obligations under
the ABS interests issued in the securitization transaction has been
reduced to 33 percent of the total unpaid principal obligations of the
ABS interests at closing of the securitization transaction; or
(iii) Two years after the date of the closing of the securitization
transaction.
(2) Securitizations of residential mortgages. (i) If all of the
assets that collateralize a securitization transaction subject to risk
retention under this part are residential mortgages, the prohibitions on
sale and hedging pursuant to paragraphs (a) and (b) of this section
shall expire on or after the date that is the later of:
(A) Five years after the date of the closing of the securitization
transaction; or
(B) The date on which the total unpaid principal balance of the
residential mortgages that collateralize the securitization transaction
has been reduced to 25 percent of the total unpaid principal balance of
such residential mortgages at the cut-off date or similar date for
establishing the composition of the securitized assets collateralizing
the asset-backed securities issued pursuant to the securitization
transaction.
(ii) Notwithstanding paragraph (f)(2)(i) of this section, the
prohibitions on sale and hedging pursuant to paragraphs (a) and (b) of
this section shall expire with respect to the sponsor of a
securitization transaction described in paragraph (f)(2)(i) of this
section on or after the date that is seven years after the date of the
closing of the securitization transaction.
(3) Conservatorship or receivership of sponsor. A conservator or
receiver of the sponsor (or any other person holding risk retention
pursuant to this
[[Page 195]]
part) of a securitization transaction is permitted to sell or hedge any
economic interest in the securitization transaction if the conservator
or receiver has been appointed pursuant to any provision of federal or
State law (or regulation promulgated thereunder) that provides for the
appointment of the Federal Deposit Insurance Corporation, or an agency
or instrumentality of the United States or of a State as conservator or
receiver, including without limitation any of the following authorities:
(i) 12 U.S.C. 1811;
(ii) 12 U.S.C. 1787;
(iii) 12 U.S.C. 4617; or
(iv) 12 U.S.C. 5382.
(4) Revolving pool securitizations. The provisions of paragraphs
(f)(1) and (2) are not available to sponsors of revolving pool
securitizations with respect to the forms of risk retention specified in
Sec. 246.5.
Subpart D_Exceptions and Exemptions
Sec. 246.13 Exemption for qualified residential mortgages.
(a) Definitions. For purposes of this section, the following
definitions shall apply:
Currently performing means the borrower in the mortgage transaction
is not currently thirty (30) days or more past due, in whole or in part,
on the mortgage transaction.
Qualified residential mortgage means a ``qualified mortgage'' as
defined in section 129C of the Truth in Lending Act (15 U.S.C.1639c) and
regulations issued thereunder, as amended from time to time.
(b) Exemption. A sponsor shall be exempt from the risk retention
requirements in subpart B of this part with respect to any
securitization transaction, if:
(1) All of the assets that collateralize the asset-backed securities
are qualified residential mortgages or servicing assets;
(2) None of the assets that collateralize the asset-backed
securities are asset-backed securities;
(3) As of the cut-off date or similar date for establishing the
composition of the securitized assets collateralizing the asset-backed
securities issued pursuant to the securitization transaction, each
qualified residential mortgage collateralizing the asset-backed
securities is currently performing; and
(4)(i) The depositor with respect to the securitization transaction
certifies that it has evaluated the effectiveness of its internal
supervisory controls with respect to the process for ensuring that all
assets that collateralize the asset-backed security are qualified
residential mortgages or servicing assets and has concluded that its
internal supervisory controls are effective; and
(ii) The evaluation of the effectiveness of the depositor's internal
supervisory controls must be performed, for each issuance of an asset-
backed security in reliance on this section, as of a date within 60 days
of the cut-off date or similar date for establishing the composition of
the asset pool collateralizing such asset-backed security; and
(iii) The sponsor provides, or causes to be provided, a copy of the
certification described in paragraph (b)(4)(i) of this section to
potential investors a reasonable period of time prior to the sale of
asset-backed securities in the issuing entity, and, upon request, to the
Commission and its appropriate Federal banking agency, if any.
(c) Repurchase of loans subsequently determined to be non-qualified
after closing. A sponsor that has relied on the exemption provided in
paragraph (b) of this section with respect to a securitization
transaction shall not lose such exemption with respect to such
transaction if, after closing of the securitization transaction, it is
determined that one or more of the residential mortgage loans
collateralizing the asset-backed securities does not meet all of the
criteria to be a qualified residential mortgage provided that:
(1) The depositor complied with the certification requirement set
forth in paragraph (b)(4) of this section;
(2) The sponsor repurchases the loan(s) from the issuing entity at a
price at least equal to the remaining aggregate unpaid principal balance
and accrued interest on the loan(s) no later than 90 days after the
determination
[[Page 196]]
that the loans do not satisfy the requirements to be a qualified
residential mortgage; and
(3) The sponsor promptly notifies, or causes to be notified, the
holders of the asset-backed securities issued in the securitization
transaction of any loan(s) included in such securitization transaction
that is (or are) required to be repurchased by the sponsor pursuant to
paragraph (c)(2) of this section, including the amount of such
repurchased loan(s) and the cause for such repurchase.
Sec. 246.14 Definitions applicable to qualifying commercial loans,
qualifying commercial real estate loans, and qualifying automobile
loans.
The following definitions apply for purposes of Sec. Sec. 246.15
through 246.18:
Appraisal Standards Board means the board of the Appraisal
Foundation that develops, interprets, and amends the Uniform Standards
of Professional Appraisal Practice (USPAP), establishing generally
accepted standards for the appraisal profession.
Automobile loan:
(1) Means any loan to an individual to finance the purchase of, and
that is secured by a first lien on, a passenger car or other passenger
vehicle, such as a minivan, van, sport-utility vehicle, pickup truck, or
similar light truck for personal, family, or household use; and
(2) Does not include any:
(i) Loan to finance fleet sales;
(ii) Personal cash loan secured by a previously purchased
automobile;
(iii) Loan to finance the purchase of a commercial vehicle or farm
equipment that is not used for personal, family, or household purposes;
(iv) Lease financing;
(v) Loan to finance the purchase of a vehicle with a salvage title;
or
(vi) Loan to finance the purchase of a vehicle intended to be used
for scrap or parts.
Combined loan-to-value (CLTV) ratio means, at the time of
origination, the sum of the principal balance of a first-lien mortgage
loan on the property, plus the principal balance of any junior-lien
mortgage loan that, to the creditor's knowledge, would exist at the
closing of the transaction and that is secured by the same property,
divided by:
(1) For acquisition funding, the lesser of the purchase price or the
estimated market value of the real property based on an appraisal that
meets the requirements set forth in Sec. 246.17(a)(2)(ii); or
(2) For refinancing, the estimated market value of the real property
based on an appraisal that meets the requirements set forth in Sec.
246.17(a)(2)(ii).
Commercial loan means a secured or unsecured loan to a company or an
individual for business purposes, other than any:
(1) Loan to purchase or refinance a one-to-four family residential
property;
(2) Commercial real estate loan.
Commercial real estate (CRE) loan means:
(1) A loan secured by a property with five or more single family
units, or by nonfarm nonresidential real property, the primary source
(50 percent or more) of repayment for which is expected to be:
(i) The proceeds of the sale, refinancing, or permanent financing of
the property; or
(ii) Rental income associated with the property;
(2) Loans secured by improved land if the obligor owns the fee
interest in the land and the land is leased to a third party who owns
all improvements on the land, and the improvements are nonresidential or
residential with five or more single family units; and
(3) Does not include:
(i) A land development and construction loan (including 1- to 4-
family residential or commercial construction loans);
(ii) Any other land loan; or
(iii) An unsecured loan to a developer.
Debt service coverage (DSC) ratio means:
(1) For qualifying leased CRE loans, qualifying multi-family loans,
and other CRE loans:
(i) The annual NOI less the annual replacement reserve of the CRE
property at the time of origination of the CRE loan(s) divided by
(ii) The sum of the borrower's annual payments for principal and
interest
[[Page 197]]
(calculated at the fully-indexed rate) on any debt obligation.
(2) For commercial loans:
(i) The borrower's EBITDA as of the most recently completed fiscal
year divided by
(ii) The sum of the borrower's annual payments for principal and
interest on all debt obligations.
Debt to income (DTI) ratio means the borrower's total debt,
including the monthly amount due on the automobile loan, divided by the
borrower's monthly income.
Earnings before interest, taxes, depreciation, and amortization
(EBITDA) means the annual income of a business before expenses for
interest, taxes, depreciation and amortization are deducted, as
determined in accordance with GAAP.
Environmental risk assessment means a process for determining
whether a property is contaminated or exposed to any condition or
substance that could result in contamination that has an adverse effect
on the market value of the property or the realization of the collateral
value.
First lien means a lien or encumbrance on property that has priority
over all other liens or encumbrances on the property.
Junior lien means a lien or encumbrance on property that is lower in
priority relative to other liens or encumbrances on the property.
Leverage ratio means the borrower's total debt divided by the
borrower's EBITDA.
Loan-to-value (LTV) ratio means, at the time of origination, the
principal balance of a first-lien mortgage loan on the property divided
by:
(1) For acquisition funding, the lesser of the purchase price or the
estimated market value of the real property based on an appraisal that
meets the requirements set forth in Sec. 246.17(a)(2)(ii); or
(2) For refinancing, the estimated market value of the real property
based on an appraisal that meets the requirements set forth in Sec.
246.17(a)(2)(ii).
Model year means the year determined by the manufacturer and
reflected on the vehicle's Motor Vehicle Title as part of the vehicle
description.
Net operating income (NOI) refers to the income a CRE property
generates for the owner after all expenses have been deducted for
federal income tax purposes, except for depreciation, debt service
expenses, and federal and state income taxes, and excluding any unusual
and nonrecurring items of income.
Operating affiliate means an affiliate of a borrower that is a
lessor or similar party with respect to the commercial real estate
securing the loan.
Payments-in-kind means payments of accrued interest that are not
paid in cash when due, and instead are paid by increasing the principal
balance of the loan or by providing equity in the borrowing company.
Purchase money security interest means a security interest in
property that secures the obligation of the obligor incurred as all or
part of the price of the property.
Purchase price means the amount paid by the borrower for the vehicle
net of any incentive payments or manufacturer cash rebates.
Qualified tenant means:
(1) A tenant with a lease who has satisfied all obligations with
respect to the property in a timely manner; or
(2) A tenant who originally had a lease that subsequently expired
and currently is leasing the property on a month-to-month basis, has
occupied the property for at least three years prior to the date of
origination, and has satisfied all obligations with respect to the
property in a timely manner.
Qualifying leased CRE loan means a CRE loan secured by commercial
nonfarm real property, other than a multi-family property or a hotel,
inn, or similar property:
(1) That is occupied by one or more qualified tenants pursuant to a
lease agreement with a term of no less than one (1) month; and
(2) Where no more than 20 percent of the aggregate gross revenue of
the property is payable from one or more tenants who:
(i) Are subject to a lease that will terminate within six months
following the date of origination; or
(ii) Are not qualified tenants.
[[Page 198]]
Qualifying multi-family loan means a CRE loan secured by any
residential property (excluding a hotel, motel, inn, hospital, nursing
home, or other similar facility where dwellings are not leased to
residents):
(1) That consists of five or more dwelling units (including
apartment buildings, condominiums, cooperatives and other similar
structures) primarily for residential use; and
(2) Where at least 75 percent of the NOI is derived from residential
rents and tenant amenities (including income from parking garages,
health or swim clubs, and dry cleaning), and not from other commercial
uses.
Rental income means:
(1) Income derived from a lease or other occupancy agreement between
the borrower or an operating affiliate of the borrower and a party which
is not an affiliate of the borrower for the use of real property or
improvements serving as collateral for the applicable loan; and
(2) Other income derived from hotel, motel, dormitory, nursing home,
assisted living, mini-storage warehouse or similar properties that are
used primarily by parties that are not affiliates or employees of the
borrower or its affiliates.
Replacement reserve means the monthly capital replacement or
maintenance amount based on the property type, age, construction and
condition of the property that is adequate to maintain the physical
condition and NOI of the property.
Salvage title means a form of vehicle title branding, which notes
that the vehicle has been severely damaged and/or deemed a total loss
and uneconomical to repair by an insurance company that paid a claim on
the vehicle.
Total debt, with respect to a borrower, means:
(1) In the case of an automobile loan, the sum of:
(i) All monthly housing payments (rent- or mortgage-related,
including property taxes, insurance and home owners association fees);
and
(ii) Any of the following that is dependent upon the borrower's
income for payment:
(A) Monthly payments on other debt and lease obligations, such as
credit card loans or installment loans, including the monthly amount due
on the automobile loan;
(B) Estimated monthly amortizing payments for any term debt, debts
with other than monthly payments and debts not in repayment (such as
deferred student loans, interest-only loans); and
(C) Any required monthly alimony, child support or court-ordered
payments; and
(2) In the case of a commercial loan, the outstanding balance of all
long-term debt (obligations that have a remaining maturity of more than
one year) and the current portion of all debt that matures in one year
or less.
Total liabilities ratio means the borrower's total liabilities
divided by the sum of the borrower's total liabilities and equity, less
the borrower's intangible assets, with each component determined in
accordance with GAAP.
Trade-in allowance means the amount a vehicle purchaser is given as
a credit at the purchase of a vehicle for the fair exchange of the
borrower's existing vehicle to compensate the dealer for some portion of
the vehicle purchase price, not to exceed the highest trade-in value of
the existing vehicle, as determined by a nationally recognized
automobile pricing agency and based on the manufacturer, year, model,
features, mileage, and condition of the vehicle, less the payoff balance
of any outstanding debt collateralized by the existing vehicle.
Uniform Standards of Professional Appraisal Practice (USPAP) means
generally accepted standards for professional appraisal practice issued
by the Appraisal Standards Board of the Appraisal Foundation.
Sec. 246.15 Qualifying commercial loans, commercial real estate loans,
and automobile loans.
(a) General exception for qualifying assets. Commercial loans,
commercial real estate loans, and automobile loans that are securitized
through a securitization transaction shall be subject to a 0 percent
risk retention requirement under subpart B, provided that the following
conditions are met:
[[Page 199]]
(1) The assets meet the underwriting standards set forth in
Sec. Sec. 246.16 (qualifying commercial loans), 246.17 (qualifying CRE
loans), or 246.18 (qualifying automobile loans) of this part, as
applicable;
(2) The securitization transaction is collateralized solely by loans
of the same asset class and by servicing assets;
(3) The securitization transaction does not permit reinvestment
periods; and
(4) The sponsor provides, or causes to be provided, to potential
investors a reasonable period of time prior to the sale of asset-backed
securities of the issuing entity, and, upon request, to the Commission,
and to its appropriate Federal banking agency, if any, in written form
under the caption ``Credit Risk Retention'', a description of the manner
in which the sponsor determined the aggregate risk retention requirement
for the securitization transaction after including qualifying commercial
loans, qualifying CRE loans, or qualifying automobile loans with 0
percent risk retention.
(b) Risk retention requirement. For any securitization transaction
described in paragraph (a) of this section, the percentage of risk
retention required under Sec. 246.3(a) is reduced by the percentage
evidenced by the ratio of the unpaid principal balance of the qualifying
commercial loans, qualifying CRE loans, or qualifying automobile loans
(as applicable) to the total unpaid principal balance of commercial
loans, CRE loans, or automobile loans (as applicable) that are included
in the pool of assets collateralizing the asset-backed securities issued
pursuant to the securitization transaction (the qualifying asset ratio);
provided that:
(1) The qualifying asset ratio is measured as of the cut-off date or
similar date for establishing the composition of the securitized assets
collateralizing the asset-backed securities issued pursuant to the
securitization transaction;
(2) If the qualifying asset ratio would exceed 50 percent, the
qualifying asset ratio shall be deemed to be 50 percent; and
(3) The disclosure required by paragraph (a)(4) of this section also
includes descriptions of the qualifying commercial loans, qualifying CRE
loans, and qualifying automobile loans (qualifying assets) and
descriptions of the assets that are not qualifying assets, and the
material differences between the group of qualifying assets and the
group of assets that are not qualifying assets with respect to the
composition of each group's loan balances, loan terms, interest rates,
borrower credit information, and characteristics of any loan collateral.
(c) Exception for securitizations of qualifying assets only.
Notwithstanding other provisions of this section, the risk retention
requirements of subpart B of this part shall not apply to securitization
transactions where the transaction is collateralized solely by servicing
assets and either qualifying commercial loans, qualifying CRE loans, or
qualifying automobile loans.
(d) Record maintenance. A sponsor must retain the disclosures
required in paragraphs (a) and (b) of this section and the
certifications required in Sec. Sec. 246.16(a)(8), 246.17(a)(10), and
246.18(a)(8), as applicable, in its records until three years after all
ABS interests issued in the securitization are no longer outstanding.
The sponsor must provide the disclosures and certifications upon request
to the Commission and the sponsor's appropriate Federal banking agency,
if any.
Sec. 246.16 Underwriting standards for qualifying commercial loans.
(a) Underwriting, product and other standards. (1) Prior to
origination of the commercial loan, the originator:
(i) Verified and documented the financial condition of the borrower:
(A) As of the end of the borrower's two most recently completed
fiscal years; and
(B) During the period, if any, since the end of its most recently
completed fiscal year;
(ii) Conducted an analysis of the borrower's ability to service its
overall debt obligations during the next two years, based on reasonable
projections;
(iii) Determined that, based on the previous two years' actual
performance, the borrower had:
(A) A total liabilities ratio of 50 percent or less;
(B) A leverage ratio of 3.0 or less; and
[[Page 200]]
(C) A DSC ratio of 1.5 or greater;
(iv) Determined that, based on the two years of projections, which
include the new debt obligation, following the closing date of the loan,
the borrower will have:
(A) A total liabilities ratio of 50 percent or less;
(B) A leverage ratio of 3.0 or less; and
(C) A DSC ratio of 1.5 or greater.
(2) Prior to, upon or promptly following the inception of the loan,
the originator:
(i) If the loan is originated on a secured basis, obtains a
perfected security interest (by filing, title notation or otherwise) or,
in the case of real property, a recorded lien, on all of the property
pledged to collateralize the loan; and
(ii) If the loan documents indicate the purpose of the loan is to
finance the purchase of tangible or intangible property, or to refinance
such a loan, obtains a first lien on the property.
(3) The loan documentation for the commercial loan includes
covenants that:
(i) Require the borrower to provide to the servicer of the
commercial loan the borrower's financial statements and supporting
schedules on an ongoing basis, but not less frequently than quarterly;
(ii) Prohibit the borrower from retaining or entering into a debt
arrangement that permits payments-in-kind;
(iii) Impose limits on:
(A) The creation or existence of any other security interest or lien
with respect to any of the borrower's property that serves as collateral
for the loan;
(B) The transfer of any of the borrower's assets that serve as
collateral for the loan; and
(C) Any change to the name, location or organizational structure of
the borrower, or any other party that pledges collateral for the loan;
(iv) Require the borrower and any other party that pledges
collateral for the loan to:
(A) Maintain insurance that protects against loss on the collateral
for the commercial loan at least up to the amount of the loan, and that
names the originator or any subsequent holder of the loan as an
additional insured or loss payee;
(B) Pay taxes, charges, fees, and claims, where non-payment might
give rise to a lien on any collateral;
(C) Take any action required to perfect or protect the security
interest and first lien (as applicable) of the originator or any
subsequent holder of the loan in any collateral for the commercial loan
or the priority thereof, and to defend any collateral against claims
adverse to the lender's interest;
(D) Permit the originator or any subsequent holder of the loan, and
the servicer of the loan, to inspect any collateral for the commercial
loan and the books and records of the borrower; and
(E) Maintain the physical condition of any collateral for the
commercial loan.
(4) Loan payments required under the loan agreement are:
(i) Based on level monthly payments of principal and interest (at
the fully indexed rate) that fully amortize the debt over a term that
does not exceed five years from the date of origination; and
(ii) To be made no less frequently than quarterly over a term that
does not exceed five years.
(5) The primary source of repayment for the loan is revenue from the
business operations of the borrower.
(6) The loan was funded within the six (6) months prior to the cut-
off date or similar date for establishing the composition of the
securitized assets collateralizing the asset-backed securities issued
pursuant to the securitization transaction.
(7) At the cut-off date or similar date for establishing the
composition of the securitized assets collateralizing the asset-backed
securities issued pursuant to the securitization transaction, all
payments due on the loan are contractually current.
(8)(i) The depositor of the asset-backed security certifies that it
has evaluated the effectiveness of its internal supervisory controls
with respect to the process for ensuring that all qualifying commercial
loans that collateralize the asset-backed security and that reduce the
sponsor's risk retention requirement under Sec. 246.15 meet all of the
requirements set forth in paragraphs (a)(1) through (7) of this
[[Page 201]]
section and has concluded that its internal supervisory controls are
effective;
(ii) The evaluation of the effectiveness of the depositor's internal
supervisory controls referenced in paragraph (a)(8)(i) of this section
shall be performed, for each issuance of an asset-backed security, as of
a date within 60 days of the cut-off date or similar date for
establishing the composition of the asset pool collateralizing such
asset-backed security; and
(iii) The sponsor provides, or causes to be provided, a copy of the
certification described in paragraph (a)(8)(i) of this section to
potential investors a reasonable period of time prior to the sale of
asset-backed securities in the issuing entity, and, upon request, to its
appropriate Federal banking agency, if any.
(b) Cure or buy-back requirement. If a sponsor has relied on the
exception provided in Sec. 246.15 with respect to a qualifying
commercial loan and it is subsequently determined that the loan did not
meet all of the requirements set forth in paragraphs (a)(1) through (7)
of this section, the sponsor shall not lose the benefit of the exception
with respect to the commercial loan if the depositor complied with the
certification requirement set forth in paragraph (a)(8) of this section
and:
(1) The failure of the loan to meet any of the requirements set
forth in paragraphs (a)(1) through (7) of this section is not material;
or
(2) No later than 90 days after the determination that the loan does
not meet one or more of the requirements of paragraphs (a)(1) through
(7) of this section, the sponsor:
(i) Effectuates cure, establishing conformity of the loan to the
unmet requirements as of the date of cure; or
(ii) Repurchases the loan(s) from the issuing entity at a price at
least equal to the remaining principal balance and accrued interest on
the loan(s) as of the date of repurchase.
(3) If the sponsor cures or repurchases pursuant to paragraph (b)(2)
of this section, the sponsor must promptly notify, or cause to be
notified, the holders of the asset-backed securities issued in the
securitization transaction of any loan(s) included in such
securitization transaction that is required to be cured or repurchased
by the sponsor pursuant to paragraph (b)(2) of this section, including
the principal amount of such loan(s) and the cause for such cure or
repurchase.
Sec. 246.17 Underwriting standards for qualifying CRE loans.
(a) Underwriting, product and other standards. (1) The CRE loan must
be secured by the following:
(i) An enforceable first lien, documented and recorded appropriately
pursuant to applicable law, on the commercial real estate and
improvements;
(ii)(A) An assignment of:
(1) Leases and rents and other occupancy agreements related to the
commercial real estate or improvements or the operation thereof for
which the borrower or an operating affiliate is a lessor or similar
party and all payments under such leases and occupancy agreements; and
(2) All franchise, license and concession agreements related to the
commercial real estate or improvements or the operation thereof for
which the borrower or an operating affiliate is a lessor, licensor,
concession granter or similar party and all payments under such other
agreements, whether the assignments described in this paragraph
(a)(1)(ii)(A)(2) are absolute or are stated to be made to the extent
permitted by the agreements governing the applicable franchise, license
or concession agreements;
(B) An assignment of all other payments due to the borrower or due
to any operating affiliate in connection with the operation of the
property described in paragraph (a)(1)(i) of this section; and
(C) The right to enforce the agreements described in paragraph
(a)(1)(ii)(A) of this section and the agreements under which payments
under paragraph (a)(1)(ii)(B) of this section are due against, and
collect amounts due from, each lessee, occupant or other obligor whose
payments were assigned pursuant to paragraphs (a)(1)(ii)(A) or (B) of
this section upon a breach by the borrower of any of the terms of, or
the occurrence of any
[[Page 202]]
other event of default (however denominated) under, the loan documents
relating to such CRE loan; and
(iii) A security interest:
(A) In all interests of the borrower and any applicable operating
affiliate in all tangible and intangible personal property of any kind,
in or used in the operation of or in connection with, pertaining to,
arising from, or constituting, any of the collateral described in
paragraphs (a)(1)(i) or (ii) of this section; and
(B) In the form of a perfected security interest if the security
interest in such property can be perfected by the filing of a financing
statement, fixture filing, or similar document pursuant to the law
governing the perfection of such security interest;
(2) Prior to origination of the CRE loan, the originator:
(i) Verified and documented the current financial condition of the
borrower and each operating affiliate;
(ii) Obtained a written appraisal of the real property securing the
loan that:
(A) Had an effective date not more than six months prior to the
origination date of the loan by a competent and appropriately State-
certified or State-licensed appraiser;
(B) Conforms to generally accepted appraisal standards as evidenced
by the USPAP and the appraisal requirements \1\ of the Federal banking
agencies; and
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\1\ 12 CFR part 34, subpart C (OCC); 12 CFR part 208, subpart E, and
12 CFR part 225, subpart G (Board); and 12 CFR part 323 (FDIC).
---------------------------------------------------------------------------
(C) Provides an ``as is'' opinion of the market value of the real
property, which includes an income approach; \2\
---------------------------------------------------------------------------
\2\ See USPAP, Standard 1.
---------------------------------------------------------------------------
(iii) Qualified the borrower for the CRE loan based on a monthly
payment amount derived from level monthly payments consisting of both
principal and interest (at the fully-indexed rate) over the term of the
loan, not exceeding 25 years, or 30 years for a qualifying multi-family
property;
(iv) Conducted an environmental risk assessment to gain
environmental information about the property securing the loan and took
appropriate steps to mitigate any environmental liability determined to
exist based on this assessment;
(v) Conducted an analysis of the borrower's ability to service its
overall debt obligations during the next two years, based on reasonable
projections (including operating income projections for the property);
(vi)(A) Determined that based on the two years' actual performance
immediately preceding the origination of the loan, the borrower would
have had:
(1) A DSC ratio of 1.5 or greater, if the loan is a qualifying
leased CRE loan, net of any income derived from a tenant(s) who is not a
qualified tenant(s);
(2) A DSC ratio of 1.25 or greater, if the loan is a qualifying
multi-family property loan; or
(3) A DSC ratio of 1.7 or greater, if the loan is any other type of
CRE loan;
(B) If the borrower did not own the property for any part of the
last two years prior to origination, the calculation of the DSC ratio,
for purposes of paragraph (a)(2)(vi)(A) of this section, shall include
the property's operating income for any portion of the two-year period
during which the borrower did not own the property;
(vii) Determined that, based on two years of projections, which
include the new debt obligation, following the origination date of the
loan, the borrower will have:
(A) A DSC ratio of 1.5 or greater, if the loan is a qualifying
leased CRE loan, net of any income derived from a tenant(s) who is not a
qualified tenant(s);
(B) A DSC ratio of 1.25 or greater, if the loan is a qualifying
multi-family property loan; or
(C) A DSC ratio of 1.7 or greater, if the loan is any other type of
CRE loan.
(3) The loan documentation for the CRE loan includes covenants that:
(i) Require the borrower to provide the borrower's financial
statements and supporting schedules to the servicer on an ongoing basis,
but not less frequently than quarterly, including information on
existing, maturing and new leasing or rent-roll activity for the
property securing the loan, as appropriate; and
(ii) Impose prohibitions on:
[[Page 203]]
(A) The creation or existence of any other security interest with
respect to the collateral for the CRE loan described in paragraphs
(a)(1)(i) and (a)(1)(ii)(A) of this section, except as provided in
paragraph (a)(4) of this section;
(B) The transfer of any collateral for the CRE loan described in
paragraph (a)(1)(i) or (a)(1)(ii)(A) of this section or of any other
collateral consisting of fixtures, furniture, furnishings, machinery or
equipment other than any such fixture, furniture, furnishings, machinery
or equipment that is obsolete or surplus; and
(C) Any change to the name, location or organizational structure of
any borrower, operating affiliate or other pledgor unless such borrower,
operating affiliate or other pledgor shall have given the holder of the
loan at least 30 days advance notice and, pursuant to applicable law
governing perfection and priority, the holder of the loan is able to
take all steps necessary to continue its perfection and priority during
such 30-day period.
(iii) Require each borrower and each operating affiliate to:
(A) Maintain insurance that protects against loss on collateral for
the CRE loan described in paragraph (a)(1)(i) of this section for an
amount no less than the replacement cost of the property improvements,
and names the originator or any subsequent holder of the loan as an
additional insured or lender loss payee;
(B) Pay taxes, charges, fees, and claims, where non-payment might
give rise to a lien on collateral for the CRE loan described in
paragraphs (a)(1)(i) and (ii) of this section;
(C) Take any action required to:
(1) Protect the security interest and the enforceability and
priority thereof in the collateral described in paragraphs (a)(1)(i) and
(a)(1)(ii)(A) of this section and defend such collateral against claims
adverse to the originator's or any subsequent holder's interest; and
(2) Perfect the security interest of the originator or any
subsequent holder of the loan in any other collateral for the CRE loan
to the extent that such security interest is required by this section to
be perfected;
(D) Permit the originator or any subsequent holder of the loan, and
the servicer, to inspect any collateral for the CRE loan and the books
and records of the borrower or other party relating to any collateral
for the CRE loan;
(E) Maintain the physical condition of collateral for the CRE loan
described in paragraph (a)(1)(i) of this section;
(F) Comply with all environmental, zoning, building code, licensing
and other laws, regulations, agreements, covenants, use restrictions,
and proffers applicable to collateral for the CRE loan described in
paragraph (a)(1)(i) of this section;
(G) Comply with leases, franchise agreements, condominium
declarations, and other documents and agreements relating to the
operation of collateral for the CRE loan described in paragraph
(a)(1)(i) of this section, and to not modify any material terms and
conditions of such agreements over the term of the loan without the
consent of the originator or any subsequent holder of the loan, or the
servicer; and
(H) Not materially alter collateral for the CRE loan described in
paragraph (a)(1)(i) of this section without the consent of the
originator or any subsequent holder of the loan, or the servicer.
(4) The loan documentation for the CRE loan prohibits the borrower
and each operating affiliate from obtaining a loan secured by a junior
lien on collateral for the CRE loan described in paragraph (a)(1)(i) or
(a)(1)(ii)(A) of this section, unless:
(i) The sum of the principal amount of such junior lien loan, plus
the principal amount of all other loans secured by collateral described
in paragraph (a)(1)(i) or (a)(1)(ii)(A) of this section, does not exceed
the applicable CLTV ratio in paragraph (a)(5) of this section, based on
the appraisal at origination of such junior lien loan; or
(ii) Such loan is a purchase money obligation that financed the
acquisition of machinery or equipment and the borrower or operating
affiliate (as applicable) pledges such machinery and equipment as
additional collateral for the CRE loan.
(5) At origination, the applicable loan-to-value ratios for the loan
are:
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(i) LTV less than or equal to 65 percent and CLTV less than or equal
to 70 percent; or
(ii) LTV less than or equal to 60 percent and CLTV less than or
equal to 65 percent, if an appraisal used to meet the requirements set
forth in paragraph (a)(2)(ii) of this section used a direct
capitalization rate, and that rate is less than or equal to the sum of:
(A) The 10-year swap rate, as reported in the Federal Reserve's H.15
Report (or any successor report) as of the date concurrent with the
effective date of such appraisal; and
(B) 300 basis points.
(iii) If the appraisal required under paragraph (a)(2)(ii) of this
section included a direct capitalization method using an overall
capitalization rate, that rate must be disclosed to potential investors
in the securitization.
(6) All loan payments required to be made under the loan agreement
are:
(i) Based on level monthly payments of principal and interest (at
the fully indexed rate) to fully amortize the debt over a term that does
not exceed 25 years, or 30 years for a qualifying multifamily loan; and
(ii) To be made no less frequently than monthly over a term of at
least ten years.
(7) Under the terms of the loan agreement:
(i) Any maturity of the note occurs no earlier than ten years
following the date of origination;
(ii) The borrower is not permitted to defer repayment of principal
or payment of interest; and
(iii) The interest rate on the loan is:
(A) A fixed interest rate;
(B) An adjustable interest rate and the borrower, prior to or
concurrently with origination of the CRE loan, obtained a derivative
that effectively results in a fixed interest rate; or
(C) An adjustable interest rate and the borrower, prior to or
concurrently with origination of the CRE loan, obtained a derivative
that established a cap on the interest rate for the term of the loan,
and the loan meets the underwriting criteria in paragraphs (a)(2)(vi)
and (vii) of this section using the maximum interest rate allowable
under the interest rate cap.
(8) The originator does not establish an interest reserve at
origination to fund all or part of a payment on the loan.
(9) At the cut-off date or similar date for establishing the
composition of the securitized assets collateralizing the asset-backed
securities issued pursuant to the securitization transaction, all
payments due on the loan are contractually current.
(10)(i) The depositor of the asset-backed security certifies that it
has evaluated the effectiveness of its internal supervisory controls
with respect to the process for ensuring that all qualifying CRE loans
that collateralize the asset-backed security and that reduce the
sponsor's risk retention requirement under Sec. 246.15 meet all of the
requirements set forth in paragraphs (a)(1) through (9) of this section
and has concluded that its internal supervisory controls are effective;
(ii) The evaluation of the effectiveness of the depositor's internal
supervisory controls referenced in paragraph (a)(10)(i) of this section
shall be performed, for each issuance of an asset-backed security, as of
a date within 60 days of the cut-off date or similar date for
establishing the composition of the asset pool collateralizing such
asset-backed security;
(iii) The sponsor provides, or causes to be provided, a copy of the
certification described in paragraph (a)(10)(i) of this section to
potential investors a reasonable period of time prior to the sale of
asset-backed securities in the issuing entity, and, upon request, to its
appropriate Federal banking agency, if any; and
(11) Within two weeks of the closing of the CRE loan by its
originator or, if sooner, prior to the transfer of such CRE loan to the
issuing entity, the originator shall have obtained a UCC lien search
from the jurisdiction of organization of the borrower and each operating
affiliate, that does not report, as of the time that the security
interest of the originator in the property described in paragraph
(a)(1)(iii) of this section was perfected, other higher priority liens
of record on any property described in paragraph (a)(1)(iii) of this
section, other than purchase money security interests.
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(b) Cure or buy-back requirement. If a sponsor has relied on the
exception provided in Sec. 246.15 with respect to a qualifying CRE loan
and it is subsequently determined that the CRE loan did not meet all of
the requirements set forth in paragraphs (a)(1) through (9) and (a)(11)
of this section, the sponsor shall not lose the benefit of the exception
with respect to the CRE loan if the depositor complied with the
certification requirement set forth in paragraph (a)(10) of this
section, and:
(1) The failure of the loan to meet any of the requirements set
forth in paragraphs (a)(1) through (9) and (a)(11) of this section is
not material; or;
(2) No later than 90 days after the determination that the loan does
not meet one or more of the requirements of paragraphs (a)(1) through
(9) or (a)(11) of this section, the sponsor:
(i) Effectuates cure, restoring conformity of the loan to the unmet
requirements as of the date of cure; or
(ii) Repurchases the loan(s) from the issuing entity at a price at
least equal to the remaining principal balance and accrued interest on
the loan(s) as of the date of repurchase.
(3) If the sponsor cures or repurchases pursuant to paragraph (b)(2)
of this section, the sponsor must promptly notify, or cause to be
notified, the holders of the asset-backed securities issued in the
securitization transaction of any loan(s) included in such
securitization transaction that is required to be cured or repurchased
by the sponsor pursuant to paragraph (b)(2) of this section, including
the principal amount of such repurchased loan(s) and the cause for such
cure or repurchase.
Sec. 246.18 Underwriting standards for qualifying automobile loans.
(a) Underwriting, product and other standards. (1) Prior to
origination of the automobile loan, the originator:
(i) Verified and documented that within 30 days of the date of
origination:
(A) The borrower was not currently 30 days or more past due, in
whole or in part, on any debt obligation;
(B) Within the previous 24 months, the borrower has not been 60 days
or more past due, in whole or in part, on any debt obligation;
(C) Within the previous 36 months, the borrower has not:
(1) Been a debtor in a proceeding commenced under Chapter 7
(Liquidation), Chapter 11 (Reorganization), Chapter 12 (Family Farmer or
Family Fisherman plan), or Chapter 13 (Individual Debt Adjustment) of
the U.S. Bankruptcy Code; or
(2) Been the subject of any federal or State judicial judgment for
the collection of any unpaid debt;
(D) Within the previous 36 months, no one-to-four family property
owned by the borrower has been the subject of any foreclosure, deed in
lieu of foreclosure, or short sale; or
(E) Within the previous 36 months, the borrower has not had any
personal property repossessed;
(ii) Determined and documented that the borrower has at least 24
months of credit history; and
(iii) Determined and documented that, upon the origination of the
loan, the borrower's DTI ratio is less than or equal to 36 percent.
(A) For the purpose of making the determination under paragraph
(a)(1)(iii) of this section, the originator must:
(1) Verify and document all income of the borrower that the
originator includes in the borrower's effective monthly income (using
payroll stubs, tax returns, profit and loss statements, or other similar
documentation); and
(2) On or after the date of the borrower's written application and
prior to origination, obtain a credit report regarding the borrower from
a consumer reporting agency that compiles and maintain files on
consumers on a nationwide basis (within the meaning of 15 U.S.C.
1681a(p)) and verify that all outstanding debts reported in the
borrower's credit report are incorporated into the calculation of the
borrower's DTI ratio under paragraph (a)(1)(iii) of this section;
(2) An originator will be deemed to have met the requirements of
paragraph (a)(1)(i) of this section if:
(i) The originator, no more than 30 days before the closing of the
loan, obtains a credit report regarding the borrower from a consumer
reporting agency that compiles and maintains files on
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consumers on a nationwide basis (within the meaning of 15 U.S.C.
1681a(p));
(ii) Based on the information in such credit report, the borrower
meets all of the requirements of paragraph (a)(1)(i) of this section,
and no information in a credit report subsequently obtained by the
originator before the closing of the loan contains contrary information;
and
(iii) The originator obtains electronic or hard copies of the credit
report.
(3) At closing of the automobile loan, the borrower makes a down
payment from the borrower's personal funds and trade-in allowance, if
any, that is at least equal to the sum of:
(i) The full cost of the vehicle title, tax, and registration fees;
(ii) Any dealer-imposed fees;
(iii) The full cost of any additional warranties, insurance or other
products purchased in connection with the purchase of the vehicle; and
(iv) 10 percent of the vehicle purchase price.
(4) The originator records a first lien securing the loan on the
purchased vehicle in accordance with State law.
(5) The terms of the loan agreement provide a maturity date for the
loan that does not exceed the lesser of:
(i) Six years from the date of origination; or
(ii) 10 years minus the difference between the current model year
and the vehicle's model year.
(6) The terms of the loan agreement:
(i) Specify a fixed rate of interest for the life of the loan;
(ii) Provide for a level monthly payment amount that fully amortizes
the amount financed over the loan term;
(iii) Do not permit the borrower to defer repayment of principal or
payment of interest; and
(iv) Require the borrower to make the first payment on the
automobile loan within 45 days of the loan's contract date.
(7) At the cut-off date or similar date for establishing the
composition of the securitized assets collateralizing the asset-backed
securities issued pursuant to the securitization transaction, all
payments due on the loan are contractually current; and
(8)(i) The depositor of the asset-backed security certifies that it
has evaluated the effectiveness of its internal supervisory controls
with respect to the process for ensuring that all qualifying automobile
loans that collateralize the asset-backed security and that reduce the
sponsor's risk retention requirement under Sec. 246.15 meet all of the
requirements set forth in paragraphs (a)(1) through (7) of this section
and has concluded that its internal supervisory controls are effective;
(ii) The evaluation of the effectiveness of the depositor's internal
supervisory controls referenced in paragraph (a)(8)(i) of this section
shall be performed, for each issuance of an asset-backed security, as of
a date within 60 days of the cut-off date or similar date for
establishing the composition of the asset pool collateralizing such
asset-backed security; and
(iii) The sponsor provides, or causes to be provided, a copy of the
certification described in paragraph (a)(8)(i) of this section to
potential investors a reasonable period of time prior to the sale of
asset-backed securities in the issuing entity, and, upon request, to its
appropriate Federal banking agency, if any.
(b) Cure or buy-back requirement. If a sponsor has relied on the
exception provided in Sec. 246.15 with respect to a qualifying
automobile loan and it is subsequently determined that the loan did not
meet all of the requirements set forth in paragraphs (a)(1) through (7)
of this section, the sponsor shall not lose the benefit of the exception
with respect to the automobile loan if the depositor complied with the
certification requirement set forth in paragraph (a)(8) of this section,
and:
(1) The failure of the loan to meet any of the requirements set
forth in paragraphs (a)(1) through (7) of this section is not material;
or
(2) No later than ninety (90) days after the determination that the
loan does not meet one or more of the requirements of paragraphs (a)(1)
through (7) of this section, the sponsor:
(i) Effectuates cure, establishing conformity of the loan to the
unmet requirements as of the date of cure; or
(ii) Repurchases the loan(s) from the issuing entity at a price at
least equal to the remaining principal balance and
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accrued interest on the loan(s) as of the date of repurchase.
(3) If the sponsor cures or repurchases pursuant to paragraph (b)(2)
of this section, the sponsor must promptly notify, or cause to be
notified, the holders of the asset-backed securities issued in the
securitization transaction of any loan(s) included in such
securitization transaction that is required to be cured or repurchased
by the sponsor pursuant to paragraph (b)(2) of this section, including
the principal amount of such loan(s) and the cause for such cure or
repurchase.
Sec. 246.19 General exemptions.
(a) Definitions. For purposes of this section, the following
definitions shall apply:
Community-focused residential mortgage means a residential mortgage
exempt from the definition of ``covered transaction'' under Sec.
1026.43(a)(3)(iv) and (v) of the CFPB's Regulation Z (12 CFR
1026.43(a)).
First pay class means a class of ABS interests for which all
interests in the class are entitled to the same priority of payment and
that, at the time of closing of the transaction, is entitled to
repayments of principal and payments of interest prior to or pro-rata
with all other classes of securities collateralized by the same pool of
first-lien residential mortgages, until such class has no principal or
notional balance remaining.
Inverse floater means an ABS interest issued as part of a
securitization transaction for which interest or other income is payable
to the holder based on a rate or formula that varies inversely to a
reference rate of interest.
Qualifying three-to-four unit residential mortgage loan means a
mortgage loan that is:
(i) Secured by a dwelling (as defined in 12 CFR 1026.2(a)(19)) that
is owner occupied and contains three-to-four housing units;
(ii) Is deemed to be for business purposes for purposes of
Regulation Z under 12 CFR part 1026, Supplement I, paragraph 3(a)(5)(i);
and
(iii) Otherwise meets all of the requirements to qualify as a
qualified mortgage under Sec. 1026.43(e) and (f) of Regulation Z (12
CFR 1026.43(e) and (f)) as if the loan were a covered transaction under
that section.
(b) This part shall not apply to:
(1) U.S. Government-backed securitizations. Any securitization
transaction that:
(i) Is collateralized solely by residential, multifamily, or health
care facility mortgage loan assets that are insured or guaranteed (in
whole or in part) as to the payment of principal and interest by the
United States or an agency of the United States, and servicing assets;
or
(ii) Involves the issuance of asset-backed securities that:
(A) Are insured or guaranteed as to the payment of principal and
interest by the United States or an agency of the United States; and
(B) Are collateralized solely by residential, multifamily, or health
care facility mortgage loan assets or interests in such assets, and
servicing assets.
(2) Certain agricultural loan securitizations. Any securitization
transaction that is collateralized solely by loans or other assets made,
insured, guaranteed, or purchased by any institution that is subject to
the supervision of the Farm Credit Administration, including the Federal
Agricultural Mortgage Corporation, and servicing assets;
(3) State and municipal securitizations. Any asset-backed security
that is a security issued or guaranteed by any State, or by any
political subdivision of a State, or by any public instrumentality of a
State that is exempt from the registration requirements of the
Securities Act of 1933 by reason of section 3(a)(2) of that Act (15
U.S.C. 77c(a)(2)); and
(4) Qualified scholarship funding bonds. Any asset-backed security
that meets the definition of a qualified scholarship funding bond, as
set forth in section 150(d)(2) of the Internal Revenue Code of 1986 (26
U.S.C. 150(d)(2)).
(5) Pass-through resecuritizations. Any securitization transaction
that:
(i) Is collateralized solely by servicing assets, and by asset-
backed securities:
(A) For which credit risk was retained as required under subpart B
of this part; or
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(B) That were exempted from the credit risk retention requirements
of this part pursuant to subpart D of this part;
(ii) Is structured so that it involves the issuance of only a single
class of ABS interests; and
(iii) Provides for the pass-through of all principal and interest
payments received on the underlying asset-backed securities (net of
expenses of the issuing entity) to the holders of such class.
(6) First-pay-class securitizations. Any securitization transaction
that:
(i) Is collateralized solely by servicing assets, and by first-pay
classes of asset-backed securities collateralized by first-lien
residential mortgages on properties located in any state:
(A) For which credit risk was retained as required under subpart B
of this part; or
(B) That were exempted from the credit risk retention requirements
of this part pursuant to subpart D of this part;
(ii) Does not provide for any ABS interest issued in the
securitization transaction to share in realized principal losses other
than pro rata with all other ABS interests issued in the securitization
transaction based on the current unpaid principal balance of such ABS
interests at the time the loss is realized;
(iii) Is structured to reallocate prepayment risk;
(iv) Does not reallocate credit risk (other than as a consequence of
reallocation of prepayment risk); and
(v) Does not include any inverse floater or similarly structured ABS
interest.
(7) Seasoned loans. (i) Any securitization transaction that is
collateralized solely by servicing assets, and by seasoned loans that
meet the following requirements:
(A) The loans have not been modified since origination; and
(B) None of the loans have been delinquent for 30 days or more.
(ii) For purposes of this paragraph, a seasoned loan means:
(A) With respect to asset-backed securities collateralized by
residential mortgages, a loan that has been outstanding and performing
for the longer of:
(1) A period of five years; or
(2) Until the outstanding principal balance of the loan has been
reduced to 25 percent of the original principal balance.
(3) Notwithstanding paragraphs (b)(7)(ii)(A)(1) and (2) of this
section, any residential mortgage loan that has been outstanding and
performing for a period of at least seven years shall be deemed a
seasoned loan.
(B) With respect to all other classes of asset-backed securities, a
loan that has been outstanding and performing for the longer of:
(1) A period of at least two years; or
(2) Until the outstanding principal balance of the loan has been
reduced to 33 percent of the original principal balance.
(8) Certain public utility securitizations. (i) Any securitization
transaction where the asset-back securities issued in the transaction
are secured by the intangible property right to collect charges for the
recovery of specified costs and such other assets, if any, of an issuing
entity that is wholly owned, directly or indirectly, by an investor
owned utility company that is subject to the regulatory authority of a
State public utility commission or other appropriate State agency.
(ii) For purposes of this paragraph:
(A) Specified cost means any cost identified by a State legislature
as appropriate for recovery through securitization pursuant to specified
cost recovery legislation; and
(B) Specified cost recovery legislation means legislation enacted by
a State that:
(1) Authorizes the investor owned utility company to apply for, and
authorizes the public utility commission or other appropriate State
agency to issue, a financing order determining the amount of specified
costs the utility will be allowed to recover;
(2) Provides that pursuant to a financing order, the utility
acquires an intangible property right to charge, collect, and receive
amounts necessary to provide for the full recovery of the specified
costs determined to be recoverable, and assures that the charges are
non-bypassable and will be paid by
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customers within the utility's historic service territory who receive
utility goods or services through the utility's transmission and
distribution system, even if those customers elect to purchase these
goods or services from a third party; and
(3) Guarantees that neither the State nor any of its agencies has
the authority to rescind or amend the financing order, to revise the
amount of specified costs, or in any way to reduce or impair the value
of the intangible property right, except as may be contemplated by
periodic adjustments authorized by the specified cost recovery
legislation.
(c) Exemption for securitizations of assets issued, insured or
guaranteed by the United States. This part shall not apply to any
securitization transaction if the asset-backed securities issued in the
transaction are:
(1) Collateralized solely by obligations issued by the United States
or an agency of the United States and servicing assets;
(2) Collateralized solely by assets that are fully insured or
guaranteed as to the payment of principal and interest by the United
States or an agency of the United States (other than those referred to
in paragraph (b)(1)(i) of this section) and servicing assets; or
(3) Fully guaranteed as to the timely payment of principal and
interest by the United States or any agency of the United States;
(d) Federal Deposit Insurance Corporation securitizations. This part
shall not apply to any securitization transaction that is sponsored by
the Federal Deposit Insurance Corporation acting as conservator or
receiver under any provision of the Federal Deposit Insurance Act or of
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection
Act.
(e) Reduced requirement for certain student loan securitizations.
The 5 percent risk retention requirement set forth in Sec. 246.4 shall
be modified as follows:
(1) With respect to a securitization transaction that is
collateralized solely by student loans made under the Federal Family
Education Loan Program (``FFELP loans'') that are guaranteed as to 100
percent of defaulted principal and accrued interest, and servicing
assets, the risk retention requirement shall be 0 percent;
(2) With respect to a securitization transaction that is
collateralized solely by FFELP loans that are guaranteed as to at least
98 percent but less than 100 percent of defaulted principal and accrued
interest, and servicing assets, the risk retention requirement shall be
2 percent; and
(3) With respect to any other securitization transaction that is
collateralized solely by FFELP loans, and servicing assets, the risk
retention requirement shall be 3 percent.
(f) Community-focused lending securitizations. (1) This part shall
not apply to any securitization transaction if the asset-backed
securities issued in the transaction are collateralized solely by
community-focused residential mortgages and servicing assets.
(2) For any securitization transaction that includes both community-
focused residential mortgages and residential mortgages that are not
exempt from risk retention under this part, the percent of risk
retention required under Sec. 246.4(a) is reduced by the ratio of the
unpaid principal balance of the community-focused residential mortgages
to the total unpaid principal balance of residential mortgages that are
included in the pool of assets collateralizing the asset-backed
securities issued pursuant to the securitization transaction (the
community-focused residential mortgage asset ratio); provided that:
(i) The community-focused residential mortgage asset ratio is
measured as of the cut-off date or similar date for establishing the
composition of the pool assets collateralizing the asset-backed
securities issued pursuant to the securitization transaction; and
(ii) If the community-focused residential mortgage asset ratio would
exceed 50 percent, the community-focused residential mortgage asset
ratio shall be deemed to be 50 percent.
(g) Exemptions for securitizations of certain three-to-four unit
mortgage loans. A sponsor shall be exempt from the risk retention
requirements in subpart B of this part with respect to any
securitization transaction if:
(1)(i) The asset-backed securities issued in the transaction are
collateralized solely by qualifying
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three-to-four unit residential mortgage loans and servicing assets; or
(ii) The asset-backed securities issued in the transaction are
collateralized solely by qualifying three-to-four unit residential
mortgage loans, qualified residential mortgages as defined in Sec.
246.13, and servicing assets.
(2) The depositor with respect to the securitization provides the
certifications set forth in Sec. 246.13(b)(4) with respect to the
process for ensuring that all assets that collateralize the asset-backed
securities issued in the transaction are qualifying three-to-four unit
residential mortgage loans, qualified residential mortgages, or
servicing assets; and
(3) The sponsor of the securitization complies with the repurchase
requirements in Sec. 246.13(c) with respect to a loan if, after
closing, it is determined that the loan does not meet all of the
criteria to be either a qualified residential mortgage or a qualifying
three-to-four unit residential mortgage loan, as appropriate.
(h) Rule of construction. Securitization transactions involving the
issuance of asset-backed securities that are either issued, insured, or
guaranteed by, or are collateralized by obligations issued by, or loans
that are issued, insured, or guaranteed by, the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation, or a
Federal home loan bank shall not on that basis qualify for exemption
under this part.
Sec. 246.20 Safe harbor for certain foreign-related transactions.
(a) Definitions. For purposes of this section, the following
definition shall apply:
U.S. person means:
(i) Any of the following:
(A) Any natural person resident in the United States;
(B) Any partnership, corporation, limited liability company, or
other organization or entity organized or incorporated under the laws of
any State or of the United States;
(C) Any estate of which any executor or administrator is a U.S.
person (as defined under any other clause of this definition);
(D) Any trust of which any trustee is a U.S. person (as defined
under any other clause of this definition);
(E) Any agency or branch of a foreign entity located in the United
States;
(F) Any non-discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary for the benefit or
account of a U.S. person (as defined under any other clause of this
definition);
(G) Any discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary organized,
incorporated, or (if an individual) resident in the United States; and
(H) Any partnership, corporation, limited liability company, or
other organization or entity if:
(1) Organized or incorporated under the laws of any foreign
jurisdiction; and
(2) Formed by a U.S. person (as defined under any other clause of
this definition) principally for the purpose of investing in securities
not registered under the Act; and
(ii) ``U.S. person(s)'' does not include:
(A) Any discretionary account or similar account (other than an
estate or trust) held for the benefit or account of a person not
constituting a U.S. person (as defined in paragraph (i) of this section)
by a dealer or other professional fiduciary organized, incorporated, or
(if an individual) resident in the United States;
(B) Any estate of which any professional fiduciary acting as
executor or administrator is a U.S. person (as defined in paragraph (i)
of this section) if:
(1) An executor or administrator of the estate who is not a U.S.
person (as defined in paragraph (i) of this section) has sole or shared
investment discretion with respect to the assets of the estate; and
(2) The estate is governed by foreign law;
(C) Any trust of which any professional fiduciary acting as trustee
is a U.S. person (as defined in paragraph (i) of this section), if a
trustee who is not a U.S. person (as defined in paragraph (i) of this
section) has sole or shared investment discretion with respect to the
trust assets, and no beneficiary of the
[[Page 211]]
trust (and no settlor if the trust is revocable) is a U.S. person (as
defined in paragraph (i) of this section);
(D) An employee benefit plan established and administered in
accordance with the law of a country other than the United States and
customary practices and documentation of such country;
(E) Any agency or branch of a U.S. person (as defined in paragraph
(i) of this section) located outside the United States if:
(1) The agency or branch operates for valid business reasons; and
(2) The agency or branch is engaged in the business of insurance or
banking and is subject to substantive insurance or banking regulation,
respectively, in the jurisdiction where located;
(F) The International Monetary Fund, the International Bank for
Reconstruction and Development, the Inter-American Development Bank, the
Asian Development Bank, the African Development Bank, the United
Nations, and their agencies, affiliates and pension plans, and any other
similar international organizations, their agencies, affiliates and
pension plans.
(b) In general. This part shall not apply to a securitization
transaction if all the following conditions are met:
(1) The securitization transaction is not required to be and is not
registered under the Securities Act of 1933 (15 U.S.C. 77a et seq.);
(2) No more than 10 percent of the dollar value (or equivalent
amount in the currency in which the ABS interests are issued, as
applicable) of all classes of ABS interests in the securitization
transaction are sold or transferred to U.S. persons or for the account
or benefit of U.S. persons;
(3) Neither the sponsor of the securitization transaction nor the
issuing entity is:
(i) Chartered, incorporated, or organized under the laws of the
United States or any State;
(ii) An unincorporated branch or office (wherever located) of an
entity chartered, incorporated, or organized under the laws of the
United States or any State; or
(iii) An unincorporated branch or office located in the United
States or any State of an entity that is chartered, incorporated, or
organized under the laws of a jurisdiction other than the United States
or any State; and
(4) If the sponsor or issuing entity is chartered, incorporated, or
organized under the laws of a jurisdiction other than the United States
or any State, no more than 25 percent (as determined based on unpaid
principal balance) of the assets that collateralize the ABS interests
sold in the securitization transaction were acquired by the sponsor or
issuing entity, directly or indirectly, from:
(i) A majority-owned affiliate of the sponsor or issuing entity that
is chartered, incorporated, or organized under the laws of the United
States or any State; or
(ii) An unincorporated branch or office of the sponsor or issuing
entity that is located in the United States or any State.
(c) Evasions prohibited. In view of the objective of these rules and
the policies underlying Section 15G of the Exchange Act, the safe harbor
described in paragraph (b) of this section is not available with respect
to any transaction or series of transactions that, although in technical
compliance with paragraphs (a) and (b) of this section, is part of a
plan or scheme to evade the requirements of section 15G and this part.
In such cases, compliance with section 15G and this part is required.
Sec. 246.21 Additional exemptions.
(a) Securitization transactions. The federal agencies with
rulewriting authority under section 15G(b) of the Exchange Act (15
U.S.C. 78o-11(b)) with respect to the type of assets involved may
jointly provide a total or partial exemption of any securitization
transaction as such agencies determine may be appropriate in the public
interest and for the protection of investors.
(b) Exceptions, exemptions, and adjustments. The Federal banking
agencies and the Commission, in consultation with the Federal Housing
Finance Agency and the Department of Housing and Urban Development, may
jointly adopt or issue exemptions, exceptions or adjustments to the
requirements of this part, including exemptions, exceptions or
adjustments for classes of institutions or assets in accordance with
[[Page 212]]
section 15G(e) of the Exchange Act (15 U.S.C. 78o-11(e)).
Sec. 246.22 Periodic review of the QRM definition, exempted three-to-four unit residential mortgage loans, and community-focused residential mortgage
exemption
(a) The Federal banking agencies and the Commission, in consultation
with the Federal Housing Finance Agency and the Department of Housing
and Urban Development, shall commence a review of the definition of
qualified residential mortgage in Sec. 246.13, a review of the
community-focused residential mortgage exemption in Sec. 246.19(f), and
a review of the exemption for qualifying three-to-four unit residential
mortgage loans in Sec. 246.19(g):
(1) No later than four years after the effective date of the rule
(as it relates to securitizers and originators of asset-backed
securities collateralized by residential mortgages), five years
following the completion of such initial review, and every five years
thereafter; and
(2) At any time, upon the request of any Federal banking agency, the
Commission, the Federal Housing Finance Agency or the Department of
Housing and Urban Development, specifying the reason for such request,
including as a result of any amendment to the definition of qualified
mortgage or changes in the residential housing market.
(b) The Federal banking agencies, the Commission, the Federal
Housing Finance Agency and the Department of Housing and Urban
Development shall publish in the Federal Register notice of the
commencement of a review and, in the case of a review commenced under
paragraph (a)(2) of this section, the reason an agency is requesting
such review. After completion of any review, but no later than six
months after the publication of the notice announcing the review, unless
extended by the agencies, the agencies shall jointly publish a notice
disclosing the determination of their review. If the agencies determine
to amend the definition of qualified residential mortgage, the agencies
shall complete any required rulemaking within 12 months of publication
in the Federal Register of such notice disclosing the determination of
their review, unless extended by the agencies.
PART 247_REGULATION R_EXEMPTIONS AND DEFINITIONS RELATED TO
THE EXCEPTIONS FOR BANKS FROM THE DEFINITION OF BROKER--Table of Contents
Sec.
247.100 Definition.
247.700 Defined terms relating to the networking exception from the
definition of ``broker.''
247.701 Exemption from the definition of ``broker'' for certain
institutional referrals.
247.721 Defined terms relating to the trust and fiduciary activities
exception from the definition of ``broker.''
247.722 Exemption allowing banks to calculate trust and fiduciary
compensation on a bank-wide basis.
247.723 Exemptions for special accounts, transferred accounts, foreign
branches, and a de minimis number of accounts.
247.740 Defined terms relating to the sweep accounts exception from the
definition of ``broker.''
247.741 Exemption for banks effecting transactions in money market
funds.
247.760 Exemption from definition of ``broker'' for banks accepting
orders to effect transactions in securities from or on behalf
of custody accounts.
247.771 Exemption from the definition of ``broker'' for banks effecting
transactions in securities issued pursuant to Regulation S.
247.772 Exemption from the definition of ``broker'' for banks engaging
in securities lending transactions.
247.775 Exemption from the definition of ``broker'' for banks effecting
certain excepted or exempted transactions in investment
company securities.
247.776 Exemption from the definition of ``broker'' for banks effecting
certain excepted or exempted transactions in a company's
securities for its employee benefit plans.
247.780 Exemption for banks from liability under section 29 of the
Securities Exchange Act of 1934.
247.781 Exemption from the definition of ``broker'' for banks for a
limited period of time.
Authority: 15 U.S.C. 78c, 78o, 78q, 78w, and 78mm.
Source: 72 FR 56554, Oct. 3, 2007, unless otherwise noted.
[[Page 213]]
Sec. 247.100 Definition.
For purposes of this part the following definition shall apply: Act
means the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).
Sec. 247.700 Defined terms relating to the networking exception from
the definition of ``broker.''
When used with respect to the Third Party Brokerage Arrangements
(``Networking'') Exception from the definition of the term ``broker'' in
section 3(a)(4)(B)(i) of the Act (15 U.S.C. 78c(a)(4)(B)(i)) in the
context of transactions with a customer, the following terms shall have
the meaning provided:
(a) Contingent on whether the referral results in a transaction
means dependent on whether the referral results in a purchase or sale of
a security; whether an account is opened with a broker or dealer;
whether the referral results in a transaction involving a particular
type of security; or whether it results in multiple securities
transactions; provided, however, that a referral fee may be contingent
on whether a customer:
(1) Contacts or keeps an appointment with a broker or dealer as a
result of the referral; or
(2) Meets any objective, base-line qualification criteria
established by the bank or broker or dealer for customer referrals,
including such criteria as minimum assets, net worth, income, or
marginal federal or state income tax rate, or any requirement for
citizenship or residency that the broker or dealer, or the bank, may
have established generally for referrals for securities brokerage
accounts.
(b)(1) Incentive compensation means compensation that is intended to
encourage a bank employee to refer customers to a broker or dealer or
give a bank employee an interest in the success of a securities
transaction at a broker or dealer. The term does not include
compensation paid by a bank under a bonus or similar plan that is:
(i) Paid on a discretionary basis; and
(ii) Based on multiple factors or variables and:
(A) Those factors or variables include multiple significant factors
or variables that are not related to securities transactions at the
broker or dealer;
(B) A referral made by the employee is not a factor or variable in
determining the employee's compensation under the plan; and
(C) The employee's compensation under the plan is not determined by
reference to referrals made by any other person.
(2) Nothing in this paragraph (b) shall be construed to prevent a
bank from compensating an officer, director or employee under a bonus or
similar plan on the basis of any measure of the overall profitability or
revenue of:
(i) The bank, either on a stand-alone or consolidated basis;
(ii) Any affiliate of the bank (other than a broker or dealer), or
any operating unit of the bank or an affiliate (other than a broker or
dealer), if the affiliate or operating unit does not over time
predominately engage in the business of making referrals to a broker or
dealer; or
(iii) A broker or dealer if:
(A) Such measure of overall profitability or revenue is only one of
multiple factors or variables used to determine the compensation of the
officer, director or employee;
(B) The factors or variables used to determine the compensation of
the officer, director or employee include multiple significant factors
or variables that are not related to the profitability or revenue of the
broker or dealer;
(C) A referral made by the employee is not a factor or variable in
determining the employee's compensation under the plan; and
(D) The employee's compensation under the plan is not determined by
reference to referrals made by any other person.
(c) Nominal one-time cash fee of a fixed dollar amount means a cash
payment for a referral, to a bank employee who was personally involved
in referring the customer to the broker or dealer, in an amount that
meets any of the following standards:
(1) The payment does not exceed:
(i) Twice the average of the minimum and maximum hourly wage
established by the bank for the current or prior year for the job family
that includes the employee; or
[[Page 214]]
(ii) 1/1000th of the average of the minimum and maximum annual base
salary established by the bank for the current or prior year for the job
family that includes the employee; or
(2) The payment does not exceed twice the employee's actual base
hourly wage or 1/1000th of the employee's actual annual base salary; or
(3) The payment does not exceed twenty-five dollars ($25), as
adjusted in accordance with paragraph (f) of this section.
(d) Job family means a group of jobs or positions involving similar
responsibilities, or requiring similar skills, education or training,
that a bank, or a separate unit, branch or department of a bank, has
established and uses in the ordinary course of its business to
distinguish among its employees for purposes of hiring, promotion, and
compensation.
(e) Referral means the action taken by one or more bank employees to
direct a customer of the bank to a broker or dealer for the purchase or
sale of securities for the customer's account.
(f) Inflation adjustment--(1) In general. On April 1, 2012, and on
the 1st day of each subsequent 5-year period, the dollar amount referred
to in paragraph (c)(3) of this section shall be adjusted by:
(i) Dividing the annual value of the Employment Cost Index For Wages
and Salaries, Private Industry Workers (or any successor index thereto),
as published by the Bureau of Labor Statistics, for the calendar year
preceding the calendar year in which the adjustment is being made by the
annual value of such index (or successor) for the calendar year ending
December 31, 2006; and
(ii) Multiplying the dollar amount by the quotient obtained in
paragraph (f)(1)(i) of this section.
(2) Rounding. If the adjusted dollar amount determined under
paragraph (f)(1) of this section for any period is not a multiple of $1,
the amount so determined shall be rounded to the nearest multiple of $1.
Sec. 247.701 Exemption from the definition of ``broker'' for certain
institutional referrals.
(a) General. A bank that meets the requirements for the exception
from the definition of ``broker'' under section 3(a)(4)(B)(i) of the Act
(15 U.S.C. 78c(a)(4)(B)(i)), other than section 3(a)(4)(B)(i)(VI) of the
Act (15 U.S.C. 78c(a)(4)(B)(i)(VI)), is exempt from the conditions of
section 3(a)(4)(B)(i)(VI) of the Act solely to the extent that a bank
employee receives a referral fee for referring a high net worth customer
or institutional customer to a broker or dealer with which the bank has
a contractual or other written arrangement of the type specified in
section 3(a)(4)(B)(i) of the Act, if:
(1) Bank employee. (i) The bank employee is:
(A) Not registered or approved, or otherwise required to be
registered or approved, in accordance with the qualification standards
established by the rules of any self-regulatory organization;
(B) Predominantly engaged in banking activities other than making
referrals to a broker or dealer; and
(C) Not subject to statutory disqualification, as that term is
defined in section 3(a)(39) of the Act (15 U.S.C. 78c(a)(39)), except
subparagraph (E) of that section; and
(ii) The high net worth customer or institutional customer is
encountered by the bank employee in the ordinary course of the
employee's assigned duties for the bank.
(2) Bank determinations and obligations--(i) Disclosures. The bank
provides the high net worth customer or institutional customer the
information set forth in paragraph (b) of this section
(A) In writing prior to or at the time of the referral; or
(B) Orally prior to or at the time of the referral and
(1) The bank provides such information to the customer in writing
within 3 business days of the date on which the bank employee refers the
customer to the broker or dealer; or
(2) The written agreement between the bank and the broker or dealer
provides for the broker or dealer to provide such information to the
customer
[[Page 215]]
in writing in accordance with paragraph (a)(3)(i) of this section.
(ii) Customer qualification. (A) In the case of a customer that is a
not a natural person, the bank has a reasonable basis to believe that
the customer is an institutional customer before the referral fee is
paid to the bank employee.
(B) In the case of a customer that is a natural person, the bank has
a reasonable basis to believe that the customer is a high net worth
customer prior to or at the time of the referral.
(iii) Employee qualification information. Before a referral fee is
paid to a bank employee under this section, the bank provides the broker
or dealer the name of the employee and such other identifying
information that may be necessary for the broker or dealer to determine
whether the bank employee is registered or approved, or otherwise
required to be registered or approved, in accordance with the
qualification standards established by the rules of any self-regulatory
organization or is subject to statutory disqualification, as that term
is defined in section 3(a)(39) of the Act (15 U.S.C. 78c(a)(39)), except
subparagraph (E) of that section.
(iv) Good faith compliance and corrections. A bank that acts in good
faith and that has reasonable policies and procedures in place to comply
with the requirements of this section shall not be considered a
``broker'' under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) solely
because the bank fails to comply with the provisions of this paragraph
(a)(2) with respect to a particular customer if the bank:
(A) Takes reasonable and prompt steps to remedy the error (such as,
for example, by promptly making the required determination or promptly
providing the broker or dealer the required information); and
(B) Makes reasonable efforts to reclaim the portion of the referral
fee paid to the bank employee for the referral that does not, following
any required remedial action, meet the requirements of this section and
that exceeds the amount otherwise permitted under section
3(a)(4)(B)(i)(VI) of the Act (15 U.S.C. 78c(a)(4)(B)(i)(VI)) and Sec.
247.700.
(3) Provisions of written agreement. The written agreement between
the bank and the broker or dealer shall require that:
(i) Broker-dealer written disclosures. If, pursuant to paragraph
(a)(2)(i)(B)(2) of this section, the broker or dealer is to provide the
customer in writing the disclosures set forth in paragraph (b) of this
section, the broker or dealer provides such information to the customer
in writing:
(A) Prior to or at the time the customer begins the process of
opening an account at the broker or dealer, if the customer does not
have an account with the broker or dealer; or
(B) Prior to the time the customer places an order for a securities
transaction with the broker or dealer as a result of the referral, if
the customer already has an account at the broker or dealer.
(ii) Customer and employee qualifications. Before the referral fee
is paid to the bank employee:
(A) The broker or dealer determine that the bank employee is not
subject to statutory disqualification, as that term is defined in
section 3(a)(39) of the Act (15 U.S.C. 78c(a)(39)), except subparagraph
(E) of that section; and
(B) The broker or dealer has a reasonable basis to believe that the
customer is a high net worth customer or an institutional customer.
(iii) Suitability or sophistication determination by broker or
dealer--(A) Contingent referral fees. In any case in which payment of
the referral fee is contingent on completion of a securities transaction
at the broker or dealer, the broker or dealer, before such securities
transaction is conducted, perform a suitability analysis of the
securities transaction in accordance with the rules of the broker or
dealer's applicable self-regulatory organization as if the broker or
dealer had recommended the securities transaction.
(B) Non-contingent referral fees. In any case in which payment of
the referral fee is not contingent on the completion of a securities
transaction at the broker or dealer, the broker or dealer, before the
referral fee is paid, either:
(1) Determine that the customer:
[[Page 216]]
(i) Has the capability to evaluate investment risk and make
independent decisions; and
(ii) Is exercising independent judgment based on the customer's own
independent assessment of the opportunities and risks presented by a
potential investment, market factors and other investment
considerations; or
(2) Perform a suitability analysis of all securities transactions
requested by the customer contemporaneously with the referral in
accordance with the rules of the broker or dealer's applicable self-
regulatory organization as if the broker or dealer had recommended the
securities transaction.
(iv) Notice to the customer. The broker or dealer inform the
customer if the broker or dealer determines that the customer or the
securities transaction(s) to be conducted by the customer does not meet
the applicable standard set forth in paragraph (a)(3)(iii) of this
section.
(v) Notice to the bank. The broker or dealer promptly inform the
bank if the broker or dealer determines that:
(A) The customer is not a high net worth customer or institutional
customer, as applicable; or
(B) The bank employee is subject to statutory disqualification, as
that term is defined in section 3(a)(39) of the Act (15 U.S.C.
78c(a)(39)), except subparagraph (E) of that section.
(b) Required disclosures. The disclosures provided to the high net
worth customer or institutional customer pursuant to paragraphs
(a)(2)(i) or (a)(3)(i) of this section shall clearly and conspicuously
disclose:
(1) The name of the broker or dealer; and
(2) That the bank employee participates in an incentive compensation
program under which the bank employee may receive a fee of more than a
nominal amount for referring the customer to the broker or dealer and
payment of this fee may be contingent on whether the referral results in
a transaction with the broker or dealer.
(c) Receipt of other compensation. Nothing in this section prevents
or prohibits a bank from paying or a bank employee from receiving any
type of compensation that would not be considered incentive compensation
under Sec. 247.700(b)(1) or that is described in Sec. 247.700(b)(2).
(d) Definitions. When used in this section:
(1) High net worth customer--(i) General. High net worth customer
means:
(A) Any natural person who, either individually or jointly with his
or her spouse, has at least $5 million in net worth excluding the
primary residence and associated liabilities of the person and, if
applicable, his or her spouse; and
(B) Any revocable, inter vivos or living trust the settlor of which
is a natural person who, either individually or jointly with his or her
spouse, meets the net worth standard set forth in paragraph (d)(1)(i)(A)
of this section.
(ii) Individual and spousal assets. In determining whether any
person is a high net worth customer, there may be included in the assets
of such person
(A) Any assets held individually;
(B) If the person is acting jointly with his or her spouse, any
assets of the person's spouse (whether or not such assets are held
jointly); and
(C) If the person is not acting jointly with his or her spouse,
fifty percent of any assets held jointly with such person's spouse and
any assets in which such person shares with such person's spouse a
community property or similar shared ownership interest.
(2) Institutional customer means any corporation, partnership,
limited liability company, trust or other non-natural person that has,
or is controlled by a non-natural person that has, at least:
(i) $10 million in investments; or
(ii) $20 million in revenues; or
(iii) $15 million in revenues if the bank employee refers the
customer to the broker or dealer for investment banking services.
(3) Investment banking services includes, without limitation, acting
as an underwriter in an offering for an issuer; acting as a financial
adviser in a merger, acquisition, tender offer or similar transaction;
providing venture capital, equity lines of credit, private investment-
private equity transactions or similar investments; serving as placement
agent for an issuer; and engaging in similar activities.
[[Page 217]]
(4) Referral fee means a fee (paid in one or more installments) for
the referral of a customer to a broker or dealer that is:
(i) A predetermined dollar amount, or a dollar amount determined in
accordance with a predetermined formula (such as a fixed percentage of
the dollar amount of total assets placed in an account with the broker
or dealer), that does not vary based on:
(A) The revenue generated by or the profitability of securities
transactions conducted by the customer with the broker or dealer; or
(B) The quantity, price, or identity of securities transactions
conducted over time by the customer with the broker or dealer; or
(C) The number of customer referrals made; or
(ii) A dollar amount based on a fixed percentage of the revenues
received by the broker or dealer for investment banking services
provided to the customer.
(e) Inflation adjustments--(1) In general. On April 1, 2012, and on
the 1st day of each subsequent 5-year period, each dollar amount in
paragraphs (d)(1) and (d)(2) of this section shall be adjusted by:
(i) Dividing the annual value of the Personal Consumption
Expenditures Chain-Type Price Index (or any successor index thereto), as
published by the Department of Commerce, for the calendar year preceding
the calendar year in which the adjustment is being made by the annual
value of such index (or successor) for the calendar year ending December
31, 2006; and
(ii) Multiplying the dollar amount by the quotient obtained in
paragraph (e)(1)(i) of this section.
(2) Rounding. If the adjusted dollar amount determined under
paragraph (e)(1) of this section for any period is not a multiple of
$100,000, the amount so determined shall be rounded to the nearest
multiple of $100,000.
[72 FR 56554, Oct. 3, 2007, as amended at 73 FR 20780, Apr. 17, 2008]
Sec. 247.721 Defined terms relating to the trust and fiduciary
activities exception from the definition of ``broker.''
(a) Defined terms for chiefly compensated test. For purposes of this
part and section 3(a)(4)(B)(ii) of the Act (15 U.S.C. 78c(a)(4)(B)(ii)),
the following terms shall have the meaning provided:
(1) Chiefly compensated--account-by-account test. Chiefly
compensated shall mean the relationship-total compensation percentage
for each trust or fiduciary account of the bank is greater than 50
percent.
(2) The relationship-total compensation percentage for a trust or
fiduciary account shall be the mean of the yearly compensation
percentage for the account for the immediately preceding year and the
yearly compensation percentage for the account for the year immediately
preceding that year.
(3) The yearly compensation percentage for a trust or fiduciary
account shall be
(i) Equal to the relationship compensation attributable to the trust
or fiduciary account during the year divided by the total compensation
attributable to the trust or fiduciary account during that year, with
the quotient expressed as a percentage; and
(ii) Calculated within 60 days of the end of the year.
(4) Relationship compensation means any compensation a bank receives
attributable to a trust or fiduciary account that consists of:
(i) An administration fee, including, without limitation, a fee
paid--
(A) For personal services, tax preparation, or real estate
settlement services;
(B) For disbursing funds from, or for recording receipt of payments
to, a trust or fiduciary account;
(C) In connection with securities lending or borrowing transactions;
(D) For custody services; or
(E) In connection with an investment in shares of an investment
company for personal service, the maintenance of shareholder accounts or
any service described in paragraph (a)(4)(iii)(C) of this section;
(ii) An annual fee (payable on a monthly, quarterly or other basis),
including, without limitation, a fee paid for assessing investment
performance or for reviewing compliance with applicable investment
guidelines or restrictions;
(iii) A fee based on a percentage of assets under management,
including, without limitation, a fee paid
[[Page 218]]
(A) Pursuant to a plan under Sec. 270.12b-1;
(B) In connection with an investment in shares of an investment
company for personal service or the maintenance of shareholder accounts;
(C) Based on a percentage of assets under management for any of the
following services--
(1) Providing transfer agent or sub-transfer agent services for
beneficial owners of investment company shares;
(2) Aggregating and processing purchase and redemption orders for
investment company shares;
(3) Providing beneficial owners with account statements showing
their purchases, sales, and positions in the investment company;
(4) Processing dividend payments for the investment company;
(5) Providing sub-accounting services to the investment company for
shares held beneficially;
(6) Forwarding communications from the investment company to the
beneficial owners, including proxies, shareholder reports, dividend and
tax notices, and updated prospectuses; or
(7) Receiving, tabulating, and transmitting proxies executed by
beneficial owners of investment company shares;
(D) Based on the financial performance of the assets in an account;
or
(E) For the types of services described in paragraph (a)(4)(i)(C) or
(D) of this section if paid based on a percentage of assets under
management;
(iv) A flat or capped per order processing fee, paid by or on behalf
of a customer or beneficiary, that is equal to not more than the cost
incurred by the bank in connection with executing securities
transactions for trust or fiduciary accounts; or
(v) Any combination of such fees.
(5) Trust or fiduciary account means an account for which the bank
acts in a trustee or fiduciary capacity as defined in section 3(a)(4)(D)
of the Act (15 U.S.C. 78c(a)(4)(D)).
(6) Year means a calendar year, or fiscal year consistently used by
the bank for recordkeeping and reporting purposes.
(b) Revenues derived from transactions conducted under other
exceptions or exemptions. For purposes of calculating the yearly
compensation percentage for a trust or fiduciary account, a bank may at
its election exclude the compensation associated with any securities
transaction conducted in accordance with the exceptions in section
3(a)(4)(B)(i) or sections 3(a)(4)(B)(iii)-(xi) of the Act (15 U.S.C.
78c(a)(4)(B)(i) or 78c(a)(4)(B)(iii)-(xi)) and the rules issued
thereunder, including any exemption related to such exceptions jointly
adopted by the Commission and the Board, provided that if the bank
elects to exclude such compensation, the bank must exclude the
compensation from both the relationship compensation (if applicable) and
total compensation for the account.
(c) Advertising restrictions--(1) In general. A bank complies with
the advertising restriction in section 3(a)(4)(B)(ii)(II) of the Act (15
U.S.C. 78c(a)(4)(B)(ii)(II)) if advertisements by or on behalf of the
bank do not advertise--
(i) That the bank provides securities brokerage services for trust
or fiduciary accounts except as part of advertising the bank's broader
trust or fiduciary services; and
(ii) The securities brokerage services provided by the bank to trust
or fiduciary accounts more prominently than the other aspects of the
trust or fiduciary services provided to such accounts.
(2) Advertisement. For purposes of this section, the term
advertisement has the same meaning as in Sec. 247.760(h)(2).
[72 FR 56554, Oct. 3, 2007, as amended at 73 FR 20780, Apr. 17, 2008]
Sec. 247.722 Exemption allowing banks to calculate trust and
fiduciary compensation on a bank-wide basis.
(a) General. A bank is exempt from meeting the ``chiefly
compensated'' condition in section 3(a)(4)(B)(ii)(I) of the Act (15
U.S.C. 78c(a)(4)(B)(ii)(I)) to the extent that it effects transactions
in securities for any account in a trustee or fiduciary capacity within
the scope of section 3(a)(4)(D) of the Act (15 U.S.C. 78c(a)(4)(D)) if:
(1) The bank meets the other conditions for the exception from the
definition of the term ``broker'' under sections 3(a)(4)(B)(ii) and
3(a)(4)(C) of the Act (15 U.S.C. 78c(a)(4)(B)(ii) and 15
[[Page 219]]
U.S.C. 78c(a)(4)(C)), including the advertising restrictions in section
3(a)(4)(B)(ii)(II) of the Act (15 U.S.C. 78c(a)(4)(B)(ii)(II) as
implemented by Sec. 247.721(c); and
(2) The aggregate relationship-total compensation percentage for the
bank's trust and fiduciary business is at least 70 percent.
(b) Aggregate relationship-total compensation percentage. For
purposes of this section, the aggregate relationship-total compensation
percentage for a bank's trust and fiduciary business shall be the mean
of the bank's yearly bank-wide compensation percentage for the
immediately preceding year and the bank's yearly bank-wide compensation
percentage for the year immediately preceding that year.
(c) Yearly bank-wide compensation percentage. For purposes of this
section, a bank's yearly bank-wide compensation percentage for a year
shall be
(1) Equal to the relationship compensation attributable to the
bank's trust and fiduciary business as a whole during the year divided
by the total compensation attributable to the bank's trust and fiduciary
business as a whole during that year, with the quotient expressed as a
percentage; and
(2) Calculated within 60 days of the end of the year.
(d) Revenues derived from transactions conducted under other
exceptions or exemptions. For purposes of calculating the yearly
compensation percentage for a trust or fiduciary account, a bank may at
its election exclude the compensation associated with any securities
transaction conducted in accordance with the exceptions in section
3(a)(4)(B)(i) or sections 3(a)(4)(B)(iii)-(xi) of the Act (15 U.S.C.
78c(a)(4)(B)(i) or 78c(a)(4)(B)(iii)-(xi)) and the rules issued
thereunder, including any exemption related to such sections jointly
adopted by the Commission and the Board, provided that if the bank
elects to exclude such compensation, the bank must exclude the
compensation from both the relationship compensation (if applicable) and
total compensation of the bank.
Sec. 247.723 Exemptions for special accounts, transferred accounts,
foreign branches and a de minimis number of accounts.
(a) Short-term accounts. A bank may, in determining its compliance
with the chiefly compensated test in Sec. 247.721(a)(1) or Sec.
247.722(a)(2), exclude any trust or fiduciary account that had been open
for a period of less than 3 months during the relevant year.
(b) Accounts acquired as part of a business combination or asset
acquisition. For purposes of determining compliance with the chiefly
compensated test in Sec. 247.721(a)(1) or Sec. 247.722(a)(2), any
trust or fiduciary account that a bank acquired from another person as
part of a merger, consolidation, acquisition, purchase of assets or
similar transaction may be excluded by the bank for 12 months after the
date the bank acquired the account from the other person.
(c) Non-shell foreign branches--(1) Exemption. For purposes of
determining compliance with the chiefly compensated test in Sec.
247.722(a)(2), a bank may exclude the trust or fiduciary accounts held
at a non-shell foreign branch of the bank if the bank has reasonable
cause to believe that trust or fiduciary accounts of the foreign branch
held by or for the benefit of a U.S. person as defined in 17 CFR
230.902(k) constitute less than 10 percent of the total number of trust
or fiduciary accounts of the foreign branch.
(2) Rules of construction. Solely for purposes of this paragraph
(c), a bank will be deemed to have reasonable cause to believe that a
trust or fiduciary account of a foreign branch of the bank is not held
by or for the benefit of a U.S. person if
(i) The principal mailing address maintained and used by the foreign
branch for the accountholder(s) and beneficiary(ies) of the account is
not in the United States; or
(ii) The records of the foreign branch indicate that the
accountholder(s) and beneficiary(ies) of the account is not a U.S.
person as defined in 17 CFR 230.902(k).
(3) Non-shell foreign branch. Solely for purposes of this paragraph
(c), a non-shell foreign branch of a bank means a branch of the bank
[[Page 220]]
(i) That is located outside the United States and provides banking
services to residents of the foreign jurisdiction in which the branch is
located; and
(ii) For which the decisions relating to day-to-day operations and
business of the branch are made at that branch and are not made by an
office of the bank located in the United States.
(d) Accounts transferred to a broker or dealer or other unaffiliated
entity. Notwithstanding section 3(a)(4)(B)(ii)(I) of the Act (15 U.S.C.
78c(a)(4)(B)(ii)(I)) and Sec. 247.721(a)(1) of this part, a bank
operating under Sec. 247.721(a)(1) shall not be considered a broker for
purposes of section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) solely
because a trust or fiduciary account does not meet the chiefly
compensated standard in Sec. 247.721(a)(1) if, within 3 months of the
end of the year in which the account fails to meet such standard, the
bank transfers the account or the securities held by or on behalf of the
account to a broker or dealer registered under section 15 of the Act (15
U.S.C. 78o) or another entity that is not an affiliate of the bank and
is not required to be registered as a broker or dealer.
(e) De minimis exclusion. A bank may, in determining its compliance
with the chiefly compensated test in Sec. 247.721(a)(1), exclude a
trust or fiduciary account if:
(1) The bank maintains records demonstrating that the securities
transactions conducted by or on behalf of the account were undertaken by
the bank in the exercise of its trust or fiduciary responsibilities with
respect to the account;
(2) The total number of accounts excluded by the bank under this
paragraph (d) does not exceed the lesser of--
(i) 1 percent of the total number of trust or fiduciary accounts
held by the bank, provided that if the number so obtained is less than 1
the amount shall be rounded up to 1; or
(ii) 500; and
(3) The bank did not rely on this paragraph (e) with respect to such
account during the immediately preceding year.
[72 FR 56554, Oct. 3, 2007, as amended at 73 FR 20780, Apr. 17, 2008]
Sec. 247.740 Defined terms relating to the sweep accounts exception
from the definition of ``broker.''
For purposes of section 3(a)(4)(B)(v) of the Act (15 U.S.C.
78c(a)(4)(B)(v)), the following terms shall have the meaning provided:
(a) Deferred sales load has the same meaning as in 17 CFR 270.6c-10.
(b) Money market fund means an open-end company registered under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) that is
regulated as a money market fund pursuant to 17 CFR 270.2a-7.
(c)(1) No-load, in the context of an investment company or the
securities issued by an investment company, means, for securities of the
class or series in which a bank effects transactions, that:
(i) That class or series is not subject to a sales load or a
deferred sales load; and
(ii) Total charges against net assets of that class or series of the
investment company's securities for sales or sales promotion expenses,
for personal service, or for the maintenance of shareholder accounts do
not exceed 0.25 of 1% of average net assets annually.
(2) For purposes of this definition, charges for the following will
not be considered charges against net assets of a class or series of an
investment company's securities for sales or sales promotion expenses,
for personal service, or for the maintenance of shareholder accounts:
(i) Providing transfer agent or sub-transfer agent services for
beneficial owners of investment company shares;
(ii) Aggregating and processing purchase and redemption orders for
investment company shares;
(iii) Providing beneficial owners with account statements showing
their purchases, sales, and positions in the investment company;
(iv) Processing dividend payments for the investment company;
(v) Providing sub-accounting services to the investment company for
shares held beneficially;
(vi) Forwarding communications from the investment company to the
beneficial owners, including proxies, shareholder reports, dividend and
tax notices, and updated prospectuses; or
[[Page 221]]
(vii) Receiving, tabulating, and transmitting proxies executed by
beneficial owners of investment company shares.
(d) Open-end company has the same meaning as in section 5(a)(1) of
the Investment Company Act of 1940 (15 U.S.C. 80a-5(a)(1)).
(e) Sales load has the same meaning as in section 2(a)(35) of the
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(35)).
Sec. 247.741 Exemption for banks effecting transactions in money
market funds.
(a) A bank is exempt from the definition of the term ``broker''
under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) to the extent
that it effects transactions on behalf of a customer in securities
issued by a money market fund, provided that:
(1) The bank either
(i) Provides the customer, directly or indirectly, any other product
or service, the provision of which would not, in and of itself, require
the bank to register as a broker or dealer under section 15(a) of the
Act (15 U.S.C. 78o(a)); or
(ii) Effects the transactions on behalf of another bank as part of a
program for the investment or reinvestment of deposit funds of, or
collected by, the other bank; and
(2)(i) The class or series of securities is no-load; or
(ii) If the class or series of securities is not no-load
(A) The bank or, if applicable, the other bank described in
paragraph (a)(1)(B) of this section provides the customer, not later
than at the time the customer authorizes the securities transactions, a
prospectus for the securities; and
(B) The bank and, if applicable, the other bank described in
paragraph (a)(1)(B) of this section do not characterize or refer to the
class or series of securities as no-load.
(b) Definitions. For purposes of this section:
(1) Money market fund has the same meaning as in Sec. 247.740(b).
(2) No-load has the same meaning as in Sec. 247.740(c).
[72 FR 56554, Oct. 3, 2007, as amended at 73 FR 20780, Apr. 17, 2008]
Sec. 247.760 Exemption from definition of ``broker'' for banks
accepting orders to effect transactions in securities from or on
behalf of custody accounts.
(a) Employee benefit plan accounts and individual retirement
accounts or similar accounts. A bank is exempt from the definition of
the term ``broker'' under section 3(a)(4) of the Act (15 U.S.C.
78c(a)(4)) to the extent that, as part of its customary banking
activities, the bank accepts orders to effect transactions in securities
for an employee benefit plan account or an individual retirement account
or similar account for which the bank acts as a custodian if:
(1) Employee compensation restriction and additional conditions. The
bank complies with the employee compensation restrictions in paragraph
(c) of this section and the other conditions in paragraph (d) of this
section;
(2) Advertisements. Advertisements by or on behalf of the bank do
not:
(i) Advertise that the bank accepts orders for securities
transactions for employee benefit plan accounts or individual retirement
accounts or similar accounts, except as part of advertising the other
custodial or safekeeping services the bank provides to these accounts;
or
(ii) Advertise that such accounts are securities brokerage accounts
or that the bank's safekeeping and custody services substitute for a
securities brokerage account; and
(3) Advertisements and sales literature for individual retirement or
similar accounts. Advertisements and sales literature issued by or on
behalf of the bank do not describe the securities order-taking services
provided by the bank to individual retirement accounts or similar
accounts more prominently than the other aspects of the custody or
safekeeping services provided by the bank to these accounts.
(b) Accommodation trades for other custodial accounts. A bank is
exempt from the definition of the term ``broker'' under section 3(a)(4)
of the Act (15
[[Page 222]]
U.S.C. 78c(a)(4)) to the extent that, as part of its customary banking
activities, the bank accepts orders to effect transactions in securities
for an account for which the bank acts as custodian other than an
employee benefit plan account or an individual retirement account or
similar account if:
(1) Accommodation. The bank accepts orders to effect transactions in
securities for the account only as an accommodation to the customer;
(2) Employee compensation restriction and additional conditions. The
bank complies with the employee compensation restrictions in paragraph
(c) of this section and the other conditions in paragraph (d) of this
section;
(3) Bank fees. Any fee charged or received by the bank for effecting
a securities transaction for the account does not vary based on:
(i) Whether the bank accepted the order for the transaction; or
(ii) The quantity or price of the securities to be bought or sold;
(4) Advertisements. Advertisements by or on behalf of the bank do
not state that the bank accepts orders for securities transactions for
the account;
(5) Sales literature. Sales literature issued by or on behalf of the
bank:
(i) Does not state that the bank accepts orders for securities
transactions for the account except as part of describing the other
custodial or safekeeping services the bank provides to the account; and
(ii) Does not describe the securities order-taking services provided
to the account more prominently than the other aspects of the custody or
safekeeping services provided by the bank to the account; and
(6) Investment advice and recommendations. The bank does not provide
investment advice or research concerning securities to the account, make
recommendations to the account concerning securities or otherwise
solicit securities transactions from the account; provided, however,
that nothing in this paragraph (b)(6) shall prevent a bank from:
(i) Publishing, using or disseminating advertisements and sales
literature in accordance with paragraphs (b)(4) and (b)(5) of this
section; and
(ii) Responding to customer inquiries regarding the bank's
safekeeping and custody services by providing:
(A) Advertisements or sales literature consistent with the
provisions of paragraphs (b)(4) and (b)(5) of this section describing
the safekeeping, custody and related services that the bank offers;
(B) A prospectus prepared by a registered investment company, or
sales literature prepared by a registered investment company or by the
broker or dealer that is the principal underwriter of the registered
investment company pertaining to the registered investment company's
products;
(C) Information based on the materials described in paragraphs
(b)(6)(ii)(A) and (B) of this section; or
(iii) Responding to inquiries regarding the bank's safekeeping,
custody or other services, such as inquiries concerning the customer's
account or the availability of sweep or other services, so long as the
bank does not provide investment advice or research concerning
securities to the account or make a recommendation to the account
concerning securities.
(c) Employee compensation restriction. A bank may accept orders
pursuant to this section for a securities transaction for an account
described in paragraph (a) or (b) of this section only if no bank
employee receives compensation, including a fee paid pursuant to a plan
under 17 CFR 270.12b-1, from the bank, the executing broker or dealer,
or any other person that is based on whether a securities transaction is
executed for the account or that is based on the quantity, price, or
identity of securities purchased or sold by such account, provided that
nothing in this paragraph shall prohibit a bank employee from receiving
compensation that would not be considered incentive compensation under
Sec. 247.700(b)(1) as if a referral had been made by the bank employee,
or any compensation described in Sec. 247.700(b)(2).
(d) Other conditions. A bank may accept orders for a securities
transaction for an account for which the bank acts as a custodian under
this section only if the bank:
(1) Does not act in a trustee or fiduciary capacity (as defined in
section
[[Page 223]]
3(a)(4)(D) of the Act (15 U.S.C. 78c(a)(4)(D)) with respect to the
account, other than as a directed trustee;
(2) Complies with section 3(a)(4)(C) of the Act (15 U.S.C.
78c(a)(4)(C)) in handling any order for a securities transaction for the
account; and
(3) Complies with section 3(a)(4)(B)(viii)(II) of the Act (15 U.S.C.
78c(a)(4)(B)(viii)(II)) regarding carrying broker activities.
(e) Non-fiduciary administrators and recordkeepers. A bank that acts
as a non-fiduciary and non-custodial administrator or recordkeeper for
an employee benefit plan account for which another bank acts as
custodian may rely on the exemption provided in this section if:
(1) Both the custodian bank and the administrator or recordkeeper
bank comply with paragraphs (a), (c) and (d) of this section; and
(2) The administrator or recordkeeper bank does not execute a cross-
trade with or for the employee benefit plan account or net orders for
securities for the employee benefit plan account, other than:
(i) Crossing or netting orders for shares of open-end investment
companies not traded on an exchange, or
(ii) Crossing orders between or netting orders for accounts of the
custodian bank that contracted with the administrator or recordkeeper
bank for services.
(f) Subcustodians. A bank that acts as a subcustodian for an account
for which another bank acts as custodian may rely on the exemptions
provided in this section if:
(1) For employee benefit plan accounts and individual retirement
accounts or similar accounts, both the custodian bank and the
subcustodian bank meet the requirements of paragraphs (a), (c) and (d)
of this section;
(2) For other custodial accounts, both the custodian bank and the
subcustodian bank meet the requirements of paragraphs (b), (c) and (d)
of this section; and
(3) The subcustodian bank does not execute a cross-trade with or for
the account or net orders for securities for the account, other than:
(i) Crossing or netting orders for shares of open-end investment
companies not traded on an exchange, or
(ii) Crossing orders between or netting orders for accounts of the
custodian bank.
(g) Evasions. In considering whether a bank meets the terms of this
section, both the form and substance of the relevant account(s),
transaction(s) and activities (including advertising activities) of the
bank will be considered in order to prevent evasions of the requirements
of this section.
(h) Definitions. When used in this section:
(1) Account for which the bank acts as a custodian means an account
that is:
(i) An employee benefit plan account for which the bank acts as a
custodian;
(ii) An individual retirement account or similar account for which
the bank acts as a custodian;
(iii) An account established by a written agreement between the bank
and the customer that sets forth the terms that will govern the fees
payable to, and rights and obligations of, the bank regarding the
safekeeping or custody of securities; or
(iv) An account for which the bank acts as a directed trustee.
(2) Advertisement means any material that is published or used in
any electronic or other public media, including any Web site, newspaper,
magazine or other periodical, radio, television, telephone or tape
recording, videotape display, signs or billboards, motion pictures, or
telephone directories (other than routine listings).
(3) Directed trustee means a trustee that does not exercise
investment discretion with respect to the account.
(4) Employee benefit plan account means a pension plan, retirement
plan, profit sharing plan, bonus plan, thrift savings plan, incentive
plan, or other similar plan, including, without limitation, an employer-
sponsored plan qualified under section 401(a) of the Internal Revenue
Code (26 U.S.C. 401(a)), a governmental or other plan described in
section 457 of the Internal Revenue Code (26 U.S.C. 457), a tax-deferred
plan described in section 403(b) of the Internal Revenue Code (26 U.S.C.
403(b)), a
[[Page 224]]
church plan, governmental, multiemployer or other plan described in
section 414(d), (e) or (f) of the Internal Revenue Code (26 U.S.C.
414(d), (e) or (f)), an incentive stock option plan described in section
422 of the Internal Revenue Code (26 U.S.C. 422); a Voluntary Employee
Beneficiary Association Plan described in section 501(c)(9) of the
Internal Revenue Code (26 U.S.C. 501(c)(9)), a non-qualified deferred
compensation plan (including a rabbi or secular trust), a supplemental
or mirror plan, and a supplemental unemployment benefit plan.
(5) Individual retirement account or similar account means an
individual retirement account as defined in section 408 of the Internal
Revenue Code (26 U.S.C. 408), Roth IRA as defined in section 408A of the
Internal Revenue Code (26 U.S.C. 408A), health savings account as
defined in section 223(d) of the Internal Revenue Code (26 U.S.C.
223(d)), Archer medical savings account as defined in section 220(d) of
the Internal Revenue Code (26 U.S.C. 220(d)), Coverdell education
savings account as defined in section 530 of the Internal Revenue Code
(26 U.S.C. 530), or other similar account.
(6) Sales literature means any written or electronic communication,
other than an advertisement, that is generally distributed or made
generally available to customers of the bank or the public, including
circulars, form letters, brochures, telemarketing scripts, seminar
texts, published articles, and press releases concerning the bank's
products or services.
(7) Principal underwriter has the same meaning as in section
2(a)(29) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(29)).
Sec. 247.771 Exemption from the definition of ``broker'' for banks
effecting transactions in securities issued pursuant to Regulation S.
(a) A bank is exempt from the definition of the term ``broker''
under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)), to the extent
that, as agent, the bank:
(1) Effects a sale in compliance with the requirements of 17 CFR
230.903 of an eligible security to a purchaser who is not in the United
States;
(2) Effects, by or on behalf of a person who is not a U.S. person
under 17 CFR 230.902(k), a resale of an eligible security after its
initial sale with a reasonable belief that the eligible security was
initially sold outside of the United States within the meaning of and in
compliance with the requirements of 17 CFR 230.903 to a purchaser who is
not in the United States or a registered broker or dealer, provided that
if the resale is made prior to the expiration of any applicable
distribution compliance period specified in 17 CFR 230.903(b)(2) or
(b)(3), the resale is made in compliance with the requirements of 17 CFR
230.904; or
(3) Effects, by or on behalf of a registered broker or dealer, a
resale of an eligible security after its initial sale with a reasonable
belief that the eligible security was initially sold outside of the
United States within the meaning of and in compliance with the
requirements of 17 CFR 230.903 to a purchaser who is not in the United
States, provided that if the resale is made prior to the expiration of
any applicable distribution compliance period specified in 17 CFR
230.903(b)(2) or (b)(3), the resale is made in compliance with the
requirements of 17 CFR 230.904.
(b) Definitions. For purposes of this section:
(1) Distributor has the same meaning as in 17 CFR 230.902(d).
(2) Eligible security means a security that:
(i) Is not being sold from the inventory of the bank or an affiliate
of the bank; and
(ii) Is not being underwritten by the bank or an affiliate of the
bank on a firm-commitment basis, unless the bank acquired the security
from an unaffiliated distributor that did not purchase the security from
the bank or an affiliate of the bank.
(3) Purchaser means a person who purchases an eligible security and
who is not a U.S. person under 17 CFR 230.902(k).
[[Page 225]]
Sec. 247.772 Exemption from the definition of ``broker'' for banks
engaging in securities lending transactions.
(a) A bank is exempt from the definition of the term ``broker''
under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)), to the extent
that, as an agent, it engages in or effects securities lending
transactions, and any securities lending services in connection with
such transactions, with or on behalf of a person the bank reasonably
believes to be:
(1) A qualified investor as defined in section 3(a)(54)(A) of the
Act (15 U.S.C. 78c(a)(54)(A)); or
(2) Any employee benefit plan that owns and invests on a
discretionary basis, not less than $ 25,000,000 in investments.
(b) Securities lending transaction means a transaction in which the
owner of a security lends the security temporarily to another party
pursuant to a written securities lending agreement under which the
lender retains the economic interests of an owner of such securities,
and has the right to terminate the transaction and to recall the loaned
securities on terms agreed by the parties.
(c) Securities lending services means:
(1) Selecting and negotiating with a borrower and executing, or
directing the execution of the loan with the borrower;
(2) Receiving, delivering, or directing the receipt or delivery of
loaned securities;
(3) Receiving, delivering, or directing the receipt or delivery of
collateral;
(4) Providing mark-to-market, corporate action, recordkeeping or
other services incidental to the administration of the securities
lending transaction;
(5) Investing, or directing the investment of, cash collateral; or
(6) Indemnifying the lender of securities with respect to various
matters.
Sec. 247.775 Exemption from the definition of ``broker'' for banks
effecting certain excepted or exempted transactions in investment
company securities.
(a) A bank that meets the conditions for an exception or exemption
from the definition of the term ``broker'' except for the condition in
section 3(a)(4)(C)(i) of the Act (15 U.S.C. 78c(a)(4)(C)(i)), is exempt
from such condition to the extent that it effects a transaction in a
covered security, if:
(1) Any such security is neither traded on a national securities
exchange nor through the facilities of a national securities association
or an interdealer quotation system;
(2) The security is distributed by a registered broker or dealer, or
the sales charge is no more than the amount permissible for a security
sold by a registered broker or dealer pursuant to any applicable rules
adopted pursuant to section 22(b)(1) of the Investment Company Act of
1940 (15 U.S.C. 80a-22(b)(1)) by a securities association registered
under section 15A of the Act (15 U.S.C. 78o-3); and
(3) Any such transaction is effected:
(i) Through the National Securities Clearing Corporation; or
(ii) Directly with a transfer agent or with an insurance company or
separate account that is excluded from the definition of transfer agent
in Section 3(a)(25) of the Act.
(b) Definitions. For purposes of this section:
(1) Covered security means:
(i) Any security issued by an open-end company, as defined by
section 5(a)(1) of the Investment Company Act (15 U.S.C. 80a-5(a)(1)),
that is registered under that Act; and
(ii) Any variable insurance contract funded by a separate account,
as defined by section 2(a)(37) of the Investment Company Act (15 U.S.C.
80a-2(a)(37)), that is registered under that Act.
(2) Interdealer quotation system has the same meaning as in 17 CFR
240.15c2-11.
(3) Insurance company has the same meaning as in 15 U.S.C.
77b(a)(13).
[72 FR 56554, Oct. 3, 2007, as amended at 73 FR 20780, Apr. 17, 2008]
Sec. 247.776 Exemption from the definition of ``broker'' for banks
effecting certain excepted or exempted transactions in a company's
securities for its employee benefit plans.
(a) A bank that meets the conditions for an exception or exemption
from the definition of the term ``broker'' except for the condition in
section 3(a)(4)(C)(i)
[[Page 226]]
of the Act (15 U.S.C. 78c(a)(4)(C)(i)), is exempt from such condition to
the extent that it effects a transaction in the securities of a company
directly with a transfer agent acting for the company that issued the
security, if:
(1) No commission is charged with respect to the transaction;
(2) The transaction is conducted by the bank solely for the benefit
of an employee benefit plan account;
(3) Any such security is obtained directly from:
(i) The company; or
(ii) An employee benefit plan of the company; and
(4) Any such security is transferred only to:
(i) The company; or
(ii) An employee benefit plan of the company.
(b) For purposes of this section, the term employee benefit plan
account has the same meaning as in Sec. 247.760(h)(4).
Sec. 247.780 Exemption for banks from liability under section 29
of the Securities Exchange Act of 1934.
(a) No contract entered into before March 31, 2009, shall be void or
considered voidable by reason of section 29(b) of the Act (15 U.S.C.
78cc(b)) because any bank that is a party to the contract violated the
registration requirements of section 15(a) of the Act (15 U.S.C.
78o(a)), any other applicable provision of the Act, or the rules and
regulations thereunder based solely on the bank's status as a broker
when the contract was created.
(b) No contract shall be void or considered voidable by reason of
section 29(b) of the Act (15 U.S.C. 78cc(b)) because any bank that is a
party to the contract violated the registration requirements of section
15(a) of the Act (15 U.S.C. 78o(a)) or the rules and regulations
thereunder based solely on the bank's status as a broker when the
contract was created, if:
(1) At the time the contract was created, the bank acted in good
faith and had reasonable policies and procedures in place to comply with
section 3(a)(4)(B) of the Act (15 U.S.C. 78c(a)(4)(B)) and the rules and
regulations thereunder; and
(2) At the time the contract was created, any violation of the
registration requirements of section 15(a) of the Act by the bank did
not result in any significant harm or financial loss or cost to the
person seeking to void the contract.
Sec. 247.781 Exemption from the definition of ``broker'' for banks
for a limited period of time.
A bank is exempt from the definition of the term ``broker'' under
section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) until the first day of
its first fiscal year commencing after September 30, 2008.
PART 248_REGULATIONS S P, S AM, AND S ID--Table of Contents
Subpart A_Regulation S-P: Privacy of Consumer Financial Information and
Safeguarding Personal Information
Sec.
248.1 Purpose and scope.
248.2 Model privacy form: rule of construction.
248.3 Definitions.
Privacy and Opt Out Notices
248.4 Initial privacy notice to consumers required.
248.5 Annual privacy notice to customers required.
248.6 Information to be included in privacy notices.
248.7 Form of opt out notice to consumers; opt out methods.
248.8 Revised privacy notices.
248.9 Delivering privacy and opt out notices.
Limits on Disclosures
248.10 Limits on disclosure of nonpublic personal information to
nonaffiliated third parties.
248.11 Limits on redisclosure and reuse of information.
248.12 Limits on sharing account number information for marketing
purposes.
Exceptions
248.13 Exception to opt out requirements for service providers and joint
marketing.
248.14 Exceptions to notice and opt out requirements for processing and
servicing transactions.
248.15 Other exceptions to notice and opt out requirements.
Relation to Other Laws; Effective Date
248.16 Protection of Fair Credit Reporting Act.
[[Page 227]]
248.17 Relation to State laws.
248.18 Effective date; transition rule.
248.19-248.29 [Reserved]
248.30 Procedures to safeguard customer records and information.
248.31-248.100 [Reserved]
Appendix A to Subpart A of Part 248--Forms
Subpart B_Regulation S-AM: Limitations on Affiliate Marketing
248.101 Purpose and scope.
248.102 Examples.
248.103-248.119 [Reserved]
248.120 Definitions.
248.121 Affiliate marketing opt out and exceptions.
248.122 Scope and duration of opt out.
248.123 Contents of opt out notice; consolidated and equivalent notices.
248.124 Reasonable opportunity to opt out.
248.125 Reasonable and simple methods of opting out.
248.126 Delivery of opt out notices.
248.127 Renewal of opt out elections.
248.128 Effective date, compliance date, and prospective application.
Appendix to Subpart B of Part 248--Model Forms
Subpart C_Regulation S ID: Identity Theft Red Flags
248.201 Duties regarding the detection, prevention, and mitigation of
identity theft.
248.202 Duties of card issuers regarding changes of address.
Appendix A to Subpart C of Part 248--Interagency Guidelines on Identity
Theft Detection, Prevention, and Mitigation
Authority: 15 U.S.C. 78q, 78q-1, 78o-4, 78o-5, 78w, 78mm, 80a-30,
80a-37, 80b-4, 80b-11, 1681m(e), 1681s(b), 1681s-3 and note,
1681w(a)(1), 6801-6809, and 6825; Pub. L. 111-203, secs. 1088(a)(8),
(a)(10), and sec. 1088(b), 124 Stat. 1376 (2010).
Source: 65 FR 40362, June 29, 2000, unless otherwise noted.
Editorial Note: Nomenclature changes to part 248 appear at 74 FR
40431, Aug. 11, 2009.
Subpart A_Regulation S-P: Privacy of Consumer Financial Information and
Safeguarding Personal Information
Sec. 248.1 Purpose and scope.
(a) Purpose. This subpart governs the treatment of nonpublic
personal information about consumers by the financial institutions
listed in paragraph (b) of this section. This subpart:
(1) Requires a financial institution to provide notice to customers
about its privacy policies and practices;
(2) Describes the conditions under which a financial institution may
disclose nonpublic personal information about consumers to nonaffiliated
third parties; and
(3) Provides a method for consumers to prevent a financial
institution from disclosing that information to most nonaffiliated third
parties by ``opting out'' of that disclosure, subject to the exceptions
in Sec. Sec. 248.13, 248.14, and 248.15.
(b) Scope. Except with respect to Sec. 248.30(b), this subpart
applies only to nonpublic personal information about individuals who
obtain financial products or services primarily for personal, family, or
household purposes from the institutions listed below. This subpart does
not apply to information about companies or about individuals who obtain
financial products or services primarily for business, commercial, or
agricultural purposes. This part applies to brokers, dealers, and
investment companies, as well as to investment advisers that are
registered with the Commission. It also applies to foreign (non-
resident) brokers, dealers, investment companies and investment advisers
that are registered with the Commission. These entities are referred to
in this subpart as ``you.'' This subpart does not apply to foreign (non-
resident) brokers, dealers, investment companies and investment advisers
that are not registered with the Commission. Nothing in this subpart
modifies, limits, or supersedes the standards governing individually
identifiable health information promulgated by the Secretary of Health
and Human Services under the authority of sections 262 and 264 of the
Health Insurance Portability and Accountability Act of 1996 (42 U.S.C.
1320d-1320d-8).
[65 FR 40362, June 29, 2000, as amended at 69 FR 71329, Dec. 8, 2004]
Sec. 248.2 Model privacy form: rule of construction.
(a) Model privacy form. Use of the model privacy form in appendix A
to subpart A of this part, consistent with
[[Page 228]]
the instructions in appendix A to subpart A, constitutes compliance with
the notice content requirements of Sec. Sec. 248.6 and 248.7 of this
part, although use of the model privacy form is not required.
(b) Examples. The examples in this part provide guidance concerning
the rule's application in ordinary circumstances. The facts and
circumstances of each individual situation, however, will determine
whether compliance with an example, to the extent practicable,
constitutes compliance with this part.
(c) Substituted compliance with CFTC financial privacy rules by
futures commission merchants and introducing brokers. Except with
respect to Sec. 248.30(b), any futures commission merchant or
introducing broker (as those terms are defined in the Commodity Exchange
Act (7 U.S.C. 1, et seq.)) registered by notice with the Commission for
the purpose of conducting business in security futures products pursuant
to section 15(b)(11)(A) of the Securities Exchange Act of 1934 (15
U.S.C. 78o(b)(11)(A)) that is subject to and in compliance with the
financial privacy rules of the Commodity Futures Trading Commission (17
CFR part 160) will be deemed to be in compliance with this part.
[74 FR 62984, Dec. 1, 2009]
Sec. 248.3 Definitions.
As used in this subpart, unless the context requires otherwise:
(a) Affiliate of a broker, dealer, or investment company, or an
investment adviser registered with the Commission means any company that
controls, is controlled by, or is under common control with the broker,
dealer, or investment company, or investment adviser registered with the
Commission. In addition, a broker, dealer, or investment company, or an
investment adviser registered with the Commission will be deemed an
affiliate of a company for purposes of this subpart if:
(1) That company is regulated under Title V of the GLBA by the
Federal Trade Commission or by a Federal functional regulator other than
the Commission; and
(2) Rules adopted by the Federal Trade Commission or another federal
functional regulator under Title V of the GLBA treat the broker, dealer,
or investment company, or investment adviser registered with the
Commission as an affiliate of that company.
(b) Broker has the same meaning as in section 3(a)(4) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)).
(c)(1) Clear and conspicuous means that a notice is reasonably
understandable and designed to call attention to the nature and
significance of the information in the notice.
(2) Examples--(i) Reasonably understandable. You make your notice
reasonably understandable if you:
(A) Present the information in the notice in clear, concise
sentences, paragraphs, and sections;
(B) Use short explanatory sentences or bullet lists whenever
possible;
(C) Use definite, concrete, everyday words and active voice whenever
possible;
(D) Avoid multiple negatives;
(E) Avoid legal and highly technical business terminology whenever
possible; and
(F) Avoid explanations that are imprecise and readily subject to
different interpretations.
(ii) Designed to call attention. You design your notice to call
attention to the nature and significance of the information in it if
you:
(A) Use a plain-language heading to call attention to the notice;
(B) Use a typeface and type size that are easy to read;
(C) Provide wide margins and ample line spacing;
(D) Use boldface or italics for key words; and
(E) Use distinctive type size, style, and graphic devices, such as
shading or sidebars when you combine your notice with other information.
(iii) Notices on web sites. If you provide a notice on a web page,
you design your notice to call attention to the nature and significance
of the information in it if you use text or visual cues to encourage
scrolling down the page if necessary to view the entire notice and
ensure that other elements on the web site (such as text, graphics,
hyperlinks, or sound) do not distract attention from the notice, and you
either:
(A) Place the notice on a screen that consumers frequently access,
such as a
[[Page 229]]
page on which transactions are conducted; or
(B) Place a link on a screen that consumers frequently access, such
as a page on which transactions are conducted, that connects directly to
the notice and is labeled appropriately to convey the importance,
nature, and relevance of the notice.
(d) Collect means to obtain information that you organize or can
retrieve by the name of an individual or by identifying number, symbol,
or other identifying particular assigned to the individual, irrespective
of the source of the underlying information.
(e) Commission means the Securities and Exchange Commission.
(f) Company means any corporation, limited liability company,
business trust, general or limited partnership, association, or similar
organization.
(g)(1) Consumer means an individual who obtains or has obtained a
financial product or service from you that is to be used primarily for
personal, family, or household purposes, or that individual's legal
representative.
(2) Examples. (i) An individual is your consumer if he or she
provides nonpublic personal information to you in connection with
obtaining or seeking to obtain brokerage services or investment advisory
services, whether or not you provide brokerage services to the
individual or establish a continuing relationship with the individual.
(ii) An individual is not your consumer if he or she provides you
only with his or her name, address, and general areas of investment
interest in connection with a request for a prospectus, an investment
adviser brochure, or other information about financial products or
services.
(iii) An individual is not your consumer if he or she has an account
with another broker or dealer (the introducing broker-dealer) that
carries securities for the individual in a special omnibus account with
you (the clearing broker-dealer) in the name of the introducing broker-
dealer, and when you receive only the account numbers and transaction
information of the introducing broker-dealer's consumers in order to
clear transactions.
(iv) If you are an investment company, an individual is not your
consumer when the individual purchases an interest in shares you have
issued only through a broker or dealer or investment adviser who is the
record owner of those shares.
(v) An individual who is a consumer of another financial institution
is not your consumer solely because you act as agent for, or provide
processing or other services to, that financial institution.
(vi) An individual is not your consumer solely because he or she has
designated you as trustee for a trust.
(vii) An individual is not your consumer solely because he or she is
a beneficiary of a trust for which you are a trustee.
(viii) An individual is not your consumer solely because he or she
is a participant or a beneficiary of an employee benefit plan that you
sponsor or for which you act as a trustee or fiduciary.
(h) Consumer reporting agency has the same meaning as in section
603(f) of the Fair Credit Reporting Act (15 U.S.C. 1681a(f)).
(i) Control of a company means the power to exercise a controlling
influence over the management or policies of a company whether through
ownership of securities, by contract, or otherwise. Any person who owns
beneficially, either directly or through one or more controlled
companies, more than 25 percent of the voting securities of any company
is presumed to control the company. Any person who does not own more
than 25 percent of the voting securities of any company will be presumed
not to control the company. Any presumption regarding control may be
rebutted by evidence, but, in the case of an investment company, will
continue until the Commission makes a decision to the contrary according
to the procedures described in section 2(a)(9) of the Investment Company
Act of 1940 (15 U.S.C. 80a-2(a)(9)).
(j) Customer means a consumer who has a customer relationship with
you.
(k)(1) Customer relationship means a continuing relationship between
a consumer and you under which you provide one or more financial
products or services to the consumer that are to be used primarily for
personal, family, or household purposes.
[[Page 230]]
(2) Examples--(i) Continuing relationship. A consumer has a
continuing relationship with you if:
(A) The consumer has a brokerage account with you, or if a
consumer's account is transferred to you from another broker-dealer;
(B) The consumer has an investment advisory contract with you
(whether written or oral);
(C) The consumer is the record owner of securities you have issued
if you are an investment company;
(D) The consumer holds an investment product through you, such as
when you act as a custodian for securities or for assets in an
Individual Retirement Arrangement;
(E) The consumer purchases a variable annuity from you;
(F) The consumer has an account with an introducing broker or dealer
that clears transactions with and for its customers through you on a
fully disclosed basis;
(G) You hold securities or other assets as collateral for a loan
made to the consumer, even if you did not make the loan or do not effect
any transactions on behalf of the consumer; or
(H) You regularly effect or engage in securities transactions with
or for a consumer even if you do not hold any assets of the consumer.
(ii) No continuing relationship. A consumer does not, however, have
a continuing relationship with you if you open an account for the
consumer solely for the purpose of liquidating or purchasing securities
as an accommodation, i.e., on a one time basis, without the expectation
of engaging in other transactions.
(l) Dealer has the same meaning as in section 3(a)(5) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(5)).
(m) Federal functional regulator means:
(1) The Board of Governors of the Federal Reserve System;
(2) The Office of the Comptroller of the Currency;
(3) The Board of Directors of the Federal Deposit Insurance
Corporation;
(4) The Director of the Office of Thrift Supervision;
(5) The National Credit Union Administration Board
(6) The Securities and Exchange Commission; and
(7) The Commodity Futures Trading Commission.
(n)(1) Financial institution means any institution the business of
which is engaging in activities that are financial in nature or
incidental to such financial activities as described in section 4(k) of
the Bank Holding Company Act of 1956 (12 U.S.C. 1843(k)).
(2) Financial institution does not include:
(i) The Federal Agricultural Mortgage Corporation or any entity
chartered and operating under the Farm Credit Act of 1971 (12 U.S.C.
2001 et seq.); or
(ii) Institutions chartered by Congress specifically to engage in
securitizations, secondary market sales (including sales of servicing
rights), or similar transactions related to a transaction of a consumer,
as long as such institutions do not sell or transfer nonpublic personal
information to a nonaffiliated third party.
(o)(1) Financial product or service means any product or service
that a financial holding company could offer by engaging in an activity
that is financial in nature or incidental to such a financial activity
under section 4(k) of the Bank Holding Company Act of 1956 (12 U.S.C.
1843(k)).
(2) Financial service includes your evaluation or brokerage of
information that you collect in connection with a request or an
application from a consumer for a financial product or service.
(p) GLBA means the Gramm-Leach-Bliley Act (Pub. L. No. 106-102, 113
Stat. 1338 (1999)).
(q) Investment adviser has the same meaning as in section 202(a)(11)
of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)).
(r) Investment company has the same meaning as in section 3 of the
Investment Company Act of 1940 (15 U.S.C. 80a-3), and includes a
separate series of the investment company.
(s)(1) Nonaffiliated third party means any person except:
(i) Your affiliate; or
[[Page 231]]
(ii) A person employed jointly by you and any company that is not
your affiliate (but nonaffiliated third party includes the other company
that jointly employs the person).
(2) Nonaffiliated third party includes any company that is an
affiliate solely by virtue of your or your affiliate's direct or
indirect ownership or control of the company in conducting merchant
banking or investment banking activities of the type described in
section 4(k)(4)(H) or insurance company investment activities of the
type described in section 4(k)(4)(I) of the Bank Holding Company Act (12
U.S.C. 1843(k)(4)(H) and (I)).
(t)(1) Nonpublic personal information means:
(i) Personally identifiable financial information; and
(ii) Any list, description, or other grouping of consumers (and
publicly available information pertaining to them) that is derived using
any personally identifiable financial information that is not publicly
available information.
(2) Nonpublic personal information does not include:
(i) Publicly available information, except as included on a list
described in paragraph (t)(1)(ii) of this section or when the publicly
available information is disclosed in a manner that indicates the
individual is or has been your consumer; or
(ii) Any list, description, or other grouping of consumers (and
publicly available information pertaining to them) that is derived
without using any personally identifiable financial information that is
not publicly available information.
(3) Examples of lists. (i) Nonpublic personal information includes
any list of individuals' names and street addresses that is derived in
whole or in part using personally identifiable financial information
that is not publicly available information, such as account numbers.
(ii) Nonpublic personal information does not include any list of
individuals' names and addresses that contains only publicly available
information, is not derived in whole or in part using personally
identifiable financial information that is not publicly available
information, and is not disclosed in a manner that indicates that any of
the individuals on the list is a consumer of a financial institution.
(u)(1) Personally identifiable financial information means any
information:
(i) A consumer provides to you to obtain a financial product or
service from you;
(ii) About a consumer resulting from any transaction involving a
financial product or service between you and a consumer; or
(iii) You otherwise obtain about a consumer in connection with
providing a financial product or service to that consumer.
(2) Examples--(i) Information included. Personally identifiable
financial information includes:
(A) Information a consumer provides to you on an application to
obtain a loan, credit card, or other financial product or service;
(B) Account balance information, payment history, overdraft history,
and credit or debit card purchase information;
(C) The fact that an individual is or has been one of your customers
or has obtained a financial product or service from you;
(D) Any information about your consumer if it is disclosed in a
manner that indicates that the individual is or has been your consumer;
(E) Any information that a consumer provides to you or that you or
your agent otherwise obtain in connection with collecting on a loan or
servicing a loan;
(F) Any information you collect through an Internet ``cookie'' (an
information collecting device from a web server); and
(G) Information from a consumer report.
(ii) Information not included. Personally identifiable financial
information does not include:
(A) A list of names and addresses of customers of an entity that is
not a financial institution; or
(B) Information that does not identify a consumer, such as aggregate
information or blind data that does not contain personal identifiers
such as account numbers, names, or addresses.
[[Page 232]]
(v)(1) Publicly available information means any information that you
reasonably believe is lawfully made available to the general public
from:
(i) Federal, State, or local government records;
(ii) Widely distributed media; or
(iii) Disclosures to the general public that are required to be made
by federal, State, or local law.
(2) Examples--(i) Reasonable belief. (A) You have a reasonable
belief that information about your consumer is made available to the
general public if you have confirmed, or your consumer has represented
to you, that the information is publicly available from a source
described in paragraphs (v)(1)(i)-(iii) of this section;
(B) You have a reasonable belief that information about your
consumer is made available to the general public if you have taken steps
to submit the information, in accordance with your internal procedures
and policies and with applicable law, to a keeper of federal, State, or
local government records that is required by law to make the information
publicly available.
(C) You have a reasonable belief that an individual's telephone
number is lawfully made available to the general public if you have
located the telephone number in the telephone book or the consumer has
informed you that the telephone number is not unlisted.
(D) You do not have a reasonable belief that information about a
consumer is publicly available solely because that information would
normally be recorded with a keeper of federal, State, or local
government records that is required by law to make the information
publicly available, if the consumer has the ability in accordance with
applicable law to keep that information nonpublic, such as where a
consumer may record a deed in the name of a blind trust.
(ii) Government records. Publicly available information in
government records includes information in government real estate
records and security interest filings.
(iii) Widely distributed media. Publicly available information from
widely distributed media includes information from a telephone book, a
television or radio program, a newspaper, or a web site that is
available to the general public on an unrestricted basis. A web site is
not restricted merely because an Internet service provider or a site
operator requires a fee or a password, so long as access is available to
the general public.
(w) You means:
(1) Any broker or dealer;
(2) Any investment company; and
(3) Any investment adviser registered with the Commission under the
Investment Advisers Act of 1940.
[65 FR 40362, June 29, 2000, as amended at 66 FR 45147, Aug. 27, 2001;
74 FR 40431, Aug. 11, 2009]
Privacy and Opt Out Notices
Sec. 248.4 Initial privacy notice to consumers required.
(a) Initial notice requirement. You must provide a clear and
conspicuous notice that accurately reflects your privacy policies and
practices to:
(1) Customer. An individual who becomes your customer, not later
than when you establish a customer relationship, except as provided in
paragraph (e) of this section; and
(2) Consumer. A consumer, before you disclose any nonpublic personal
information about the consumer to any nonaffiliated third party, if you
make such a disclosure other than as authorized by Sec. Sec. 248.14 and
248.15.
(b) When initial notice to a consumer is not required. You are not
required to provide an initial notice to a consumer under paragraph (a)
of this section if:
(1) You do not disclose any nonpublic personal information about the
consumer to any nonaffiliated third party, other than as authorized by
Sec. Sec. 248.14 and 248.15; and
(2) You do not have a customer relationship with the consumer.
(c) When you establish a customer relationship--(1) General rule.
You establish a customer relationship when you and the consumer enter
into a continuing relationship.
(2) Special rule for loans. You do not have a customer relationship
with a consumer if you buy a loan made to the consumer but do not have
the servicing rights for that loan.
[[Page 233]]
(3) Examples of establishing customer relationship. You establish a
customer relationship when the consumer:
(i) Effects a securities transaction with you or opens a brokerage
account with you under your procedures;
(ii) Opens a brokerage account with an introducing broker or dealer
that clears transactions with and for its customers through you on a
fully disclosed basis;
(iii) Enters into an advisory contract with you (whether in writing
or orally); or
(iv) Purchases shares you have issued (and the consumer is the
record owner of the shares), if you are an investment company.
(d) Existing customers. When an existing customer obtains a new
financial product or service from you that is to be used primarily for
personal, family, or household purposes, you satisfy the initial notice
requirements of paragraph (a) of this section as follows:
(1) You may provide a revised privacy notice, under Sec. 248.8,
that covers the customer's new financial product or service; or
(2) If the initial, revised, or annual notice that you most recently
provided to that customer was accurate with respect to the new financial
product or service, you do not need to provide a new privacy notice
under paragraph (a) of this section.
(e) Exceptions to allow subsequent delivery of notice. (1) You may
provide the initial notice required by paragraph (a)(1) of this section
within a reasonable time after you establish a customer relationship if:
(i) Establishing the customer relationship is not at the customer's
election;
(ii) Providing notice not later than when you establish a customer
relationship would substantially delay the customer's transaction and
the customer agrees to receive the notice at a later time; or
(iii) A nonaffiliated broker or dealer or investment adviser
establishes a customer relationship between you and a consumer without
your prior knowledge.
(2) Examples of exceptions--(i) Not at customer's election.
Establishing a customer relationship is not at the customer's election
if the customer's account is transferred to you by a trustee selected by
the Securities Investor Protection Corporation (``SIPC'') and appointed
by a United States Court.
(ii) Substantial delay of customer's transaction. Providing notice
not later than when you establish a customer relationship would
substantially delay the customer's transaction when you and the
individual agree over the telephone to enter into a customer
relationship involving prompt delivery of the financial product or
service.
(iii) No substantial delay of customer's transaction. Providing
notice not later than when you establish a customer relationship would
not substantially delay the customer's transaction when the relationship
is initiated in person at your office or through other means by which
the customer may view the notice, such as on a web site.
(f) Delivery. When you are required to deliver an initial privacy
notice by this section, you must deliver it according to Sec. 248.9. If
you use a short-form initial notice for non-customers according to Sec.
248.6(d), you may deliver your privacy notice according to Sec.
248.6(d)(3).
Sec. 248.5 Annual privacy notice to customers required.
(a)(1) General rule. You must provide a clear and conspicuous notice
to customers that accurately reflects your privacy policies and
practices not less than annually during the continuation of the customer
relationship. Annually means at least once in any period of 12
consecutive months during which that relationship exists. You may define
the 12-consecutive-month period, but you must apply it to the customer
on a consistent basis.
(2) Example. You provide a notice annually if you define the 12-
consecutive-month period as a calendar year and provide the annual
notice to the customer once in each calendar year following the calendar
year in which you provided the initial notice. For example, if a
customer opens an account on any day of year 1, you must provide an
annual notice to that customer by December 31 of year 2.
(b)(1) Termination of customer relationship. You are not required to
provide an annual notice to a former customer.
[[Page 234]]
(2) Examples. Your customer becomes a former customer when:
(i) The individual's brokerage account is closed;
(ii) The individual's investment advisory contract is terminated;
(iii) You are an investment company and the individual is no longer
the record owner of securities you have issued; or
(iv) You are an investment company and your customer has been
determined to be a lost securityholder as defined in 17 CFR 240.17a-
24(b).
(c) Special rule for loans. If you do not have a customer
relationship with a consumer under the special provision for loans in
Sec. 248.4(c)(2), then you need not provide an annual notice to that
consumer under this section.
(d) Delivery. When you are required to deliver an annual privacy
notice by this section, you must deliver it according to Sec. 248.9.
Sec. 248.6 Information to be included in privacy notices.
(a) General rule. The initial, annual, and revised privacy notices
that you provide under Sec. Sec. 248.4, 248.5, and 248.8 must include
each of the following items of information that applies to you or to the
consumers to whom you send your privacy notice, in addition to any other
information you wish to provide:
(1) The categories of nonpublic personal information that you
collect;
(2) The categories of nonpublic personal information that you
disclose;
(3) The categories of affiliates and nonaffiliated third parties to
whom you disclose nonpublic personal information, other than those
parties to whom you disclose information under Sec. Sec. 248.14 and
248.15;
(4) The categories of nonpublic personal information about your
former customers that you disclose and the categories of affiliates and
nonaffiliated third parties to whom you disclose nonpublic personal
information about your former customers, other than those parties to
whom you disclose information under Sec. Sec. 248.14 and 248.15;
(5) If you disclose nonpublic personal information to a
nonaffiliated third party under Sec. 248.13 (and no other exception
applies to that disclosure), a separate statement of the categories of
information you disclose and the categories of third parties with whom
you have contracted;
(6) An explanation of the consumer's right under Sec. 248.10(a) to
opt out of the disclosure of nonpublic personal information to
nonaffiliated third parties, including the method(s) by which the
consumer may exercise that right at that time;
(7) Any disclosures that you make under section 603(d)(2)(A)(iii) of
the Fair Credit Reporting Act (15 U.S.C. 1681a(d)(2)(A)(iii)) (that is,
notices regarding the ability to opt out of disclosures of information
among affiliates);
(8) Your policies and practices with respect to protecting the
confidentiality and security of nonpublic personal information; and
(9) Any disclosure that you make under paragraph (b) of this
section.
(b) Description of nonaffiliated third parties subject to
exceptions. If you disclose nonpublic personal information to third
parties as authorized under Sec. Sec. 248.14 and 248.15, you are not
required to list those exceptions in the initial or annual privacy
notices required by Sec. Sec. 248.4 and 248.5. When describing the
categories with respect to those parties, it is sufficient to state that
you make disclosures to other nonaffiliated companies:
(1) For your everyday business purposes such as [include all that
apply] to process transactions, maintain account(s), respond to court
orders and legal investigations, or report to credit bureaus; or
(2) As permitted by law.
(c) Examples--(1) Categories of nonpublic personal information that
you collect. You satisfy the requirement to categorize the nonpublic
personal information that you collect if you list the following
categories, as applicable:
(i) Information from the consumer;
(ii) Information about the consumer's transactions with you or your
affiliates;
(iii) Information about the consumer's transactions with
nonaffiliated third parties; and
(iv) Information from a consumer-reporting agency.
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(2) Categories of nonpublic personal information you disclose. (i)
You satisfy the requirement to categorize the nonpublic personal
information that you disclose if you list the categories described in
paragraph (e)(1) of this section, as applicable, and a few examples to
illustrate the types of information in each category.
(ii) If you reserve the right to disclose all of the nonpublic
personal information about consumers that you collect, you may simply
state that fact without describing the categories or examples of the
nonpublic personal information you disclose.
(3) Categories of affiliates and nonaffiliated third parties to whom
you disclose. You satisfy the requirement to categorize the affiliates
and nonaffiliated third parties to whom you disclose nonpublic personal
information if you list the following categories, as applicable, and a
few examples to illustrate the types of third parties in each category:
(i) Financial service providers;
(ii) Non-financial companies; and
(iii) Others.
(4) Disclosures under exception for service providers and joint
marketers. If you disclose nonpublic personal information under the
exception in Sec. 248.13 to a nonaffiliated third party to market
products or services that you offer alone or jointly with another
financial institution, you satisfy the disclosure requirement of
paragraph (a)(5) of this section if you:
(i) List the categories of nonpublic personal information you
disclose, using the same categories and examples you used to meet the
requirements of paragraph (a)(2) of this section, as applicable; and
(ii) State whether the third party is:
(A) A service provider that performs marketing services on your
behalf or on behalf of you and another financial institution; or
(B) A financial institution with which you have a joint marketing
agreement.
(5) Simplified notices. If you do not disclose, and do not wish to
reserve the right to disclose, nonpublic personal information to
affiliates or nonaffiliated third parties except as authorized under
Sec. Sec. 248.14 and 248.15, you may simply state that fact, in
addition to the information you must provide under paragraphs (a)(1),
(a)(8), (a)(9), and (b) of this section.
(6) Confidentiality and security. You describe your policies and
practices with respect to protecting the confidentiality and security of
nonpublic personal information if you do both of the following:
(i) Describe in general terms who is authorized to have access to
the information; and
(ii) State whether you have security practices and procedures in
place to ensure the confidentiality of the information in accordance
with your policy. You are not required to describe technical information
about the safeguards you use.
(d) Short-form initial notice with opt out notice for non-customers.
(1) You may satisfy the initial notice requirements in Sec. Sec.
248.4(a)(2), 248.7(b), and 248.7(c) for a consumer who is not a customer
by providing a short-form initial notice at the same time as you deliver
an opt out notice as required in Sec. 248.7.
(2) A short-form initial notice must:
(i) Be clear and conspicuous;
(ii) State that your privacy notice is available upon request; and
(iii) Explain a reasonable means by which the consumer may obtain
the privacy notice.
(3) You must deliver your short-form initial notice according to
Sec. 248.9. You are not required to deliver your privacy notice with
your short-form initial notice. You instead may simply provide the
consumer a reasonable means to obtain your privacy notice. If a consumer
who receives your short-form notice requests your privacy notice, you
must deliver your privacy notice according to Sec. 248.9.
(4) Examples of obtaining privacy notice. You provide a reasonable
means by which a consumer may obtain a copy of your privacy notice if
you:
(i) Provide a toll-free telephone number that the consumer may call
to request the notice; or
(ii) For a consumer who conducts business in person at your office,
maintain copies of the notice on hand that you provide to the consumer
immediately upon request.
[[Page 236]]
(e) Future disclosures. Your notice may include:
(1) Categories of nonpublic personal information that you reserve
the right to disclose in the future, but do not currently disclose; and
(2) Categories of affiliates or nonaffiliated third parties to whom
you reserve the right in the future to disclose, but to whom you do not
currently disclose, nonpublic personal information.
(f) Model privacy form. Pursuant to Sec. 248.2(a) and appendix A to
subpart A of this part, Form S-P meets the notice content requirements
of this section.
[65 FR 40362, June 29, 2000, as amended at 74 FR 62985, Dec. 1, 2009]
Sec. 248.7 Form of opt out notice to consumers; opt out methods.
(a)(1) Form of opt out notice. If you are required to provide an opt
out notice under Sec. 248.10(a), you must provide a clear and
conspicuous notice to each of your consumers that accurately explains
the right to opt out under that section. The notice must state:
(i) That you disclose or reserve the right to disclose nonpublic
personal information about your consumer to a nonaffiliated third party;
(ii) That the consumer has the right to opt out of that disclosure;
and
(iii) A reasonable means by which the consumer may exercise the opt
out right.
(2) Examples--(i) Adequate opt out notice. You provide adequate
notice that the consumer can opt out of the disclosure of nonpublic
personal information to a nonaffiliated third party if you:
(A) Identify all of the categories of nonpublic personal information
that you disclose or reserve the right to disclose, and all of the
categories of nonaffiliated third parties to which you disclose the
information, as described in Sec. 248.6(a)(2) and (3) and state that
the consumer can opt out of the disclosure of that information; and
(B) Identify the financial products or services that the consumer
obtains from you, either singly or jointly, to which the opt out
direction would apply.
(ii) Reasonable opt out means. You provide a reasonable means to
exercise an opt out right if you:
(A) Designate check-off boxes in a prominent position on the
relevant forms with the opt out notice;
(B) Include a reply form together with the opt out notice;
(C) Provide an electronic means to opt out, such as a form that can
be sent via electronic mail or a process at your web site, if the
consumer agrees to the electronic delivery of information; or
(D) Provide a toll-free telephone number that consumers may call to
opt out.
(iii) Unreasonable opt out means. You do not provide a reasonable
means of opting out if:
(A) The only means of opting out is for the consumer to write his or
her own letter to exercise that opt out right; or
(B) The only means of opting out as described in any notice
subsequent to the initial notice is to use a check-off box that you
provided with the initial notice but did not include with the subsequent
notice.
(iv) Specific opt out means. You may require each consumer to opt
out through a specific means, as long as that means is reasonable for
that consumer.
(b) Same form as initial notice permitted. You may provide the opt
out notice together with or on the same written or electronic form as
the initial notice you provide in accordance with Sec. 248.4.
(c) Initial notice required when opt out notice delivered subsequent
to initial notice. If you provide the opt out notice after the initial
notice in accordance with Sec. 248.4, you must also include a copy of
the initial notice with the opt out notice in writing or, if the
consumer agrees, electronically.
(d) Joint relationships. (1) If two or more consumers jointly obtain
a financial product or service from you, you may provide a single opt
out notice. Your opt out notice must explain how you will treat an opt
out direction by a joint consumer.
(2) Any of the joint consumers may exercise the right to opt out.
You may either:
[[Page 237]]
(i) Treat an opt out direction by a joint consumer as applying to
all of the associated joint consumers; or
(ii) Permit each joint consumer to opt out separately.
(3) If you permit each joint consumer to opt out separately, you
must permit one of the joint consumers to opt out on behalf of all of
the joint consumers.
(4) You may not require all joint consumers to opt out before you
implement any opt out direction.
(5) Example. If John and Mary have a joint brokerage account with
you and arrange for you to send statements to John's address, you may do
any of the following, but you must explain in your opt out notice which
opt out policy you will follow:
(i) Send a single opt out notice to John's address, but you must
accept an opt out direction from either John or Mary;
(ii) Treat an opt out direction by either John or Mary as applying
to the entire account. If you do so, and John opts out, you may not
require Mary to opt out as well before implementing John's opt out
direction; or
(iii) Permit John and Mary to make different opt out directions. If
you do so:
(A) You must permit John and Mary to opt out for each other.
(B) If both opt out, you must permit both to notify you in a single
response (such as on a form or through a telephone call).
(C) If John opts out and Mary does not, you may only disclose
nonpublic personal information about Mary, but not about John and not
about John and Mary jointly.
(e) Time to comply with opt out. You must comply with a consumer's
opt out direction as soon as reasonably practicable after you receive
it.
(f) Continuing right to opt out. A consumer may exercise the right
to opt out at any time.
(g) Duration of consumer's opt out direction. (1) A consumer's
direction to opt out under this section is effective until the consumer
revokes it in writing or, if the consumer agrees, electronically.
(2) When a customer relationship terminates, the customer's opt out
direction continues to apply to the nonpublic personal information that
you collected during or related to that relationship. If the individual
subsequently establishes a new customer relationship with you, the opt
out direction that applied to the former relationship does not apply to
the new relationship.
(h) Delivery. When you are required to deliver an opt out notice by
this section, you must deliver it according to Sec. 248.9.
(i) Model privacy form. Pursuant to Sec. 248.2(a) and appendix A to
subpart A of this part, Form S-P meets the notice content requirements
of this section.
[65 FR 40362, June 29, 2000, as amended at 74 FR 62985, Dec. 1, 2009]
Sec. 248.8 Revised privacy notices.
(a) General rule. Except as otherwise authorized in this subpart,
you must not, directly or through any affiliate, disclose any nonpublic
personal information about a consumer to a nonaffiliated third party
other than as described in the initial notice that you provided to that
consumer under Sec. 248.4, unless:
(1) You have provided to the consumer a clear and conspicuous
revised notice that accurately describes your policies and practices;
(2) You have provided to the consumer a new opt out notice;
(3) You have given the consumer a reasonable opportunity, before you
disclose the information to the nonaffiliated third party, to opt out of
the disclosure; and
(4) The consumer does not opt out.
(b) Examples. (1) Except as otherwise permitted by Sec. Sec.
248.13, 248.14, and 248.15, you must provide a revised notice before
you:
(i) Disclose a new category of nonpublic personal information to any
nonaffiliated third party;
(ii) Disclose nonpublic personal information to a new category of
nonaffiliated third party; or
(iii) Disclose nonpublic personal information about a former
customer to a nonaffiliated third party, if that former customer has not
had the opportunity to exercise an opt out right regarding that
disclosure.
[[Page 238]]
(2) A revised notice is not required if you disclose nonpublic
personal information to a new nonaffiliated third party that you
adequately described in your prior notice.
(c) Delivery. When you are required to deliver a revised privacy
notice by this section, you must deliver it according to Sec. 248.9.
Sec. 248.9 Delivering privacy and opt out notices.
(a) How to provide notices. You must provide any privacy notices and
opt out notices, including short-form initial notices that this subpart
requires so that each consumer can reasonably be expected to receive
actual notice in writing or, if the consumer agrees, electronically.
(b)(1) Examples of reasonable expectation of actual notice. You may
reasonably expect that a consumer will receive actual notice if you:
(i) Hand-deliver a printed copy of the notice to the consumer;
(ii) Mail a printed copy of the notice to the last known address of
the consumer;
(iii) For the consumer who conducts transactions electronically,
post the notice on the electronic site and require the consumer to
acknowledge receipt of the notice as a necessary step to obtaining a
particular financial product or service; or
(iv) For an isolated transaction with the consumer, such as an ATM
transaction, post the notice on the ATM screen and require the consumer
to acknowledge receipt of the notice as a necessary step to obtaining
the particular financial product or service.
(2) Examples of unreasonable expectation of actual notice. You may
not, however, reasonably expect that a consumer will receive actual
notice of your privacy policies and practices if you:
(i) Only post a sign in your branch or office or generally publish
advertisements of your privacy policies and practices; or
(ii) Send the notice via electronic mail to a consumer who does not
obtain a financial product or service from you electronically.
(c) Annual notices only. (1) You may reasonably expect that a
customer will receive actual notice of your annual privacy notice if:
(i) The customer uses your web site to access financial products and
services electronically and agrees to receive notices at the web site
and you post your current privacy notice continuously in a clear and
conspicuous manner on the web site; or
(ii) The customer has requested that you refrain from sending any
information regarding the customer relationship, and your current
privacy notice remains available to the customer upon request.
(2) Example of reasonable expectation of receipt of annual privacy
notice. You may reasonably expect that consumers who share an address
will receive actual notice of your annual privacy notice if you deliver
the notice with or in a stockholder or shareholder report under the
conditions in 17 CFR 270.30d-1(f) or 17 CFR 270.30d-2(b), or with or in
a prospectus under the conditions in 17 CFR 230.154.
(d) Oral description of notice insufficient. You may not provide any
notice required by this subpart solely by orally explaining the notice,
either in person or over the telephone.
(e) Retention or accessibility of notices for customers. (1) For
customers only, you must provide the initial notice required by Sec.
248.4(a)(1), the annual notice required by Sec. 248.5(a), and the
revised notice required by Sec. 248.8, so that the customer can retain
them or obtain them later in writing or, if the customer agrees,
electronically.
(2) Examples of retention or accessibility. You provide a privacy
notice to the customer so that the customer can retain it or obtain it
later if you:
(i) Hand-deliver a printed copy of the notice to the customer;
(ii) Mail a printed copy of the notice to the last known address of
the customer; or
(iii) Make your current privacy notice available on a web site (or a
link to another web site) for the customer who obtains a financial
product or service electronically and agrees to receive the notice at
the web site.
(f) Joint notice with other financial institutions. You may provide
a joint notice from you and one or more of your
[[Page 239]]
affiliates or other financial institutions, as identified in the notice,
as long as the notice is accurate with respect to you and the other
institutions.
(g) Joint relationships. If two or more consumers jointly obtain a
financial product or service from you, you may satisfy the initial,
annual, and revised notice requirements of paragraph (a) of this section
by providing one notice to those consumers jointly.
Limits on Disclosures
Sec. 248.10 Limits on disclosure of nonpublic personal information
to nonaffiliated third parties.
(a)(1) Conditions for disclosure. Except as otherwise authorized in
this subpart, you may not, directly or through any affiliate, disclose
any nonpublic personal information about a consumer to a nonaffiliated
third party unless:
(i) You have provided to the consumer an initial notice as required
under Sec. 248.4;
(ii) You have provided to the consumer an opt out notice as required
in Sec. 248.7;
(iii) You have given the consumer a reasonable opportunity, before
you disclose the information to the nonaffiliated third party, to opt
out of the disclosure; and
(iv) The consumer does not opt out.
(2) Opt out definition. Opt out means a direction by the consumer
that you not disclose nonpublic personal information about that consumer
to a nonaffiliated third party, other than as permitted by Sec. Sec.
248.13, 248.14, and 248.15.
(3) Examples of reasonable opportunity to opt out. You provide a
consumer with a reasonable opportunity to opt out if:
(i) By mail. You mail the notices required in paragraph (a)(1) of
this section to the consumer and allow the consumer to opt out by
mailing a form, calling a toll-free telephone number, or any other
reasonable means within 30 days after the date you mailed the notices.
(ii) By electronic means. A customer opens an on-line account with
you and agrees to receive the notices required in paragraph (a)(1) of
this section electronically, and you allow the customer to opt out by
any reasonable means within 30 days after the date that the customer
acknowledges receipt of the notices in conjunction with opening the
account.
(iii) Isolated transaction with consumer. For an isolated
transaction, such as the provision of brokerage services to a consumer
as an accommodation, you provide the consumer with a reasonable
opportunity to opt out if you provide the notices required in paragraph
(a)(1) of this section at the time of the transaction and request that
the consumer decide, as a necessary part of the transaction, whether to
opt out before completing the transaction.
(b) Application of opt out to all consumers and all nonpublic
personal information. (1) You must comply with this section, regardless
of whether you and the consumer have established a customer
relationship.
(2) Unless you comply with this section, you may not, directly or
through any affiliate, disclose any nonpublic personal information about
a consumer that you have collected, regardless of whether you collected
it before or after receiving the direction to opt out from the consumer.
(c) Partial opt out. You may allow a consumer to select certain
nonpublic personal information or certain nonaffiliated third parties
with respect to which the consumer wishes to opt out.
Sec. 248.11 Limits on redisclosure and reuse of information.
(a)(1) Information you receive under an exception. If you receive
nonpublic personal information from a nonaffiliated financial
institution under an exception in Sec. 248.14 or Sec. 248.15, your
disclosure and use of that information is limited as follows:
(i) You may disclose the information to the affiliates of the
financial institution from which you received the information;
(ii) You may disclose the information to your affiliates, but your
affiliates may, in turn, disclose and use the information only to the
extent that you may disclose and use the information; and
(iii) You may disclose and use the information pursuant to an
exception in Sec. 248.14 or Sec. 248.15 in the ordinary course of
business to carry out the activity
[[Page 240]]
covered by the exception under which you received the information.
(2) Example. If you receive a customer list from a nonaffiliated
financial institution in order to provide account-processing services
under the exception in Sec. 248.14(a), you may disclose that
information under any exception in Sec. 248.14 or Sec. 248.15 in the
ordinary course of business in order to provide those services. You
could also disclose that information in response to a properly
authorized subpoena or in the ordinary course of business to your
attorneys, accountants, and auditors. You could not disclose that
information to a third party for marketing purposes or use that
information for your own marketing purposes.
(b)(1) Information you receive outside of an exception. If you
receive nonpublic personal information from a nonaffiliated financial
institution other than under an exception in Sec. 248.14 or Sec.
248.15, you may disclose the information only:
(i) To the affiliates of the financial institution from which you
received the information;
(ii) To your affiliates, but your affiliates may, in turn, disclose
the information only to the extent that you can disclose the
information; and
(iii) To any other person, if the disclosure would be lawful if made
directly to that person by the financial institution from which you
received the information.
(2) Example. If you obtain a customer list from a nonaffiliated
financial institution outside of the exceptions in Sec. Sec. 248.14 and
248.15:
(i) You may use that list for your own purposes;
(ii) You may disclose that list to another nonaffiliated third party
only if the financial institution from which you purchased the list
could have lawfully disclosed the list to that third party. That is, you
may disclose the list in accordance with the privacy policy of the
financial institution from which you received the list, as limited by
the opt out direction of each consumer whose nonpublic personal
information you intend to disclose, and you may disclose the list in
accordance with an exception in Sec. 248.14 or Sec. 248.15, such as in
the ordinary course of business to your attorneys, accountants, or
auditors.
(c) Information you disclose under an exception. If you disclose
nonpublic personal information to a nonaffiliated third party under an
exception in Sec. 248.14 or Sec. 248.15, the third party may disclose
and use that information only as follows:
(1) The third party may disclose the information to your affiliates;
(2) The third party may disclose the information to its affiliates,
but its affiliates may, in turn, disclose and use the information only
to the extent that the third party may disclose and use the information;
and
(3) The third party may disclose and use the information pursuant to
an exception in Sec. 248.14 or Sec. 248.15 in the ordinary course of
business to carry out the activity covered by the exception under which
it received the information.
(d) Information you disclose outside of an exception. If you
disclose nonpublic personal information to a nonaffiliated third party
other than under an exception in Sec. 248.14 or Sec. 248.15, the third
party may disclose the information only:
(1) To your affiliates;
(2) To its affiliates, but its affiliates, in turn, may disclose the
information only to the extent the third party can disclose the
information; and
(3) To any other person, if the disclosure would be lawful if you
made it directly to that person.
Sec. 248.12 Limits on sharing account number information for
marketing purposes.
(a) General prohibition on disclosure of account numbers. You must
not, directly or through an affiliate, disclose, other than to a
consumer reporting agency, an account number or similar form of access
number or access code for a consumer's credit card account, deposit
account, or transaction account to any nonaffiliated third party for use
in telemarketing, direct mail marketing, or other marketing through
electronic mail to the consumer.
(b) Exceptions. Paragraph (a) of this section does not apply if you
disclose
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an account number or similar form of access number or access code:
(1) To your agent or service provider solely in order to perform
marketing for your own products or services, as long as the agent or
service provider is not authorized to directly initiate charges to the
account; or
(2) To a participant in a private label credit card program or an
affinity or similar program where the participants in the program are
identified to the customer when the customer enters into the program.
(c) Example--Account number. An account number, or similar form of
access number or access code, does not include a number or code in an
encrypted form, as long as you do not provide the recipient with a means
to decode the number or code.
Exceptions
Sec. 248.13 Exception to opt out requirements for service providers
and joint marketing.
(a) General rule. (1) The opt out requirements in Sec. Sec. 248.7
and 248.10 do not apply when you provide nonpublic personal information
to a nonaffiliated third party to perform services for you or functions
on your behalf, if you:
(i) Provide the initial notice in accordance with Sec. 248.4; and
(ii) Enter into a contractual agreement with the third party that
prohibits the third party from disclosing or using the information other
than to carry out the purposes for which you disclosed the information,
including use under an exception in Sec. 248.14 or Sec. 248.15 in the
ordinary course of business to carry out those purposes.
(2) Example. If you disclose nonpublic personal information under
this section to a financial institution with which you perform joint
marketing, your contractual agreement with that institution meets the
requirements of paragraph (a)(1)(ii) of this section if it prohibits the
institution from disclosing or using the nonpublic personal information
except as necessary to carry out the joint marketing or under an
exception in Sec. 248.14 or Sec. 248.15 in the ordinary course of
business to carry out that joint marketing.
(b) Service may include joint marketing. The services a
nonaffiliated third party performs for you under paragraph (a) of this
section may include marketing of your own products or services or
marketing of financial products or services offered pursuant to joint
agreements between you and one or more financial institutions.
(c) Definition of joint agreement. For purposes of this section,
joint agreement means a written contract pursuant to which you and one
or more financial institutions jointly offer, endorse, or sponsor a
financial product or service.
Sec. 248.14 Exceptions to notice and opt out requirements for
processing and servicing transactions.
(a) Exceptions for processing and servicing transactions at
consumer's request. The requirements for initial notice in Sec.
248.4(a)(2), for the opt out in Sec. Sec. 248.7 and 248.10, and for
initial notice in Sec. 248.13 in connection with service providers and
joint marketing, do not apply if you disclose nonpublic personal
information as necessary to effect, administer, or enforce a transaction
that a consumer requests or authorizes, or in connection with:
(1) Processing or servicing a financial product or service that a
consumer requests or authorizes;
(2) Maintaining or servicing the consumer's account with you, or
with another entity as part of a private label credit card program or
other extension of credit on behalf of such entity; or
(3) A proposed or actual securitization, secondary market sale
(including sales of servicing rights), or similar transaction related to
a transaction of the consumer.
(b) Necessary to effect, administer, or enforce a transaction means
that the disclosure is:
(1) Required, or is one of the lawful or appropriate methods, to
enforce your rights or the rights of other persons engaged in carrying
out the financial transaction or providing the product or service; or
(2) Required, or is a usual, appropriate, or acceptable method:
(i) To carry out the transaction or the product or service business
of which the transaction is a part, and record, service, or maintain the
consumer's account in the ordinary course
[[Page 242]]
of providing the financial service or financial product;
(ii) To administer or service benefits or claims relating to the
transaction or the product or service business of which it is a part;
(iii) To provide a confirmation, statement, or other record of the
transaction, or information on the status or value of the financial
service or financial product to the consumer or the consumer's agent or
broker;
(iv) To accrue or recognize incentives or bonuses associated with
the transaction that are provided by you or any other party;
(v) To underwrite insurance at the consumer's request or for
reinsurance purposes, or for any of the following purposes as they
relate to a consumer's insurance: Account administration, reporting,
investigating, or preventing fraud or material misrepresentation,
processing premium payments, processing insurance claims, administering
insurance benefits (including utilization review activities),
participating in research projects, or as otherwise required or
specifically permitted by federal or State law; or
(vi) In connection with:
(A) The authorization, settlement, billing, processing, clearing,
transferring, reconciling or collection of amounts charged, debited, or
otherwise paid using a debit, credit, or other payment card, check, or
account number, or by other payment means;
(B) The transfer of receivables, accounts, or interests therein; or
(C) The audit of debit, credit, or other payment information.
Sec. 248.15 Other exceptions to notice and opt out requirements.
(a) Exceptions to notice and opt out requirements. The requirements
for initial notice in Sec. 248.4(a)(2), for the opt out in Sec. Sec.
248.7 and 248.10, and for initial notice in Sec. 248.13 in connection
with service providers and joint marketing do not apply when you
disclose nonpublic personal information:
(1) With the consent or at the direction of the consumer, provided
that the consumer has not revoked the consent or direction;
(2)(i) To protect the confidentiality or security of your records
pertaining to the consumer, service, product, or transaction;
(ii) To protect against or prevent actual or potential fraud,
unauthorized transactions, claims, or other liability;
(iii) For required institutional risk control or for resolving
consumer disputes or inquiries;
(iv) To persons holding a legal or beneficial interest relating to
the consumer; or
(v) To persons acting in a fiduciary or representative capacity on
behalf of the consumer;
(3) To provide information to insurance rate advisory organizations,
guaranty funds or agencies, agencies that are rating you, persons that
are assessing your compliance with industry standards, and your
attorneys, accountants, and auditors;
(4) To the extent specifically permitted or required under other
provisions of law and in accordance with the Right to Financial Privacy
Act of 1978 (12 U.S.C. 3401 et seq.), to law enforcement agencies
(including a federal functional regulator, the Secretary of the
Treasury, with respect to 31 U.S.C. Chapter 53, Subchapter II (Records
and Reports on Monetary Instruments and Transactions) and 12 U.S.C.
Chapter 21 (Financial Recordkeeping), a State insurance authority, with
respect to any person domiciled in that insurance authority's State that
is engaged in providing insurance, and the Federal Trade Commission),
self-regulatory organizations, or for an investigation on a matter
related to public safety;
(5)(i) To a consumer reporting agency in accordance with the Fair
Credit Reporting Act (15 U.S.C. 1681 et seq.), or
(ii) From a consumer report reported by a consumer reporting agency;
(6) In connection with a proposed or actual sale, merger, transfer,
or exchange of all or a portion of a business or operating unit if the
disclosure of nonpublic personal information concerns solely consumers
of such business or unit; or
(7)(i) To comply with federal, State, or local laws, rules and other
applicable legal requirements;
(ii) To comply with a properly authorized civil, criminal, or
regulatory investigation, or subpoena or summons
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by federal, State, or local authorities; or
(iii) To respond to judicial process or government regulatory
authorities having jurisdiction over you for examination, compliance, or
other purposes as authorized by law.
(b) Examples of consent and revocation of consent. (1) A consumer
may specifically consent to your disclosure to a nonaffiliated mortgage
lender of the value of the assets in the consumer's brokerage or
investment advisory account so that the lender can evaluate the
consumer's application for a mortgage loan.
(2) A consumer may revoke consent by subsequently exercising the
right to opt out of future disclosures of nonpublic personal information
as permitted under Sec. 248.7(f).
Relation to Other Laws; Effective Date
Sec. 248.16 Protection of Fair Credit Reporting Act.
Nothing in this subpart shall be construed to modify, limit, or
supersede the operation of the Fair Credit Reporting Act (15 U.S.C. 1681
et seq.), and no inference shall be drawn on the basis of the provisions
of this subpart regarding whether information is transaction or
experience information under section 603 of that Act.
Sec. 248.17 Relation to State laws.
(a) In general. This subpart shall not be construed as superseding,
altering, or affecting any statute, regulation, order, or interpretation
in effect in any State, except to the extent that such State statute,
regulation, order, or interpretation is inconsistent with the provisions
of this subpart, and then only to the extent of the inconsistency.
(b) Greater protection under State law. For purposes of this
section, a State statute, regulation, order, or interpretation is not
inconsistent with the provisions of this subpart if the protection such
statute, regulation, order, or interpretation affords any consumer is
greater than the protection provided under this subpart, as determined
by the Federal Trade Commission, after consultation with the Commission,
on the Federal Trade Commission's own motion, or upon the petition of
any interested party.
Sec. 248.18 Effective date; transition rule.
(a) Effective date. This subpart is effective November 13, 2000. In
order to provide sufficient time for you to establish policies and
systems to comply with the requirements of this subpart, the compliance
date for this subpart is July 1, 2001.
(b)(1) Notice requirement for consumers who are your customers on
the compliance date. By July 1, 2001, you must have provided an initial
notice, as required by Sec. 248.4, to consumers who are your customers
on July 1, 2001.
(2) Example. You provide an initial notice to consumers who are your
customers on July 1, 2001, if, by that date, you have established a
system for providing an initial notice to all new customers and have
mailed the initial notice to all your existing customers.
(c) Two-year grandfathering of service agreements. Until July 1,
2002, a contract that you have entered into with a nonaffiliated third
party to perform services for you or functions on your behalf satisfies
the provisions of Sec. 248.13(a)(2), even if the contract does not
include a requirement that the third party maintain the confidentiality
of nonpublic personal information, as long as you entered into the
agreement on or before July 1, 2000.
Sec. Sec. 248.19-248.29 [Reserved]
Sec. 248.30 Procedures to safeguard customer records and information;
disposal of consumer report information.
(a) Every broker, dealer, and investment company, and every
investment adviser registered with the Commission must adopt written
policies and procedures that address administrative, technical, and
physical safeguards for the protection of customer records and
information. These written policies and procedures must be reasonably
designed to:
(1) Insure the security and confidentiality of customer records and
information;
(2) Protect against any anticipated threats or hazards to the
security or integrity of customer records and information; and
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(3) Protect against unauthorized access to or use of customer
records or information that could result in substantial harm or
inconvenience to any customer.
(b) Disposal of consumer report information and records--(1)
Definitions (i) Consumer report has the same meaning as in section
603(d) of the Fair Credit Reporting Act (15 U.S.C. 1681a(d)).
(ii) Consumer report information means any record about an
individual, whether in paper, electronic or other form, that is a
consumer report or is derived from a consumer report. Consumer report
information also means a compilation of such records. Consumer report
information does not include information that does not identify
individuals, such as aggregate information or blind data.
(iii) Disposal means:
(A) The discarding or abandonment of consumer report information; or
(B) The sale, donation, or transfer of any medium, including
computer equipment, on which consumer report information is stored.
(iv) Notice-registered broker-dealers means a broker or dealer
registered by notice with the Commission under section 15(b)(11) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o(b)(11)).
(v) Transfer agent has the same meaning as in section 3(a)(25) of
the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(25)).
(2) Proper disposal requirements--(i) Standard. Every broker and
dealer other than notice-registered broker-dealers, every investment
company, and every investment adviser and transfer agent registered with
the Commission, that maintains or otherwise possesses consumer report
information for a business purpose must properly dispose of the
information by taking reasonable measures to protect against
unauthorized access to or use of the information in connection with its
disposal.
(ii) Relation to other laws. Nothing in this section shall be
construed:
(A) To require any broker, dealer, or investment company, or any
investment adviser or transfer agent registered with the Commission to
maintain or destroy any record pertaining to an individual that is not
imposed under other law; or
(B) To alter or affect any requirement imposed under any other
provision of law to maintain or destroy any of those records.
[65 FR 40362, June 29, 2000, as amended at 69 FR 71329, Dec. 8, 2004]
Sec. Sec. 248.31-248.100 [Reserved]
Sec. Appendix A to Subpart A of Part 248--Forms
A. Any person may view and print this form at: http://www.sec.gov/
about/forms/secforms.htm.
B. Use of Form S-P by brokers, dealers, and investment companies,
and investment advisers registered with the Commission constitutes
compliance with the notice content requirements of Sec. Sec. 248.6 and
248.7 of this part.
FORM S-P--Model Privacy Form
A. The Model Privacy Form
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B. General Instructions
1. How the Model Privacy Form is Used
(a) The model form may be used, at the option of a financial
institution, including a group of financial institutions that use a
common privacy notice, to meet the content requirements of the privacy
notice and opt-out notice set forth in Sec. Sec. 248.6 and 248.7 of
this part.
(b) The model form is a standardized form, including page layout,
content, format, style, pagination, and shading. Institutions seeking to
obtain the safe harbor through use of the model form may modify it only
as described in these instructions.
(c) Note that disclosure of certain information, such as assets,
income, and information from a consumer reporting agency, may give rise
to obligations under the Fair Credit Reporting Act [15 U.S.C. 1681-
1681x] (FCRA), such as a requirement to permit a consumer to opt out of
disclosures to affiliates or designation as a consumer reporting agency
if disclosures are made to nonaffiliated third parties.
(d) The word ``customer'' may be replaced by the word ``member''
whenever it appears in the model form, as appropriate.
2. The Contents of the Model Privacy Form
The model form consists of two pages, which may be printed on both
sides of a single sheet of paper, or may appear on two separate pages.
Where an institution provides a long list of institutions at the end of
the model form in accordance with Instruction C.3(a)(1), or provides
additional information in accordance with Instruction C.3(c), and such
list or additional information exceeds the space available on page two
of the model form, such list or additional information may extend to a
third page.
(a) Page One. The first page consists of the following components:
(1) Date last revised (upper right-hand corner).
(2) Title.
(3) Key frame (Why?, What?, How?).
(4) Disclosure table (``Reasons we can share your personal
information'').
(5) ``To limit our sharing'' box, as needed, for the financial
institution's opt-out information.
(6) ``Questions'' box, for customer service contact information.
(7) Mail-in opt-out form, as needed.
(b) Page Two. The second page consists of the following components:
(1) Heading (Page 2).
(2) Frequently Asked Questions (``Who we are'' and ``What we do'').
(3) Definitions.
(4) ``Other important information'' box, as needed.
3. The Format of the Model Privacy Form
The format of the model form may be modified only as described
below.
(a) Easily readable type font. Financial institutions that use the
model form must use an easily readable type font. While a number of
factors together produce easily readable type font, institutions are
required to use a minimum of 10-point font (unless otherwise expressly
permitted in these Instructions) and sufficient spacing between the
lines of type.
(b) Logo. A financial institution may include a corporate logo on
any page of the notice, so long as it does not interfere with the
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readability of the model form or the space constraints of each page.
(c) Page size and orientation. Each page of the model form must be
printed on paper in portrait orientation, the size of which must be
sufficient to meet the layout and minimum font size requirements, with
sufficient white space on the top, bottom, and sides of the content.
(d) Color. The model form must be printed on white or light color
paper (such as cream) with black or other contrasting ink color. Spot
color may be used to achieve visual interest, so long as the color
contrast is distinctive and the color does not detract from the
readability of the model form. Logos may also be printed in color.
(e) Languages. The model form may be translated into languages other
than English.
C. Information Required in the Model Privacy Form
The information in the model form may be modified only as described
below:
1. Name of the Institution or Group of Affiliated Institutions Providing
the Notice
Insert the name of the financial institution providing the notice or
a common identity of affiliated institutions jointly providing the
notice on the form wherever [name of financial institution] appears.
2. Page One
(a) Last revised date. The financial institution must insert in the
upper right-hand corner the date on which the notice was last revised.
The information shall appear in minimum 8-point font as ``rev. [month/
year]'' using either the name or number of the month, such as ``rev.
July 2009'' or ``rev. 7/09''.
(b) General instructions for the ``What?'' box. (1) The bulleted
list identifies the types of personal information that the institution
collects and shares. All institutions must use the term ``Social
Security number'' in the first bullet.
(2) Institutions must use five (5) of the following terms to
complete the bulleted list: income; account balances; payment history;
transaction history; transaction or loss history; credit history; credit
scores; assets; investment experience; credit-based insurance scores;
insurance claim history; medical information; overdraft history;
purchase history; account transactions; risk tolerance; medical-related
debts; credit card or other debt; mortgage rates and payments;
retirement assets; checking account information; employment information;
wire transfer instructions.
(c) General instructions for the disclosure table. The left column
lists reasons for sharing or using personal information. Each reason
correlates to a specific legal provision described in paragraph C.2(d)
of this Instruction. In the middle column, each institution must provide
a ``Yes'' or ``No'' response that accurately reflects its information
sharing policies and practices with respect to the reason listed on the
left. In the right column, each institution must provide in each box one
of the following three (3) responses, as applicable, that reflects
whether a consumer can limit such sharing: ``Yes'' if it is required to
or voluntarily provides an opt-out; ``No'' if it does not provide an
opt-out; or ``We don't share'' if it answers ``No'' in the middle
column. Only the sixth row (``For our affiliates to market to you'') may
be omitted at the option of the institution. See paragraph C.2(d)(6) of
this Instruction.
(d) Specific disclosures and corresponding legal provisions. (1) For
our everyday business purposes. This reason incorporates sharing
information under Sec. Sec. 248.14 and 248.15 and with service
providers pursuant to Sec. 248.13 of this part other than the purposes
specified in paragraphs C.2(d)(2) or C.2(d)(3) of these Instructions.
(2) For our marketing purposes. This reason incorporates sharing
information with service providers by an institution for its own
marketing pursuant to Sec. 248.13 of this part. An institution that
shares for this reason may choose to provide an opt-out.
(3) For joint marketing with other financial companies. This reason
incorporates sharing information under joint marketing agreements
between two or more financial institutions and with any service provider
used in connection with such agreements pursuant to Sec. 248.13 of this
part. An institution that shares for this reason may choose to provide
an opt-out.
(4) For our affiliates' everyday business purposes--information
about transactions and experiences. This reason incorporates sharing
information specified in sections 603(d)(2)(A)(i) and (ii) of the FCRA.
An institution that shares for this reason may choose to provide an opt-
out.
(5) For our affiliates' everyday business purposes--information
about creditworthiness. This reason incorporates sharing information
pursuant to section 603(d)(2)(A)(iii) of the FCRA. An institution that
shares for this reason must provide an opt-out.
(6) For our affiliates to market to you. This reason incorporates
sharing information specified in section 624 of the FCRA. This reason
may be omitted from the disclosure table when: the institution does not
have affiliates (or does not disclose personal information to its
affiliates); the institution's affiliates do not use personal
information in a manner that requires an opt-out; or the institution
provides the affiliate marketing notice separately. Institutions that
include
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this reason must provide an opt-out of indefinite duration. An
institution that is required to provide an affiliate marketing opt-out,
but does not include that opt-out in the model form under this part,
must comply with section 624 of the FCRA and 17 CFR part 248, subpart B,
with respect to the initial notice and opt-out and any subsequent
renewal notice and opt-out. An institution not required to provide an
opt-out under this subparagraph may elect to include this reason in the
model form.
(7) For nonaffiliates to market to you. This reason incorporates
sharing described in Sec. Sec. 248.7 and 248.10(a) of this part. An
institution that shares personal information for this reason must
provide an opt-out.
(e) To limit our sharing: A financial institution must include this
section of the model form only if it provides an opt-out. The word
``choice'' may be written in either the singular or plural, as
appropriate. Institutions must select one or more of the applicable opt-
out methods described: telephone, such as by a toll-free number; a Web
site; or use of a mail-in opt-out form. Institutions may include the
words ``toll-free'' before telephone, as appropriate. An institution
that allows consumers to opt out online must provide either a specific
Web address that takes consumers directly to the opt-out page or a
general Web address that provides a clear and conspicuous direct link to
the opt-out page. The opt-out choices made available to the consumer who
contacts the institution through these methods must correspond
accurately to the ``Yes'' responses in the third column of the
disclosure table. In the part titled ``Please note'' institutions may
insert a number that is 30 or greater in the space marked ``[30].''
Instructions on voluntary or state privacy law opt-out information are
in paragraph C.2(g)(5) of these Instructions.
(f) Questions box. Customer service contact information must be
inserted as appropriate, where [phone number] or [Web site] appear.
Institutions may elect to provide either a phone number, such as a toll-
free number, or a Web address, or both. Institutions may include the
words ``toll-free'' before the telephone number, as appropriate.
(g) Mail-in opt-out form. Financial institutions must include this
mail-in form only if they state in the ``To limit our sharing'' box that
consumers can opt out by mail. The mail-in form must provide opt-out
options that correspond accurately to the ``Yes'' responses in the third
column in the disclosure table. Institutions that require customers to
provide only name and address may omit the section identified as
``[account ].'' Institutions that require additional or different
information, such as a random opt-out number or a truncated account
number, to implement an opt-out election should modify the ``[account
]'' reference accordingly. This includes institutions that require
customers with multiple accounts to identify each account to which the
opt-out should apply. An institution must enter its opt-out mailing
address: in the far right of this form (see version 3); or below the
form (see version 4). The reverse side of the mail-in opt-out form must
not include any content of the model form.
(1) Joint accountholder. Only institutions that provide their joint
accountholders the choice to opt out for only one accountholder, in
accordance with paragraph C.3(a)(5) of these Instructions, must include
in the far left column of the mail-in form the following statement: ``If
you have a joint account, your choice(s) will apply to everyone on your
account unless you mark below. [square] Apply my choice(s) only to me.''
The word ``choice'' may be written in either the singular or plural, as
appropriate. Financial institutions that provide insurance products or
services, provide this option, and elect to use the model form may
substitute the word ``policy'' for ``account'' in this statement.
Institutions that do not provide this option may eliminate this left
column from the mail-in form.
(2) FCRA Section 603(d)(2)(A)(iii) opt-out. If the institution
shares personal information pursuant to section 603(d)(2)(A)(iii) of the
FCRA, it must include in the mail-in opt-out form the following
statement: ``[square] Do not share information about my creditworthiness
with your affiliates for their everyday business purposes.''
(3) FCRA Section 624 opt-out. If the institution incorporates
section 624 of the FCRA in accord with paragraph C.2(d)(6) of these
Instructions, it must include in the mail-in opt-out form the following
statement: ``[square] Do not allow your affiliates to use my personal
information to market to me.''
(4) Nonaffiliate opt-out. If the financial institution shares
personal information pursuant to Sec. 248.10(a) of this part, it must
include in the mail-in opt-out form the following statement: ``[square]
Do not share my personal information with nonaffiliates to market their
products and services to me.''
(5) Additional opt-outs. Financial institutions that use the
disclosure table to provide opt-out options beyond those required by
Federal law must provide those opt-outs in this section of the model
form. A financial institution that chooses to offer an opt-out for its
own marketing in the mail-in opt-out form must include one of the two
following statements: ``[square] Do not share my personal information to
market to me.'' or ``[square] Do not use my personal information to
market to me.'' A financial institution that chooses to offer an opt-out
for joint marketing must include the following statement: ``[square] Do
not share my personal information with other financial institutions to
jointly market to me.''
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(h) Barcodes. A financial institution may elect to include a barcode
and/or ``tagline'' (an internal identifier) in 6-point font at the
bottom of page one, as needed for information internal to the
institution, so long as these do not interfere with the clarity or text
of the form.
3. Page Two
(a) General Instructions for the Questions. Certain of the Questions
may be customized as follows:
(1) ``Who is providing this notice?'' This question may be omitted
where only one financial institution provides the model form and that
institution is clearly identified in the title on page one. Two or more
financial institutions that jointly provide the model form must use this
question to identify themselves as required by Sec. 248.9(f) of this
part. Where the list of institutions exceeds four (4) lines, the
institution must describe in the response to this question the general
types of institutions jointly providing the notice and must separately
identify those institutions, in minimum 8-point font, directly following
the ``Other important information'' box, or, if that box is not included
in the institution's form, directly following the ``Definitions.'' The
list may appear in a multi-column format.
(2) ``How does [name of financial institution] protect my personal
information?'' The financial institution may only provide additional
information pertaining to its safeguards practices following the
designated response to this question. Such information may include
information about the institution's use of cookies or other measures it
uses to safeguard personal information. Institutions are limited to a
maximum of 30 additional words.
(3) ``How does [name of financial institution] collect my personal
information?'' Institutions must use five (5) of the following terms to
complete the bulleted list for this question: open an account; deposit
money; pay your bills; apply for a loan; use your credit or debit card;
seek financial or tax advice; apply for insurance; pay insurance
premiums; file an insurance claim; seek advice about your investments;
buy securities from us; sell securities to us; direct us to buy
securities; direct us to sell your securities; make deposits or
withdrawals from your account; enter into an investment advisory
contract; give us your income information; provide employment
information; give us your employment history; tell us about your
investment or retirement portfolio; tell us about your investment or
retirement earnings; apply for financing; apply for a lease; provide
account information; give us your contact information; pay us by check;
give us your wage statements; provide your mortgage information; make a
wire transfer; tell us who receives the money; tell us where to send the
money; show your government-issued ID; show your driver's license; order
a commodity futures or option trade. Institutions that collect personal
information from their affiliates and/or credit bureaus must include
after the bulleted list the following statement: ``We also collect your
personal information from others, such as credit bureaus, affiliates, or
other companies.'' Institutions that do not collect personal information
from their affiliates or credit bureaus but do collect information from
other companies must include the following statement instead: ``We also
collect your personal information from other companies.'' Only
institutions that do not collect any personal information from
affiliates, credit bureaus, or other companies can omit both statements.
(4) ``Why can't I limit all sharing?'' Institutions that describe
state privacy law provisions in the ``Other important information'' box
must use the bracketed sentence: ``See below for more on your rights
under state law.'' Other institutions must omit this sentence.
(5) ``What happens when I limit sharing for an account I hold
jointly with someone else?'' Only financial institutions that provide
opt-out options must use this question. Other institutions must omit
this question. Institutions must choose one of the following two
statements to respond to this question: ``Your choices will apply to
everyone on your account.'' or ``Your choices will apply to everyone on
your account--unless you tell us otherwise.'' Financial institutions
that provide insurance products or services and elect to use the model
form may substitute the word ``policy'' for ``account'' in these
statements.
(b) General Instructions for the Definitions. The financial
institution must customize the space below the responses to the three
definitions in this section. This specific information must be in
italicized lettering to set off the information from the standardized
definitions.
(1) Affiliates. As required by Sec. 248.6(a)(3) of this part, where
[affiliate information] appears, the financial institution must:
(i) If it has no affiliates, state: ``[name of financial
institution] has no affiliates;''
(ii) If it has affiliates but does not share personal information,
state: ``[name of financial institution] does not share with our
affiliates;'' or
(iii) If it shares with its affiliates, state, as applicable: ``Our
affiliates include companies with a [common corporate identity of
financial institution] name; financial companies such as [insert
illustrative list of companies]; nonfinancial companies, such as [insert
illustrative list of companies] and others, such as [insert illustrative
list].''
(2) Nonaffiliates. As required by Sec. 248.6(c)(3) of this part,
where [nonaffiliate information] appears, the financial institution
must:
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(i) If it does not share with nonaffiliated third parties, state:
``[name of financial institution] does not share with nonaffiliates so
they can market to you;'' or
(ii) If it shares with nonaffiliated third parties, state, as
applicable: ``Nonaffiliates we share with can include [list categories
of companies such as mortgage companies, insurance companies, direct
marketing companies, and nonprofit organizations].''
(3) Joint Marketing. As required by Sec. 248.13 of this part, where
[joint marketing] appears, the financial institution must:
(i) If it does not engage in joint marketing, state: ``[name of
financial institution] doesn't jointly market;'' or
(ii) If it shares personal information for joint marketing, state,
as applicable: ``Our joint marketing partners include [list categories
of companies such as credit card companies].''
(c) General instructions for the ``Other important information''
box. This box is optional. The space provided for information in this
box is not limited. Only the following types of information can appear
in this box.
(1) State and/or international privacy law information; and/or
(2) Acknowledgment of receipt form.
[74 FR 62985, Dec. 1, 2009]
Subpart B_Regulation S-AM: Limitations on Affiliate Marketing
Source: 74 FR 40431, Aug. 11, 2009, unless otherwise noted.
Sec. 248.101 Purpose and scope.
(a) Purpose. The purpose of this subpart is to implement section 624
of the Fair Credit Reporting Act, 15 U.S.C. 1681, et seq. (``FCRA'').
Section 624, which was added to the FCRA by section 214 of the Fair and
Accurate Credit Transactions Act of 2003, Public Law 108-159, 117 Stat.
1952 (2003) (``FACT Act'' or ``Act''), regulates the use of consumer
information received from an affiliate to make marketing solicitations.
(b) Scope. This subpart applies to any broker or dealer other than a
notice-registered broker or dealer, to any investment company, and to
any investment adviser or transfer agent registered with the Commission.
These entities are referred to in this subpart as ``you.''
Sec. 248.102 Examples.
The examples in this subpart are not exclusive. The examples in this
subpart provide guidance concerning the rules' application in ordinary
circumstances. The facts and circumstances of each individual situation,
however, will determine whether compliance with an example, to the
extent applicable, constitutes compliance with this subpart. Examples in
a paragraph illustrate only the issue described in the paragraph and do
not illustrate any other issue that may arise under this subpart.
Similarly, the examples do not illustrate any issues that may arise
under other laws or regulations.
Sec. Sec. 248.103-248.119 [Reserved]
Sec. 248.120 Definitions.
As used in this subpart, unless the context requires otherwise:
(a) Affiliate of a broker, dealer, or investment company, or an
investment adviser or transfer agent registered with the Commission
means any person that is related by common ownership or common control
with the broker, dealer, or investment company, or the investment
adviser or transfer agent registered with the Commission. In addition, a
broker, dealer, or investment company, or an investment adviser or
transfer agent registered with the Commission will be deemed an
affiliate of a company for purposes of this subpart if:
(1) That company is regulated under section 214 of the FACT Act,
Public Law 108-159, 117 Stat. 1952 (2003), by a government regulator
other than the Commission; and
(2) Rules adopted by the other government regulator under section
214 of the FACT Act treat the broker, dealer, or investment company, or
investment adviser or transfer agent registered with the Commission as
an affiliate of that company.
(b) Broker has the same meaning as in section 3(a)(4) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)). A ``broker'' does
not include a broker registered by notice with the Commission under
section 15(b)(11) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(b)(11)).
(c) Clear and conspicuous means reasonably understandable and
designed to call attention to the nature and significance of the
information presented.
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(d) Commission means the Securities and Exchange Commission.
(e) Company means any corporation, limited liability company,
business trust, general or limited partnership, association, or similar
organization.
(f) Concise--(1) In general. The term ``concise'' means a reasonably
brief expression or statement.
(2) Combination with other required disclosures. A notice required
by this subpart may be concise even if it is combined with other
disclosures required or authorized by Federal or State law.
(g) Consumer means an individual.
(h) Control of a company means the power to exercise a controlling
influence over the management or policies of a company whether through
ownership of securities, by contract, or otherwise. Any person who owns
beneficially, either directly or through one or more controlled
companies, more than 25 percent of the voting securities of any company
is presumed to control the company. Any person who does not own more
than 25 percent of the voting securities of any company will be presumed
not to control the company. Any presumption regarding control may be
rebutted by evidence, but, in the case of an investment company, will
continue until the Commission makes a decision to the contrary according
to the procedures described in section 2(a)(9) of the Investment Company
Act of 1940 (15 U.S.C. 80a-2(a)(9)).
(i) Dealer has the same meaning as in section 3(a)(5) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(5)). A ``dealer'' does
not include a dealer registered by notice with the Commission under
section 15(b)(11) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(b)(11)).
(j) Eligibility information means any information the communication
of which would be a consumer report if the exclusions from the
definition of ``consumer report'' in section 603(d)(2)(A) of the FCRA
did not apply. Eligibility information does not include aggregate or
blind data that does not contain personal identifiers such as account
numbers, names, or addresses.
(k) FCRA means the Fair Credit Reporting Act (15 U.S.C. 1681, et
seq.).
(l) GLBA means the Gramm-Leach-Bliley Act (15 U.S.C. 6801, et seq.).
(m) Investment adviser has the same meaning as in section 202(a)(11)
of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)).
(n) Investment company has the same meaning as in section 3 of the
Investment Company Act of 1940 (15 U.S.C. 80a-3) and includes a separate
series of the investment company.
(o) Marketing solicitation--(1) In general. The term ``marketing
solicitation'' means the marketing of a product or service initiated by
a person to a particular consumer that is:
(i) Based on eligibility information communicated to that person by
its affiliate as described in this subpart; and
(ii) Intended to encourage the consumer to purchase or obtain such
product or service.
(2) Exclusion of marketing directed at the general public. A
marketing solicitation does not include marketing communications that
are directed at the general public. For example, television, general
circulation magazine, billboard advertisements and publicly available
Web sites that are not directed to particular consumers would not
constitute marketing solicitations, even if those communications are
intended to encourage consumers to purchase products and services from
the person initiating the communications.
(3) Examples of marketing solicitations. A marketing solicitation
would include, for example, a telemarketing call, direct mail, e-mail,
or other form of marketing communication directed to a particular
consumer that is based on eligibility information received from an
affiliate.
(p) Person means any individual, partnership, corporation, trust,
estate, cooperative, association, government or governmental subdivision
or agency, or other entity.
(q) Pre-existing business relationship--(1) In general. The term
``pre-existing business relationship'' means a relationship between a
person, or a person's licensed agent, and a consumer based on:
(i) A financial contract between the person and the consumer which
is in force on the date on which the consumer is sent a solicitation
covered by this subpart;
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(ii) The purchase, rental, or lease by the consumer of the person's
goods or services, or a financial transaction (including holding an
active account or a policy in force or having another continuing
relationship) between the consumer and the person, during the 18-month
period immediately preceding the date on which the consumer is sent a
solicitation covered by this subpart; or
(iii) An inquiry or application by the consumer regarding a product
or service offered by that person during the three-month period
immediately preceding the date on which the consumer is sent a
solicitation covered by this subpart.
(2) Examples of pre-existing business relationships. (i) If a
consumer has a brokerage account with a broker-dealer that is currently
in force, the broker-dealer has a pre-existing business relationship
with the consumer and can use eligibility information it receives from
its affiliates to make solicitations to the consumer about its products
or services.
(ii) If a consumer has an investment advisory contract with a
registered investment adviser, the investment adviser has a pre-existing
business relationship with the consumer and can use eligibility
information it receives from its affiliates to make solicitations to the
consumer about its products or services.
(iii) If a consumer was the record owner of securities issued by an
investment company, but the consumer redeems these securities, the
investment company has a pre-existing business relationship with the
consumer and can use eligibility information it receives from its
affiliates to make solicitations to the consumer about its products or
services for 18 months after the date the consumer redeemed the
investment company's securities.
(iv) If a consumer applies for a margin account offered by a broker-
dealer, but does not obtain a product or service from or enter into a
financial contract or transaction with the broker-dealer, the broker-
dealer has a pre-existing business relationship with the consumer and
can therefore use eligibility information it receives from its
affiliates to make solicitations to the consumer about its products or
services for three months after the date of the application.
(v) If a consumer makes a telephone inquiry to a broker-dealer about
its products or services and provides contact information to the broker-
dealer, but does not obtain a product or service from or enter into a
financial contract or transaction with the institution, the broker-
dealer has a pre-existing business relationship with the consumer and
can therefore use eligibility information it receives from its
affiliates to make solicitations to the consumer about its products or
services for three months after the date of the inquiry.
(vi) If a consumer makes an inquiry by e-mail to a broker-dealer
about one of its affiliated investment company's products or services
but does not obtain a product or service from, or enter into a financial
contract or transaction with the broker-dealer or the investment
company, the broker-dealer and the investment company both have a pre-
existing business relationship with the consumer and can therefore use
eligibility information they receive from their affiliates to make
solicitations to the consumer about their products or services for three
months after the date of the inquiry.
(vii) If a consumer who has a pre-existing business relationship
with an investment company that is part of a group of affiliated
companies makes a telephone call to the centralized call center for the
affiliated companies to inquire about products or services offered by a
broker-dealer affiliated with the investment company, and provides
contact information to the call center, the call constitutes an inquiry
to the broker-dealer. In these circumstances, the broker-dealer has a
pre-existing business relationship with the consumer and can therefore
use eligibility information it receives from the investment company to
make solicitations to the consumer about its products or services for
three months after the date of the inquiry.
(3) Examples where no pre-existing business relationship is created.
(i) If a consumer makes a telephone call to a centralized call center
for a group of affiliated companies to inquire about the
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consumer's existing account at a broker-dealer, the call does not
constitute an inquiry to any affiliate other than the broker-dealer that
holds the consumer's account and does not establish a pre-existing
business relationship between the consumer and any affiliate of the
account-holding broker-dealer.
(ii) If a consumer who has an advisory contract with a registered
investment adviser makes a telephone call to an affiliate of the
investment adviser to ask about the affiliate's retail locations and
hours, but does not make an inquiry about the affiliate's products or
services, the call does not constitute an inquiry and does not establish
a pre-existing business relationship between the consumer and the
affiliate. Also, the affiliate's capture of the consumer's telephone
number does not constitute an inquiry and does not establish a pre-
existing business relationship between the consumer and the affiliate.
(iii) If a consumer makes a telephone call to a broker-dealer in
response to an advertisement offering a free promotional item to
consumers who call a toll-free number, but the advertisement does not
indicate that the broker-dealer's products or services will be marketed
to consumers who call in response, the call does not create a pre-
existing business relationship between the consumer and the broker-
dealer because the consumer has not made an inquiry about a product or
service offered by the institution, but has merely responded to an offer
for a free promotional item.
(r) Transfer agent has the same meaning as in section 3(a)(25) of
the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(25)).
(s) You means:
(1) Any broker or dealer other than a broker or dealer registered by
notice with the Commission under section 15(b)(11) of the Securities
Exchange Act of 1934 (15 U.S.C. 78o(b)(11));
(2) Any investment company;
(3) Any investment adviser registered with the Commission under the
Investment Advisers Act of 1940 (15 U.S.C. 80b-1, et seq.); and
(4) Any transfer agent registered with the Commission under section
17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1).
Sec. 248.121 Affiliate marketing opt out and exceptions.
(a) Initial notice and opt out requirement--(1) In general. You may
not use eligibility information about a consumer that you receive from
an affiliate to make a marketing solicitation to the consumer, unless:
(i) It is clearly and conspicuously disclosed to the consumer in
writing or, if the consumer agrees, electronically, in a concise notice
that you may use eligibility information about that consumer received
from an affiliate to make marketing solicitations to the consumer;
(ii) The consumer is provided a reasonable opportunity and a
reasonable and simple method to ``opt out,'' or the consumer prohibits
you from using eligibility information to make marketing solicitations
to the consumer; and
(iii) The consumer has not opted out.
(2) Example. A consumer has a brokerage account with a broker-
dealer. The broker-dealer furnishes eligibility information about the
consumer to its affiliated investment adviser. Based on that eligibility
information, the investment adviser wants to make a marketing
solicitation to the consumer about its discretionary advisory accounts.
The investment adviser does not have a pre-existing business
relationship with the consumer and none of the other exceptions apply.
The investment adviser is prohibited from using eligibility information
received from its broker-dealer affiliate to make marketing
solicitations to the consumer about its discretionary advisory accounts
unless the consumer is given a notice and opportunity to opt out and the
consumer does not opt out.
(3) Affiliates who may provide the notice. The notice required by
this paragraph must be provided:
(i) By an affiliate that has or has previously had a pre-existing
business relationship with the consumer; or
(ii) As part of a joint notice from two or more members of an
affiliated group of companies, provided that at least one of the
affiliates on the joint notice
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has or has previously had a pre-existing business relationship with the
consumer.
(b) Making marketing solicitations--(1) In general. For purposes of
this subpart, you make a marketing solicitation if:
(i) You receive eligibility information from an affiliate;
(ii) You use that eligibility information to do one or more of the
following:
(A) Identify the consumer or type of consumer to receive a marketing
solicitation;
(B) Establish criteria used to select the consumer to receive a
marketing solicitation; or
(C) Decide which of your products or services to market to the
consumer or tailor your marketing solicitation to that consumer; and
(iii) As a result of your use of the eligibility information, the
consumer is provided a marketing solicitation.
(2) Receiving eligibility information from an affiliate, including
through a common database. You may receive eligibility information from
an affiliate in various ways, including when the affiliate places that
information into a common database that you may access.
(3) Receipt or use of eligibility information by your service
provider. Except as provided in paragraph (b)(5) of this section, you
receive or use an affiliate's eligibility information if a service
provider acting on your behalf (whether an affiliate or a nonaffiliated
third party) receives or uses that information in the manner described
in paragraph (b)(1)(i) or (b)(1)(ii) of this section. All relevant facts
and circumstances will determine whether a person is acting as your
service provider when it receives or uses an affiliate's eligibility
information in connection with marketing your products and services.
(4) Use by an affiliate of its own eligibility information. Unless
you have used eligibility information that you receive from an affiliate
in the manner described in paragraph (b)(1)(ii) of this section, you do
not make a marketing solicitation subject to this subpart if your
affiliate:
(i) Uses its own eligibility information that it obtained in
connection with a pre-existing business relationship it has or had with
the consumer to market your products or services to the affiliate's
consumer; or
(ii) Directs its service provider to use the affiliate's own
eligibility information that it obtained in connection with a pre-
existing business relationship it has or had with the consumer to market
your products or services to the consumer, and you do not communicate
directly with the service provider regarding that use.
(5) Use of eligibility information by a service provider--(i) In
general. You do not make a marketing solicitation subject to this
subpart if a service provider (including an affiliated or third-party
service provider that maintains or accesses a common database that you
may access) receives eligibility information from your affiliate that
your affiliate obtained in connection with a pre-existing business
relationship it has or had with the consumer and uses that eligibility
information to market your products or services to that affiliate's
consumer, so long as:
(A) Your affiliate controls access to and use of its eligibility
information by the service provider (including the right to establish
the specific terms and conditions under which the service provider may
use such information to market your products or services);
(B) Your affiliate establishes specific terms and conditions under
which the service provider may access and use your affiliate's
eligibility information to market your products and services (or those
of affiliates generally) to your affiliate's consumers, such as the
identity of the affiliated companies whose products or services may be
marketed to the affiliate's consumers by the service provider, the types
of products or services of affiliated companies that may be marketed,
and the number of times your affiliate's consumers may receive marketing
materials, and periodically evaluates the service provider's compliance
with those terms and conditions;
(C) Your affiliate requires the service provider to implement
reasonable policies and procedures designed to ensure that the service
provider uses your affiliate's eligibility information in accordance
with the terms and conditions established by your affiliate relating to
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the marketing of your products or services;
(D) Your affiliate is identified on or with the marketing materials
provided to the consumer; and
(E) You do not directly use your affiliate's eligibility information
in the manner described in paragraph (b)(1)(ii) of this section.
(ii) Writing requirements. (A) The requirements of paragraphs
(b)(5)(i)(A) and (C) of this section must be set forth in a written
agreement between your affiliate and the service provider; and
(B) The specific terms and conditions established by your affiliate
as provided in paragraph (b)(5)(i)(B) of this section must be set forth
in writing.
(6) Examples of making marketing solicitations. (i) A consumer has
an investment advisory contract with a registered investment adviser
that is affiliated with a broker-dealer. The broker-dealer receives
eligibility information about the consumer from the investment adviser.
The broker-dealer uses that eligibility information to identify the
consumer to receive a marketing solicitation about brokerage products
and services, and, as a result, the broker-dealer provides a marketing
solicitation to the consumer about its brokerage services. Pursuant to
paragraph (b)(1) of this section, the broker-dealer has made a marketing
solicitation to the consumer.
(ii) The same facts as in the example in paragraph (b)(6)(i) of this
section, except that after using the eligibility information to identify
the consumer to receive a marketing solicitation about brokerage
products and services, the broker-dealer asks the registered investment
adviser to send the marketing solicitation to the consumer and the
investment adviser does so. Pursuant to paragraph (b)(1) of this
section, the broker-dealer has made a marketing solicitation to the
consumer because it used eligibility information about the consumer that
it received from an affiliate to identify the consumer to receive a
marketing solicitation about its products or services, and, as a result,
a marketing solicitation was provided to the consumer about the broker-
dealer's products and services.
(iii) The same facts as in the example in paragraph (b)(6)(i) of
this section, except that eligibility information about consumers who
have an investment advisory contract with a registered investment
adviser is placed into a common database that all members of the
affiliated group of companies may independently access and use. Without
using the investment adviser's eligibility information, the broker-
dealer develops selection criteria and provides those criteria,
marketing materials, and related instructions to the investment adviser.
The investment adviser reviews eligibility information about its own
consumers using the selection criteria provided by the broker-dealer to
determine which consumers should receive the broker-dealer's marketing
materials and sends the broker-dealer's marketing materials to those
consumers. Even though the broker-dealer has received eligibility
information through the common database as provided in paragraph (b)(2)
of this section, it did not use that information to identify consumers
or establish selection criteria; instead, the investment adviser used
its own eligibility information. Therefore, pursuant to paragraph
(b)(4)(i) of this section, the broker-dealer has not made a marketing
solicitation to the consumer.
(iv) The same facts as in the example in paragraph (b)(6)(iii) of
this section, except that the registered investment adviser provides the
broker-dealer's criteria to the investment adviser's service provider
and directs the service provider to use the investment adviser's
eligibility information to identify investment adviser consumers who
meet the criteria and to send the broker-dealer's marketing materials to
those consumers. The broker-dealer does not communicate directly with
the service provider regarding the use of the investment adviser's
information to market its products or services to the investment
adviser's consumers. Pursuant to paragraph (b)(4)(ii) of this section,
the broker-dealer has not made a marketing solicitation to the consumer.
(v) An affiliated group of companies includes an investment company,
a principal underwriter for the investment company, a retail broker-
dealer,
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and a transfer agent that also acts as a service provider. Each
affiliate in the group places information about its consumers into a
common database. The service provider has access to all information in
the common database. The investment company controls access to and use
of its eligibility information by the service provider. This control is
set forth in a written agreement between the investment company and the
service provider. The written agreement also requires the service
provider to establish reasonable policies and procedures designed to
ensure that the service provider uses the investment company's
eligibility information in accordance with specific terms and conditions
established by the investment company relating to the marketing of the
products and services of all affiliates, including the principal
underwriter and the retail broker-dealer. In a separate written
communication, the investment company specifies the terms and conditions
under which the service provider may use the investment company's
eligibility information to market the retail broker-dealer's products
and services to the investment company's consumers. The specific terms
and conditions are: a list of affiliated companies (including the retail
broker-dealer) whose products or services may be marketed to the
investment company's consumers by the service provider; the specific
products or services or types of products or services that may be
marketed to the investment company's consumers by the service provider;
the categories of eligibility information that may be used by the
service provider in marketing products or services to the investment
company's consumers; the types or categories of the investment company's
consumers to whom the service provider may market products or services
of investment company affiliates; the number and types of marketing
communications that the service provider may send to the investment
company's consumers; and the length of time during which the service
provider may market the products or services of the investment company's
affiliates to its consumers. The investment company periodically
evaluates the service provider's compliance with these terms and
conditions. The retail broker-dealer asks the service provider to market
brokerage services to certain of the investment company's consumers.
Without using the investment company's eligibility information, the
retail broker-dealer develops selection criteria and provides those
criteria, its marketing materials, and related instructions to the
service provider. The service provider uses the investment company's
eligibility information from the common database to identify the
investment company's consumers to whom brokerage services will be
marketed. When the retail broker-dealer's marketing materials are
provided to the identified consumers, the name of the investment company
is displayed on the retail broker-dealer's marketing materials, an
introductory letter that accompanies the marketing materials, an account
statement that accompanies the marketing materials, or the envelope
containing the marketing materials. The requirements of paragraph (b)(5)
of this section have been satisfied, and the retail broker-dealer has
not made a marketing solicitation to the consumer.
(vi) The same facts as in the example in paragraph (b)(6)(v) of this
section, except that the terms and conditions permit the service
provider to use the investment company's eligibility information to
market the products and services of other affiliates to the investment
company's consumers whenever the service provider deems it appropriate
to do so. The service provider uses the investment company's eligibility
information in accordance with the discretion afforded to it by the
terms and conditions. Because the terms and conditions are not specific,
the requirements of paragraph (b)(5) of this section have not been
satisfied.
(c) Exceptions. The provisions of this subpart do not apply to you
if you use eligibility information that you receive from an affiliate:
(1) To make a marketing solicitation to a consumer with whom you
have a pre-existing business relationship;
(2) To facilitate communications to an individual for whose benefit
you provide employee benefit or other services pursuant to a contract
with an employer related to and arising out of the
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current employment relationship or status of the individual as a
participant or beneficiary of an employee benefit plan;
(3) To perform services on behalf of an affiliate, except that this
paragraph shall not be construed as permitting you to send marketing
solicitations on behalf of an affiliate if the affiliate would not be
permitted to send the marketing solicitation as a result of the election
of the consumer to opt out under this subpart;
(4) In response to a communication about your products or services
initiated by the consumer;
(5) In response to an authorization or request by the consumer to
receive solicitations; or
(6) If your compliance with this subpart would prevent you from
complying with any provision of State insurance laws pertaining to
unfair discrimination in any State in which you are lawfully doing
business.
(d) Examples of exceptions--(1) Example of the pre-existing business
relationship exception. A consumer has a brokerage account with a
broker-dealer. The consumer also has a deposit account with the broker-
dealer's affiliated depository institution. The broker-dealer receives
eligibility information about the consumer from its depository
institution affiliate and uses that information to make a marketing
solicitation to the consumer about the broker-dealer's college savings
accounts. The broker-dealer may make this marketing solicitation even if
the consumer has not been given a notice and opportunity to opt out
because the broker-dealer has a pre-existing business relationship with
the consumer.
(2) Examples of service provider exception. (i) A consumer has a
brokerage account with a broker-dealer. The broker-dealer furnishes
eligibility information about the consumer to its affiliate, a
registered investment adviser. Based on that eligibility information,
the investment adviser wants to make a marketing solicitation to the
consumer about its advisory services. The investment adviser does not
have a pre-existing business relationship with the consumer and none of
the other exceptions in paragraph (c) of this section apply. The
consumer has been given an opt out notice and has elected to opt out of
receiving such marketing solicitations. The investment adviser asks a
service provider to send the marketing solicitation to the consumer on
its behalf. The service provider may not send the marketing solicitation
on behalf of the investment adviser because, as a result of the
consumer's opt out election, the investment adviser is not permitted to
make the marketing solicitation.
(ii) The same facts as in paragraph (d)(2)(i) of this section,
except the consumer has been given an opt out notice, but has not
elected to opt out. The investment adviser asks a service provider to
send the solicitation to the consumer on its behalf. The service
provider may send the marketing solicitation on behalf of the investment
adviser because, as a result of the consumer's not opting out, the
investment adviser is permitted to make the marketing solicitation.
(3) Examples of consumer-initiated communications. (i) A consumer
who is the record owner of shares in an investment company initiates a
communication with an affiliated registered investment adviser about
advisory services. The affiliated investment adviser may use eligibility
information about the consumer it obtains from the investment company or
any other affiliate to make marketing solicitations regarding the
affiliated investment adviser's services in response to the consumer-
initiated communication.
(ii) A consumer who has a brokerage account with a broker-dealer
contacts the broker-dealer to request information about how to save and
invest for a child's college education without specifying the type of
savings or investment vehicle in which the consumer may be interested.
Information about a range of different products or services offered by
the broker-dealer and one or more of its affiliates may be responsive to
that communication. Such products, services, and investments may include
the following: investments in affiliated investment companies;
investments in section 529 plans offered by the broker-dealer; or trust
services offered by a different financial institution in the affiliated
group. Any affiliate offering
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products or services that would be responsive to the consumer's request
for information about saving and investing for a child's college
education may use eligibility information to make marketing
solicitations to the consumer in response to this communication.
(iii) A registered investment adviser makes a marketing call to the
consumer without using eligibility information received from an
affiliate. The investment adviser leaves a voice-mail message that
invites the consumer to call a toll-free number to receive information
about services offered by the investment adviser. If the consumer calls
the toll-free number to inquire about the investment advisory services,
the call is a consumer-initiated communication about a product or
service, and the investment adviser may now use eligibility information
it receives from its affiliates to make marketing solicitations to the
consumer.
(iv) A consumer calls a broker-dealer to ask about retail locations
and hours, but does not request information about its products or
services. The broker-dealer may not use eligibility information it
receives from an affiliate to make marketing solicitations to the
consumer because the consumer-initiated communication does not relate to
the broker-dealer's products or services. Thus, the use of eligibility
information received from an affiliate would not be responsive to the
communication and the exception does not apply.
(v) A consumer calls a broker-dealer to ask about retail locations
and hours. The customer service representative asks the consumer if
there is a particular product or service about which the consumer is
seeking information. The consumer responds that the consumer wants to
stop in and find out about mutual funds (i.e., registered open-end
investment companies). The customer service representative offers to
provide that information by telephone and mail additional information to
the consumer. The consumer agrees and provides or confirms contact
information for receipt of the materials to be mailed. The broker-dealer
may use eligibility information it receives from an affiliate to make
marketing solicitations to the consumer about mutual funds because such
marketing solicitations would respond to the consumer-initiated
communication about mutual funds.
(4) Examples of consumer authorization or request for marketing
solicitations. (i) A consumer who has a brokerage account with a broker-
dealer authorizes or requests information about life insurance offered
by the broker-dealer's insurance affiliate. The authorization or
request, whether given to the broker-dealer or the insurance affiliate,
would permit the insurance affiliate to use eligibility information
about the consumer it obtains from the broker-dealer or any other
affiliate to make marketing solicitations to the consumer about life
insurance.
(ii) A consumer completes an online application to open an online
brokerage account with a broker-dealer. The broker-dealer's online
application contains a blank check box that the consumer may check to
authorize or request information from the broker-dealer's affiliates.
The consumer checks the box. The consumer has authorized or requested
marketing solicitations from the broker-dealer's affiliates.
(iii) A consumer completes an online application to open an online
brokerage account with a broker-dealer. The broker-dealer's online
application contains a check box indicating that the consumer authorizes
or requests information from the broker-dealer's affiliates. The
consumer does not deselect the check box. The consumer has not
authorized or requested marketing solicitations from the broker-dealer's
affiliates.
(iv) The terms and conditions of a brokerage account agreement
contain preprinted boilerplate language stating that by applying to open
an account the consumer authorizes or requests to receive solicitations
from the broker-dealer's affiliates. The consumer has not authorized or
requested marketing solicitations from the broker-dealer's affiliates.
(e) Relation to affiliate-sharing notice and opt out. Nothing in
this subpart limits the responsibility of a person to comply with the
notice and opt out provisions of Section 603(d)(2)(A)(iii) of
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the FCRA (15 U.S.C. 1681a(d)(2)(A)(iii)) where applicable.
Sec. 248.122 Scope and duration of opt out.
(a) Scope of opt out--(1) In general. Except as otherwise provided
in this section, the consumer's election to opt out prohibits any
affiliate covered by the opt out notice from using eligibility
information received from another affiliate as described in the notice
to make marketing solicitations to the consumer.
(2) Continuing relationship--(i) In general. If the consumer
establishes a continuing relationship with you or your affiliate, an opt
out notice may apply to eligibility information obtained in connection
with:
(A) A single continuing relationship or multiple continuing
relationships that the consumer establishes with you or your affiliates,
including continuing relationships established subsequent to delivery of
the opt out notice, so long as the notice adequately describes the
continuing relationships covered by the opt out; or
(B) Any other transaction between the consumer and you or your
affiliates as described in the notice.
(ii) Examples of continuing relationships. A consumer has a
continuing relationship with you or your affiliate if the consumer:
(A) Opens a brokerage account or enters into an advisory contract
with you or your affiliate;
(B) Obtains a loan for which you or your affiliate owns the
servicing rights;
(C) Purchases investment company shares in his or her own name;
(D) Holds an investment through you or your affiliate; such as when
you act or your affiliate acts as a custodian for securities or for
assets in an individual retirement arrangement;
(E) Enters into an agreement or understanding with you or your
affiliate whereby you or your affiliate undertakes to arrange or broker
a home mortgage loan for the consumer;
(F) Enters into a lease of personal property with you or your
affiliate; or
(G) Obtains financial, investment, or economic advisory services
from you or your affiliate for a fee.
(3) No continuing relationship--(i) In general. If there is no
continuing relationship between a consumer and you or your affiliate,
and you or your affiliate obtain eligibility information about a
consumer in connection with a transaction with the consumer, such as an
isolated transaction or an application that is denied, an opt out notice
provided to the consumer only applies to eligibility information
obtained in connection with that transaction.
(ii) Examples of isolated transactions. An isolated transaction
occurs if:
(A) The consumer uses your or your affiliate's ATM to withdraw cash
from an account at another financial institution; or
(B) A broker-dealer opens a brokerage account for the consumer
solely for the purpose of liquidating or purchasing securities as an
accommodation, i.e., on a one-time basis, without the expectation of
engaging in other transactions.
(4) Menu of alternatives. A consumer may be given the opportunity to
choose from a menu of alternatives when electing to prohibit
solicitations, such as by electing to prohibit solicitations from
certain types of affiliates covered by the opt out notice but not other
types of affiliates covered by the notice, electing to prohibit
marketing solicitations based on certain types of eligibility
information but not other types of eligibility information, or electing
to prohibit marketing solicitations by certain methods of delivery but
not other methods of delivery. However, one of the alternatives must
allow the consumer to prohibit all marketing solicitations from all of
the affiliates that are covered by the notice.
(5) Special rule for a notice following termination of all
continuing relationships--(i) In general. A consumer must be given a new
opt out notice if, after all continuing relationships with you or your
affiliate(s) are terminated, the consumer subsequently establishes
another continuing relationship with you or your affiliate(s) and the
consumer's eligibility information is to be used to make a marketing
solicitation. The new opt out notice must apply, at a minimum, to
eligibility information obtained in connection with the new continuing
relationship. Consistent
[[Page 265]]
with paragraph (b) of this section, the consumer's decision not to opt
out after receiving the new opt out notice would not override a prior
opt out election by the consumer that applies to eligibility information
obtained in connection with a terminated relationship, regardless of
whether the new opt out notice applies to eligibility information
obtained in connection with the terminated relationship.
(ii) Example. A consumer has an advisory contract with a company
that is registered with the Commission as both a broker-dealer and an
investment adviser, and that is part of an affiliated group. The
consumer terminates the advisory contract. One year after terminating
the advisory contract, the consumer opens a brokerage account with the
same company. The consumer must be given a new notice and opportunity to
opt out before the company's affiliates may make marketing solicitations
to the consumer using eligibility information obtained by the company in
connection with the new brokerage account relationship, regardless of
whether the consumer opted out in connection with the advisory contract.
(b) Duration of opt out. The election of a consumer to opt out must
be effective for a period of at least five years (the ``opt out
period'') beginning when the consumer's opt out election is received and
implemented, unless the consumer subsequently revokes the opt out in
writing or, if the consumer agrees, electronically. An opt out period of
more than five years may be established, including an opt out period
that does not expire unless revoked by the consumer.
(c) Time of opt out. A consumer may opt out at any time.
Sec. 248.123 Contents of opt out notice; consolidated and equivalent
notices.
(a) Contents of opt out notice--(1) In general. A notice must be
clear, conspicuous, and concise, and must accurately disclose:
(i) The name of the affiliate(s) providing the notice. If the notice
is provided jointly by multiple affiliates and each affiliate shares a
common name, such as ``ABC,'' then the notice may indicate that it is
being provided by multiple companies with the ABC name or multiple
companies in the ABC group or family of companies, for example, by
stating that the notice is provided by ``all of the ABC companies,''
``the ABC banking, credit card, insurance, and securities companies,''
or by listing the name of each affiliate providing the notice. But if
the affiliates providing the joint notice do not all share a common
name, then the notice must either separately identify each affiliate by
name or identify each of the common names used by those affiliates, for
example, by stating that the notice is provided by ``all of the ABC and
XYZ companies'' or by ``the ABC bank and securities companies and the
XYZ insurance companies'';
(ii) A list of the affiliates or types of affiliates whose use of
eligibility information is covered by the notice, which may include
companies that become affiliates after the notice is provided to the
consumer. If each affiliate covered by the notice shares a common name,
such as ``ABC,'' then the notice may indicate that it applies to
multiple companies with the ABC name or multiple companies in the ABC
group or family of companies, for example, by stating that the notice is
provided by ``all of the ABC companies,'' ``the ABC banking, credit
card, insurance, and securities companies,'' or by listing the name of
each affiliate providing the notice. But if the affiliates covered by
the notice do not all share a common name, then the notice must either
separately identify each covered affiliate by name or identify each of
the common names used by those affiliates, for example, by stating that
the notice applies to ``all of the ABC and XYZ companies'' or to ``the
ABC banking and securities companies and the XYZ insurance companies'';
(iii) A general description of the types of eligibility information
that may be used to make marketing solicitations to the consumer;
(iv) That the consumer may elect to limit the use of eligibility
information to make marketing solicitations to the consumer;
(v) That the consumer's election will apply for the specified period
of time stated in the notice and, if applicable,
[[Page 266]]
that the consumer will be allowed to renew the election once that period
expires;
(vi) If the notice is provided to consumers who may have previously
opted out, such as if a notice is provided to consumers annually, that
the consumer who has chosen to limit marketing solicitations does not
need to act again until the consumer receives a renewal notice; and
(vii) A reasonable and simple method for the consumer to opt out.
(2) Joint relationships. (i) If two or more consumers jointly obtain
a product or service, a single opt out notice may be provided to the
joint consumers. Any of the joint consumers may exercise the right to
opt out.
(ii) The opt out notice must explain how an opt out direction by a
joint consumer will be treated. An opt out direction by a joint consumer
may be treated as applying to all of the associated joint consumers, or
each joint consumer may be permitted to opt out separately. If each
joint consumer is permitted to opt out separately, one of the joint
consumers must be permitted to opt out on behalf of all of the joint
consumers and the joint consumers must be permitted to exercise their
separate rights to opt out in a single response.
(iii) It is impermissible to require all joint consumers to opt out
before implementing any opt out direction.
(3) Alternative contents. If the consumer is afforded a broader
right to opt out of receiving marketing than is required by this
subpart, the requirements of this section may be satisfied by providing
the consumer with a clear, conspicuous, and concise notice that
accurately discloses the consumer's opt out rights.
(4) Model notices. Model notices are provided in the Appendix to
this subpart.
(b) Coordinated and consolidated notices. A notice required by this
subpart may be coordinated and consolidated with any other notice or
disclosure required to be issued under any other provision of law by the
entity providing the notice, including but not limited to the notice
described in section 603(d)(2)(A)(iii) of the FCRA (15 U.S.C.
1681a(d)(2)(A)(iii)) and the GLBA privacy notice.
(c) Equivalent notices. A notice or other disclosure that is
equivalent to the notice required by this subpart, and that is provided
to a consumer together with disclosures required by any other provision
of law, satisfies the requirements of this section.
Sec. 248.124 Reasonable opportunity to opt out.
(a) In general. You must not use eligibility information that you
receive from an affiliate to make marketing solicitations to a consumer
about your products or services unless the consumer is provided a
reasonable opportunity to opt out, as required by Sec.
248.121(a)(1)(ii).
(b) Examples of a reasonable opportunity to opt out. The consumer is
given a reasonable opportunity to opt out if:
(1) By mail. The opt out notice is mailed to the consumer. The
consumer is given 30 days from the date the notice is mailed to elect to
opt out by any reasonable means.
(2) By electronic means. (i) The opt out notice is provided
electronically to the consumer, such as by posting the notice at an
Internet Web site at which the consumer has obtained a product or
service. The consumer acknowledges receipt of the electronic notice. The
consumer is given 30 days after the date the consumer acknowledges
receipt to elect to opt out by any reasonable means.
(ii) The opt out notice is provided to the consumer by e-mail where
the consumer has agreed to receive disclosures by e-mail from the person
sending the notice. The consumer is given 30 days after the e-mail is
sent to elect to opt out by any reasonable means.
(3) At the time of an electronic transaction. The opt out notice is
provided to the consumer at the time of an electronic transaction, such
as a transaction conducted on an Internet Web site. The consumer is
required to decide, as a necessary part of proceeding with the
transaction, whether to opt out before completing the transaction. There
is a simple process that the consumer may use to opt out at that time
using the same mechanism through which the transaction is conducted.
[[Page 267]]
(4) At the time of an in-person transaction. The opt out notice is
provided to the consumer in writing at the time of an in-person
transaction. The consumer is required to decide, as a necessary part of
proceeding with the transaction, whether to opt out before completing
the transaction, and is not permitted to complete the transaction
without making a choice. There is a simple process that the consumer may
use during the course of the in-person transaction to opt out, such as
completing a form that requires consumers to write a ``yes'' or ``no''
to indicate their opt out preference or that requires the consumer to
check one of two blank check boxes--one that allows consumers to
indicate that they want to opt out and one that allows consumers to
indicate that they do not want to opt out.
(5) By including in a privacy notice. The opt out notice is included
in a GLBA privacy notice. The consumer is allowed to exercise the opt
out within a reasonable period of time and in the same manner as the opt
out under that privacy notice.
Sec. 248.125 Reasonable and simple methods of opting out.
(a) In general. You must not use eligibility information about a
consumer that you receive from an affiliate to make a marketing
solicitation to the consumer about your products or services, unless the
consumer is provided a reasonable and simple method to opt out, as
required by Sec. 248.121(a)(1)(ii).
(b) Examples--(1) Reasonable and simple opt out methods. Reasonable
and simple methods for exercising the opt out right include:
(i) Designating a check-off box in a prominent position on the opt
out form;
(ii) Including a reply form and a self-addressed envelope together
with the opt out notice;
(iii) Providing an electronic means to opt out, such as a form that
can be electronically mailed or processed at an Internet Web site, if
the consumer agrees to the electronic delivery of information;
(iv) Providing a toll-free telephone number that consumers may call
to opt out; or
(v) Allowing consumers to exercise all of their opt out rights
described in a consolidated opt out notice that includes the GLBA
privacy, FCRA affiliate sharing, and FCRA affiliate marketing opt outs,
by a single method, such as by calling a single toll-free telephone
number.
(2) Opt out methods that are not reasonable and simple. Reasonable
and simple methods for exercising an opt out right do not include:
(i) Requiring the consumer to write his or her own letter;
(ii) Requiring the consumer to call or write to obtain a form for
opting out, rather than including the form with the opt out notice; or
(iii) Requiring the consumer who receives the opt out notice in
electronic form only, such as through posting at an Internet Web site,
to opt out solely by paper mail or by visiting a different Web site
without providing a link to that site.
(c) Specific opt out means. Each consumer may be required to opt out
through a specific means, as long as that means is reasonable and simple
for that consumer.
Sec. 248.126 Delivery of opt out notices.
(a) In general. The opt out notice must be provided so that each
consumer can reasonably be expected to receive actual notice. For opt
out notices provided electronically, the notice may be provided in
compliance with either the electronic disclosure provisions in this
subpart or the provisions in section 101 of the Electronic Signatures in
Global and National Commerce Act, 15 U.S.C. 7001, et seq.
(b) Examples of reasonable expectation of actual notice. A consumer
may reasonably be expected to receive actual notice if the affiliate
providing the notice:
(1) Hand-delivers a printed copy of the notice to the consumer;
(2) Mails a printed copy of the notice to the last known mailing
address of the consumer;
(3) Provides a notice by e-mail to a consumer who has agreed to
receive electronic disclosures by e-mail from the affiliate providing
the notice; or
[[Page 268]]
(4) Posts the notice on the Internet Web site at which the consumer
obtained a product or service electronically and requires the consumer
to acknowledge receipt of the notice.
(c) Examples of no reasonable expectation of actual notice. A
consumer may not reasonably be expected to receive actual notice if the
affiliate providing the notice:
(1) Only posts the notice on a sign in a branch or office or
generally publishes the notice in a newspaper;
(2) Sends the notice by e-mail to a consumer who has not agreed to
receive electronic disclosures by e-mail from the affiliate providing
the notice; or
(3) Posts the notice on an Internet Web site without requiring the
consumer to acknowledge receipt of the notice.
Sec. 248.127 Renewal of opt out elections.
(a) Renewal notice and opt out requirement--(1) In general. After
the opt out period expires, you may not make marketing solicitations to
a consumer who previously opted out, unless:
(i) The consumer has been given a renewal notice that complies with
the requirements of this section and Sec. Sec. 248.124 through 248.126,
and a reasonable opportunity and a reasonable and simple method to renew
the opt out, and the consumer does not renew the opt out; or
(ii) An exception in Sec. 248.121(c) applies.
(2) Renewal period. Each opt out renewal must be effective for a
period of at least five years as provided in Sec. 248.122(b).
(3) Affiliates who may provide the notice. The notice required by
this paragraph must be provided:
(i) By the affiliate that provided the previous opt out notice, or
its successor; or
(ii) As part of a joint renewal notice from two or more members of
an affiliated group of companies, or their successors, that jointly
provided the previous opt out notice.
(b) Contents of renewal notice. The renewal notice must be clear,
conspicuous, and concise, and must accurately disclose:
(1) The name of the affiliate(s) providing the notice. If the notice
is provided jointly by multiple affiliates and each affiliate shares a
common name, such as ``ABC,'' then the notice may indicate it is being
provided by multiple companies with the ABC name or multiple companies
in the ABC group or family of companies, for example, by stating that
the notice is provided by ``all of the ABC companies,'' ``the ABC
banking, credit card, insurance, and securities companies,'' or by
listing the name of each affiliate providing the notice. But if the
affiliates providing the joint notice do not all share a common name,
then the notice must either separately identify each affiliate by name
or identify each of the common names used by those affiliates, for
example, by stating that the notice is provided by ``all of the ABC and
XYZ companies'' or by ``the ABC banking and securities companies and the
XYZ insurance companies'';
(2) A list of the affiliates or types of affiliates whose use of
eligibility information is covered by the notice, which may include
companies that become affiliates after the notice is provided to the
consumer. If each affiliate covered by the notice shares a common name,
such as ``ABC,'' then the notice may indicate that it applies to
multiple companies with the ABC name or multiple companies in the ABC
group or family of companies, for example, by stating that the notice is
provided by ``all of the ABC companies,'' ``the ABC banking, credit
card, insurance, and securities companies,'' or by listing the name of
each affiliate providing the notice. But if the affiliates covered by
the notice do not all share a common name, then the notice must either
separately identify each covered affiliate by name or identify each of
the common names used by those affiliates, for example, by stating that
the notice applies to ``all of the ABC and XYZ companies'' or to ``the
ABC banking and securities companies and the XYZ insurance companies'';
(3) A general description of the types of eligibility information
that may be used to make marketing solicitations to the consumer;
[[Page 269]]
(4) That the consumer previously elected to limit the use of certain
information to make marketing solicitations to the consumer;
(5) That the consumer's election has expired or is about to expire;
(6) That the consumer may elect to renew the consumer's previous
election;
(7) If applicable, that the consumer's election to renew will apply
for the specified period of time stated in the notice and that the
consumer will be allowed to renew the election once that period expires;
and
(8) A reasonable and simple method for the consumer to opt out.
(c) Timing of the renewal notice--(1) In general. A renewal notice
may be provided to the consumer either:
(i) A reasonable period of time before the expiration of the opt out
period; or
(ii) Any time after the expiration of the opt out period but before
marketing solicitations that would have been prohibited by the expired
opt out are made to the consumer.
(2) Combination with annual privacy notice. If you provide an annual
privacy notice under the GLBA, providing a renewal notice with the last
annual privacy notice provided to the consumer before expiration of the
opt out period is a reasonable period of time before expiration of the
opt out in all cases.
(d) No effect on opt out period. An opt out period may not be
shortened by sending a renewal notice to the consumer before expiration
of the opt out period, even if the consumer does not renew the opt out.
Sec. 248.128 Effective date, compliance date, and prospective
application.
(a) Effective date. This subpart is effective September 10, 2009.
(b) Mandatory compliance date. Compliance with this subpart is
required not later than January 1, 2010.
(c) Prospective application. The provisions of this subpart do not
prohibit you from using eligibility information that you receive from an
affiliate to make a marketing solicitation to a consumer if you receive
such information prior to January 1, 2010. For purposes of this section,
you are deemed to receive eligibility information when such information
is placed into a common database and is accessible by you.
Sec. Appendix to Subpart B of Part 248--Model Forms
a. Although you and your affiliates are not required to use the
model forms in this Appendix, use of a model form (if applicable to each
person that uses it) complies with the requirement in section 624 of the
FCRA for clear, conspicuous, and concise notices.
b. Although you may need to change the language or format of a model
form to reflect your actual policies and procedures, any such changes
may not be so extensive as to affect the substance, clarity, or
meaningful sequence of the language in the model forms. Acceptable
changes include, for example:
1. Rearranging the order of the references to ``your income,''
``your account history,'' and ``your credit score.''
2. Substituting other types of information for ``income,'' ``account
history,'' or ``credit score'' for accuracy, such as ``payment
history,'' ``credit history,'' ``payoff status,'' or ``claims history.''
3. Substituting a clearer and more accurate description of the
affiliates providing or covered by the notice for phrases such as ``the
[ABC] group of companies.''
4. Substituting other types of affiliates covered by the notice for
``credit card,'' ``insurance,'' or ``securities'' affiliates.
5. Omitting items that are not accurate or applicable. For example,
if a person does not limit the duration of the opt out period, the
notice may omit information about the renewal notice.
6. Adding a statement informing the consumer how much time they have
to opt out before shared eligibility information may be used to make
solicitations to them.
7. Adding a statement that the consumer may exercise the right to
opt out at any time.
8. Adding the following statement, if accurate: ``If you previously
opted out, you do not need to do so again.''
9. Providing a place on the form for the consumer to fill in
identifying information, such as his or her name and address.
10. Adding disclosures regarding the treatment of opt-outs by joint
consumers to comply with Sec. 248.123(a)(2), if applicable.
[[Page 270]]
A-1--Model Form for Initial Opt Out Notice (Single-Affiliate Notice)
A-2--Model Form for Initial Opt Out Notice (Joint Notice)
A-3--Model Form for Renewal Notice (Single-Affiliate Notice)
A-4--Model Form for Renewal Notice (Joint Notice)
A-5--Model Form for Voluntary ``No Marketing'' Notice
A-1--Model Form for Initial Opt Out Notice (Single-Affiliate Notice)--
[Your Choice to Limit Marketing]/[Marketing Opt Out]
[Name of Affiliate] is providing this notice.
[Optional: Federal law gives you the right to
limit some but not all marketing from our affiliates. Federal law also
requires us to give you this notice to tell you about your choice to
limit marketing from our affiliates.]
You may limit our affiliates in the [ABC] group
of companies, such as our [investment adviser, broker, transfer agent,
and investment company] affiliates, from marketing their products or
services to you based on your personal information that we collect and
share with them. This information includes your [income], your [account
history with us], and your [credit score].
Your choice to limit marketing offers from our
affiliates will apply [until you tell us to change your choice]/[for x
years from when you tell us your choice]/[for at least 5 years from when
you tell us your choice]. [Include if the opt out period expires.] Once
that period expires, you will receive a renewal notice that will allow
you to continue to limit marketing offers from our affiliates for
[another x years]/[at least another 5 years].
[Include, if applicable, in a subsequent notice,
including an annual notice, for consumers who may have previously opted
out.] If you have already made a choice to limit marketing offers from
our affiliates, you do not need to act again until you receive the
renewal notice.
To limit marketing offers, contact us [include all that apply]:
By telephone: 1-877--
On the Web: www.--.com
By mail: check the box and complete the form
below, and send the form to:
[Company name]
[Company address]
Do not allow your affiliates to use my personal information to
market to me.
A-2--Model Form for Initial Opt Out Notice (Joint Notice)--[Your Choice
to Limit Marketing]/[Marketing Opt Out]
The [ABC group of companies] is providing this
notice.
[Optional: Federal law gives you the right to
limit some but not all marketing from the [ABC] companies. Federal law
also requires us to give you this notice to tell you about your choice
to limit marketing from the [ABC] companies.]
You may limit the [ABC] companies, such as the
[ABC investment companies, investment advisers, transfer agents, and
broker-dealers] affiliates, from marketing their products or services to
you based on your personal information that they receive from other
[ABC] companies. This information includes your [income], your [account
history], and your [credit score].
Your choice to limit marketing offers from the
[ABC] companies will apply [until you tell us to change your choice]/
[for x years from when you tell us your choice]/[for at least 5 years
from when you tell us your choice]. [Include if the opt out period
expires.] Once that period expires, you will receive a renewal notice
that will allow you to continue to limit marketing offers from the [ABC]
companies for [another x years]/[at least another 5 years].
[Include, if applicable, in a subsequent notice,
including an annual notice, for consumers who may have previously opted
out.] If you have already made a choice to limit marketing offers from
the [ABC] companies, you do not need to act again until you receive the
renewal notice.
To limit marketing offers, contact us [include all that apply]:
By telephone: 1-877--
On the Web: www.--.com
By mail: check the box and complete the form
below, and send the form to:
[Company name]
[Company address]
Do not allow any company [in the ABC group of companies] to use my
personal information to market to me.
A-3--Model Form for Renewal Notice (Single-Affiliate Notice)--[Renewing
Your Choice to Limit Marketing]/[Renewing Your Marketing Opt Out]
[Name of Affiliate] is providing this notice.
[Optional: Federal law gives you the right to
limit some but not all marketing from our affiliates. Federal law also
requires us to give you this notice to tell you about your choice to
limit marketing from our affiliates.]
You previously chose to limit our affiliates in
the [ABC] group of companies, such
[[Page 271]]
as our [investment adviser, investment company, transfer agent, and
broker-dealer] affiliates, from marketing their products or services to
you based on your personal information that we share with them. This
information includes your [income], your [account history with us], and
your [credit score].
Your choice has expired or is about to expire.
To renew your choice to limit marketing for [x] more years, contact
us [include all that apply]:
By telephone: 1-877--
On the Web: www.--.com
By mail: check the box and complete the form
below, and send the form to:
[Company name]
[Company address]
Renew my choice to limit marketing for [x] more years.
A-4--Model Form for Renewal Notice (Joint Notice)--[Renewing Your Choice
to Limit Marketing]/[Renewing Your Marketing Opt Out]
The [ABC group of companies] is providing this
notice.
[Optional: Federal law gives you the right to
limit some but not all marketing from the [ABC] companies. Federal law
also requires us to give you this notice to tell you about your choice
to limit marketing from the [ABC] companies.]
You previously chose to limit the [ABC]
companies, such as the [ABC investment adviser, investment company,
transfer agent, and broker-dealer] affiliates, from marketing their
products or services to you based on your personal information that they
receive from other ABC companies. This information includes your
[income], your [account history], and your [credit score].
Your choice has expired or is about to expire.
To renew your choice to limit marketing for [x] more years, contact
us [include all that apply]:
By telephone: 1-877--
On the Web: www.--.com
By mail: check the box and complete the form
below, and send the form to:
[Company name]
[Company address]
Renew my choice to limit marketing for [x] more years.
A-5--Model Form for Voluntary ``No Marketing'' Notice--Your Choice to
Stop Marketing
[Name of Affiliate] is providing this notice.
You may choose to stop all marketing from us and
our affiliates.
[Your choice to stop marketing from us and our
affiliates will apply until you tell us to change your choice.]
To stop all marketing, contact us [include all that apply]:
By telephone: 1-877--
On the Web: www.--.com
By mail: check the box and complete the form
below, and send the form to:
[Company name]
[Company address]
Do not market to me.
Subpart C_Regulation S ID: Identity Theft Red Flags
Source: 78 FR 23663, Apr. 17, 2013, unless otherwise noted.
Sec. 248.201 Duties regarding the detection, prevention, and
mitigation of identity theft.
(a) Scope. This section applies to a financial institution or
creditor, as defined in the Fair Credit Reporting Act (15 U.S.C. 1681),
that is:
(1) A broker, dealer or any other person that is registered or
required to be registered under the Securities Exchange Act of 1934;
(2) An investment company that is registered or required to be
registered under the Investment Company Act of 1940, that has elected to
be regulated as a business development company under that Act, or that
operates as an employees' securities company under that Act; or
(3) An investment adviser that is registered or required to be
registered under the Investment Advisers Act of 1940.
(b) Definitions. For purposes of this subpart, and Appendix A of
this subpart, the following definitions apply:
(1) Account means a continuing relationship established by a person
with a financial institution or creditor to obtain a product or service
for personal, family, household or business purposes. Account includes a
brokerage account, a mutual fund account (i.e., an account with an open-
end investment company), and an investment advisory account.
(2) The term board of directors includes:
(i) In the case of a branch or agency of a foreign financial
institution or
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creditor, the managing official of that branch or agency; and
(ii) In the case of a financial institution or creditor that does
not have a board of directors, a designated employee at the level of
senior management.
(3) Covered account means:
(i) An account that a financial institution or creditor offers or
maintains, primarily for personal, family, or household purposes, that
involves or is designed to permit multiple payments or transactions,
such as a brokerage account with a broker-dealer or an account
maintained by a mutual fund (or its agent) that permits wire transfers
or other payments to third parties; and
(ii) Any other account that the financial institution or creditor
offers or maintains for which there is a reasonably foreseeable risk to
customers or to the safety and soundness of the financial institution or
creditor from identity theft, including financial, operational,
compliance, reputation, or litigation risks.
(4) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
(5) Creditor has the same meaning as in 15 U.S.C. 1681m(e)(4).
(6) Customer means a person that has a covered account with a
financial institution or creditor.
(7) Financial institution has the same meaning as in 15 U.S.C.
1681a(t).
(8) Identifying information means any name or number that may be
used, alone or in conjunction with any other information, to identify a
specific person, including any--
(i) Name, Social Security number, date of birth, official State or
government issued driver's license or identification number, alien
registration number, government passport number, employer or taxpayer
identification number;
(ii) Unique biometric data, such as fingerprint, voice print, retina
or iris image, or other unique physical representation;
(iii) Unique electronic identification number, address, or routing
code; or
(iv) Telecommunication identifying information or access device (as
defined in 18 U.S.C. 1029(e)).
(9) Identity theft means a fraud committed or attempted using the
identifying information of another person without authority.
(10) Red Flag means a pattern, practice, or specific activity that
indicates the possible existence of identity theft.
(11) Service provider means a person that provides a service
directly to the financial institution or creditor.
(12) Other definitions.
(i) Broker has the same meaning as in section 3(a)(4) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)).
(ii) Commission means the Securities and Exchange Commission.
(iii) Dealer has the same meaning as in section 3(a)(5) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(5)).
(iv) Investment adviser has the same meaning as in section
202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-
2(a)(11)).
(v) Investment company has the same meaning as in section 3 of the
Investment Company Act of 1940 (15 U.S.C. 80a-3), and includes a
separate series of the investment company.
(vi) Other terms not defined in this subpart have the same meaning
as in the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.).
(c) Periodic identification of covered accounts. Each financial
institution or creditor must periodically determine whether it offers or
maintains covered accounts. As a part of this determination, a financial
institution or creditor must conduct a risk assessment to determine
whether it offers or maintains covered accounts described in paragraph
(b)(3)(ii) of this section, taking into consideration:
(1) The methods it provides to open its accounts;
(2) The methods it provides to access its accounts; and
(3) Its previous experiences with identity theft.
(d) Establishment of an Identity Theft Prevention Program--
(1) Program requirement. Each financial institution or creditor that
offers or maintains one or more covered accounts must develop and
implement a written Identity Theft Prevention Program (Program) that is
designed to detect, prevent, and mitigate identity theft in connection
with the opening of
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a covered account or any existing covered account. The Program must be
appropriate to the size and complexity of the financial institution or
creditor and the nature and scope of its activities.
(2) Elements of the Program. The Program must include reasonable
policies and procedures to:
(i) Identify relevant Red Flags for the covered accounts that the
financial institution or creditor offers or maintains, and incorporate
those Red Flags into its Program;
(ii) Detect Red Flags that have been incorporated into the Program
of the financial institution or creditor;
(iii) Respond appropriately to any Red Flags that are detected
pursuant to paragraph (d)(2)(ii) of this section to prevent and mitigate
identity theft; and
(iv) Ensure the Program (including the Red Flags determined to be
relevant) is updated periodically, to reflect changes in risks to
customers and to the safety and soundness of the financial institution
or creditor from identity theft.
(e) Administration of the Program. Each financial institution or
creditor that is required to implement a Program must provide for the
continued administration of the Program and must:
(1) Obtain approval of the initial written Program from either its
board of directors or an appropriate committee of the board of
directors;
(2) Involve the board of directors, an appropriate committee
thereof, or a designated employee at the level of senior management in
the oversight, development, implementation and administration of the
Program;
(3) Train staff, as necessary, to effectively implement the Program;
and
(4) Exercise appropriate and effective oversight of service provider
arrangements.
(f) Guidelines. Each financial institution or creditor that is
required to implement a Program must consider the guidelines in Appendix
A to this subpart and include in its Program those guidelines that are
appropriate.
Sec. 248.202 Duties of card issuers regarding changes of address.
(a) Scope. This section applies to a person described in Sec.
248.201(a) that issues a credit or debit card (card issuer).
(b) Definitions. For purposes of this section:
(1) Cardholder means a consumer who has been issued a credit card or
debit card as defined in 15 U.S.C. 1681a(r).
(2) Clear and conspicuous means reasonably understandable and
designed to call attention to the nature and significance of the
information presented.
(3) Other terms not defined in this subpart have the same meaning as
in the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.).
(c) Address validation requirements. A card issuer must establish
and implement reasonable written policies and procedures to assess the
validity of a change of address if it receives notification of a change
of address for a consumer's debit or credit card account and, within a
short period of time afterwards (during at least the first 30 days after
it receives such notification), the card issuer receives a request for
an additional or replacement card for the same account. Under these
circumstances, the card issuer may not issue an additional or
replacement card, until, in accordance with its reasonable policies and
procedures and for the purpose of assessing the validity of the change
of address, the card issuer:
(1)(i) Notifies the cardholder of the request:
(A) At the cardholder's former address; or
(B) By any other means of communication that the card issuer and the
cardholder have previously agreed to use; and
(ii) Provides to the cardholder a reasonable means of promptly
reporting incorrect address changes; or
(2) Otherwise assesses the validity of the change of address in
accordance with the policies and procedures the card issuer has
established pursuant to Sec. 248.201.
(d) Alternative timing of address validation. A card issuer may
satisfy the requirements of paragraph (c) of this section if it
validates an address pursuant to the methods in paragraph (c)(1) or
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(c)(2) of this section when it receives an address change notification,
before it receives a request for an additional or replacement card.
(e) Form of notice. Any written or electronic notice that the card
issuer provides under this paragraph must be clear and conspicuous and
be provided separately from its regular correspondence with the
cardholder.
Sec. Appendix A to Subpart C of Part 248--Interagency Guidelines on
Identity Theft Detection, Prevention, and Mitigation
Section 248.201 requires each financial institution and creditor
that offers or maintains one or more covered accounts, as defined in
Sec. 248.201(b)(3), to develop and provide for the continued
administration of a written Program to detect, prevent, and mitigate
identity theft in connection with the opening of a covered account or
any existing covered account. These guidelines are intended to assist
financial institutions and creditors in the formulation and maintenance
of a Program that satisfies the requirements of Sec. 248.201.
I. The Program
In designing its Program, a financial institution or creditor may
incorporate, as appropriate, its existing policies, procedures, and
other arrangements that control reasonably foreseeable risks to
customers or to the safety and soundness of the financial institution or
creditor from identity theft.
II. Identifying Relevant Red Flags
(a) Risk Factors. A financial institution or creditor should
consider the following factors in identifying relevant Red Flags for
covered accounts, as appropriate:
(1) The types of covered accounts it offers or maintains;
(2) The methods it provides to open its covered accounts;
(3) The methods it provides to access its covered accounts; and
(4) Its previous experiences with identity theft.
(b) Sources of Red Flags. Financial institutions and creditors
should incorporate relevant Red Flags from sources such as:
(1) Incidents of identity theft that the financial institution or
creditor has experienced;
(2) Methods of identity theft that the financial institution or
creditor has identified that reflect changes in identity theft risks;
and
(3) Applicable regulatory guidance.
(c) Categories of Red Flags. The Program should include relevant Red
Flags from the following categories, as appropriate. Examples of Red
Flags from each of these categories are appended as Supplement A to this
Appendix A.
(1) Alerts, notifications, or other warnings received from consumer
reporting agencies or service providers, such as fraud detection
services;
(2) The presentation of suspicious documents;
(3) The presentation of suspicious personal identifying information,
such as a suspicious address change;
(4) The unusual use of, or other suspicious activity related to, a
covered account; and
(5) Notice from customers, victims of identity theft, law
enforcement authorities, or other persons regarding possible identity
theft in connection with covered accounts held by the financial
institution or creditor.
III. Detecting Red Flags
The Program's policies and procedures should address the detection
of Red Flags in connection with the opening of covered accounts and
existing covered accounts, such as by:
(a) Obtaining identifying information about, and verifying the
identity of, a person opening a covered account, for example, using the
policies and procedures regarding identification and verification set
forth in the Customer Identification Program rules implementing 31
U.S.C. 5318(l) (31 CFR 1023.220 (broker-dealers) and 1024.220 (mutual
funds)); and
(b) Authenticating customers, monitoring transactions, and verifying
the validity of change of address requests, in the case of existing
covered accounts.
IV. Preventing and Mitigating Identity Theft
The Program's policies and procedures should provide for appropriate
responses to the Red Flags the financial institution or creditor has
detected that are commensurate with the degree of risk posed. In
determining an appropriate response, a financial institution or creditor
should consider aggravating factors that may heighten the risk of
identity theft, such as a data security incident that results in
unauthorized access to a customer's account records held by the
financial institution, creditor, or third party, or notice that a
customer has provided information related to a covered account held by
the financial institution or creditor to someone fraudulently claiming
to represent the financial institution or creditor or to a fraudulent
Web site. Appropriate responses may include the following:
(a) Monitoring a covered account for evidence of identity theft;
(b) Contacting the customer;
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(c) Changing any passwords, security codes, or other security
devices that permit access to a covered account;
(d) Reopening a covered account with a new account number;
(e) Not opening a new covered account;
(f) Closing an existing covered account;
(g) Not attempting to collect on a covered account or not selling a
covered account to a debt collector;
(h) Notifying law enforcement; or
(i) Determining that no response is warranted under the particular
circumstances.
V. Updating the Program
Financial institutions and creditors should update the Program
(including the Red Flags determined to be relevant) periodically, to
reflect changes in risks to customers or to the safety and soundness of
the financial institution or creditor from identity theft, based on
factors such as:
(a) The experiences of the financial institution or creditor with
identity theft;
(b) Changes in methods of identity theft;
(c) Changes in methods to detect, prevent, and mitigate identity
theft;
(d) Changes in the types of accounts that the financial institution
or creditor offers or maintains; and
(e) Changes in the business arrangements of the financial
institution or creditor, including mergers, acquisitions, alliances,
joint ventures, and service provider arrangements.
VI. Methods for Administering the Program
(a) Oversight of Program. Oversight by the board of directors, an
appropriate committee of the board, or a designated employee at the
level of senior management should include:
(1) Assigning specific responsibility for the Program's
implementation;
(2) Reviewing reports prepared by staff regarding compliance by the
financial institution or creditor with Sec. 248.201; and
(3) Approving material changes to the Program as necessary to
address changing identity theft risks.
(b) Reports. (1) In general. Staff of the financial institution or
creditor responsible for development, implementation, and administration
of its Program should report to the board of directors, an appropriate
committee of the board, or a designated employee at the level of senior
management, at least annually, on compliance by the financial
institution or creditor with Sec. 248.201.
(2) Contents of report. The report should address material matters
related to the Program and evaluate issues such as: The effectiveness of
the policies and procedures of the financial institution or creditor in
addressing the risk of identity theft in connection with the opening of
covered accounts and with respect to existing covered accounts; service
provider arrangements; significant incidents involving identity theft
and management's response; and recommendations for material changes to
the Program.
(c) Oversight of service provider arrangements. Whenever a financial
institution or creditor engages a service provider to perform an
activity in connection with one or more covered accounts the financial
institution or creditor should take steps to ensure that the activity of
the service provider is conducted in accordance with reasonable policies
and procedures designed to detect, prevent, and mitigate the risk of
identity theft. For example, a financial institution or creditor could
require the service provider by contract to have policies and procedures
to detect relevant Red Flags that may arise in the performance of the
service provider's activities, and either report the Red Flags to the
financial institution or creditor, or to take appropriate steps to
prevent or mitigate identity theft.
VII. Other Applicable Legal Requirements
Financial institutions and creditors should be mindful of other
related legal requirements that may be applicable, such as:
(a) For financial institutions and creditors that are subject to 31
U.S.C. 5318(g), filing a Suspicious Activity Report in accordance with
applicable law and regulation;
(b) Implementing any requirements under 15 U.S.C. 1681c-1(h)
regarding the circumstances under which credit may be extended when the
financial institution or creditor detects a fraud or active duty alert;
(c) Implementing any requirements for furnishers of information to
consumer reporting agencies under 15 U.S.C. 1681s-2, for example, to
correct or update inaccurate or incomplete information, and to not
report information that the furnisher has reasonable cause to believe is
inaccurate; and
(d) Complying with the prohibitions in 15 U.S.C. 1681m on the sale,
transfer, and placement for collection of certain debts resulting from
identity theft.
Supplement A to Appendix A
In addition to incorporating Red Flags from the sources recommended
in section II.b. of the Guidelines in Appendix A to this subpart, each
financial institution or creditor may consider incorporating into its
Program, whether singly or in combination, Red Flags from the following
illustrative examples in connection with covered accounts:
Alerts, Notifications or Warnings From a Consumer Reporting Agency
1. A fraud or active duty alert is included with a consumer report.
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2. A consumer reporting agency provides a notice of credit freeze in
response to a request for a consumer report.
3. A consumer reporting agency provides a notice of address
discrepancy, as referenced in Sec. 605(h) of the Fair Credit Reporting
Act (15 U.S.C. 1681c(h)).
4. A consumer report indicates a pattern of activity that is
inconsistent with the history and usual pattern of activity of an
applicant or customer, such as:
a. A recent and significant increase in the volume of inquiries;
b. An unusual number of recently established credit relationships;
c. A material change in the use of credit, especially with respect
to recently established credit relationships; or
d. An account that was closed for cause or identified for abuse of
account privileges by a financial institution or creditor.
Suspicious Documents
5. Documents provided for identification appear to have been altered
or forged.
6. The photograph or physical description on the identification is
not consistent with the appearance of the applicant or customer
presenting the identification.
7. Other information on the identification is not consistent with
information provided by the person opening a new covered account or
customer presenting the identification.
8. Other information on the identification is not consistent with
readily accessible information that is on file with the financial
institution or creditor, such as a signature card or a recent check.
9. An application appears to have been altered or forged, or gives
the appearance of having been destroyed and reassembled.
Suspicious Personal Identifying Information
10. Personal identifying information provided is inconsistent when
compared against external information sources used by the financial
institution or creditor. For example:
a. The address does not match any address in the consumer report; or
b. The Social Security Number (SSN) has not been issued, or is
listed on the Social Security Administration's Death Master File.
11. Personal identifying information provided by the customer is not
consistent with other personal identifying information provided by the
customer. For example, there is a lack of correlation between the SSN
range and date of birth.
12. Personal identifying information provided is associated with
known fraudulent activity as indicated by internal or third-party
sources used by the financial institution or creditor. For example:
a. The address on an application is the same as the address provided
on a fraudulent application; or
b. The phone number on an application is the same as the number
provided on a fraudulent application.
13. Personal identifying information provided is of a type commonly
associated with fraudulent activity as indicated by internal or third-
party sources used by the financial institution or creditor. For
example:
a. The address on an application is fictitious, a mail drop, or a
prison; or
b. The phone number is invalid, or is associated with a pager or
answering service.
14. The SSN provided is the same as that submitted by other persons
opening an account or other customers.
15. The address or telephone number provided is the same as or
similar to the address or telephone number submitted by an unusually
large number of other persons opening accounts or by other customers.
16. The person opening the covered account or the customer fails to
provide all required personal identifying information on an application
or in response to notification that the application is incomplete.
17. Personal identifying information provided is not consistent with
personal identifying information that is on file with the financial
institution or creditor.
18. For financial institutions and creditors that use challenge
questions, the person opening the covered account or the customer cannot
provide authenticating information beyond that which generally would be
available from a wallet or consumer report.
Unusual Use of, or Suspicious Activity Related to, the Covered Account
19. Shortly following the notice of a change of address for a
covered account, the institution or creditor receives a request for a
new, additional, or replacement means of accessing the account or for
the addition of an authorized user on the account.
20. A covered account is used in a manner that is not consistent
with established patterns of activity on the account. There is, for
example:
a. Nonpayment when there is no history of late or missed payments;
b. A material increase in the use of available credit;
c. A material change in purchasing or spending patterns; or
d. A material change in electronic fund transfer patterns in
connection with a deposit account.
21. A covered account that has been inactive for a reasonably
lengthy period of time is used (taking into consideration the type of
account, the expected pattern of usage and other relevant factors).
22. Mail sent to the customer is returned repeatedly as
undeliverable although transactions continue to be conducted in
connection with the customer's covered account.
[[Page 277]]
23. The financial institution or creditor is notified that the
customer is not receiving paper account statements.
24. The financial institution or creditor is notified of
unauthorized charges or transactions in connection with a customer's
covered account.
Notice From Customers, Victims of Identity Theft, Law Enforcement
Authorities, or Other Persons Regarding Possible Identity Theft in
Connection With Covered Accounts Held by the Financial Institution or
Creditor
25. The financial institution or creditor is notified by a customer,
a victim of identity theft, a law enforcement authority, or any other
person that it has opened a fraudulent account for a person engaged in
identity theft.
PART 249_FORMS, SECURITIES EXCHANGE ACT OF 1934--Table of Contents
Sec.
249.0-1 Availability of forms.
Subpart A_Forms for Registration or Exemption of, and Notification of
Action Taken by, National Securities Exchanges
249.1 Form 1, for application for, and amendments to applications for,
registration as a national securities exchange or exemption
from registration pursuant to Section 5 of the Exchange Act.
249.10 Form 1-N for notice registration as a national securities
exchange.
249.11 Form R31 for reporting covered sales and covered round turn
transactions under section 31 of the Act.
249.25 Form 25, for notification of removal from listing and/or
registration.
249.26 Form 26, for notification of the admission to trading of a
substituted or additional class of security under Rule 12a-5
(Sec. 240.12a-5 of this chapter).
Subpart B_Forms for Reports To Be Filed by Officers, Directors, and
Security Holders
249.103 Form 3, initial statement of beneficial ownership of securities.
249.104 Form 4, statement of changes in beneficial ownership of
securities.
249.105 Form 5, annual statement of beneficial ownership of securities.
Subpart C_Forms for Applications for Registration of Securities on
National Securities Exchanges and Similar Matters
249.208 [Reserved]
249.208a Form 8-A, for registration of certain classes of securities
pursuant to section 12(b) or (g) of the Securities Exchange
Act of 1934.
249.208b-249.208c [Reserved]
249.210 Form 10, general form for registration of securities pursuant to
section 12(b) or (g) of the Securities Exchange Act of 1934.
249.210b [Reserved]
249.218 Form 18, for foreign governments and political subdivisions
thereof.
249.220f Form 20-F, registration of securities of foreign private
issuers pursuant to section 12(b) or (g), annual and
transition reports pursuant to sections 13 and 15(d), and
shell company reports required under Rule 13a-19 or 15d-19
(Sec. 240.13a-19 or Sec. 240.15d-19 of this chapter).
249.240f Form 40-F, for registration of securities of certain Canadian
issuers pursuant to section 12(b) or (g) and for reports
pursuant to section 15(d) and Rule 15d-4 (Sec. 240.15d-4 of
this chapter).
249.250 Form F-X, for appointment of agent for service of process by
issuers registering securities on Form F-8, F-9, F-10 or F-80
(Sec. 239.38, 239.39, 239.40 or 239.41 of this chapter), or
registering securities or filing periodic reports on Form 40-F
(Sec. 249.240f of this chapter), or by any issuer or other
non-U.S. person filing tender offer documents on Schedule 13E-
4F, 14D-1F or 14D-9F (Sec. 240.13e-102, 240.14d-102 or
240.14d-103 of this chapter), or by any non-U.S. person acting
as trustee with respect to securities registered on Form F-7
(Sec. 249.37 of this chapter), F-8, F-9, F-10 or F-80.
Subpart D_Forms for Annual and Other Reports of Issuers and Other
Persons Required Under Sections 13, 14A, and 15(d) of the Securities
Exchange Act of 1934
249.306 Form 6-K report of foreign issuer pursuant to Rules 13a-16
(Sec. 240.13a-16 of this chapter) and 15d-16 (Sec. 240.15d-
16 of this chapter) under the Securities Exchange Act of 1934.
249.308 Form 8-K, for current reports.
249.308a Form 10-Q, for quarterly and transition reports under sections
13 or 15(d) of the Securities Exchange Act of 1934.
249.310 Form 10-K, for annual and transition reports pursuant to
sections 13 or 15(d) of the Securities Exchange Act of 1934.
249.310b-249.310c [Reserved]
249.311 Form 11-K, for annual reports of employee stock purchase,
savings and similar plans pursuant to section 15(d) of the
Securities Exchange Act of 1934.
249.312 Form 10-D, periodic distribution reports by asset-backed
issuers.
249.318 Form 18-K, annual report for foreign governments and political
subdivisions thereof.
249.322 Form 12b-25--Notification of late filing.
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249.323 Form 15, certification of termination of registration of a class
of security under section 12(g) or notice of suspension of
duty to file reports pursuant to sections 13 and 15(d) of the
Act.
249.324 Form 15F, certification by a foreign private issuer regarding
the termination of registration of a class of securities under
section 12(g) or the duty to file reports under section 13(a)
or section 15(d).
249.325 Form 13F, report of institutional investment manager pursuant to
section 13(f) of the Securities Exchange Act of 1934.
249.326 Form N-PX, annual report of proxy voting record.
249.327 Form 13H, Information required on large traders pursuant to
Section 13(h) of the Securities Exchange Act of 1934 and rules
thereunder.
249.328T Form 17-H, Risk assessment report for brokers and dealers
pursuant to section 17(h) of the Securities Exchange Act of
1934 and rules thereunder.
249.330 Form N-CEN, annual report of registered investment companies.
249.331 Form N-CSR, certified shareholder report.
249.332 Form SHO, report of institutional investment managers pursuant
to section 13(f)(2) of the Securities Exchange Act of 1934.
249.333 Form F-SR.
249.444 Form SE, form for submission of paper format exhibits by
electronic filers.
249.445 [Reserved]
249.446 Form ID, uniform application for access codes to file on EDGAR.
249.447 Form TH--Notification of reliance on temporary hardship
exemption.
Subpart E_Forms for Statements Made in Connection With Exempt Tender
Offers
249.480 Form CB, tender offer statement in connection with a tender
offer for a foreign private issuer.
Subpart F_Forms for Registration of Brokers and Dealers Transacting
Business on Over-the-Counter Markets
249.501 Form BD, for application for registration as a broker and dealer
or to amend or supplement such an application.
249.501a Form BDW, notice of withdrawal from registration as broker-
dealer pursuant to Sec. 240.15b6-1, Sec. 240.15Bc3-1, or
Sec. 240.15Cc1-1 of this chapter.
249.501b Form BD-N for notice registration as a broker-dealer.
249.507 Form 7-M, consent to service of process by an individual
nonresident broker-dealer.
249.508 Form 8-M, consent to service of process by a corporation which
is a nonresident broker-dealer.
249.509 Form 9-M, consent to service of process by a partnership
nonresident broker-dealer.
249.510 Form 10-M, consent to service of process by a nonresident
general partner of a broker-dealer firm.
Subpart G_Forms for Reports To Be Made by Certain Exchange Members,
Brokers, Dealers, Security-Based Swap Dealers, and Major Security-Based
Swap Participants
249.617 Form X-17A-5, information required of certain brokers, dealers,
security-based swap dealers, and major security-based swap
participants pursuant to sections 15F and 17 of the Securities
Exchange Act of 1934 and Sec. Sec. 240.17a-5, 240.17a-10,
240.17a-11, 240.17a-12, and 240.18a-79 of this chapter, as
applicable.
249.618 Form BD-Y2K, information required of broker-dealers pursuant to
section 17 of the Securities Exchange Act of 1934 and Sec.
240.17a-5 of this chapter.
249.619 Form TA-Y2K, information required of transfer agents pursuant to
section 17 of the Securities Exchange Act of 1934 and Sec.
240.17Ad-18 of this chapter.
249.620-249.634 [Reserved]
249.635 Form X-17A-19, report by national securities exchanges and
registered national securities associations of changes in the
membership status of any of their members.
249.636 [Reserved]
249.637 Form ATS, information required of alternative trading systems
pursuant to Sec. 242.301(b)(2) of this chapter.
249.638 Form ATS-R, information required of alternative trading systems
pursuant to Sec. 242.301(b)(8) of this chapter.
249.639 Form custody.
249.640 Form ATS-N, information required of NMS Stock ATSs pursuant to
Sec. 242.304(a) of this chapter.
249.641 Form CRS, Relationship Summary for Brokers and Dealers Providing
Services to Retail Investors, pursuant to Sec. 240.17a-14 of
this chapter.
[[Page 279]]
Subpart H_Forms for Reports as to Stabilization
249.709 [Reserved]
Subpart I_Forms for Self-Regulatory Organization Rule Changes and Forms
for Registration of and Reporting by National Securities Associations
and Affiliated Securities Associations
249.801 Form X-15AA-1, for application for registration as a national
securities association or affiliated securities association.
249.802 Form X-15AJ-1, for amendatory and/or supplementary statements to
registration statement of a national securities association or
an affiliated securities association.
249.803 Form X-15AJ-2, for annual consolidated supplement of a national
securities association or an affiliated securities
association.
249.819 Form 19b-4, for electronic filings with respect to proposed rule
changes, advance notices and security-based swap submissions
by all self-regulatory organizations.
249.820 Form 19b-4(e) for the listing and trading of new derivative
securities products by self-regulatory organizations that are
not deemed proposed rule changes pursuant to Rule 19b-
4(e)(Sec. 240.19b-4(e)).
249.821 Form PILOT, information required of self-regulatory
organizations operating pilot trading systems pursuant to
Sec. 240.19b-5 of this chapter.
249.822 Form 19b-7, for electronic filing with respect to proposed rule
changes by self-regulatory organizations under Section
19(b)(7)(A) of the Securities Exchange Act of 1934.
Subpart J [Reserved]
Subpart K_Forms for Registration of, and Reporting by Securities
Information Processors
249.1001 Form SIP, for application for registration as a securities
information processor or to amend such an application or
registration.
249.1002 Form CC, for application for registration as a competing
consolidator or to amend such an application or registration.
Subpart L_Forms for Registration of Municipal Securities Dealers
249.1100 Form MSD, application for registration as a municipal
securities dealer pursuant to rule 15Ba2-1 under the
Securities Exchange Act of 1934 or amendment to such
application.
249.1110 Form MSDW, notice of withdrawal from registration as a
municipal securities dealer pursuant to Rule 15Bc3-1 (17 CFR
240.15Bc3-1).
Subpart M_Forms for Reporting and Inquiry With Respect to Missing, Lost,
Stolen, or Counterfeit Securities
249.1200 Form X-17F-1A--Report for missing, lost, stolen or counterfeit
securities.
Subpart N_Forms for Registration of Municipal Advisors and for Providing
Information Regarding Certain Natural Persons
249.1300 Form MA, for registration as a municipal advisor, and for
amendments to registration.
249.1300T Form MA-T, for temporary registration as a municipal advisor,
and for amendments to, and withdrawals from, temporary
registration.
249.1310 Form MA-I, for providing information regarding natural person
municipal advisors, and for amendments to such information.
249.1320 Form MA-W, for withdrawal from registration as a municipal
advisor.
249.1330 Form MA-NR, for appointment of agent for service of process by
non-resident municipal advisor, non-resident general partner
or managing agent of a municipal advisor, and non-resident
natural person associated with a municipal advisor.
Subpart O_Forms for Asset-Backed Securities
249.1400 Form ABS-15G, Asset-backed securitizer report pursuant to
Section 15G of the Securities Exchange Act of 1934.
249.1401 Form ABS-EE, for submission of the asset-data file exhibits and
related documents.
Subpart P_Forms for Registration of Security-Based Swap Data
Repositories
249.1500 Form SDR, for application for registration as a security-based
swap data repository, amendments thereto, or withdrawal from
registration.
Subpart Q_Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants
249.1600 Form SBSE, for application for registration as a security-based
swap dealer or major security-based swap participant
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or to amend such an application for registration.
249.1600a Form SBSE-A, for application for registration as a security-
based swap dealer or major security-based swap participant or
to amend such an application for registration by firms
registered or registering with the Commodity Futures Trading
Commission as a swap dealer or major swap participant that are
not also registered or registering with the Commission as a
broker or dealer.
249.1600b Form SBSE-BD, for application for registration as a security-
based swap dealer or major security-based swap participant or
to amend such an application for registration by firms
registered or registering with the Commission as a broker or
dealer.
249.1600c Form SBSE-C, for certification by security-based swap dealers
and major security-based swap participants.
249.1601 Form SBSE-W, for withdrawal from registration as a security-
based swap dealer or major security-based swap participant or
to amend such an application for registration.
Subpart R_Forms for Registration of, and Filings by, Security-Based Swap
Execution Facilities
249.1701 Form SBSEF, for application for registration as a security-
based swap execution facility or to amend such application or
registration.
249.1702 Submission cover sheet, for rule and product submissions.
Subpart S [Reserved]
Subpart T_Form SCI, for filing notices and reports as required by
Regulation SCI.
249.1900 Form SCI, for filing notices and reports as required by
Regulation SCI.
Subpart U_Forms for Registration of Funding Portals
249.2000 Form Funding Portal.
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 5461 et
seq.; 18 U.S.C. 1350; Sec. 953(b) Pub. L. 111-203, 124 Stat. 1904; Sec.
102(a)(3) Pub. L. 112-106, 126 Stat. 309 (2012), Sec. 107 Pub. L. 112-
106, 126 Stat. 313 (2012), Sec. 72001 Pub. L. 114-94, 129 Stat. 1312
(2015), and secs. 2 and 3 Pub. L. 116-222, 134 Stat. 1063 (2020), unless
otherwise noted.
Section 249.220f is also issued under secs. 3(a), 202, 208, 302,
306(a), 401(a), 401(b), 406 and 407, Pub. L. 107-204, 116 Stat. 745, and
secs. 2 and 3, Pub. L. 116-222, 134 Stat. 1063.
Section 249.240f is also issued under secs. 3(a), 202, 208, 302,
306(a), 401(a), 406 and 407, Pub. L. 107-204, 116 Stat. 745.
Section 249.308 is also issued under 15 U.S.C. 80a-29 and 80a-37.
Section 249.308a is also issued under secs. 3(a) and 302, Pub. L.
107-204, 116 Stat. 745.
Section 249.308b is also issued under secs. 3(a) and 302, Pub. L.
107-204, 116 Stat. 745.
Section 249.310 is also issued under secs. 3(a), 202, 208, 302, 406
and 407, Pub. L. 107-204, 116 Stat. 745.
Section 249.326(T) also issued under section 13(f)(1) (15 U.S.C.
78m(f)(1)).
Section 249.330 is also issued under 15 U.S.C. 80a-29(a).
Section 249.331 is also issued under 15 U.S.C. 78j-1, 7202, 7233,
7241, 7264, 7265; and 18 U.S.C. 1350.
Section 249.617 is also issued under Pub. L. 111-203, Sec. 939,
939A, 124. Stat. 1376 (2010) (15 U.S.C. 78c, 15 U.S.C. 78o-7 note).
Section 249.640 is also issued under Public Law 111-203, sec. 913,
124 Stat. 1376 (2010).
Section 249.819 is also issued under 12 U.S.C. 5465(e).
Section 249.1400 is also issued under sec. 943, Pub. L. 111-203, 124
Stat. 1376.
Editorial Note: Nomenclature changes to part 249 appear at 57 FR
36501, Aug. 13, 1992, and 57 FR 47409, Oct. 16, 1992.
Sec. 249.0-1 Availability of forms.
(a) This part identifies and describes the forms prescribed for use
under the Securities Exchange Act of 1934.
(b) Any person may obtain a copy of any form prescribed for use in
this part by written request to the Securities and Exchange Commission,
100 F Street, NE, Washington, DC 20549. Any person may inspect the forms
at this address and at the Commission's regional offices. (See Sec.
200.11 of this chapter for the addresses of SEC regional offices).
[46 FR 17757, Mar. 20, 1981, as amended at 47 FR 26820, June 22, 1982;
59 FR 5946, Feb. 9, 1994; 73 FR 979, Jan. 4, 2008]
Subpart A_Forms for Registration or Exemption of, and Notification of
Action Taken by, National Securities Exchanges
Sec. 249.1 Form 1, for application for, and amendments to applications
for, registration as a national securities exchange or exemption from
registration pursuant to Section 5 of the Exchange Act.
The form shall be used for application for, and amendments to
applications for, registration as a national securities exchange or
exemption from
[[Page 281]]
registration pursuant to Section 5 of the Act, (15 U.S.C. 78e).
[63 FR 70925, Dec. 22, 1998]
Editorial Note: For Federal Register citations affecting Form 1, see
the List of CFR Sections Affected, which appears in the Finding Aids
section of the printed volume and at www.govinfo.gov.
Sec. 249.10 Form 1-N for notice registration as a national securities
exchange.
This form shall be used for notice, and amendments to the notice, to
permit an exchange to register as a national securities exchange solely
for the purposes of trading security futures products pursuant to
Section 6(g) of the Act (15 U.S.C. 78f(g)).
[66 FR 43743, Aug. 20, 2001]
Editorial Note: For Federal Register citations affecting Form 1-10,
see the List of CFR Sections Affected, which appears in the Finding Aids
section of the printed volume and at www.govinfo.gov.
Sec. 249.11 Form R31 for reporting covered sales and covered round
turn transactions under section 31 of the Act.
This form shall be used by each national securities exchange to
report to the Commission within ten business days after the end of every
month the aggregate dollar amount of sales of securities that occurred
on the exchange, had a charge date in the month of the report, and are
subject to fees pursuant to section 31(b) of the Act (15 U.S.C. 78ee)
and Sec. 240.31 of this chapter; and the total number of round turn
transactions in security futures that occurred on the exchange, had a
charge date in the month of the report, and are subject to assessments
pursuant to section 31(d) of the Act and Sec. 240.31 of this chapter.
This form also shall be used by a national securities association to
report to the Commission within ten business days after the end of every
month the aggregate dollar amount of sales of securities that occurred
by or through a member of the association otherwise than on a national
securities exchange, had a charge date in the month of the report, and
are subject to fees pursuant to section 31(c) of the Act and Sec.
240.31 of this chapter; and the total number of round turn transactions
in security futures that occurred by or through any member of the
association otherwise than on a national securities exchange, had a
charge date in the month of the report, and are subject to assessments
pursuant to section 31(d) of the Act and Sec. 240.31 of this chapter.
[69 FR 41080, July 7, 2004]
Editorial Note: For Federal Register citations affecting Form R31,
see the List of CFR Sections Affected, which appears in the Finding Aids
section of the printed volume and at www.govinfo.gov.