[Federal Register Volume 66, Number 166 (Monday, August 27, 2001)]
[Rules and Regulations]
[Pages 45138-45150]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21555]



[[Page 45137]]

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Part III





Securities and Exchange Commission





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17 CFR Parts 240, 248, and 249



Registration of Broker-Dealers Pursuant to Section 15(b)(11) of the 
Securities Exchange Act of 1934; Final Rule

  Federal Register/Vol. 66, No. 166/Monday, August 27, 2001/Rules and 
Regulations  

[[Page 45138]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 248, and 249

[Release No. 34-44730; File No. S7-13-01]
RIN 3235-AI21


Registration of Broker-Dealers Pursuant to Section 15(b)(11) of 
the Securities Exchange Act of 1934

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting rules to implement certain provisions of the Commodity Futures 
Modernization Act of 2000 (``CFMA''). First, the Commission is amending 
its broker-dealer registration requirements and adopting a new form to 
implement Section 203 of the CFMA. Under this section, futures 
commission merchants and introducing brokers that are registered with 
the Commodity Futures Trading Commission (``CFTC'') may register as 
broker-dealers by filing a notice with the Commission for the limited 
purpose of effecting transactions in security futures products.
    Second, the Commission is adopting an exemption from registration 
under Section 15(a) of the Securities Exchange Act of 1934 (``Exchange 
Act''). Subject to certain conditions, this exemption permits a broker-
dealer registered by notice to trade security futures products 
regardless of the market on which the product is listed or traded.
    Third, the Commission is adopting amendments to Regulation S-P, 
which was implemented under the Gramm-Leach-Bliley Act (``GLBA''). 
These amendments will revise certain provisions of Regulation S-P in 
light of Section 124 of the CFMA, which makes the privacy provisions of 
the GLBA applicable to activity regulated by the CFTC. These amendments 
will also permit futures commission merchants and introducing brokers 
that are registered by notice as broker-dealers to comply with 
Regulation S-P by complying with the CFTC's financial privacy rules.

EFFECTIVE DATE: August 27, 2001.

FOR FURTHER INFORMATION CONTACT: Catherine McGuire, Chief Counsel, 
Theodore R. Lazo, Special Counsel, Christina K. McGlosson, Attorney, or 
Brice D. Prince, Attorney, at 202-942-0073, Office of the Chief 
Counsel, Division of Market Regulation, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION: The Commission today is adopting Rules 15a-
10 and 15b11-1 under the Exchange Act,\1\ Form BD-N,\2\ and amendments 
to Rule 15b2-2\3\ under the Exchange Act regarding procedures for 
registration by notice of certain broker-dealers for the limited 
purpose of trading security futures products. In addition, the 
Commission is adopting amendments to Regulation S-P\4\ in light of the 
CFMA's application of the privacy provisions of the GLBA to the CFTC 
and its regulated entities.
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    \1\17 CFR 240.15a-10 and 240.15b11-1.
    \2\17 CFR 249.501b.
    \3\17 CFR 240.15b2-2.
    \4\17 CFR Part 248
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I. Introduction

    On June 20, 2001, the Commission published for comment proposed 
rules and amendments to its broker-dealer registration requirements to 
implement certain provisions of the CFMA.\5\ We proposed Rules 15a-10, 
15b11-1, and 15b11-2 under the Exchange Act, as well as amendments to 
Rule 15b2-2 under the Exchange Act and to Form BD. These proposals were 
designed to establish the procedure for futures commission merchants 
and introducing brokers that are registered with the CFTC (``CFTC 
Registrants'')\6\ to register with the Commission as broker-dealers by 
filing a notice pursuant to Exchange Act section 15(b)(11)(A)\7\ in 
order to trade security futures products (``Security Futures Product 
Broker-Dealers''). We also proposed for comment amendments to 
Regulation S-P. These amendments were designed to update Regulation S-P 
to make it consistent with amendments to the Commodity Exchange Act 
(``CEA'') that apply the privacy provisions of Title V of the GLBA to 
the CFTC and certain of its regulated entities. After careful 
consideration of the comments submitted in response to the Proposing 
Release, we are adopting the proposals with certain changes as 
discussed below.
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    \5\Securities Exchange Act Release No. 44455 (June 20, 2001), 66 
FR 34042. (``Proposing Release'').
    \6\In this release, the terms ``futures commission merchant'' 
and ``introducing broker'' have the meanings given in CEA sections 
1a(20) and 1a(23) (7 U.S.C. 1a(20) and 1a(23)), respectively.
    \7\15 U.S.C. 78o(b)(11)(A).
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II. Background

A. Security Futures Products

    The CFMA permits the trading of security futures, i.e., futures on 
individual securities and on narrow-based security indexes.\8\ The CFMA 
regulates security futures both as securities under the federal 
securities laws,\9\ and as futures for purposes of the CEA.\10\ 
Accordingly, under the CFMA, both the Commission and the CFTC have 
joint jurisdiction over the intermediaries and markets that trade 
security futures products.\11\
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    \8\Pub. L. No. 106-554, 114 Stat. 2763. Under Exchange Act 
section 3(a)(55)(A), the term ``security future'' is defined as a 
contract of sale for future delivery of a single security or of a 
narrow-based security index. 15 U.S.C. 78c(a)(55)(A).
    \9\See, e.g., Exchange Act section 3(a)(10), 15 U.S.C. 
78c(a)(10).
    \10\The term ``security future'' is defined in CEA Section 
1a(31) (7 U.S.C. 1a(31)) as a contract of sale for future delivery 
of a single security or of a narrow-based security index.
    \11\Under Exchange Act section 3(a)(56), (15 U.S.C. 78c(a)(56)) 
and CEA section 1a(33), (7 U.S.C. 1a(33)), the term ``security 
futures product'' is defined as a security future or an option on a 
security future.
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    Because they are subject to regulation both as securities and as 
futures, security futures products must be traded on trading facilities 
and through intermediaries that are registered with both the Commission 
and the CFTC. To avoid duplicative regulation, however, the CFMA 
establishes a system of notice registration under which trading 
facilities and intermediaries that are already registered with either 
the Commission or the CFTC may register with the other agency on an 
expedited basis for the limited purpose of trading security futures 
products.\12\
    The CFMA amended the broker-dealer registration requirements with 
respect to certain security futures products by adding section 
15(b)(11) to the Exchange Act.\13\ Section 15(b)(11)(A) provides that a 
broker or dealer required to register with the Commission only because 
it effects transactions in security futures products on an exchange 
registered pursuant to Exchange Act section 6(g) (``Security Futures 
Product

[[Page 45139]]

Exchange'')\14\ may register by filing a written notice with the 
Commission.\15\ We are adopting Rules 15a-10 and 15b11-1 under the 
Exchange Act, new Form BD-N, and amendments to Rule 15b2-2 under the 
Exchange Act to implement Exchange Act Section 15(b)(11).
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    \12\Specifically, markets and intermediaries that are registered 
with one agency may register with the other by submitting a written 
notice that is effective upon filing. See Exchange Act sections 6(g) 
and 15(b)(11) (15 U.S.C. 78f(g) and 78o(b)(11)) and CEA section 5f 
and 4f(a)(2) (7 U.S.C. 7b-1 and 6f(a)(2)). A ``notice registrant'' 
is then subject to primary oversight by one agency, and is exempted 
under the CFMA from all but the core provisions of the laws 
administered by the other agency.
    \13\15 U.S.C. 78o(b)(11). For purposes of the Exchange Act, any 
person who is engaged in the business of effecting transactions in 
security futures products for the account of another is a broker. 
See Exchange Act section 3(a)(4), 15 U.S.C. 78c(a)(4). Similarly, 
any person who is engaged in the business of buying and selling 
security futures products for the person's own account is a dealer. 
See Exchange Act section 3(a)(5), 15 U.S.C. 78c(a)(5). With limited 
exceptions, brokers and dealers are required by Exchange Act section 
15(a) to register with the Commission. 15 U.S.C. 78o(a).
    \14\Exchange Act section 6(g) (15 U.S.C. 78f(g)) provides that 
designated contract markets and derivatives transaction execution 
facilities that are registered with the CFTC under CEA sections 5 
and 5a (7 U.S.C. 7 and 7a), respectively, may register by notice 
with the Commission to trade security futures products as a Security 
Futures Product Exchange. We have adopted rules to establish the 
procedures for such notice registration. See Securities Exchange Act 
Release No. 44692 (August 13, 2001), 66 FR 43721.
    \15\Section 15(b)(11)(A) further states that the written notice 
filed with the Commission must be in such form and contain such 
information concerning such broker or dealer and any persons 
associated with such broker or dealer as the Commission, by rule, 
may prescribe as necessary or appropriate in the public interest or 
for the protection of investors.
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B. Privacy

    In June 2000, we adopted Regulation S-P to implement Title V of the 
GLBA.\16\ Subsequently, Section 124 of the CFMA amended the CEA to 
provide that Title V of the GLBA applies to the CFTC and certain of the 
entities that it regulates. In light of these amendments to the CEA, we 
are adopting amendments to update Regulation S-P.
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    \16\17 CFR Part 248. See Securities Exchange Act Release No. 
42905 (June 22, 2000), 65 FR 40334.
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III. Overview of Comments Received

    We received seven comment letters in response to the Proposing 
Release.\17\ Most of the commenters focused on two issues: (1) the 
proposed requirement in Proposed Rule 15b11-1 that CFTC Registrants 
complete Form BD in order to become Security Futures Product Broker-
Dealers, and (2) the provision in Proposed Rule 15a-10 that limits the 
exemption from broker-dealer registration to Security Futures Product 
Broker-Dealers that are not members of a national securities exchange 
registered pursuant to section 6(a) of the Exchange Act (``National 
Securities Exchange'') or a national securities association registered 
pursuant to Section 15A(a) of the Exchange Act (``National Securities 
Association'').
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    \17\See letters to Jonathan G. Katz, Secretary, Commission from 
Darlene Marquez, dated July 6, 2001 (``Marquez Letter''); James J. 
McNulty, President and Chief Executive Officer, Chicago Mercantile 
Exchange, dated July 24, 2001 (``CME Letter''); David J. Vitale, 
President and Chief Executive Officer, Chicago Board of Trade, dated 
July 26, 2001 (``CBOT Letter''); John M. Damgard, President, Futures 
Industy Association, dated July 26, 2001 (``FIA Letter''); Daniel J. 
Roth, Senior Executive Vice President and General Counsel, National 
Futures Association, dated July 26, 2001 (``NFA Letter''); Wendy L. 
Gramm, Director, Regulatory Studies Program, Mercatus Center, George 
Mason University, dated July 26, 2001; and Jean A. Webb, Secretary, 
CFTC, dated August 10, 2001 (``CFTC Letter'').
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    One commenter supported the requirement to complete Form BD to 
register by notice with the Commission as broker-dealers.\18\ The other 
six commenters asked us to consider developing another method for CFTC 
Registrants to provide the Commission with notice of registration. 
Specifically, those commenters noted that the CFTC and the National 
Futures Association (``NFA'') proposed using a one-page form for notice 
registration of ``full broker-dealers''\19\ that requires only the 
disclosure of basic identification information.\20\
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    \18\See Marquez Letter.
    \19\The term ``full broker-dealer'' refers to a broker-dealer 
registered pursuant to Exchange Act section 15(b)(1)(15 U.S.C. 
78o(b)(1)).
    \20\In addition, the NFA Letter stated that the NFA already 
maintains substantially the same information in its membership 
database that Form BD elicits and indicated that it would grant the 
Commission (and, if necessary, the NASD and NASD Regulation, Inc.) 
direct electronic access to NFA's Membership, Registration, and 
Receivables System on request.
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    All of the commenters also addressed Proposed Rule 15a-10, which 
provides a conditional exemption from the registration requirements of 
Exchange Act Section 15(a)(1) for Security Futures Product Broker-
Dealers. The commenters generally supported the ability of Security 
Futures Product Broker-Dealers to trade security futures products 
regardless of the market on which the products are listed or traded. 
Six commenters opposed limiting the exemption to Security Futures 
Product Broker-Dealers that are not members of a National Securities 
Exchange or a National Securities Association.\21\ The commenters also 
asserted that the proposed rule would give a competitive advantage to 
full broker-dealers (who would be able to trade on Security Futures 
Product Exchanges directly) over Security Futures Product Broker-
Dealers (who would only be able to trade on National Securities 
Exchanges and National Securities Associations indirectly through full 
broker-dealers).
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    \21\All commenters other than the Marquez Letter.
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    Two commenters supported providing an exception for Security 
Futures Product Broker-Dealers from the inspection requirement of the 
rule,\22\ and one opposed it.\23\ Finally, two commenters supported the 
proposal to amend Regulation S-P.\24\
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    \22\See CBOT Letter; CFTC Letter.
    \23\See Marquez Letter.
    \24\See FIA Letter; CFTC Letter.
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IV. Discussion and Basis for Adoption

A. Notice Registration of Broker-Dealers To Conduct Business in 
Security Futures Products

1. Rule 15b11-1 Under the Exchange Act and Form BD-N: Procedure for 
Notice Registration
    As adopted today, Rule 15b11-1 provides that a CFTC Registrant may 
register by notice with the Commission as a broker-dealer by filing 
Form BD-N. Form BD-N is a new form that the Commission is adopting to 
permit CFTC Registrants to identify themselves and to indicate that 
they meet the statutory requirements for notice registration. As we 
explained in the Proposing Release, Exchange Act section 15(b)(11) 
provides several conditions for notice registration.\25\ Rule 15b11-
1(b) will require a broker-dealer registering by notice to indicate 
where appropriate on Form BD-N that it meets all of the eligibility 
conditions for notice registration.\26\ A completed notice of 
registration will be effective upon filing. In addition, a Security 
Futures Product Broker-Dealer will be exempt from certain provisions of 
the Exchange Act with respect to transactions in security futures 
products.\27\
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    \25\First, the Security Futures Product Broker-Dealer must be 
registered with the CFTC as a futures commission merchant or as an 
introducing broker. Second, the Security Futures Product Broker-
Dealer must be a member of the NFA or another national securities 
association registered pursuant to Exchange Act section 15A(k). 
Third, the Security Futures Product Broker-Dealer must limit its 
business in securities to security futures products that are listed 
or traded on Security Futures Product Exchanges, except to the 
extent that it is permitted to conduct business in other types of 
securities without registering as a broker-dealer.
    \26\In addition, we note that under Exchange Act Section 
15(b)(11)(A)(iv), the registration of a Security Futures Product 
Broker-Dealer will terminate by operation of law if it is no longer 
registered with the CFTC or is no longer a member of the NFA. 
Moreover, Exchange Act section 15(b)(11)(A)(iii) provides that the 
registration of a Security Futures Product Broker-Dealer will be 
suspended immediately if its membership with the NFA is suspended.
    \27\Exchange Act section 15(b)(11)(B), 15 U.S.C. 78o(b)(11)(B). 
Specifically, a Security Futures Product Broker-Dealer will be 
exempt from sections 8, 11, 15(c)(3), 15(c)(5), 15B, 15C, and 17(d)-
(i) of the Exchange Act (15 U.S.C. 78h, 78k, 78o(c)(3), 78o(c)(5), 
78o-4, 78o-5, and 78q(d)-(i)).
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    As proposed, Rule 15b11-1 would have required a CFTC Registrant to 
file a completed Form BD in order to become a Security Futures Product 
Broker-Dealer. We also specifically asked for commenters' views on 
whether CFTC Registrants should be permitted to register by notice as 
Security Futures Product Broker-Dealers on a form other than Form BD. 
As noted above, six commenters responded to

[[Page 45140]]

this request and suggested that the Commission consider using another 
form of notice. After careful consideration of the comments, we decided 
to revise Rule 15b11-1 and to adopt new Form BD-N. Form BD-N requires 
CFTC Registrants only to provide basic identification information and 
to indicate that they meet the statutory requirements for notice 
registration. As discussed below, Form BD-N will elicit the same 
information that the questions we had proposed adding to Form BD would 
have elicited.
    We are also revising Rule 15b11-1 to provide that a Security 
Futures Product Broker-Dealer must amend its Form BD-N if any of the 
information contained in it is or becomes inaccurate for any reason. 
This revision parallels the requirement in Rule 15b3-1 that provides 
that a broker-dealer must promptly amend its Form BD if any of the 
information contained in it is or becomes inaccurate.\28\ Because 
Security Futures Product Broker-Dealers will not file Form BD, they 
will not be subject to Rule 15b3-1.
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    \28\In the Proposing Release, we noted that Security Futures 
Product Broker-Dealers would have been subject to Exchange Act Rule 
15b3-1.
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    The NFA has indicated to Commission staff that it believes that it 
can process Form BD-N on behalf of the Commission. The instructions to 
Form BD-N state that the form should be filed with the NFA. The 
Commission intends to designate the NFA its agent and custodian of Form 
BD-N records.\29\
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    \29\Even though Form BD-N is not sent directly to the 
Commission, it is considered a ``report'' filed with the Commission 
for purposes of Exchange Act sections 15(b), 17(a), 18(a), 32(a), 
(15 U.S.C. 78o(b), 78q(a), 78r(a)), and other applicable provisions 
of the Exchange Act.
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2. Proposed Rule 15b11-2 Under the Exchange Act: Procedure for 
Application To Convert Registration
    Proposed Rule 15b11-2 would have permitted a Security Futures 
Product Broker-Dealer to apply to become registered under Exchange Act 
section 15(b)(1) as a full broker-dealer by filing an amendment to its 
Form BD. As adopted, Form BD-N will require a CFTC Registrant only to 
provide basic identification information, and not the detailed 
disclosure that Form BD requires. Accordingly, a Security Futures 
Product Broker-Dealer that wants to become a full broker-dealer will 
have to apply on Form BD in accordance with Exchange Act Rule 15b1-
1.\30\ As a result, we are not adopting Rule 15b11-2.
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    \30\17 CFR 240.15b1-1
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3. Rule 15a-10 Under the Exchange Act: Exemption From Full Broker-
Dealer Registration for Security Futures Product Broker-Dealers
    As proposed, Rule 15a-10 provided an exemption from the 
registration requirements of Exchange Act section 15(a)(1) and 
permitted Security Futures Product Broker-Dealers to effect 
transactions in security futures products regardless of the market on 
which the products are listed or traded. The proposed exemption 
relieved Security Futures Product Broker-Dealers from Exchange Act 
section 15(b)(11), which limits the securities activity that Security 
Futures Product Broker-Dealers may engage in under its notice 
registration to effecting transactions in security futures products on 
Security Futures Product Exchanges. However, the proposed exemption in 
Rule 15a-10 did not extend to Security Futures Product Broker-Dealers 
that are members of a National Securities Exchange or a National 
Securities Association. Those firms would have had to register as a 
full broker-dealer or effect the transactions through a full broker-
dealer.
    As we noted above, six of the seven commenters requested that the 
exemption in Rule 15a-10 be expanded to permit Security Futures Product 
Broker-Dealers to become members of a National Securities Exchange or a 
National Securities Association. For the reasons discussed below, we 
are adopting Rule 15a-10 with revisions that will allow Security 
Futures Product Broker-Dealers, subject to certain conditions, to 
become members of National Securities Exchanges and National Securities 
Associations.
    As we noted in the Proposing Release, Exchange Act section 
15(b)(11)(A) provides that notice registration is available for ``a 
broker or dealer required to register only because it effects 
transactions in security futures products on an exchange registered 
pursuant to section 6(g) [of the Exchange Act] (emphasis added).'' This 
provision of the Exchange Act, which was enacted by Congress in the 
CFMA, limits Security Futures Product Broker-Dealers to effecting 
transactions in security futures products only on Security Futures 
Product Exchanges. Accordingly, the Exchange Act requires a Security 
Futures Product Broker-Dealer to be registered pursuant to Exchange Act 
section 15(b)(1) as a full broker-dealer in order to effect 
transactions in security futures products that are listed or traded on 
a National Securities Exchange or on a National Securities Association.
    We believe that it is consistent with the purposes of the CFMA for 
the Commission to permit Security Futures Product Broker-Dealers to 
trade security futures products that are listed or traded on National 
Securities Exchanges or National Securities Associations, and, subject 
to certain conditions, to permit them to trade those security futures 
products as members of such exchanges and associations. The CFMA's 
regulatory scheme provides that Security Futures Product Broker-Dealers 
are subject to primary regulation by the CFTC and regulation on core 
securities law issues by the Commission. At the same time, the CFMA 
preserves the Commission's primary regulatory authority over full 
broker-dealers. In light of this regulatory scheme, we believe that a 
Security Futures Product Broker-Dealer should be permitted to effect 
transactions in any type of security futures product. In addition, we 
believe that permitting Security Futures Product Broker-Dealers to 
effect transactions in security futures products traded on all markets 
should promote competition.
    As we noted above, Security Futures Product Broker-Dealers are 
exempted by statute from significant portions of the Exchange Act and 
the rules thereunder. In particular, Exchange Act section 
15(b)(11)(B)(ii) exempts Security Futures Product Broker-Dealers from 
Exchange Act section 11(a)-(c), which restrict trading by members of 
National Securities Exchanges for their own and certain related 
accounts. Allowing one group of exchange members to effect transactions 
outside the parameters of section 11(a) would undermine the essential 
protections provided by that section, and could impair market 
integrity. As a result, Rule 15a-10 as adopted provides that a Security 
Futures Product Broker-Dealer that trades security futures products as 
a member of a National Securities Exchange must comply with section 
11(a)-(c) with respect to its transactions in security futures products 
on that exchange.
    In addition, National Securities Exchanges and National Securities 
Associations that allow Security Futures Product Broker-Dealers to 
become members will bear the responsibility and expense of developing 
an appropriate regulatory structure and monitoring a compliance system 
that accounts for the differences in regulation between Security 
Futures Product Broker-Dealers and full broker-dealers. We believe that 
National Securities Exchanges and National Securities Associations 
should be able to decide for themselves whether to

[[Page 45141]]

accept that responsibility and expense. As a result, Rule 15a-10 as 
adopted provides that a Security Futures Product Broker-Dealer may 
become a member of a National Securities Exchange or National 
Securities Association that has rules that provide specifically for the 
membership of Security Futures Product Broker-Dealers.
    In adopting Rule 15a-10, we recognize that we may need to clarify 
the activities in which a Security Futures Product Broker-Dealer may 
engage in reliance on the rule. One commenter asked us to confirm that 
a Security Futures Product Broker-Dealer may accept and deliver 
securities in connection with security futures products that are 
``physically settled'' (i.e., security futures products that provide 
for the future delivery of the actual underlying securities rather than 
a cash equivalent). The commenter also asked us to consider amending 
Exchange Act Rules 3a43-1 and 3a44-1 so that they apply to security 
futures products,\31\ or to consider adopting separate rules to clarify 
the issue. We expect to resolve questions relating to the specific 
operation of particular security futures products when we review the 
filings made by National Securities Exchanges, National Securities 
Associations, and Security Futures Product Exchanges to list and trade 
security futures products. However, Rules 3a43-1 and 3a44-1 would not 
be appropriate models for resolving such questions. Those rules provide 
relief from broker-dealer registration for a broad range of activities 
relating to government securities. That relief was appropriate for the 
markets in futures on government securities, which were already in 
operation at the time the rules were adopted. That type of broad relief 
is not appropriate for a market that does not yet exist.
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    \31\17 CFR 240.3a43-1 and 240.3a44-1. Exchange Act Rules 3a43-1 
and 3a44-1 allow futures commission merchants that are registered 
with the CFTC to effect transactions in government securities that 
are incidental to their futures-related business without being 
considered government securities brokers or government securities 
dealers. See Securities Exchange Act Release No. 24726 (July 22, 
1987), 52 FR 27962.
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    We note, however, that Exchange Act section 6(g)(5)(B) permits 
limited trading on a principal-to-principal basis in security futures 
products to begin on August 21, 2001 or such later date by which a 
limited purpose national securities association has satisfied the 
requirements of Exchange Act section 15A(k)(2).\32\ We will not take 
enforcement action under Exchange Act section 15(a)\33\ against a 
Security Futures Product Broker-Dealer that is not registered as a full 
broker-dealer and accepts and occasionally delivers the underlying 
securities upon the expiration of a security futures product that it 
has obtained in a transaction permitted by section 6(g)(5)(B) and is 
effected between today and December 21, 2001.\34\
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    \32\Specifically, section 6(g)(5)(B) provides that trading in 
security futures products may begin at that time in transactions 
entered into: (I) on a principal-to-principal basis between parties 
trading for their own accounts or as described in section 
1a(12)(B)(ii) of the Commodity Exchange Act; and
    (II) only between eligible contract participants (as defined in 
subparagraphs (A), (B)(ii), and (C) of such section 1a(12)) at the 
time at which the persons enter into the agreement, contract, or 
transaction * * *
    \33\15 U.S.C. 78o(a).
    \34\Futures transactions are generally closed out by offsetting 
transactions rather than by delivery. This position does not extend 
to a dealer that routinely closes out its transactions in security 
futures products by physical delivery.
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4. Amendments to Rule 15b2-2 Under the Exchange Act: Inspection of 
Newly Registered Brokers and Dealers
    Rule 15b2-2 under the Exchange Act generally requires the 
Commission or a self-regulatory organization to inspect a newly 
registered broker-dealer within six months of its registration. We 
proposed to amend Rule 15b2-2 to provide an exception for Security 
Futures Product Broker-Dealers from this requirement.
    As we noted above, one commenter maintained that the proposed 
exception was not necessary, and that the inspection requirement would 
not be burdensome for Security Futures Product Broker-Dealers. The 
commenter also suggested that conducting an examination pursuant to 
Rule 15b2-2 in addition to the examinations conducted by the CFTC would 
ensure greater compliance with the federal securities laws and 
therefore would create a safer market for the public.
    We have carefully considered these comments. As we noted in the 
Proposing Release, however, the CFMA provides a specific scheme for the 
examination of Security Futures Product Broker-Dealers by the 
Commission under which the Commission consults with the CFTC with 
respect to its examinations of Security Futures Product Broker-
Dealers.\35\ We believe that this examination scheme was created in 
recognition of the fact that it could be burdensome for a Security 
Futures Product Broker-Dealer to be regularly examined by the 
Commission when its only securities business consists of security 
futures products. Moreover, under the terms of the CFMA, the Commission 
generally defers to the CFTC with respect to financial and operational 
matters involving Security Futures Product Broker-Dealers.\36\ We 
continue to believe that in light of the statutory scheme of joint 
regulation it is not necessary to apply Rule 15b2-2 to Security Futures 
Product Broker-Dealers. Accordingly, we are amending Rule 15b2-2 as 
proposed, to provide that the rule does not apply to Security Futures 
Product Broker-Dealers.
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    \35\Section 204 of the CFMA amended Exchange Act section 17(b) 
to provide that the Commission must notify the CFTC before it 
examines a Security Futures Product Broker-Dealer. Section 17(b) 
also requires the Commission, upon request, to provide the CFTC with 
any reports that the Commission prepares in connection with an 
examination of a Security Futures Broker-Dealer. In addition, 
section 17(b) specifically provides that Security Futures Product 
Broker-Dealers are not subject to routine periodic examinations by 
the Commission.
    \36\In particular, Exchange Act section 15(b)(11)(B)(iii) 
exempts Security Futures Product Broker-Dealers from Exchange Act 
section 15(c)(3) and the rules thereunder, which provide the 
financial responsibility standards for broker-dealers. 15 U.S.C. 
78o(c)(3); see e.g., Exchange Act Rule 15c3-1 (17 CFR 240.15c3-1) 
(net capital requirements for brokers or dealers).
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5. Form BD
    As we noted above, we are adopting Form BD-N, which will elicit 
most of the information regarding notice registration that would have 
been elicited through the proposed amendments to Form BD. However, two 
of the proposed amendments to Form BD would have elicited information 
that will not be elicited on Form BD-N.
    First, Proposed Item 5B would have required a Security Futures 
Product Broker-Dealer to indicate that it was applying to convert its 
registration status to become a full broker-dealer. We are not adopting 
this amendment in light of the fact that we are not adopting Rule 
15b11-2.
    Second, proposed new Item 12Z of Form BD would have provided a 
specific question for broker-dealers to use to notify the Commission of 
their security futures product business if that business accounted (or 
was expected to account) for 1% or more of the broker-dealer's annual 
revenue from the securities or investment advisory business. As we 
noted in the Proposing Release, Form BD is filed with the Central 
Registration Depository (``CRD'') system, which is operated and 
maintained by the NASD. The amendment to Item 12 would have been an 
amendment to Form BD, and any amendment to Form BD requires programming 
and systems changes to the CRD. We do not believe that it is 
appropriate at this time to impose these types of changes on the CRD 
simply to add one question to the Form. As a

[[Page 45142]]

result, we are not amending Question 12 of Form BD at this time. 
Nevertheless, full broker-dealers will still need to indicate that they 
are engaged in (or expect to be engaged in) security futures products 
activity if that business accounts (or is expected to account) for 1% 
or more of the full broker-dealer's annual revenue from the securities 
or investment advisory business.\37\ Accordingly, broker-dealers should 
use the ``Other'' category in Question 12Z of Form BD to indicate that 
they are doing business in security futures products that accounts for, 
or is expected to account for, 1% or more of its annual revenue from 
the securities or investment advisory business.
---------------------------------------------------------------------------

    \37\See Exchange Act Rule 15b3-1 (requiring broker-dealers to 
amend Form BD promptly if any information on the form is or becomes 
inaccurate for any reason).
---------------------------------------------------------------------------

6. Temporary Exemption From Broker-Dealer Registration
    Exchange Act section 6(g)(5)(B) provides that trading in security 
futures products may begin on a limited basis on August 21, 2001, or 
such later date by which a limited purpose national securities 
association has satisfied the requirements of Exchange Act section 
15A(k)(2). We recognize that CFTC Registrants that want to trade 
security futures products as permitted by section 6(g)(5)(B) may not 
have enough time to complete the notice registration process before 
trading in the products is permitted to begin.
    We believe that it is consistent with the public interest and the 
protection of investors to temporarily exempt from the registration 
requirements of section 15(a)(1) CFTC Registrants that meet the 
requirements of section 15(b)(11) for the limited trading permitted by 
section 6(g)(5)(B) of the Exchange Act. Accordingly, we are separately 
issuing an order pursuant to Exchange Act section 15(a)(2), which 
provides that CFTC Registrants are exempted from the registration 
requirements of Exchange Act section 15(a)(1)\38\ until October 21, 
2001, with respect to transactions in security futures products 
permitted by Section 6(g)(5)(B) of the Exchange Act.\39\
---------------------------------------------------------------------------

    \38\15 U.S.C. 78o(a)(1).
    \39\Securities Exchange Act Release No. 44731 (August 23, 2001). 
The text of the order will be available on the Commission's website 
at http://www.sec.gov.
---------------------------------------------------------------------------

B. Amendments to Regulation S-P

    Title V of the GLBA directed the Commission and certain other 
federal agencies to adopt rules regarding the disclosure of customers' 
personal financial information by the financial institutions subject to 
the agencies' respective jurisdictions. Under this authority, we 
adopted Regulation S-P, which generally requires broker-dealers, 
investment companies, and registered investment advisers to: (1) Notify 
customers of their privacy policies and practices; (2) describe the 
conditions under which they may disclose customer information to 
nonaffiliated third parties; and (3) provide a method for their 
customers to prevent such disclosure of that information.\40\ As 
originally enacted, Title V does not apply to the CFTC or any of its 
regulated entities.\41\
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    \40\17 CFR Part 248. See Securities Exchange Act Release No. 
42905 (June 22, 2000), 65 FR 40334.
    \41\Specifically, section 504 of the GLBA does not include the 
CFTC in the list of agencies required to adopt financial privacy 
rules. In addition, Section 509(2) of the GLBA does not include the 
CFTC in the definition of the term ``Federal functional regulator.'' 
Moreover, section 509(3)(B) of the GLBA specifically excludes from 
the definition of the term ``financial institution'' any person or 
entity with respect to any financial activity that is subject to the 
jurisdiction of the CFTC under the CEA.
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    The CFMA amended the CEA to provide that certain entities that the 
CFTC regulates are now subject to Title V of the GLBA.\42\ Accordingly, 
the CFTC has adopted its own set of financial privacy rules.\43\ 
Because we adopted Regulation S-P before the CFMA was enacted, we are 
adopting amendments to update Regulation S-P.
---------------------------------------------------------------------------

    \42\Specifically, section 124 of the CFMA added section 5g to 
the CEA (7 U.S.C. 7b-2), which made Title V of the GLBA applicable 
to activity regulated by the CFTC. CEA section 5g(a) provides that 
notwithstanding section 509(3)(B) of the GLBA, futures commission 
merchants, commodity trading advisors, commodity pool operators and 
introducing brokers subject to the jurisdiction of the CFTC are to 
be treated as ``financial institutions'' for purposes of Title V of 
the GLBA. CEA section 5g(b) provides that the CFTC is to be treated 
as a ``Federal functional regulator'' under section 509(2) of the 
GLBA, and directs the CFTC to issue its own financial privacy 
regulations under Title V of the GLBA.
    \43\Privacy of Customer Information, 66 FR 21236 (April 27, 
2001) (``CFTC Privacy Release'').
---------------------------------------------------------------------------

    Specifically, we are amending the definition of the term ``Federal 
functional regulator'' in Section 248.3(m) of Regulation S-P\44\ to add 
the CFTC to the list of regulators contained in the current definition. 
We are also amending the definition of the term ``financial 
institution'' in Section 248.3(n) of Regulation S-P\45\ to eliminate 
the exclusion for persons or entities with respect to financial 
activities subject to the jurisdiction of the CFTC under the CEA.
---------------------------------------------------------------------------

    \44\17 CFR 248.3(m).
    \45\17 CFR 248.3(n).
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    In addition, we are amending 248.2 of Regulation S-P\46\ to provide 
that Security Futures Product Broker-Dealers subject to and in 
compliance with the CFTC's financial privacy rules will also be in 
compliance with Regulation S-P. This amendment to Regulation S-P 
mirrors a similar provision in the financial privacy rules that the 
CFTC has adopted.\47\
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    \46\17 CFR 248.2.
    \47\See CFTC Privacy Release, 66 FR at 21252.
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V. Administrative Procedure Act

    Section 553(d) of the Administrative Procedure Act\48\ (``APA'') 
generally provides that, unless an exception applies, a substantive 
rule may not be made effective less than 30 days after notice of the 
rule has been published in the Federal Register. One exception to the 
30-day requirement is an agency's finding of good cause for providing a 
shorter effective date.
---------------------------------------------------------------------------

    \48\5 U.S.C. 553(d).
---------------------------------------------------------------------------

    Exchange Act section 6(g)(5)(B)\49\ evidences Congress' desire for 
principal-to-principal transactions between certain market participants 
in security futures products to begin on August 21, 2001. For CFTC 
Registrants to engage in the trading permitted by section 6(g)(5)(B), 
they must first register by notice with the Commission to become 
Security Futures Product Broker-Dealers. Prior to passage of the CFMA, 
there was no need for the Commission to have the rules providing for 
notice registration of CFTC Registrants as broker-dealers that the 
Commission is adopting today.
---------------------------------------------------------------------------

    \49\15 U.S.C. 78f(g)(3)(B).
---------------------------------------------------------------------------

    Since the passage of the CFMA, the Commission has moved quickly to 
propose and adopt rules that would allow CFTC Registrants to register 
by notice with the Commission to become Security Futures Product 
Broker-Dealers. The CFMA became law on December 21, 2000. The 
Commission proposed these rules and amendments to existing rules on 
June 20, 2001. The comment period for the rules and amendments ended on 
July 26, 2001.
    After reviewing and considering the comments received, the 
Commission is now adopting the rules, form, and rule amendments that 
would allow CFTC Registrants to register by notice with the Commission 
to become Security Futures Product Broker-Dealers. By allowing certain 
principal-to-principal transactions to begin on August 21, 2001, 
Congress, in essence, established a statutory deadline for the adoption 
of the notice registration rules. If the effective date of these rules 
and rule amendments is delayed for 30 days, the Commission will not 
have a notice registration procedure in place and CFTC Registrants 
consequently will not be able to register with the Commission

[[Page 45143]]

before principal-to-principal trading begins on August 21, 2001.
    The primary purpose of the 30-day delayed effectiveness requirement 
is to give affected parties a reasonable period of time to adjust to 
new rules. Here, the parties that must comply with the rules, form, and 
rule amendments to implement the notice registration process--CFTC 
Registrants--would not be harmed by immediate effectiveness of the 
rules, form and rule amendments. CFTC registrants are familiar with the 
rules and rule amendments, which are similar to the proposals that were 
published for comment. While Form BD-N is a new form, most of the 
information it requires would have been required by the questions that 
the Commission proposed adding to Form BD. New Form BD-N responds to 
comments that the Commission received on this proposal, and should be 
significantly less burdensome for CFTC Registrants to complete than 
Form BD, which the Commission originally proposed as the form for 
registration by notice. We believe that a 30-day delay in the 
effectiveness of the new rule, new form, and rule amendments could 
interfere with the goals of the CFMA. Moreover, affected parties that 
need additional time to adjust to the new notice registration procedure 
will have a 60-day period in which they may engage in the trading of 
security futures products permitted by section 6(g)(5)(B) without 
having to file Form BD-N.\50\ For these reasons, the Commission finds 
that good cause exists for the rules, form and rule amendments to be 
immediately effective upon publication.
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    \50\The Commission is issuing an order pursuant to Exchange Act 
section 15(a)(2), which provides an exemption from broker-dealer 
registration until October 21, 2001, for CFTC Registrants that meet 
the statutory requirements for notice registration.
---------------------------------------------------------------------------

VI. Paperwork Reduction Act Analysis

    Certain provisions of the new rules and form, and the rule 
amendments contain ``collection of information requirements'' within 
the meaning of the Paperwork Reduction Act of 1995.\51\ The Commission 
published a notice soliciting comments on the collection of information 
requirements in the Proposing Release and submitted these requirements 
to the Office of Management and Budget (``OMB'') for review in 
accordance with the PRA requirements in effect at the time. As 
proposed, Rule 15b11-1 would have required CFTC Registrants to file 
Form BD to become Securities Futures Product Broker-Dealers. Therefore, 
the submission to OMB modified the collection of information titled 
``Application for Registration as a Broker-Dealer'' that was already 
approved for Form BD under control number 3235-0012. OMB subsequently 
approved this new collection of information in accordance with the 
clearance requirements of 44 U.S.C. 3507.
---------------------------------------------------------------------------

    \51\44 U.S.C. 3501 et seq. (``PRA'').
---------------------------------------------------------------------------

    As adopted, Rule 15b11-1 requires CFTC Registrants that wish to 
become Securities Futures Product Broker-Dealers to file new Form BD-N. 
The Commission, therefore, is amending the collection of information 
approved under control number 3235-0012 to delete the information on 
Form BD related to Security Futures Product Broker-Dealers, and is 
filing a new collection of information with OMB to approve new Form BD-
N. The title of this new collection of information will be ``Form BD-N, 
Notice Registration for CFTC Registrants to register with the 
Commission as Securities Futures Product Broker-Dealers.'' As explained 
below, the burden on respondents completing Form BD-N will be 
significantly less than it would have been if they had been required to 
complete Form BD.
    The collection of information obligation imposed by Form BD-N is 
mandatory for CFTC Registrants choosing to register by notice with the 
Commission pursuant to Exchange Act section 15(b)(11). An agency may 
not conduct or sponsor, and a person is not required to respond to, an 
information collection unless it displays a currently valid OMB control 
number.\52\
---------------------------------------------------------------------------

    \52\44 U.S.C. 3506(c)(1)(B)(v).
---------------------------------------------------------------------------

A. Summary of Collection of Information

    Exchange Act section 15(b)(11) provides for the notice registration 
of Security Futures Product Broker-Dealers. We are adopting Rule 15b11-
1 under the Exchange Act to establish the procedure for notice 
registration of CFTC Registrants to become Security Futures Product 
Broker-Dealers. Rule 15b11-1 provides that a CFTC Registrant eligible 
for notice registration must file the notice on Form BD-N.
    Form BD-N requires a CFTC Registrant to indicate that it meets the 
three statutory requirements for notice registration. First, the 
Security Futures Product Broker-Dealer must be registered with the CFTC 
as a futures commission merchant or as an introducing broker.\53\ 
Second, the Security Futures Product Broker-Dealer must be a member of 
the National Futures Association or another national securities 
association registered pursuant to Exchange Act section 15A(k). Third, 
the Security Futures Product Broker-Dealer must limit its business in 
securities to security futures products that are listed or traded on 
Security Futures Product Exchanges, except to the extent that it is 
permitted to conduct business in other types of securities without 
registering as a broker-dealer. Accordingly, Rule 15b11-1(b) will 
require a broker-dealer registering by notice to indicate where 
appropriate on Form BD-N that it meets these three conditions for 
notice registration. In addition, Form BD-N will require basic 
identification information about the CFTC Registrant.
---------------------------------------------------------------------------

    \53\As noted above, section 15(b)(11) provides that notice 
registration is available only to broker-dealers that fall within 
the registration requirements of section 15 by effecting 
transactions in security futures products on a Security Futures 
Product Exchange. CEA section 4d(a)(1) (7 U.S.C. 6d(A)(1)) provides 
that futures commission merchants and introducing brokers must be 
registered with the CFTC before ``soliciting orders or accepting 
orders for the purchase or sale of any commodity for future 
delivery, or involving any contracts of sale of any commodity for 
future delivery, on or subject to the rules of any contract market 
or derivatives transaction execution facility.''
---------------------------------------------------------------------------

B. Use of Information

    The Commission will use the information collected pursuant to Rule 
15b11-1 to elicit basic identification information as well as 
information that will allow the Commission to ensure that the CFTC 
Registrant meets the statutory conditions to register by notice 
pursuant to Exchange Act section 15(b)(11). This information will 
assist the Commission in fulfilling its regulatory obligations.

C. Respondents

    There are approximately 200 futures commission merchants registered 
with the CFTC; Commission staff estimates that 89 of those are also 
full broker-dealers. In addition, there are approximately 1,610 
introducing brokers registered with the CFTC; Commission staff 
estimates that 322 of those are also full broker-dealers. Therefore, 
the Commission staff estimates that approximately 1,399 futures 
commission merchants and introducing brokers ((200-89 futures 
commission merchants) + (1610-322 introducing brokers)) may potentially 
file Form BD-N to become Security Futures Product Broker-Dealers. They 
will be required to respond to the proposed collection of information 
before being registered by notice with the Commission pursuant to 
section 15(b)(11) of the Exchange Act.

[[Page 45144]]

D. Total Annual Reporting and Recordkeeping Burden

    Completion of Form BD-N will not impose any significant burdens on 
CFTC Registrants other than those that result from compliance with the 
CFMA. We estimate that the average time necessary to complete Form BD-N 
by a CFTC Registrant will be 30 minutes. Therefore, we estimate that 
the total one-time burden hours for all CFTC Registrants filing Form 
BD-N will be approximately 699.5 hours (0.5 hours  x  1,399 potential 
registrants). We estimate that the average time necessary to complete 
an amendment to Form BD-N will be approximately 15 minutes. The total 
annual burden hours for CFTC Registrants amending Form BD-N will depend 
on the frequency with which amendments are filed. Historically, the 
Commission has received an average of 3.25 amendments to Form BD 
annually per broker-dealer.\54\ Accordingly, we estimate that the total 
annual burden hours for all CFTC Registrants filing amendments to Form 
BD-N will be 1,136 (3.25 amendments per year per CFTC Registrant  x  
0.25 hours per amendment  x  1,399 CFTC Registrants). Form BD-N is 
substantially shorter than Form BD.
---------------------------------------------------------------------------

    \54\Given that Form BD-N is substantially shorter than Form BD, 
we expect that this estimate will represent the outside limit of the 
amount of amendments to Form BD-N that Security Futures Product 
Broker-Dealers will submit.
---------------------------------------------------------------------------

E. Record Retention Period

    As set forth in 17 CFR 200.80f, a Security Futures Product Broker-
Dealer is required to retain records of the collection of information 
for as long as it is registered with the Commission plus 50 years.

F. Collection of Information Is Mandatory

    This collection of information is mandatory.

G. Responses to Collection of Information Would Not Be Kept 
Confidential

    The collection of information will not be kept confidential.

H. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to--(i) evaluate whether the proposed collections of 
information are necessary for the proper performance of the functions 
of the agency, including whether the information shall have practical 
utility; (ii) evaluate the accuracy of the agency's estimate of the 
burden of the proposed collections of information; (iii) enhance the 
quality, utility, and clarity of the information to be collected; and 
(iv) minimize the burden of the collections of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons desiring to submit comments on the collection of 
information requirements described above should direct them to the 
following persons: (1) Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Office of 
Management and Budget, Room 10102, New Executive Office Building, 
Washington, DC 20503; and (2) Jonathan G. Katz, Secretary, Securities 
and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-
0609 with reference to File No. S7-13-01. OMB is required to make a 
decision concerning the collections of information between 30 and 60 
days after publication, so a comment to OMB is best assured of having 
its full effect if OMB receives it within 30 days of publication. The 
Commission has submitted the proposed collections of information to OMB 
for approval. Requests for the materials submitted to OMB by the 
Commission with regard to these collections of information should be in 
writing, refer to File No. S7-13-01, and be submitted to the Securities 
and Exchange Commission, Records Management, Office of Filings and 
Information Services, 450 Fifth Street, NW., Washington, DC 20549.

VII. Costs and Benefits of Final Rules

    In the Proposing Release, the Commission requested comment on all 
aspects of the costs and benefits of the rules and amendments 
considered in this proceeding. The Commission encouraged commenters to 
identify, discuss, analyze, and supply relevant data regarding any 
additional costs or benefits. The Commission has considered the costs 
and benefits of Rules 15a-10 and 15b11-1, Form BD-N, and the amendments 
to Rule 15b2-2 and to Regulation S-P. We are sensitive to the costs and 
benefits that might arise from compliance with our rules and 
amendments. In response to commenters' concerns about the costs and 
benefits of utilizing Form BD for notice registration, we are instead 
adopting Form BD-N, which will be significantly less burdensome for 
CFTC Registrants. We understand, however, that some of the rules we are 
adopting today will impose costs on some persons or entities. The 
majority of our adopted rules and amendments, however, are necessary to 
implement provisions of the CFMA.\55\ We believe that these adopted 
rules and amendments will not impose any significant costs other than 
those that result from compliance with the CFMA.
---------------------------------------------------------------------------

    \55\Pub. L. No. 106-554, Appendix E, 114 Stat. 2763.
---------------------------------------------------------------------------

A. Security Futures Products

    We are adopting Exchange Act Rule 15b11-1 and Form BD-N to 
prescribe the requirements for CFTC Registrants to register by notice 
with the Commission as broker-dealers pursuant to Exchange Act section 
15(b)(11)(A)\56\ to effect transactions in security futures products. 
We are also adopting Exchange Act Rule 15a--10 to provide Security 
Futures Product Broker-Dealers with an exemption from registration as 
full broker-dealers pursuant to Exchange Act section 15(a)(1). In 
addition, we are adopting conforming amendments to Exchange Act Rule 
15b2-2.\57\
---------------------------------------------------------------------------

    \56\15 U.S.C. 78o(b)(11)(A).
    \57\17 CFR 240.15b2-2.
---------------------------------------------------------------------------

    The rules, form, and amendments that we are adopting today respond 
to the mandate of the CFMA that, among other things, requires the 
Commission to prescribe, by rule, the process for notice registration 
to be used by Security Futures Product Broker-Dealers. Our rules and 
amendments relating to security futures products are being made 
primarily pursuant to Exchange Act section 15(b)(11), which was added 
to the Exchange Act by the CFMA.

B. Amendments to Regulation S-P

    We are adopting amendments to update Regulation S-P to make it 
consistent with CEA section 5g.\58\ Specifically, we are amending the 
definitions of the terms ``Federal functional regulator'' and 
``financial institution.'' In addition, we are amending Regulation S-P 
to provide that Security Futures Product Broker-Dealers may comply with 
Regulation S-P by complying with the CFTC's financial privacy rules.
---------------------------------------------------------------------------

    \58\7 U.S.C. 7b-2. Section 5g was added to the CEA by the CFMA.
---------------------------------------------------------------------------

C. Costs and Benefits of the Rulemaking

1. Costs and Benefits of Rules 15a-10 and 15b11-1, Form BD-N, and 
Amendments to Rule 15b2-2
    We are adopting Rule 15b11-1 to set forth the information that CFTC 
Registrants must submit to register with the Commission as a Security 
Futures Product Broker-Dealer. Rule 15b11-1 will require a CFTC 
Registrant registering as a Security Futures Product Broker-Dealer 
pursuant to Exchange Act

[[Page 45145]]

section 15(b)(11)(A)\59\ to file Form BD-N with the Commission. Form 
BD-N will elicit basic identifying information to allow the Commission 
to determine whether the CFTC Registrant meets the statutory 
requirements for notice registration.
---------------------------------------------------------------------------

    \59\15 U.S.C. 78o(b)(11)(A).
---------------------------------------------------------------------------

    Rule 15a-10 will permit Security Futures Product Broker-Dealers to 
effect transactions in security futures products regardless of where 
they are listed or traded without being subject to the registration 
requirements of Exchange Act section 15(a)(1).\60\ In addition, the 
amendments to Rule 15b2-2 will provide an exception for Security 
Futures Product Broker-Dealers from the requirements of that rule.
---------------------------------------------------------------------------

    \60\15 U.S.C. 78o(a)(1).
---------------------------------------------------------------------------

    a. Benefits. Rule 15b11-1 provides CFTC Registrants with an 
expedited filing process to become registered with the Commission as a 
Security Futures Product Broker-Dealer. A Form BD-N submitted by a CFTC 
Registrant as a notice of registration as a Security Futures Product 
Broker-Dealer will not require approval from the Commission. In 
addition, Form BD-N will require CFTC Registrants to submit basic 
identification information and to indicate that they meet the statutory 
requirements for notice registration. Therefore, it will take very 
little time for a CFTC Registrant to complete Form BD-N.
    Rule 15a-10 will exempt Security Futures Product Broker-Dealers 
from the statutory requirement that they register as full broker-
dealers in order to effect transactions in security futures products 
that are listed or traded on a National Securities Exchange or a 
National Securities Association. This exemption will relieve Security 
Futures Product Broker-Dealers from a statutory limit on their ability 
to effect transactions in security futures products under their notice 
registrations. In addition, we are adopting an exception for Security 
Futures Product Broker-Dealers from the requirement in Rule 15b2-2 that 
they will be inspected by a self-regulatory organization within 6 
months of becoming registered. These rules and amendments should 
increase the types of business that Security Futures Product Broker-
Dealers may engage in under their notice registrations and reduce their 
regulatory burdens.
    b. Costs. Rule 15b11-1 under the Exchange Act and Form BD-N will 
require CFTC Registrants to gather a limited amount of easily available 
information to file with the Commission to become Security Futures 
Product Broker-Dealers. In addition, Security Futures Product Broker-
Dealers will be required to file an amendment to Form BD-N when 
information originally provided on Form BD-N is or becomes inaccurate. 
However, Form BD-N requires only that a CFTC Registrant provide basic 
identification information and answer a series of ``yes or no'' 
questions to indicate that it meets the statutory requirements for 
notice registration. We estimate that the total number of burden hours, 
at most, associated with this rulemaking is 1835.5 (699.5 one-time 
burden hours plus 1136 hours related to maximum number of amendments). 
Estimating CFTC Registrant wages plus overhead to be approximately $65 
per hour,\61\ we estimate the total cost associated with the paperwork 
to be at most $119,308.
---------------------------------------------------------------------------

    \61\Based on the Securities Industry Association's Report on 
Management and Professional Earnings in the Securities Industry 
2000, National Statistics Table, Broker (AMEX) plus 35% overhead. 
This estimate assumes that the CFTC Registrant's compensation is 
roughly equal to that of brokers on the American Stock Exchange.
---------------------------------------------------------------------------

    We believe that Rules 15a-10 and 15b11-1, Form BD-N, and amendments 
to Rule 15b2-2 that we are adopting today have been designed to 
minimize costs and should not result in significant costs to any person 
or entity. We revised Rule 15b11-1 and created Form BD-N to make the 
cost of notice registration as minimal as possible. In addition, CFTC 
Registrants and full broker-dealers will be subject to the rules, 
amendments and form only if they choose to engage in business in 
security futures products.
2. Costs and Benefits of the Amendments to Regulation S-P
    We are adopting amendments to Regulation S-P to update it in light 
of amendments that the CFMA made to the CEA. Specifically, the CFMA 
added Section 5g to the CEA to make the privacy provisions of Title V 
of the GLBA applicable to certain activity regulated by the CFTC. We 
adopted Regulation S-P pursuant to Title V of the GLBA before the CFMA 
was enacted. We are amending the definition of the term ``Federal 
functional regulator'' in section 248.3(m) of Regulation S-P to add the 
CFTC to the list of regulators contained in the current definition. We 
are amending the definition of the term ``financial institution'' in 
section 248.3(n) of Regulation S-P to eliminate the exclusion relating 
to the CFTC and its regulated entities. In addition, we are amending 
section 248.2 of Regulation S-P to provide that Security Futures 
Product Broker-Dealers may comply with Regulation S-P by complying with 
the CFTC's financial privacy rules.\62\
---------------------------------------------------------------------------

    \62\Our amendments to Regulation S-P will parallel a similar 
provision in the financial privacy rules that the CFTC has adopted. 
See 17 CFR 160(b)(1); see also Privacy of Consumer Financial 
Information, 66 FR 21236 (Apr. 27, 2001).
---------------------------------------------------------------------------

    a. Benefits. Our amendments to Regulation S-P will clarify its 
application and reduce uncertainty that might result if the definitions 
of the terms ``federal financial regulator'' and ``financial 
institution'' in Regulation S-P were not amended in light of section 5g 
of the CEA. Moreover, the amendments should benefit Security Futures 
Product Broker-Dealers by making it clear that they will be in 
compliance with Regulation S-P if they comply with the CFTC's financial 
privacy rules.
    b. Costs. Our amendments will not affect the operation of 
Regulation S-P or impose any new requirements on any person or entity. 
As a result, we believe that our amendments to Regulation S-P will not 
result in any additional costs to any person or entity.

VIII. Analysis of the Burden on Competition, Promotion of 
Efficiency, and Capital Formation

    Section 3(f) of the Exchange Act\63\ requires the Commission, when 
engaging in a rulemaking requiring the Commission to consider or 
determine whether an action is necessary or appropriate in the public 
interest, to consider also whether the action will promote efficiency, 
competition, and capital formation. As adopted, Rule 15b11-1, Form BD-
N, and amendments to Rule 15b2-2 will provide CFTC Registrants with an 
expedited process to register with the Commission, which we believe 
will serve as an efficient and cost-effective means for those entities 
to meet their statutory registration obligations with respect to 
security futures products. Form BD-N will provide CFTC Registrants with 
a short and concise form of notice on which to register as Security 
Future Product Broker-Dealers. In addition, Rule 15a-10 should improve 
the efficiency of the marketplace and aid capital formation by 
providing CFTC Registrants with the ability to effect transactions in 
security futures products on all markets on which the products are 
listed and traded. We believe that these rules will help bolster 
investor confidence and lower investor costs by increasing competition 
in the markets for security futures products and helping to ensure that 
all qualified market participants have the opportunity to participate 
in those markets. This should promote

[[Page 45146]]

market efficiency, competition and capital formation.
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    \63\15 U.S.C. 78c(f).
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    Our amendments to Regulation S-P should promote efficiency and 
competition by providing that Security Futures Product Broker-Dealers 
will have to comply with the financial privacy rules of only their 
primary regulator. Because the only purpose of the amendments is to 
update Regulation S-P in light of the CFMA, we believe that our 
amendments will not adversely affect capital formation.
    Section 23(a)(2) of the Exchange Act\64\ requires the Commission, 
in making rules under the Exchange Act, to consider the impact that any 
such rule will have on competition. In addition, section 23(a)(2) 
prohibits the Commission from adopting any rule that will impose a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act. Six commenters addressed the 
proposal's effect on competition. The Commission has considered these 
comments and reviewed the proposed rules in light of the standards set 
forth in sections 3(f) and 23(a)(2) of the Exchange Act. The commenters 
specifically addressed the fact that the exemption from broker-dealer 
registration in Rule 15a-10 is limited to Security Futures Product 
Broker-Dealers that are not members of a National Securities Exchange 
or National Securities Association. As noted above, the commenters 
generally asserted that Rule 15a-10 would give a competitive advantage 
to full broker-dealers (who would be able to trade on Security Futures 
Product Exchanges directly) over Security Futures Product Broker-
Dealers (who would only be able to trade on National Securities 
Exchanges and National Securities Associations indirectly through full 
broker-dealers). The revisions to Rule 15a-10 address those commenters' 
concerns.
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    \64\15 U.S.C. 78w(a).
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    The adopted rules and amendments, which implement provisions of the 
CFMA, will apply equally to all affected entities. The rules and 
amendments also will provide the mechanism for Security Futures Product 
Broker-Dealers to enter the new market for security futures products. 
All CFTC Registrants that intend to effect transactions in security 
futures products will use the same procedures to register by notice 
with the Commission, and the conditions for notice registration will 
apply equally to all CFTC Registrants. In addition, the adopted rules 
and amendments relieve Security Futures Product Broker-Dealers from a 
statutory limitation on their activity and will permit them to trade 
security futures products regardless of the market on which the 
products are listed or traded, thereby allowing them to compete evenly 
with full broker-dealers. As a result, we believe that our adopted 
rules and amendments will not create any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. Moreover, the amendments to Regulation S-P will not have an impact 
on competition because their only purpose is to update Regulation S-P 
in light of the CFMA.

IX. Summary of Regulatory Flexibility Act Certification

    Pursuant to section 605(b) of the Regulatory Flexibility Act,\65\ 
the Acting Chairman of the Commission certified that the proposed 
rules, form and conforming amendments would not have a significant 
economic impact on a substantial number of small entities. This 
certification, including the reasons therefore, was attached to the 
Proposing Release No. 34-44455 (June 20, 2001) as Appendix A. The 
Commission solicited comments concerning the impact on small entities 
and the Regulatory Flexibility Act certification, but received no 
comments.
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    \65\5 U.S.C. 605(b).
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X. Statutory Basis

    The Commission is adopting Rules 15a-10 and 15b11-1 under the 
Exchange Act, Form BD-N, and amendments to Rule 15b2-2 under the 
Exchange Act, pursuant to the authority set forth in the Exchange Act, 
particularly sections 15(a), 15(b), 17(a), and 23(a).\66\ The 
Commission is adopting amendments to Regulation S-P pursuant to section 
504 of the GLBA\67\ and Exchange Act sections 17 and 23(a).\68\
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    \66\15 U.S.C. 78o(a), 78o(b), 78q, 78o-4(a)(2), 78o-5(a)(2), and 
78w(a).
    \67\15 U.S.C. 6804.
    \68\15 U.S.C. 78q and 78w(a).
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List of Subjects

17 CFR Part 240

    Brokers, Confidential business information, Fraud, Reporting and 
recordkeeping requirements, Securities.

17 CFR Part 248

    Brokers, Consumer protection, Investment companies, Privacy, 
Reporting and recordkeeping requirements, Securities.

17 CFR Part 249

    Brokers, Reporting and recordkeeping requirements, Securities.

Text of Rules and Amendments

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 
78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 
78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 
and 80b-11, unless otherwise noted.
* * * * *

    2. By adding Sec. 240.15a-10 to read as follows:


Sec. 240.15a-10  Exemption of certain brokers or dealers with respect 
to security futures products.

    (a) A broker or dealer that is registered by notice with the 
Commission pursuant to section 15(b)(11)(A) of the Act (15 U.S.C. 
78o(b)(11)(A)) and that is not a member of either a national securities 
exchange registered pursuant to section 6(a) of the Act (15 U.S.C. 
78f(a)) or a national securities association registered pursuant to 
section 15A(a) of the Act (15 U.S.C. 78o-3(a)) will be exempt from the 
registration requirement of section 15(a)(1) of the Act (15 U.S.C. 
78o(a)(1)) solely to act as a broker or a dealer in security futures 
products.
    (b) A broker or dealer that is registered by notice with the 
Commission pursuant to section 15(b)(11)(A) of the Act (15 U.S.C. 
78o(b)(11)(A)) and that is a member of either a national securities 
exchange registered pursuant to section 6(a) of the Act (15 U.S.C. 
78f(a)) or a national securities association registered pursuant to 
section 15A(a) of the Act (15 U.S.C. 78o-3(a)) will be exempt from the 
registration requirement of section 15(a)(1) of the Act (15 U.S.C. 
78o(a)(1)) solely to act as a broker or a dealer in security futures 
products, if:
    (1) The rules of any such exchange or association of which the 
broker or dealer is a member provides specifically for a broker or 
dealer that is registered by notice with the Commission pursuant to 
section 15(b)(11)(A) of the Act (15 U.S.C. 78o(b)(11)(A)) to become a 
member of such exchange or association; and
    (2) The broker or dealer complies with section 11(a)-(c) of the Act 
(15 U.S.C. 78k(a)-(c)) with respect to any transactions in security 
futures products

[[Page 45147]]

on a national securities exchange registered pursuant to section 6(a) 
of the Act (15 U.S.C. 78f(a)) of which it is a member, notwithstanding 
section 15(b)(11)(B)(ii) of the Act (15 U.S.C. 78o(b)(11)(B)(ii)).

    3. By amending Sec. 240.15b2-2 by:
    a. At the end of paragraph (e)(2), removing the word ``or'';
    b. At the end of paragraph (e)(3), removing the period and in its 
place adding ``; or''; and
    c. Adding paragraph (e)(4).
    The addition reads as follows:


Sec. 240.15b2-2  Inspection of newly registered brokers and dealers.

* * * * *
    (e) * * *
    (4) The member is registered with the Commission pursuant to 
section 15(b)(11)(A) of the Act (15 U.S.C. 78o(b)(11)(A)).

    4. By adding Sec. 240.15b11-1 before the undesignated center 
heading ``Rules Relating to Over-the-Counter Markets'' to read as 
follows:


Sec. 240.15b11-1  Registration by notice of security futures product 
broker-dealers.

    (a) A broker or dealer may register by notice pursuant to section 
15(b)(11)(A) of the Act (15 U.S.C. 78o(b)(11)(A)) if it:
    (1) Is registered with the Commodity Futures Trading Commission as 
a futures commission merchant or an introducing broker, as those terms 
are defined in the Commodity Exchange Act (7 U.S.C. 1, et seq.), 
respectively;
    (2) Is a member of the National Futures Association or another 
national securities association registered under section 15A(k) of the 
Act (15 U.S.C. 78o-3(k)); and
    (3) Is not required to register as a broker or dealer in connection 
with transactions in securities other than security futures products.
    (b) A broker or dealer registering by notice pursuant to section 
15(b)(11)(A) of the Act (15 U.S.C. 78o(b)(11)(A)) must file Form BD-N 
(17 CFR 249.501b) in accordance with the instructions to the form. A 
broker or dealer registering by notice pursuant to this section must 
indicate where appropriate on Form BD-N that it satisfies all of the 
conditions in paragraph (a) of this section.
    (c) If the information contained in any notice of registration 
filed on Form BD-N (17 CFR 249.501b) pursuant to this section is or 
becomes inaccurate for any reason, the broker or dealer shall promptly 
file an amendment on Form BD-N correcting such information.
    (d) An application for registration by notice, and any amendments 
thereto, that are filed on Form BD-N (17 CFR 249.501b) pursuant to this 
section will be considered a ``report'' filed with the Commission for 
purposes of sections 15(b), 17(a), 18(a), 32(a) (15 U.S.C. 78o(b), 
78q(a), 78r(a), 78ff(a)) and other applicable provisions of the Act.

PART 248--REGULATION S-P: PRIVACY OF CONSUMER FINANCIAL INFORMATION

    5. The authority citation for part 248 continues to read as 
follows:

    Authority: 15 U.S.C. 6801-6809; 15 U.S.C. 78q, 78w, 80a-30(a), 
80a-37, 80b-4, and 80b-11.

    6. By amending Sec. 248.2 by designating the current text as 
paragraph (a) and adding paragraph (b) to read as follows:


Sec. 248.2  Rule of construction.

* * * * *
    (b) Substituted compliance with CFTC financial privacy rules by 
futures commission merchants and introducing brokers. 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.

    7. By amending Sec. 248.3 by:
    a. At the end of paragraph (m)(5), removing the word ``and'';
    b. At the end of paragraph (m)(6), removing the period and in its 
place adding ``; and'';
    c. Adding paragraph (m)(7);
    d. Removing paragraph (n)(2)(i); and
    e. Redesignating paragraphs (n)(2)(ii) and (n)(2)(iii) as 
paragraphs (n)(2)(i) and (n)(2)(ii).
    The addition reads as follows:


Sec. 248.3  Definitions.

* * * * *
    (m) * * *
    (7) The Commodity Futures Trading Commission.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    8. The authority citation for part 249 continues to read in part as 
follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *

    9. By adding Sec. 249.501b and Form BD-N to read as follows:


Sec. 249.501b  Form BD-N for notice registration as a broker-dealer.

    This form shall be used for notice of registration as a broker-
dealer pursuant to Section 15(b)(11)(A) of the Act (15 U.S.C. 
78o(b)(11)(A)) for the limited purpose of trading security futures 
products, or to amend such notice.

    Note: Form BD-N is attached as Appendix A to this document. Form 
BD-N will not appear in the Code of Federal Regulations.



    By the Commission.\69\
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    \69\Chairman Pitt did not participate in this matter.
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    Dated: August 21, 2001.
Margaret H. McFarland,
Deputy Secretary.

Appendix A

[Note: Appendix A to the preamble will not appear in the Code of 
Federal Regulations.]

Form BD-N

OMB Approval
    OMB Number:
    Expires:
    Estimated Average burden hours per form:

United States Securities and Exchange Commission, Washington, D.C. 
20549

Form for Notice of Registration as a Broker-Dealer for the Purpose of 
Trading Security Futures Products Pursuant to Section 15(b)(11) of the 
Securities Exchange Act of 1934

Form BD-N Instructions

    1. General Instructions--Form BD-N is the form for notice of 
registration as a broker-dealer for the limited purpose of trading 
security futures products (``Security Futures Product Broker-
Dealer'') pursuant to Section 15(b)(11) of the Securities Exchange 
Act of 1934 (``Exchange Act'').
     A Security Futures Product Broker-Dealer must be 
registered with the Commodity Futures Trading Commission as a 
futures commission merchant or as an introducing broker, and must 
state that it is so registered by answering ``yes'' to Item 2A.
     A Security Futures Product Broker-Dealer must be a 
member of the National Futures Association (``NFA'') or another 
national securities association registered under Section 15A(k) of 
the Exchange Act, and must indicate such membership by answering 
``yes'' to Item 2B.
     Except for securities transactions that do not require 
broker-dealer registration (such as transactions in government 
securities that are incidental to futures-related business as 
defined in Rules 3a43-1 and 3a44-1 under the Exchange Act), a 
Security Futures Product Broker-Dealer must limit its business in 
securities to security futures products, and must indicate that it 
will properly limit its securities business to security futures 
products by answering ``yes'' to Item 2C.

Note:
     A Security Futures Product Broker-Dealer may apply for 
registration as a ``full''

[[Page 45148]]

broker-dealer pursuant to Section 15(b)(1) of the Exchange Act to 
conduct business in securities other than in security futures 
products by filing an application on Form BD. A full broker-dealer 
is not subject to the exemptions contained in Section 15(b)(11)(B) 
of the Exchange Act, even with respect to its business in security 
futures products.
     The notice registration of the Security Futures Product 
Broker-Dealer will remain effective while the Security Futures 
Product Broker-Dealer's application to become a full broker-dealer 
is pending. However, the Security Futures Product Broker-Dealer must 
continue to limit its business in securities to security futures 
products until it has satisfied all of the requirements under the 
Exchange Act to become a full broker-dealer. An application by a 
Security Futures Product Broker-Dealer to become a full broker-
dealer constitutes express consent to withdrawal of its notice 
registration once it has satisfied all of the requirements under the 
Exchange Act to become a full broker-dealer.

    2. Contact Employee--The individual listed as the contact 
employee must be authorized to receive all contact information, 
communications, and mailings and is responsible for disseminating 
such information within the Security Futures Product Broker-Dealer's 
organization.
    3. Format
     Attach an Execution Page (Page 1) with original manual 
signatures.
     Please type all information.
     Use only the current version of Form BD-N or a 
reproduction.
    4. Where To File and Number of Copies--Submit one original and 
two copies of Form BD-N to the Commission's designated agent, the 
NFA, at the following address: National Futures Association, 
Registration Department, 200 West Madison Street, Suite 1600, 
Chicago, IL 60606.
    5. Paperwork Reduction Act Disclosure
     Form BD-N requires a futures commission merchant or an 
introducing broker registering as a Security Futures Product Broker-
Dealer for the sole purpose of trading security futures products 
pursuant to Section 15(b)(11) of the Exchange Act to provide the 
Commission with certain information.
     An agency may not conduct or sponsor, and a person is 
not required to respond to, a collection of information unless it 
displays a currently valid control number. Sections 15, 17(a), and 
23(a) of the Exchange Act authorize the Commission to collect 
information on Form BD-N. See 15 U.S.C. Secs. 78o, 78q(a), and 
78w(a).
     Form BD-N is designed to enable the Commission to 
determine whether a Security Futures Product Broker-Dealer is in 
compliance with the requirements of the Exchange Act.
     It is estimated that a futures commission merchant or 
an introducing broker will spend approximately 0.5 hours completing 
Form BD-N. It also is estimated that each Security Futures Product 
Broker-Dealer will spend approximately 0.25 hours preparing each 
amendment to Form BD-N.
     It is mandatory that futures commission merchants and 
introducing brokers seeking to trade security futures products file 
a Form BD-N with the Commission through its designated agent, the 
NFA. It is also mandatory that Security Futures Product Broker-
Dealers file amendments to Form BD-N with the Commission's 
designated agent, the NFA.
     The Commission gives no assurance of confidentiality 
with respect to the responses submitted on Form BD-N. The public has 
access to the information contained on Form BD-N.
     This collection of information has been reviewed by the 
Office of Management and Budget in accordance with the requirements 
of 44 U.S.C. Sec. 3507.

BILLING CODE 8010-01-U

[[Page 45149]]

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[[Page 45150]]


[GRAPHIC][TIFF OMITTED]TR27AU01.001

[FR Doc. 01-21555 Filed 8-24-01; 8:45 am]
BILLING CODE 8010-01-C