[Federal Register Volume 67, Number 78 (Tuesday, April 23, 2002)]
[Rules and Regulations]
[Pages 19671-19673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9854]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 240

[Release Nos. 33-8091; 34-45769; File No. S7-11-02]
RIN 3235-AI40


Amendment to Definition of ``Equity Security''

AGENCY: Securities and Exchange Commission.

ACTION: Final rule with request for comments.

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SUMMARY: The Commodity Futures Modernization Act of 2000 amended the 
definition of ``security'' in the Securities Act of 1933 and the 
definitions of ``security'' and ``equity security'' in the Securities 
Exchange Act of 1934 to include a security future. We are amending the 
definitions of ``equity security'' in the rules under the Securities 
Act and the Exchange Act to conform them to the statutory definitions 
with respect to security futures.

DATES: Effective Date: These rules are effective June 7, 2002.
    Comment Date: Comments on the amended rules must be received on or 
before May 23, 2002.

ADDRESSES: Please send three copies of your comments to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW, Washington, DC 20549-0609. Alternatively, you may submit your 
comments electronically to the following e-mail address: [email protected]. All comment letters should refer to File No. S7-11-
02; please include this file number in the subject line if you use e-
mail. We will make all comment letters available for public inspection 
and copying in our public reference room at the same address. We will 
post electronically submitted comment letters on the Commission's 
Internet website (http://www.sec.gov).\1\
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    \1\ We do not edit personal identifying information, such as 
names or e-mail addresses, from electronic submissions. You should 
only submit information you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: N. Sean Harrison, Special Counsel, 
Office of Rulemaking, Division of Corporation Finance at (202) 942-
2910, or in writing, at the Securities and Exchange Commission, 450 
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Fifth Street NW, Washington, DC 20549-0312.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Rule 405 \2\ 
under the Securities Act of 1933 \3\ and Rule 3a11-1 \4\ under the 
Securities Exchange Act of 1934.\5\
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    \2\ 17 CFR 230.405.
    \3\ 15 U.S.C. 77a et seq.
    \4\ 17 CFR 240.3a11-1.
    \5\ 15 U.S.C. 78a et seq.
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I. Discussion

    One of the purposes of the Commodity Futures Modernization Act

[[Page 19672]]

of 2000 \6\ is to provide a regulatory framework for the trading of 
futures contracts on equity securities.\7\ The CFMA permits national 
securities exchanges registered under Section 6 of the Exchange Act \8\ 
and national securities associations registered under Section 15A(a) of 
the Exchange Act \9\ to list futures on individual securities and on 
narrow-based security indices (``security futures'').\10\ Among other 
things, the CFMA:
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    \6\ Pub. L. No. 106-554 Stat. 2763 (2000).
    \7\ H.R. Rep. No. 106-711 (II), at 2 (2000).
    \8\ 15 U.S.C. 78(f).
    \9\ 15 U.S.C. 78o-3(a).
    \10\ The terms ``security future'' and ``narrow-based security 
index'' are defined in Section 3(a)(55) of the Exchange Act [15 
U.S.C. 78c(a)(55)].
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     Amended the definition of ``security'' in Section 
2(a)(1)\11\ of the Securities Act and Section 3(a)(10)\12\ of the 
Exchange Act to include security futures;
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    \11\ 15 U.S.C. 77b(a)(1).
    \12\ 15 U.S.C. 78c(a)(10).
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     Amended the definition of ``equity security'' in Section 
3(a)(11)\13\ of the Exchange Act to include security futures;
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    \13\ 15 U.S.C. 78c(a)(11)
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     Exempted certain security futures from the registration 
requirements of the Securities Act \14\;
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    \14\ The security futures exemption is contained in Section 
3(a)(14) of the Securities Act [15 U.S.C. 77c(a)(14)]. Section 
3(a)(14) exempts any security futures product that is: (A) cleared 
by a clearing agency registered under Section 17A of the Exchange 
Act or exempt from registration under subsection (b)(7) of Section 
17A; and (B) traded on a national securities exchange or a national 
securities association registered pursuant to Section 15A(a) of the 
Exchange Act.
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     Exempted security futures from the provisions of Section 
12(a) \15\ of the Exchange Act;
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    \15\ 15 U.S.C. 781(a). Section 12(a) of the Exchange Act 
prohibits any broker or dealer from engaging in any transaction in a 
security on a national exchange, unless the security is registered 
under the Exchange Act.
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     Amended Section 12(g) \16\ of the Exchange Act to clarify 
that security futures are not equity securities of the issuer of the 
underlying securities; and
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    \16\ 15 U.S.C. 781(g).
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     Amended Section 16 of the Exchange Act to cover ownership 
of, and transactions in, security futures. \17\
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    \17\ Exchange Act Section 16(f) [15 U.S.C. 78p(f)]. Section 16 
applies to every person who is the beneficial owner of more than ten 
percent of any class of equity security registered under Section 12 
of the Exchange Act, and each officer and director of the issuer of 
such security. Under Section 16, these persons must file reports 
disclosing their transactions in all equity securities of the 
issuer. We intend to issue a separate interpretive release that will 
set forth the Commission's views concerning the treatment of 
security futures under Section 16 and other provisions of the 
federal securities laws and the rules thereunder.
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    No futures contracts on single stocks or on narrow-based security 
indices are currently traded on national securities exchanges or 
associations.
    We are amending the definitions of ``equity security'' in 
Securities Act Rule 405 and Exchange Act Rule 3a11-1 to include 
security futures, consistent with the statutory treatment of security 
futures.\18\ We adopted Rule 3a11-1 in 1965 to clarify that the term 
``equity security,'' as used in Sections 12(g) and 16 of the Exchange 
Act as well as Exchange Act Rule 12h-1,\19\ includes a wider range of 
equity interests than are specifically listed in the Exchange Act 
definition.\20\ In 1982, in connection with our adoption of the 
integrated disclosure system, we amended the definition of ``equity 
security'' in Rule 405 to conform it to the definition in Rule 3a11-
1.\21\ The Rule 405 revision was made on the ground that there was no 
basis for defining ``equity security'' differently for purposes of our 
Securities Act rules than for our Exchange Act rules.\22\ We are 
amending the definitions of ``equity security'' in Rules 405 and 3a11-1 
in the same fashion. Both rules would therefore remain identical.
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    \18\ There is no definition of the term ``equity security'' in 
the Securities Act, and there is no corresponding definition of the 
term ``security'' in the Securities Act rules.
    \19\ 17 CFR 240.12h-1.
    \20\ See Release No. 34-7581 (April 23, 1965). As adopted, Rule 
3a11-1 defined ``equity security'' to include such items as limited 
partnership interests, interests in joint ventures, certificates of 
interests in business trusts, voting trust certificates, and 
American Depositary Receipts.
    \21\ Release No. 33-6383 (March 3, 1982) [47 FR 11819].
    \22\ Release No. 33-6333 (August 6, 1981) [46 FR 44194].
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    Because certain security futures are statutorily exempt from 
registration under the Securities Act and the Exchange Act, and are 
expressly included in Section 16 of the Exchange Act, we do not believe 
that the conforming changes will have any substantive impact. Rather, 
we believe that the changes will prevent any ambiguity from arising as 
a result of differences between the statutes and rules.
    As amended, the definition of ``equity security'' in both 
Securities Act Rule 405 and Exchange Act Rule 3a11-1 will read as 
follows (new language underscored):
    ``[a]ny stock or similar security, certificate of interest or 
participation in any profit sharing agreement, preorganization 
certificate or subscription, transferable share, voting trust 
certificate or certificate of deposit for an equity security, limited 
partnership interest, interest in a joint venture, or certificate of 
interest in a business trust; any security future on any such security; 
or any security convertible, with or without consideration into such a 
security, or carrying any warrant or right to subscribe to or purchase 
such a security; or any such warrant or right; or any put, call, 
straddle, or other option or privilege of buying such a security from 
or selling such a security to another without being bound to do so.''

II. Administrative Procedure Act Considerations

    Pursuant to Section 553(b) of the Administrative Procedure Act, 
\23\ the Commission for good cause finds that prior notice and public 
comment is unnecessary because, with respect to security futures, these 
amendments only conform the definitions of the term ``equity security'' 
in Commission rules to the statutory definition of the term, which was 
amended by the CFMA. We therefore do not believe that the conforming 
changes will impact the public or industry. The changes will prevent 
any ambiguity from arising as a result of differences between the 
statutes and rules. Because the Commission has found good cause that 
notice and comment are unnecessary, a regulatory flexibility analysis 
is not required. \24\
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    \23\ 5 U.S.C. 553(b)(B).
    \24\ 5 U.S.C. 603(a), 604(a).
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III. Request for Comment

    We request comment on the changes we are adopting in this release. 
The term ``equity security'' is used in a variety of places in the 
federal securities laws. Although we believe that the inclusion of 
security futures in the Rule 405 and Rule 3a11-1 definitions will not 
have any substantive effect, we solicit comment as to whether it could 
have an effect that we have not considered. Commenters should provide 
empirical data on any anticipated effects.

IV. Effects on Competition

    Section 23(a)(2) of the Exchange Act requires us to consider the 
anti-competitive effects of any rules that we adopt under the Exchange 
Act. Furthermore, Section 2(b) of the Securities Act and Section 3(f) 
of the Exchange Act require us, when engaging in rulemaking that 
requires us to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider whether the action will 
promote efficiency, competition, and capital formation. We are simply 
conforming the definition of ``equity security'' in our rules to the 
statutory changes with respect to security futures.

[[Page 19673]]

We think that the conformed definitions promote efficiency by 
conforming the treatment of security futures under the statutes and our 
rules. We do not expect the amendments to have any anti-competitive 
effects. We solicit comment on these matters with respect to the 
amended rules. Will the amendments have an adverse effect on 
competition that is neither necessary nor appropriate in furtherance of 
the purposes of the Securities Act or the Exchange Act?

V. Cost-Benefit Analysis

    The amendments we are adopting conform Rule 405 and Rule 3a11-1 to 
the revisions in the Securities Act and the Exchange Act, with respect 
to security futures. They do not alter the treatment of security 
futures under the Securities Act or the Exchange Act, or effect any 
change in the requirements imposed by the federal securities laws as 
they relate to security futures. The CFMA established the statutory 
framework for the treatment of security futures under the federal 
securities laws and the statutory amendments are self-effectuating. We 
do not believe that the amendments will have any effect on public 
companies or small entities. Any effect is the result of the CFMA 
amendments to both statutes. We request comment on whether the 
amendments would impose any additional burdens or costs on public 
companies or small entities outside of the costs or burdens imposed by 
the CFMA.

VI. Paperwork Reduction Act

    Securities Act Rule 405 and Exchange Act Rule 3a11-1 do not contain 
a ``collection of information'' requirement within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\25\ We are amending Rule 405 
and Rule 3a11-1 to include security futures in the definition of 
``equity security.'' The CFMA amended Exchange Act Section 16 to state 
that the section applies to ownership of, and transactions in, security 
futures products. The Exchange Act rules under Section 16 impose 
information collection requirements; however, the new requirements 
under Section 16 were prescribed by the CFMA and would be the same 
without the amendment to Rule 3a11-1. We therefore are not required to 
submit the amendments to the Office of Management and Budget for 
approval under the PRA.
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    \25\ 44 U.S.C. 3501 et seq.
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VII. Statutory Basis, Text of Rule and Authority

    The amendment to the Commission's rule is being adopted pursuant to 
Sections 6, 7, 10 and 19(a) of the Securities Act and Sections 3(b) and 
23(a) of the Exchange Act.

List of Subjects in 17 CFR Parts 230 and 240

    Securities, Reporting and recordkeeping requirements.

    For the reasons stated in the preamble, the Securities and Exchange 
Commission amends Title 17, Chapter II of the Code of Federal 
Regulations as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    1. The general authority citation for Part 230 is revised to read 
as follows:

    Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 
77s, 77sss, 77z-3, 78c, 78d, 78l, 78m, 78n, 78o, 78t, 78w, 78ll(d), 
78mm, 79t, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, unless 
otherwise noted.
* * * * *

    2. In Sec. 230.405 the term ``equity security'' is revised to read 
as follows:


Sec. 230.405.  Definitions of terms.

* * * * *
    Equity security. The term equity security means any stock or 
similar security, certificate of interest or participation in any 
profit sharing agreement, preorganization certificate or subscription, 
transferable share, voting trust certificate or certificate of deposit 
for an equity security, limited partnership interest, interest in a 
joint venture, or certificate of interest in a business trust; any 
security future on any such security; or any security convertible, with 
or without consideration into such a security, or carrying any warrant 
or right to subscribe to or purchase such a security; or any such 
warrant or right; or any put, call, straddle, or other option or 
privilege of buying such a security from or selling such a security to 
another without being bound to do so.
* * * * *

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

    3. 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, 78e, 78f, 78g, 78i, 
78j, 78j-l, 78k, 78k-l, 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.
* * * * *

    4. The undesignated section heading, ``Definition of `Equity 
Security' As Used in Sections 12(g) and 16'' preceding Sec. 240.3a4-1 
is removed and added to immediately precede Sec. 240.3a11-1.

    5. Section 240.3a11-1 is revised to read as follows:


Sec. 240.3a11-1.  Definition of the term ``equity security.''

    The term equity security is hereby defined to include any stock or 
similar security, certificate of interest or participation in any 
profit sharing agreement, preorganization certificate or subscription, 
transferable share, voting trust certificate or certificate of deposit 
for an equity security, limited partnership interest, interest in a 
joint venture, or certificate of interest in a business trust; any 
security future on any such security; or any security convertible, with 
or without consideration into such a security, or carrying any warrant 
or right to subscribe to or purchase such a security; or any such 
warrant or right; or any put, call, straddle, or other option or 
privilege of buying such a security from or selling such a security to 
another without being bound to do so.

    Dated: April 17, 2002.
    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-9854 Filed 4-22-02; 8:45 am]
BILLING CODE 8010-01-U