[Federal Register Volume 67, Number 88 (Tuesday, May 7, 2002)]
[Proposed Rules]
[Pages 30628-30631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-11267]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 67, No. 88 / Tuesday, May 7, 2002 / Proposed 
Rules  

[[Page 30628]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-45854; File No. S7-14-02]
RIN 3235-AI49


Assessments on Security Futures Transactions and Fees on Sales of 
Securities Resulting From Physical Settlement of Security Futures 
Pursuant to Section 31 of the Exchange Act

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing to clarify how to calculate assessments that are required to 
be paid by national securities exchanges and national securities 
associations pursuant to Section 31(d) of the Securities Exchange Act 
of 1934 (``Exchange Act'') for security futures transactions. In 
addition, the Commission is proposing guidance on how to calculate fees 
that are required to be paid by national securities exchanges and 
national securities associations pursuant to Sections 31(b) and (c) of 
the Exchange Act, respectively, for sales of securities that result 
from the physical settlement of security futures.

DATES: Comments should be submitted on or before June 6, 2002.

ADDRESSES: All comments should be submitted in triplicate and addressed 
to Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington DC 20549-0609. Comments 
also may be submitted electronically at the following E-mail address: 
[email protected]. All comment letters should refer to File No. S7-
14-02; this file number should be included on the subject line if E-
mail is used. Comment letters will be available for inspection and 
copying in the Commission's Public Reference Room at the same address. 
Electronically submitted comment letters will be posted on the 
Commission's Internet web site (http://www.sec.gov). Personal 
identifying information, such as names or e-mail addresses, will not be 
edited from electronic submissions. Submit only information you wish to 
make publicly available.

FOR FURTHER INFORMATION CONTACT: Kelly Riley, Senior Special Counsel, 
at (202) 942-0752, Susie Cho, Special Counsel, at (202) 942-0748, and 
Geoffrey Pemble, Attorney, at (202) 942-0757, Division of Market 
Regulation, Securities and Exchange Commission, 450 Fifth Street NW, 
Washington DC 20549-1001.

SUPPLEMENTARY INFORMATION:   

I. Background

    Section 31 of the Exchange Act \1\ requires each national 
securities exchange and each national securities association to pay 
assessments and fees based on transactions in or sales of certain 
securities. The Commission proposes to amend Rule 31-1 \2\ to clarify 
how national securities exchanges and national securities associations 
should calculate: (1) Assessments for security futures transactions 
required to be paid pursuant to Section 31(d) of the Exchange Act \3\ 
and (2) fees for sales of securities resulting from physical settlement 
of security futures required to be paid pursuant to either Section 
31(b) or (c) of the Exchange Act.
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    \1\ 15 U.S.C. 78ee.
    \2\ 17 CFR 240.31-1.
    \3\ Earlier this year, the Commission exempted futures on 
narrow-based security indexes from the assessment and fee 
requirements of Section 31 of the Exchange Act. See Securities 
Exchange Act Release No. 45371 (January 31, 2002), 67 FR 5199 
(February 5, 2002). Accordingly, assessments under Section 31(d) of 
the Exchange Act are required only for transactions in security 
futures on single securities.
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II. Proposal and Discussion

A. Assessments Under Section 31(d) of the Exchange Act

    Section 31(d) of the Exchange Act provides that each national 
securities exchange and each national securities association shall pay 
an assessment ``for each round turn transaction (treated as including 
one purchase and one sale of a contract of sale for future delivery) on 
a security future traded on such national securities exchange or by or 
through a member of such association otherwise than on a national 
securities exchange.'' \4\ The Commission believes that there are two 
issues that need to be clarified with regard to the application of 
Section 31(d): (1) the meaning of ``round turn'' and (2) the unit of a 
``transaction'' on which the assessment is based. These issues are 
discussed below.
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    \4\ 15 U.S.C. 78ee(d). For fiscal year 2002, the assessment is 
$0.009 for each round turn transaction on a security future. For 
fiscal year 2007 and each succeeding fiscal year, such assessment 
shall be equal to $0.0042 for each round turn transaction.
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1. Meaning of ``Round Turn''
    Section 31(d) clarifies that a ``round turn'' transaction on a 
security future is ``treated as including one purchase and one sale'' 
of a contract for future delivery. This language can be interpreted to 
mean that a round turn transaction is a completed trade involving the 
simultaneous purchase and sale of a contract for future delivery by the 
two parties to the trade. From the perspective of an exchange or 
association, there is, in fact, one purchase and one sale of a contract 
for future delivery in such a trade. As such, this interpretation is 
consistent with the fact that it is the obligation of an exchange or 
association to pay an assessment on a round turn transaction.
    An alternative interpretation would treat a round turn transaction 
as a purchase and subsequent liquidating sale, or a sale followed by a 
subsequent covering purchase, of a contract for future delivery by a 
single market participant. If this market participant-based 
interpretation of ``round turn'' were used to determine when an 
assessment is to be paid by an exchange or association under Section 
31(d), the exchange or association would need to track buy and sell 
transactions by individual market participants. Such tracking could be 
very difficult. For example, a market participant could open a large 
position on one day and then liquidate that position over several 
subsequent days.
    The ability to track the opening and closing of positions by 
individual market participants could be further complicated if, as is 
expected, some security futures trade on more than one market. That is, 
a round turn transaction under the alternative interpretation could 
involve two markets, if the purchase and sale were effected in 
different markets, and it would not be

[[Page 30629]]

clear if either or both were responsible for paying a Section 31(d) 
assessment on the transaction. The alternative interpretation of 
``round turn,'' therefore, could create difficulties under Section 
31(d) because that section appears to require only one market (an 
exchange or association) to pay the assessment on a round turn 
transaction.
    The Commission believes that it is consistent with the intent and 
language of the Section 31(d) to view a round turn transaction as a 
completed trade involving the simultaneous purchase and sale of a 
contract for future delivery by the two parties to the trade. This 
interpretation is consistent with the fact that it is the obligation of 
an exchange or association to pay the assessment on the round turn 
transaction, and the fact that the section appears to impose an 
obligation on only one market. Interpreting the term ``round turn'' in 
this manner for purposes of Section 31(d) also simplifies the 
calculation of assessments on such transactions.
    The Commission expects that the total assessments paid under this 
interpretation would be virtually identical to the total assessments 
paid under the alternative interpretation because most market 
participants are expected to enter into offsetting transactions before 
a security future settles. In any event, the Commission seeks comment 
on this interpretation of the term ``round turn'' for purposes of 
Section 31(d).
2. Meaning of ``Transaction''
    Exchanges and associations must pay Section 31(d) assessments for 
each ``round turn transaction (treated as including one purchase and 
one sale of a contract of sale for future delivery).'' The 
parenthetical makes clear that the assessment is applied on each 
purchase and sale of each contract for future delivery. Thus, the total 
Section 31 assessment an exchange or association must pay to the 
Commission will be the amount of the assessment--which is currently 
$0.009--multiplied by the number of contracts traded on such exchange 
or by or through a member of such association otherwise than on an 
exchange. The Commission proposes to amend the Preliminary Note to Rule 
31-1 to establish this method of calculating the Section 31(d) 
assessment. The Commission seeks comment, however, on the meaning of 
``transaction'' and the appropriate method for calculating the Section 
31(d) assessment on such transaction.

B. Fees Under Sections 31(b) and (c) of the Exchange Act

    In addition to the assessments paid by exchanges and associations 
pursuant to Section 31(d) of the Exchange Act, Section 31(b) of the 
Exchange Act requires each national securities exchange to pay a fee 
based on the aggregate dollar amount of sales of securities transacted 
on such exchange. Similarly, Section 31(c) of the Exchange Act requires 
each national securities association to pay a fee based on the 
aggregate dollar amount of sales transacted by or through any member of 
such association otherwise than on a national securities exchange.\5\ 
Because at physical settlement of a security future a sale of the 
underlying security or securities occurs, each national securities 
exchange or national securities association is required to pay a fee to 
the Commission based on the dollar amount of such sale. Thus, as in the 
exercise of an option,\6\ the fees that are required pursuant to either 
Section 31(b) or Section 31(c) of the Exchange Act are only payable to 
the Commission if a security future is held until settlement and 
settlement results in the physical delivery of the underlying security 
or securities. Such physical delivery occurs because a holder of the 
short position in a security future is required pursuant to the terms 
of the contract to sell the underlying security or securities to the 
holder of the long position in the security future. Security futures 
that are cash-settled do not result in the sale of the underlying 
security or securities and, therefore, do not result in a fee being 
owed by an exchange or association to the Commission pursuant to 
Sections (b) or (c) 31 of the Exchange Act.
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    \5\ Sections 31(b) and (c) of the Exchange Act set forth initial 
rates of $15 per $1,000,000. The Commission, however, is required to 
make adjustments to these fee rates pursuant to Section 31(j) of the 
Exchange Act. See Securities Exchange Act Release No. 45842 (April 
29, 2002) Order making fiscal 2003 annual adjustments to the fee 
rates applicable under Section 6(b) of the Securities Act of 1933, 
and Sections 13(e), 14(g), 31(b) and 31(c) of the Exchange Act).
    \6\ Section 31 fees that are paid upon an options exercise are 
paid only on options that are physically-settled, not options that 
are cash-settled, because, upon exercise, physically-settled options 
result in the actual sale and delivery of the underlying securities.
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    The Commission proposes to amend the Preliminary Note to Rule 31-1 
to clarify that the aggregate dollar amount of sales of securities 
resulting from the physical settlement of a security future should be 
calculated based on the price at which the security future was sold by 
the market participant effecting delivery of the underlying security 
upon settlement. The Commission, however, seeks comment on whether this 
is the appropriate price for determining the aggregate dollar amount of 
sale.
    The Commission also proposes to amend the Preliminary Note to Rule 
31-1 to clarify that the obligation to pay a Section 31(b) or (c) fee 
on a sale of a security underlying a physically-settled security future 
does not accrue until the time that physical settlement occurs. 
Because, however, one way to view a future is a sale of the underlying 
instrument at the time of the future transaction with a delayed 
settlement, the Commission requests comment on whether the obligation 
to pay a Section 31(b) or (c) fee should accrue at any time other than 
the actual settlement date.
    Finally, the Commission proposes to amend the Preliminary Note to 
Rule 31-1 to provide that The Options Clearing Corporation (``OCC'') 
may pay Section 31 assessments on round turn transactions on security 
futures and fees for sales of securities that result from the physical 
settlement of security futures on behalf of national securities 
exchanges and national securities associations. This provision would 
permit the OCC to serve the same role it currently does in paying 
Section 31 fees on options transactions on behalf of the options 
exchanges. The Commission seeks comment on whether any other registered 
entity should be permitted to pay the Section 31 assessments and fees 
due to the Commission on behalf of any national securities exchange or 
national securities association.
    The Commission reminds national securities exchanges and national 
securities associations that the obligation to pay the Section 31(d) 
assessment on a security futures transaction rests with such exchanges 
and associations. If a national securities exchange or national 
securities association intends to levy charges upon its members to 
cover the Section 31(d) assessments for security futures transactions, 
such exchange or association would need to adopt rules requiring its 
members to pay such assessments.\7\ The national securities exchanges 
and national securities associations also may want to amend their rules 
that charge their members fees to cover the fees owed by them under 
Sections 31(b) and (c) of the Exchange Act to clarify the application

[[Page 30630]]

of such fees to sales of securities resulting from the physical 
settlement of security futures. Of course, new exchanges would need to 
adopt rules to impose assessments and fees on their members to cover 
their obligations under Section 31.\8\
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    \7\ Currently, national securities exchanges and the National 
Association of Securities Dealers (``NASD'') charge their members 
fees to cover the fees owed by them to the Commission under Sections 
31(b) and (c) of the Exchange Act. See e.g., Schedule A to the NASD 
By-Laws, Section 8; New York Stock Exchange Rule 440H.
    \8\ National securities exchanges registered under Section 6(g) 
of the Exchange Act would not be required to file such rules with 
the Commission. See Exchange Act Section 6(g)(4)(B), 15 U.S.C. 
78f(g)(4)(B).
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III. Paperwork Reduction Act

    The Paperwork Reduction Act is not applicable to the proposed 
amendments because they do not impose any collection of information 
requirements that would require the approval of the Office of 
Management and Budget.

IV. Costs and Benefits of Proposed Amendments to Rule 31-1

    The Commission is considering the costs and benefits of its 
amendments to Rule 31-1 and requests comment on all aspects of this 
cost-benefit analysis, including identification of any additional costs 
or benefits of the proposed amendments to Rule 31-1. The Commission 
encourages commenters to identify, discuss, analyze, and supply 
relevant data concerning the costs and benefits of the proposed rule.

A. Costs

    The proposed amendments to Rule 31-1 are for the purpose of 
providing guidance on how Section 31 assessments and fees are to be 
calculated for transactions in security futures and sales of securities 
resulting from physical settlement of security futures. Specifically, 
the amendments are intended to clarify: (1) the method by which 
assessments required pursuant to Section 31(d) of the Exchange Act are 
calculated for round turn transactions on security futures traded on 
national securities exchanges or by members of national securities 
associations; and (2) the manner in which fees required pursuant to 
Sections 31(b) and (c) of the Exchange Act are calculated for sales of 
securities resulting from physical settlement of security futures. 
Accordingly, because the proposed amendments to Rule 31-1 do not give 
rise to additional obligations on national securities exchanges, 
associations, or other market participants, but rather merely provide 
guidance on complying with existing statutory obligations, the 
Commission preliminarily believes that there would be no costs imposed 
on market participants by the proposed amendment to the rule.

B. Benefits

    The Commission preliminarily believes that its proposed amendments 
to Rule 31-1 would benefit exchanges and associations by providing 
clarification on the assessments and fees payable under Sections 31(b), 
(c) and (d) of the Exchange Act. Although these sections of the 
Exchange Act set forth generally the obligations of national securities 
exchanges and national securities associations to pay assessments and 
fees on security futures transactions and sales of securities resulting 
from physical settlement of such futures, the Commission has concluded 
that guidance is necessary to clarify the mechanics of the assessment 
and fee calculation and collection process for security futures. The 
Commission's guidance in the proposed amendments to Rule 31-1 would 
remove any potential ambiguity in the statute about, for example, the 
meaning of ``round turn transaction'' and the price on which fees for 
sales of securities that result from the physical settlement of 
security futures will be based.

V. Consideration of Burden on Competition and Promotion of 
Efficiency, Competition, and Capital Formation

    Section 23(a)(2) of the Exchange Act requires the Commission, when 
adopting rules under the Exchange Act, to consider the impact of such 
rules on competition.\9\ In addition, Section 3(f) of the Exchange Act 
requires the Commission, when engaging in rulemaking that requires it 
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.\10\
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    \9\ 15 U.S.C. 78w(a)(2).
    \10\ 15 U.S.C. 78c(f).
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    The Commission has considered the proposed rule in light of these 
standards and preliminarily believes that the proposed rule will not 
impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. As noted above, in 
amending Rule 31-1 the Commission is merely providing guidance in the 
rule to clarify recent amendments to Section 31 of the Exchange Act. 
Likewise, the Commission preliminarily believes that the proposed rule 
will not have an impact on capital formation. To the extent the 
proposed rule reduces any ambiguity regarding the application of 
Section 31 to security futures transactions and the physical settlement 
of security futures, the proposed rule promotes efficiency. The 
Commission requests comment on the effects of the proposed rules on 
competition, efficiency, and capital formation.

VI. Regulatory Flexibility Act Certification

    Section 3(a) of the Regulatory Flexibility Act \11\ requires the 
Commission to undertake an initial regulatory flexibility analysis of 
the proposed rule's impact on small entities unless the Chairman 
certifies that the rule, if adopted, would not have a significant 
economic impact on a substantial number of small entities.\12\ The 
proposed amendments to Rule 31-1 under the Exchange Act would apply to 
national securities exchanges and national securities associations that 
are required under the Exchange Act to pay fees and assessments on 
sales of securities and security futures transactions. The Commission 
believes that there could be seven national securities exchanges and 
one national securities association that would be subject to the 
proposed rule, none of which is a small entity.\13\ The Chairman has 
certified that the proposed rule would not have a significant economic 
impact on a substantial number of small entities. A copy of the 
certification is attached as Appendix A.
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    \11\ 5 U.S.C. 603(a).
    \12\ 5 U.S.C. 605(b).
    \13\ Paragraph (e) of Exchange Act Rule 0-10 provides that the 
term ``small entity,'' when referring to an exchange, means any 
exchange that has been exempted from the reporting requirements of 
17 CFR 240.11Aa3-1 and is not affiliated with any person that is not 
a small entity. Under this standard, none of the exchanges affected 
by the proposed rule is a small entity. Similarly, the national 
securities associations affected by the proposed rule are not small 
entities as defined by 13 CFR 121.201.
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    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, the Commission also is requesting information regarding 
the potential impact of the proposed rule on the economy on an annual 
basis. Commentators should provide empirical data to support their 
views.

VII. Statutory Authority

    The Commission is proposing amendments to Rule 31-1 under the 
Exchange Act pursuant to its authority under Exchange Act Sections 
3(b), 23(a), and 31.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Rule

    For the reasons set out in the preamble, the Commission proposes to

[[Page 30631]]

amend Part 240 of Chapter II, Title 17 of the Code of Federal 
Regulations 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, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4 and 80b-11, unless otherwise noted.

* * * * *
    2. Section 240.31-1 is proposed to be amended by removing the 
Preliminary Note and adding Preliminary Notes 1 and 2 and introductory 
text to read as follows:


Sec. 240.31-1  Securities transactions exempt from transaction fees.

Preliminary Notes

    1. The section 31 fee for options transactions occurring on a 
national securities exchange, or transactions in options subject to 
prompt last sale reporting occurring otherwise than on an exchange 
(with the exception of sales of options on securities indexes) is to be 
paid by the exchange or the national securities association itself, 
respectively, or by The Options Clearing Corporation on behalf of the 
exchange or association, and such fee is to be computed on the basis of 
the option premium (market price) for the sale of the option. In the 
event of the exercise of an option, whether such option is traded on an 
exchange or otherwise, a section 31 fee is to be paid by the exchange 
or the national securities association itself, or The Options Clearing 
Corporation on behalf of the exchange or association, and such fee is 
to be computed on the basis of the exercise price of the option.
    2. The section 31(d) assessment on a round turn transaction on a 
security future traded on a national securities exchange, or by or 
through a member of a national securities association otherwise than on 
a national securities exchange, is to be paid by the exchange or the 
national securities association itself, respectively, or by The Options 
Clearing Corporation on behalf of the exchange or association, and such 
assessment is to be computed on the basis of the number of contracts of 
sale for future delivery traded on such exchange or by or through any 
member of such association otherwise than on an exchange. In the event 
of the physical settlement of a security future, a section 31 fee is to 
be paid by the exchange on which the round turn transaction on the 
security future was traded, or, if the round turn transaction on the 
security future was traded by or through a member of a national 
securities association otherwise than on a national securities 
exchange, by the association, or by The Options Clearing Corporation on 
behalf of such exchange or association. Such fee, whether paid under 
section 31(b) or section 31(c), is to be computed on the basis of the 
sale price of the security future, although the obligation to pay such 
fee does not accrue until the time that physical delivery occurs.
    The following shall be exempt from section 31 of the Act:
* * * * *

    By the Commission.

    Dated: May 1, 2002.
Jill M. Peterson,
Assistant Secretary.

    Note: This Appendix A to the Preamble will not appear in the 
Code of Federal Regulations.

Appendix A

Regulatory Flexibility Act Certification

    I, Harvey L. Pitt, Chairman of the Securities and Exchange 
Commission (``SEC''), on information and belief, hereby certify, 
pursuant to 5 U.S.C. Sec. 605(b), that the proposed amendment to 
Rule 31-1 under the Securities Exchange Act of 1934 (``Exchange 
Act'') would not, if adopted, have a significant economic impact on 
a substantial number of small entities. Section 31 of the Exchange 
Act requires each national securities exchange and each national 
securities association to pay fees and assessments to the Commission 
based on sales of or transactions in certain securities. Section 31 
of the Exchange Act was amended by the Commodity Futures 
Modernization Act of 2000 (``CFMA'') to impose assessments on 
transactions in security futures.
    The proposed amendment to Rule 31-1 would clarify the method by 
which assessments are to be calculated for transactions in security 
futures and fees are to be calculated for sales of securities 
resulting from the physical settlement of security futures. Only 
national securities exchanges and national securities associations 
are required to pay Section 31 assessments for security futures 
transactions and fees for sales of securities resulting from the 
physical settlement of security futures. None of these exchanges or 
associations is a small entity for purposes of the Regulatory 
Flexibility Act. Accordingly, the proposed amendment to Rule 31-1 
would not have a significant economic impact on a substantial number 
of small entities.
    Dated: April 30, 2002.
Harvey L. Pitt,
Chairman.
[FR Doc. 02-11267 Filed 5-6-02; 8:45 am]
BILLING CODE 8010-01-P