[Federal Register Volume 67, Number 111 (Monday, June 10, 2002)]
[Proposed Rules]
[Pages 39647-39658]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14294]



[[Page 39647]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-46014; File No. S7-19-02]
RIN 3235-AI50


Confirmation Requirements for Transactions of Security Futures 
Products Effected in Futures Accounts

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: In accordance with the Commodity Futures Modernization Act of 
2000 (``CFMA''), the Securities and Exchange Commission (``SEC'' or 
``Commission'') is publishing for comment proposed rule amendments and 
a new rule under the Securities Exchange Act of 1934 (``Exchange 
Act''). The proposed rule amendments and new rule are designed to 
clarify the disclosures broker-dealers effecting transactions in 
security futures products in customer futures accounts must make in the 
confirmations sent to customers regarding those transactions. The 
amendments would exclude certain broker-dealers effecting transactions 
in security futures products in customer futures accounts from the 
SEC's confirmation disclosure rule, provided that the transaction 
confirmations for these accounts disclose specific information and 
notify customers that certain additional information would be available 
upon written request. The new rule would also provide that broker-
dealers effecting transactions for customers in security futures 
products in a futures account are exempt from the disclosure 
requirements of Exchange Act Section 11(d)(2).

DATES: Comments should be received on or before July 10, 2002.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, 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. S7-19-02; this file number 
should be included on the subject line if e-mail is used. Comment 
letters received will be available for public inspection and copying in 
the SEC's Public Reference Room, 450 Fifth Street, NW, Washington, DC 
20549-0102. Electronically submitted comment letters will be posted on 
the SEC's Internet web site (http://www.sec.gov). The SEC does not edit 
personal identifying information, such as names or e-mail addresses, 
from electronic submissions. Submit only the information you wish to 
make publicly available.

FOR FURTHER INFORMATION CONTACT: Catherine McGuire, Chief Counsel, 
Patricia Albrecht, Special Counsel, or Norman Reed, Staff Attorney, at 
(202) 942-0073, Office of the Chief Counsel, Division of Market 
Regulation, Securities and Exchange Commission, 450 5th Street, NW., 
Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Proposed Amendments and New Rule
    A. Rule 10b-10
    B. Rule 10b-10 SIPC Disclosure Requirement
    C. Rule 11d2-1
III. General Request for Comments
IV. Paperwork Reduction Act
V. Costs and Benefits of Proposed Amendments
VI. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition, and Capital Formation
VII. Regulatory Flexibility Act Certification
VIII. Statutory Authority
    Text of Proposed Rule Amendments and Rule

I. Introduction

    The CFMA permits the trading of security futures, i.e., futures 
contracts on individual securities and on narrow-based security 
indexes.\1\ The CFMA defines security futures both as ``securities'' 
under the federal securities laws,\2\ and as futures contracts for 
purposes of the Commodity Exchange Act (``CEA'').\3\ Accordingly, the 
SEC and the Commodity Futures Trading Commission (``CFTC'') have joint 
jurisdiction over the intermediaries and markets that trade security 
futures products (``SFPs'').
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    \1\ Pub. L. 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). Under Exchange Act 
Section 3(a)(56), the term ``security futures product'' is defined 
as a security future or an option on security future. 15 U.S.C. 
78C(a)(56).
    \2\ See, e.g., Exchange Act Section 3(a)(10) (15 U.S.C. 
78c(a)(10)).
    \3\ 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. Under 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 contracts, SFPs must be traded on trading facilities and 
through intermediaries that are registered with both the SEC and the 
CFTC. The CFMA amended the CEA and the Exchange Act to provide notice 
registration procedures for persons that may be required to register 
with the SEC or the CFTC solely because they are effecting SFP 
transactions. Under the notice registration procedures, a futures 
commission merchant (``FCM'') may register with the SEC pursuant to 
Section 15(b)(11) of the Exchange Act and the rules adopted by the SEC 
\4\ (``Notice BD'') and a broker-dealer may register with the CFTC 
pursuant to Section 4f(a)(2) of the CEA and rules adopted by the CFTC 
\5\ (``Notice FCM'').
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    \4\ 15 U.S.C. 78o(b)(11)(a)(i) and Exchange Act Release No. 
44730 (August 21, 2001), 66 FR 45137 (August 27, 2001).
    \5\ 7 U.S.C. 6f(a)(2) and 66 FR 43080 (August 17, 2001).
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    Notice BDs are exempt from certain provisions of the Exchange 
Act,\6\ and Notice FCMs are exempt from certain provisions of the 
CEA.\7\ These statutory provisions were designed to allow persons that 
previously had engaged ``solely'' in either the securities or futures 
business to participate in SFP business without being subject to 
conflicting or duplicative regulation. The CFMA does not exempt firms 
that are ``fully-registered'' with both the CFTC and the SEC (``Full 
FCM/Full BDs'') from any provisions of the Exchange Act or the CEA.
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    \6\ Exchange Act Section 15(b)(11)(B) (15 U.S.C. 78o(b)(11)(B)).
    \7\ CEA Section 4f(a)(4)(A) (7 U.S.C. 6f(a)(4)(A)).
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    The CFMA requires the SEC, in consultation with the CFTC, to issue 
such rules, regulations, or orders as are necessary to avoid 
duplicative or conflicting regulations applicable to Full FCM/Full BDs 
with respect to the treatment of customer funds, securities, or 
property, maintenance of books and records, financial reporting, or 
other financial responsibility rules, involving SFPs.\8\ In absence of 
this proposed rulemaking, every firm effecting transactions in SFPs 
would need to comply with all of the confirmation disclosure 
requirements of the Exchange Act and the CEA, which would create the 
kind of duplicate regulation for SFPs that the CFMA's direction 
attempts to avoid.
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    \8\ Exchange Act Section 15(c)(3)(B) (15 U.S.C. 78o(c)(3)(B)). 
Cf. CEA Section 4d(c) (7 U.S.C. 6d(c)) (providing the same 
requirement for the CFTC).
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II. Proposed Amendments and New Rule

A. Rule 10b-10

    Generally, Exchange Act Rule 10b-10 requires broker-dealers that 
effect transactions for customers in securities, other than U.S. 
savings bonds or

[[Page 39648]]

municipal securities,\9\ to provide a confirmation, at or before the 
completion of each transaction, disclosing certain basic terms of the 
transaction. The confirmation requires, among other things, the 
disclosure of: the date, identity, price, and number of shares bought 
or sold; \10\ the capacity of the broker-dealer; \11\ the net dollar 
price and yield of a debt security; \12\ and, under specified 
circumstances, the amount of compensation paid to the broker-dealer and 
whether payment for order flow is received.\13\ The customer 
confirmation requirement, portions of which have been in effect for 
over 50 years, provides basic investor protections by conveying 
information allowing investors to verify the terms of their 
transactions; alerting investors to potential conflicts of interest 
with their broker-dealers; acting as a safeguard against fraud; and 
providing investors a means to evaluate the costs of their transactions 
and the quality of their broker-dealer's execution.\14\
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    \9\ Municipal securities are covered by a parallel rule MSRB 
Rule G-15, which applies to all municipal securities-dealers--both 
bank and non-bank dealers.
    \10\ 17 CFR 240.10b-10(a)(1).
    \11\ 17 CFR 240.10b-10(a)(2) and (8).
    \12\ 17 CFR 240.10b-10(a)(5) and (6).
    \13\ See, e.g., 17 CFR 240.10b-10(a)(2)(i)(B), (C) and (D); 17 
CFR 240.10b-10(a)(8)(i)(A).
    \14\ Exchange Act Release. No. 34962 (November 10, 1994), 59 FR 
59612 (November 17, 1994).
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    Although the CFMA exempted Notice BDs from certain Exchange Act 
provisions, including Exchange Act Section 11,\15\ it did not exempt 
them from Exchange Act Section 10 and the rules promulgated thereunder, 
including Exchange Act Rule 10b-10.\16\ In addition, as stated 
previously, the CFMA did not exempt Full FCM/Full BDs from any 
provisions of the Exchange Act or the rules promulgated thereunder. 
Accordingly, under the CFMA, entities effecting SFP transactions in 
futures accounts currently are required to meet the confirmation 
disclosure requirements of both the CEA and the Exchange Act and the 
rules thereunder.
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    \15\ Exchange Act Section 15(b)(11)(B) (15 U.S.C. 
78o(b)(11)(B)).
    \16\ 17 CFR 240.10b-10.
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    CEA Rule 1.33(b)\17\ provides the disclosure requirements FCMs 
effecting futures transactions must follow. However, although CEA Rule 
1.33(b) requires an FCM to provide a customer with a ``written 
confirmation of each commodity futures transaction,'' \18\ it does not 
specify what information must be included in the confirmation.\19\ The 
rules of certain futures exchanges, such as the Chicago Mercantile 
Exchange (``CME'') and the Chicago Board of Trade (``CBOT''),\20\ 
require an FCM to disclose in writing no later than the following 
business day after each transaction specific information regarding that 
transaction effected in a futures account. Information that must be 
disclosed includes the commodity bought or sold, the quantity, the 
price, and the delivery month.\21\ The CBOT also requires disclosure of 
the name of the other party to the contract (in other words, the FCM on 
the opposite side of the contract) or a notice disclosing that such 
information is available upon request.\22\
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    \17\ 17 CFR 1.33(b). Specifically, CEA Rule 1.33(b)(1) requires 
FCMs that effect futures transactions for customers to provide, no 
later than the next business day after the transaction, ``a written 
confirmation of each commodity futures transaction caused to be 
executed by it * * *.''
    \18\ 17 CFR 1.33(b)(1).
    \19\ CEA Rule 1.33b(2) (17 CFR 1.33(b)(2)) does specify the 
detail required in a confirmation of a commodity option transaction. 
In addition, CEA Rule 1.46(a) (17 CFR 1.46(a)) requires an FCM to 
furnish a futures or options customer a purchase-and-sale statement 
when an offsetting transaction is executed showing the financial 
result of the transactions in involved.
    \20\ See, e.g., CME Rule 537; CBOT Rules 421.00 and 421.01.
    \21\ CME Rule 537; CBOT Rules 421.00.
    \22\ See, e.g., CBOT Rules 421.00 and 421.01.
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    In a joint release issued by the SEC and the CFTC (``the 
Commissions'') proposing customer protection, reccordkeeping, 
reporting, and bankruptcy rules for accounts holding SFPs,\23\ the 
Commissions requested comment on the application to transactions in 
SFPs of their confirmation rules (Rule 10b-10 under the Exchange Act 
\24\ and Rule 1.33(b) under the CEA \25\). Of the three comment letters 
the Commissions received, two specifically addressed the Commissions' 
requests for comments on the subject of confirmations for SFPs.\26\
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    \23\ Exchange Act Release. No. 44854 (September 26, 2001), 66 FR 
50786 (October 4, 2001).
    \24\ 17 CFR 240.10b-10.
    \25\ 17 CFR 1.33(b). Specifically, CEA Rule 1.33(b)(1) requires 
FCMs that effect futures transactions for customers to provide, no 
later than the next business day after the transaction, ``a written 
confirmation of each commodity futures transaction caused to be 
executed by it * * *.''
    \26\ Letter dated December 5, 2001, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission; Letter dated December 5, 2001, from John M. Damgard, 
President, Futures Industry Association, and Mark E. Lackritz, 
President, Securities Industry Association, to Jonathan G. Katz, 
Secretary, U.S. Securities & Exchange Commission. The other letter, 
dated December 4, 2001, from James J. McNulty, Chicago Mercantile 
Exchange, Inc. and David J. Vitale, Board of Trade of the City of 
Chicago, Inc, to Jonathan G. Katz, Secretary, U.S. Securities and 
Exchange Commission, did not address the application of the 
confirmation requirements of the Commission and the CFTC but did 
support account specific recordkeeping requirements.
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    As an initial matter, the Commissions asked whether the application 
of the confirmation rules to FCMs and broker-dealers should follow from 
the type of account in which the SFPs are effected. One commenter 
supported having confirmation statements follow the type of the account 
and recommended that the SEC adopt a rule that would exempt SFPs 
carried in futures accounts from Exchange Act Rule 10b-10.\27\ The 
other commenter suggested that the SEC clarify that Exchange Act Rule 
10b-10 would not apply to a Notice BD or a Full FCM/Full BD carrying 
SFPs in a futures account.\28\
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    \27\ Letter dated December 5, 2001, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission.
    \28\ Letter dated December 5, 2001, from John M. Damgard, 
President, Futures Industry Association, and Mark E. Lackritz, 
President, Securities Industry Association, to Jonathan G. Katz, 
Secretary, U.S. Securities and Exchange Commission.
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    The Commissions also asked whether the information that FCM 
customers currently receive on confirmations would fulfill the purposes 
of Rule 10b-10 or whether FCMs should provide the particular 
information required by Rule 10b-10 to customers in SFP transactions 
upon the customers' request, to the extent that information is not 
already provided on the confirmations that the FCM prepares. In 
addition, the Commissions asked what it would cost FCMs to provide the 
information required under Rule 10b-10 on SFP confirmations.
    One commenter noted that confirmations of futures transactions 
generally provide much of the same information required by Rule 10b-10. 
Moreover, this commenter stated that futures customers understand that 
they have a right to request information in addition to that 
specifically disclosed on the confirmation. Some of this additional 
information includes the time of the transaction and the name of the 
person on the opposite side of the transaction.\29\ The commenter noted 
this is the same information that Rule 10b-10 generally allows broker-
dealers to choose whether to disclose in the confirmation or to make 
available upon written request of the customer.\30\ This commenter also 
maintained that applying Rule 10b-10(a)(2)--which

[[Page 39649]]

requires a broker-dealer to disclose whether it is acting as a 
principal or agent in a transaction--to confirmations of SFP 
transactions would create operational and programming burdens for FCMs 
without providing corresponding benefits.\31\
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    \29\ Letter dated December 5, 2001, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission.
    \30\ See Exchange Act Rule 10b-10(a)(1) and (a)(2)(i)(A) (17 CFR 
240.10b-10(a)(1) and (a)(2)(i)(A)).
    \31\ Letter dated December 5, 2001, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission.
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    The Commissions also requested information on whether there would 
be any costs to broker-dealers to provide the information required 
under CEA Rule 1.33(b) on SFP confirmations and how long it would take 
firms to implement systems to provide this information. In addition, 
the Commissions asked whether any other considerations relating to 
customers should be taken into account. The Commissions did not receive 
any comments on these queries.
    After carefully considering all of the comments received, the SEC 
has decided to avoid duplicate regulation by proposing a new paragraph 
(e) to Rule 10b-10. New paragraph (e) would clarify the type and nature 
of information a Notice BD and a Full FCM/Full BD must disclose under 
Rule 10b-10 in confirmations of SFP transactions effected in futures 
accounts. In doing so, we have taken into account the disclosure 
requirements of CEA Rule 1.33(b) and the disclosure rules of the CME 
and the CBOT.\32\
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    \32\ See CME Rule 537; CBOT Rules 421.00 and 421.01.
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    Amended Rule 10b-10(e) would require essentially the same type and 
nature of information required under CEA Rule 1.33(b) and the above-
described futures exchange rules, as well as additional information 
concerning the capacity in which the Notice BD or Full FCM/Full BD is 
acting when effecting an SFP transaction and information regarding 
payment for order flow. It also would conform to the timing 
requirements that are customary for futures confirmations.
    Specifically, Rule 10b-10(e)(1) would provide that, as long as 
certain conditions are met, the requirements of paragraphs (a) and (b) 
of Rule 10b-10 will not apply to a Notice BD or a Full FCM/Full BD that 
effects transactions for customers in SFPs in a futures account (as 
that term is defined in proposed Exchange Act Rule 15c3-3(a)(15)).\33\ 
First, under subparagraph (i) of proposed paragraph (e)(1), the Notice 
BD or Full FCM/Full BD must give or send to the customer, no later than 
the next business day after execution of any SFP transaction, written 
notification disclosing: the date the transaction was executed, the 
identity of the single security or narrow-based security index 
underlying the contract for the SFP, the number of shares or units (or 
principal amount) of such SFP purchased or sold, the price, and the 
delivery month. Second, under subparagraph (ii) of proposed paragraph 
(e)(1), the Notice BD or Full FCM/Full BD must give or send to the 
customer no later than the next business day after execution of any SFP 
transaction, written notification disclosing the source and amount of 
any remuneration received or to be received in connection with the 
transaction. This includes, but is not limited to, any markup, 
commissions, costs, fees, and other charges incurred in connection with 
the transaction.
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    \33\ Exchange Act Release No. 44854 (September 25, 2001), 66 FR 
50785 (October 4, 2001).
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    From discussions with industry participants, our staff understands 
that this information is routinely disclosed in confirmations on 
futures transactions.\34\ The staff also understands from these 
discussions that customers in the futures markets may negotiate to pay 
commissions or fees on futures transactions based on the purchase and 
subsequent liquidating sale or based on the sale and subsequent 
covering purchase rather than paying the commissions or fees at both 
the initiating and closing trade.\35\
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    \34\ See Memorandum to file number S7-17-01 regarding February 
12, 2002 Conference call between Commission staff members and 
representatives of Morgan Stanley Dean Witter (March 13, 2002).
    \35\ See Memorandum to file number S7-17-01 regarding February 
27, 2002 and March 5, 2002 conversations between Securities and 
Exchange Commission staff member and representative of Morgan 
Stanley Dean Witter (March 12, 2002).
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    Regardless, confirmation statements are sent to customers after 
both the initiating and closing trades, and the remuneration 
information in these confirmation statements reflects how the customers 
have chosen to pay commissions and fees. This disclosure system is 
designed to ensure that the customer is consistently aware of the 
nature and amount of the commissions and fees he is paying for the 
transactions effected in his futures account.\36\ Accordingly, we 
believe that this same disclosure system for fees and commissions for 
SFP transactions effected by Notice BDs and Full FCM/Full BDs in 
futures accounts is sufficient for purposes of Rule 10b-10(e)(1)(ii).
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    \36\ See Memorandum to file number S7-17-01 regarding February 
27, 2002 and March 5, 2002 conversations between Securities and 
Exchange Commission staff member and representative of Morgan 
Stanley Dean Witter (March 12, 2002).
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    Subparagraph (iii) of Rule 10b-10(e)(1) would also require the 
Notice BD or Full FCM/Full BD to give or send to the customer no later 
than the next business day after execution of any SFP transaction, 
written notification disclosing the fact that certain information will 
be available upon written request of the customer. This includes 
information about the time of the execution of the transaction and the 
identity of the other party to the contract. We believe that, while 
this information does not necessarily need to appear on the 
confirmation statement itself, the customer should have notice that it 
is available and will be provided upon written request.
    Subparagraph (iii) also would require the Notice BD or Full FCM/
Full BD to disclose that it will provide upon written request of the 
customer information regarding whether the broker or dealer is acting 
as agent for such customer, as agent for some other person, as agent 
for both such customer and some other person, or as principal for its 
own account; and, if the broker or dealer is acting as principal, 
whether it is engaging in a block transaction or an exchange of SFPs 
for physical securities (``EFP''). Although Rule 10b-10(a)(2) requires 
this information to appear in a confirmation of a securities 
transaction, we note that confirmations of futures transactions do not 
generally include this information. A commenter has also noted that 
customers would be aware of block trades and exchanges for physicals 
because these transactions require customer consent and that it would 
be unduly burdensome to require futures confirmations systems to 
capture and transmit this information.\37\
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    \37\ Letter dated December 5, 2001, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission. See, e.g., CRE Rules 526 and 538, BrokerTec Futures 
Exchange (``BTEX'') Rules 406 and 407; see also Chicago Board of 
Trade's Proposal to Adopt Block Trading Procedures, 65 FR 58051 
(September 27, 2000).
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    The nature of the futures markets appears to provide the reasons 
for this disparity. First, the CEA and CFTC Regulations require most 
futures transactions to be agency transactions.\38\ An FCM conducts 
futures transaction in a principal capacity only when conducting a 
block trade or an EFP.\39\

[[Page 39650]]

Block trades and EFPs are privately-negotiated transactions that may be 
traded apart from the public auction market either on or off the 
exchange trading floor.\40\ In addition, a block trade executed on an 
exchange generally cannot trigger the execution of conditional orders, 
such as stop orders, or otherwise affect orders in the regular 
market.\41\ An FCM that effects block trades and EFPs must meet 
stringent exchange rules, including keeping and maintaining detailed 
records of the transactions, timely reporting the transactions to the 
relevant exchange and/or clearing organization, and obtaining customer 
consent for the transactions.\42\
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    \38\ See CEA Section 4b(a)(iv) (7 U.S.C. 6b(a)(iv)) and CFTC 
Regulations 1.38 and 1.55.2(a)-(b) (17 CFR 1.38 and 155.2(a)-(b)).
    \39\ See Memorandum to file number S7-17-01 regarding March 11, 
2002, and March 12, 2002, conversations between Securities and 
Exchange Commission staff member and representative of Credit Suisse 
First Boston (March 12, 2002).
    \40\ See CME Rules 526, 538; CME Rulebook definitions of 
``Exchange-For-Physical'' and ``Block Trade;'' see also (``BTEX'') 
Rules 406, 407.
    \41\ See CME Rule 526.E.
    \42\ See BTEX Rule 406(d) and (f); BTEX Rule 407(h) and (i); CME 
Rules 520, 526.A and H, 538.4.
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    Nevertheless, an SFP is not only a futures product but a security 
product, and, as reflected in Rule 10b-10(a)(2) and Exchange Act 
Section 11(d)(2),\43\ we consider that a broker-dealer's capacity when 
effecting a securities transaction is important information that should 
be available to a customer. We recognize, however, that requiring a 
confirmation of an SFP transaction effected in futures accounts to 
disclose whether the Notice BD or Full FCM/Full BD effected the 
transaction as an agent (and who the entity was an agent for) or a 
principal could create operational and programming burdens. Therefore, 
Rule 10b-10(e)(1)(iii) would require only that the information be made 
available upon written request of the customer.
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    \43\ 15 U.S.C. 78k(d)(2).
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    Because the futures industry has never previously been required to 
provide this type of information on a regular basis, it may need 
additional time to adjust its members' operational systems, not only to 
capture this information when necessary, but also to disclose on the 
confirmation itself that the information is available upon a customer's 
written request. Therefore, as explained further below, new Rule 10b-
10(e)(2) would provide that the provisions of Rule 10b-10(e)(1)(iii) do 
not become effective for broker-dealers effecting SFP transactions in 
futures accounts until June 1, 2003, as long as the broker-dealers meet 
certain conditions. This transitional provision should provide the 
futures industry with sufficient time to make the necessary adjustments 
to their systems to comply with Rule 10b-10(e)(1)(iii).
    Finally, subparagraph (iv) of Rule 10b-10(e)(1) would require a 
Notice BD or Full FCM/Full BD to give or send to the customer no later 
than the next business day after execution of any SFP transaction, 
written notification disclosing whether it receives payment for order 
flow for effecting SFP transactions. It must also disclose the fact 
that the source and nature of any compensation received in connection 
with the particular transaction will be furnished upon the customer's 
written request. Our staff understands from discussions with industry 
representatives that payment for order flow is not currently practiced 
in the futures industry.\44\ There is no reliable method to predict 
whether the practice of payment for order flow will develop in relation 
to SFP transactions. Nevertheless, subparagraph (iv) provides a 
foundation to address the disclosure of payment for order flow in the 
event it arises in relation to SFP transactions. Because payment for 
order flow is not currently a practice in the futures industry, it is 
unlikely that the operational systems for futures accounts would 
currently capture such information for disclosure purposes. Therefore, 
as explained further below, Rule 10b-10(e)(2) would provide the futures 
industry additional time to modify their systems to capture payment for 
order flow information.
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    \44\ See Memorandum to file number S7-17-01 regarding March 11, 
2002, and March 12, 2002, conversations between Securities and 
Exchange Commission staff member and representative of Credit Suisse 
First Boston (March 12, 2002).
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    Because the futures industry may need additional time to make the 
necessary changes to comply with all of the requirements of Rule 10b-
10(e)(1), the Commission proposes to provide a transitional provision 
to allow the futures industry the extra time to make those changes. 
Specifically, Rule 10b-10(e)(2)(i) would provide that subparagraph 
(iii) of Rule 10b-10(e)(1) does not become effective until June 1, 
2003, provided that, if the broker-dealer receives a written request 
from a customer for the information Paragraph (e)(1)(iii) requires the 
broker-dealer to disclose upon a customer's written request, the 
broker-dealer makes the information available to the customer. Rule 
10b-10(e)(2)(ii) would provide that Paragraph (e)(1)(iv) shall also 
become effective June 1, 2003.
    In proposing these amendments to Rule 10b-10, we believe it is 
important to remind broker-dealers that they would continue to be 
subject to the antifraud provisions of the federal securities laws, 
including Exchange Act Rule 10b-5. We note in this regard that the 
preliminary note to Rule 10b-10 explains that the disclosure 
confirmation requirements of Rule 10b-10 are in addition to ``a broker-
dealer's obligation under the general antifraud provisions of the 
federal securities laws to disclose additional information to a 
customer at the time of the customer's investment decision.'' In 
addition, broker-dealers are still subject to self-regulatory 
organization rules that, in their current form, require broker-dealers 
to disclose information that would not be required by our proposed 
amendments to Rule 10b-10.\45\
    We invite comment on all aspects of this amendment to Rule 10b-10. 
We especially invite comment on the following subjects: (i) What, if 
any, burdens would result from requiring futures confirmation systems 
to capture and transmit information regarding capacity and payment for 
order flow for SFP transactions effected by Notice BDs or Full FCM/Full 
BDs in a futures accounts; (ii) what, if any, competitive burdens would 
affect Notice BDs effecting SFP transactions in futures accounts that 
similarly situated Full FCM/Full BDs would not be subject to; (iii) 
whether the amendments to Rule 10b-10 providing confirmation 
requirements for SFP transactions effected in futures accounts could 
result in competitive disadvantages for broker-dealers effecting SFP 
transactions in securities accounts that must follow all of the 
disclosure requirements of Rule 10b-10; (iv) if so, whether the 
requirements of paragraph (e) should be applied to all SFP transactions 
regardless of whether the transactions are effected in a securities 
account or in a futures account; (v) whether there are rules of other 
exchanges that provide different disclosure requirements that we should 
consider; (vi) whether there is any additional information that should 
be disclosed to customers; and (vii) whether the transitional period 
provides sufficient time to develop the necessary systems to capture 
the information required to be disclosed under proposed Rule 10b-10(e).
---------------------------------------------------------------------------

    \45\ See, e.g., National Association of Securities Dealers Rule 
2230.
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B. Rule 10b-10 SIPC Disclosure Requirement

    Exchange Act Rule 10b-10(a)(9) \46\ generally requires that a 
broker-dealer effecting securities transactions for a customer, or a 
broker-dealer clearing or carrying a customer's account, disclose in 
the confirmation if such broker-dealer is not a member of the 
Securities Investor Protection Corporation

[[Page 39651]]

(``SIPC'').\47\ This requirement is intended to make clear when 
customers are not protected by SIPC.
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    \46\ 17 CFR 240.10b-10(a)(9).
    \47\ See Exchange Act Release No. 34962 (November 10, 1994), 59 
FR 59612 (November 17, 1994).
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    Under the Securities Investor Protection Act of 1970 (``SIPA''), 
most broker-dealers registered under Exchange Act Section 15(b) must be 
members of SIPC.\48\ When a SIPC member is liquidated in a SIPC 
proceeding, due to bankruptcy or other financial difficulties, SIPC 
will return to customers their cash and securities held by the broker-
dealer. To the extent that the broker-dealer does not have sufficient 
resources to return the cash and securities to customers, SIPC will 
replace the missing assets, up to $500,000 per customer (including 
$100,000 for cash claims).\49\
    We required that a broker-dealer disclose in its confirmations when 
it is not a SIPC member after we witnessed several incidents involving 
the financial failure of registered broker-dealers and their 
unregistered affiliates where customers became confused regarding the 
application of SIPC coverage to their accounts.\50\ For example, in one 
of these cases, the failure of a registered broker-dealer and its 
government securities affiliate, which shared personnel and office 
facilities and did not distinguish between the two entities in certain 
written and oral communications, led to customer confusion concerning 
SIPC coverage. Because government securities brokers and dealers 
registered under Exchange Act 15C are not members of SIPC, the accounts 
of the customers of the government securities affiliates were not 
protected by SIPC.\51\
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    \48\ 15 U.S.C. 78ccc(a)(2) and 78ddd.
    \49\ 15 U.S.C. 78fff-3(a)(1).
    \50\ Exchange Act Release No. 33743 (March 9, 1994), 59 FR 12767 
(March 17, 1994).
    \51\ See id.; see generally, SEC v. Donald Sheldon Group, Inc. 
et al., Admin. Pro. File No. 3-6626 (Dec. 2, 1988.)
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    The SIPC disclosure requirement is in addition to a separate 
regulatory scheme pursuant to Exchange Act Section 15(c)(3) and 
Exchange Act Rule 15c3-3 to protect customers. That scheme protects the 
assets of broker-dealer customers by requiring a broker-dealer to 
follow certain steps to assure that customer assets are not used to 
fund the broker-dealer's business.\52\
---------------------------------------------------------------------------

    \52\ Exchange Act Section 15(c)(3) (15 U.S.C. 78o(c)(3)) and 17 
CFR 240.15c3-3.
---------------------------------------------------------------------------

    The CEA has a different customer protection scheme for customers of 
FCMs. Under the CEA, customer funds must be segregated and separately 
accounted for by FCMs.\53\
---------------------------------------------------------------------------

    \53\ CEA Section 4f(a)(4)(A) (7 U.S.C. 6f(a)(4)(A)).
---------------------------------------------------------------------------

    The CFMA amended the Exchange Act and SIPA to provide that a Notice 
BD is not subject to Exchange Act Section 15(c)(3), or the rules 
promulgated thereunder, and that a Notice BD may not become a member of 
SIPC.\54\ In addition, the CFMA amended the CEA to provide that a 
Notice FCM is not subject to the segregation requirements of the 
CEA.\55\
---------------------------------------------------------------------------

    \54\ Exchange Act Section 15(b)(11)(B)(iii) (15 U.S.C. 
78o(b)(11)(B)(iii)); SIPA Section 3(a)(2)(A) (15 U.S.C. 
78ccc(a)(2)(A)).
    \55\ CEA Section 4f(a)(4)(A)(ii) (7 U.S.C. 6f(a)(4)(A)(ii)).
---------------------------------------------------------------------------

    Full FCM/Full BDs do not have similar exemptions. Accordingly, the 
SEC and the CFTC have proposed rules that would permit Full FCM/Full 
BDs either to choose, or allow their customers to choose, whether SFP 
positions will be held in a futures account subject to CEA segregation 
requirements or a securities account subject to Rule 15c3-3 and 
SIPA.\56\ These rules would also require that, before a Full FCM/Full 
BD accepts an order from a customer for an SFP transaction, the Full 
FCM/Full BD must obtain a signed acknowledgement that the customer 
understands which protections would apply to the customer's particular 
account. The acknowledgment would have to specify which regulatory 
regime applies, and the customer would have to sign the acknowledgement 
stating that he understands that his particular account will not be 
protected under the alternative regulatory scheme. This acknowledgement 
is designed to help a customer understand that an SFP held in a futures 
account is not covered by SIPA and an SFP held in a securities account 
is not protected by segregation. Notice registrants are not required to 
obtain this acknowledgment from customers because they are subject only 
to one customer protection regulatory scheme.
---------------------------------------------------------------------------

    \56\ Exchange Act Release No. 44854 (September 26, 2001), 66 FR 
50786 (October 4, 2001).
---------------------------------------------------------------------------

    We are requesting comment on whether certain Notice BDs should be 
required, pursuant to Exchange Act Rule 10b-10(a)(9), to inform 
customers on a transaction-by-transaction basis that they are not 
members of SIPC. Should such a requirement be applicable to all notice 
registrants or to a subset that creates the greatest risk of confusion, 
such as those notice registrants that are associated persons \57\ of 
fully-registered SIPC-member broker-dealers? In addition, we request 
comment on whether customers would benefit from being informed on a 
transaction-by-transaction basis that the protections provided by 
Exchange Act Rule 15c3-3 and SIPA do not apply to SFPs held in futures 
accounts by Full FCM/Full BDs. Further, we are interested in receiving 
comment on whether the absence of such disclosures in transaction 
confirmations could lead to the type of customer confusion the SIPC 
disclosure requirement in Exchange Act 10b-10(a)(9) was designed to 
address.
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    \57\ See Exchange Act Section 3(a)(18) (15 U.S.C. 78c(a)(18)) 
(``The term ``person associated with a broker or dealer'' or 
``associated person of a broker or dealer'' means * * * any person 
directly or indirectly controlling, controlled by, or under common 
control with such broker or dealer * * *.''); see also Exchange Act 
Section 3(a)(9) (15 U.S.C. 78c(a)(9)) (``The term ``person'' means a 
natural person, company, government, or political subdivision, 
agency, or instrumentality of a government.'').
---------------------------------------------------------------------------

    In addition, we note that self-regulatory organizations, such as 
the National Association of Dealers, Inc. and the National Futures 
Association, are working to develop model disclosure documents for 
SFPs. If these documents informed customers that the protections 
provided by Exchange Act Rule 15c3-3 and SIPA do not apply to SFPs held 
in futures accounts, would such disclosures provide them with 
sufficient information so that they would not need to be informed on a 
transaction-by-transaction basis?

C. Rule 11d2-1

    Exchange Act Rule 10b-10(a)(2) \58\ generally requires that a 
broker-dealer effecting a transaction for a customer must provide 
written notification at or before the completion of a transaction 
disclosing the capacity in which the broker-dealer acted when effecting 
a securities transaction. Similarly, Exchange Act Section 11(d)(2) \59\ 
prohibits a broker-dealer from effecting any transaction for a customer 
with respect to any security (other than an exempted security) unless 
the broker-dealer ``discloses to such customer in writing at or before 
the completion of the transaction whether he is acting as a dealer for 
his own account, as a broker for such customer, or as a broker for some 
other person.''
---------------------------------------------------------------------------

    \58\ 17 CFR 240.10b-10(a)(2).
    \59\ 15 U.S.C. 78k(d)(2).
---------------------------------------------------------------------------

    As explained above, amended Rule 10b-10 would provide Full FCM/Full 
BDs and Notice BDs a conditional exception from the requirement in 
Exchange Act Rule 10b-10 to disclose the capacity in which they are 
acting when they effect SFP transactions for a customer in a futures 
account. Amended Rule 10b-10, however, would not provide an exception 
from the disclosure requirement of Exchange Act Section 11(d)(2). Under 
the CFMA, Notice BDs are exempt from the

[[Page 39652]]

provisions of Exchange Act Section 11.\60\ This exemption, however, 
does not apply to Full FCM/Full BDs.
---------------------------------------------------------------------------

    \60\ See Exchange Act Section 15(b)(11)(B)(ii) (15 U.S.C. 
78o(b)(11)(B)(ii)).
---------------------------------------------------------------------------

    We believe that requiring Full FCM/Full BDs to comply with the 
disclosure requirement of Exchange Act Section 11(d)(2) would be 
inconsistent with the relief provided in the proposed amendments to 
Rule 10b-10. Therefore, to provide consistent relief, we are proposing 
an exemption from the disclosure requirement of Exchange Act Section 
11(d)(2).\61\ This exemption would be available only to Full FCM/Full 
BDs that effect SFP transactions in futures accounts and would allow 
them to effect SFP transactions in futures accounts without being 
required to disclose the capacity in which they are acting when they 
effect these transactions.
---------------------------------------------------------------------------

    \61\ Exchange Act Section 36(a)(1) (15 U.S.C. 78mm(a)(1)); see 
also Exchange Act Section 23(a)(1) (15 U.S.C. 78w(a)(1)).
---------------------------------------------------------------------------

    We invite comments on all aspects of proposed Rule 11d2-1. We 
especially invite comment on whether this exemption for Full FCM/Full 
BDs will have any anticompetitive impact on broker-dealers that are not 
eligible for this exemption.

III. General Request for Comments

    We invite interested persons to submit written comments on all 
aspects of the proposed amendments and new rule, in addition to the 
specific requests for comments included in the release. Further, we 
invite comment on other matters that might have an effect on the 
proposals contained in the release, including any competitive impact.
    Additionally, we request comment on whether broker-dealers 
executing trades in futures accounts for certain customers should be 
subject only to the confirmation requirements prescribed by the CFTC 
and the futures exchanges. Specifically, should broker-dealers 
effecting SFP transactions in customers' futures accounts be exempted 
from the disclosure requirements of Rule 10b-10 for their sophisticated 
institutional customers who are ``qualified investors,'' as that term 
is defined in the Exchange Act Section 3(a)(54),\62\ if: (1) The 
institutional customers, after receiving full disclosure, knowingly 
agree not to receive information on the capacity in which a broker-
dealer is acting when effecting SFP transactions in a customer's 
futures account and any information regarding payment for order flow; 
and (2) the disclosure rules of the CFTC and/or the futures exchanges, 
at a minimum, require disclosure of basic information, as specified in 
proposed paragraph (e)(1)(i) and (ii), the identity of the other party 
to the contract, and the time of the execution of the transaction (or 
the fact that information regarding the identity of the other party to 
the contract and the time of the execution of the transaction will be 
available upon request)? Should we use the statutory definition of 
``qualified investors'' for purposes of this exemption, or should we 
define the category of customers differently?
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78c(a)(54).
---------------------------------------------------------------------------

    More generally, in order to help us determine whether, and to what 
extent, direct regulation in this area is necessary, and to minimize 
the burdens associated with duplicative regulation while maintaining 
investor protection, we request detailed comments from futures 
exchanges that plan to trade security futures on their rules that will 
apply to the trading of security futures and whether there are any 
differences or similarities between those rules and the proposed 
amendments to Rule 10b-10 regarding the information required to be 
provided to customers effecting security futures transactions in 
futures accounts.

IV. Paperwork Reduction Act

    Certain provisions of the proposed amendments to Exchange Act Rule 
10b-10 contain ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act of 1995.\63\ The Commission has 
submitted the proposed amendment to the Office of Management and Budget 
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. The Commission is revising the collection of information 
entitled ``Proposed Confirmation of Transactions Amendment,'' OMB 
Control Number 3235-0444. 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.
---------------------------------------------------------------------------

    \63\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Rule 10b-10

1. Collection of Information Under the Proposed Confirmation of 
Transactions Amendment
    As discussed previously in this release, the Proposed Confirmation 
of Transactions Amendment would permit alternative information 
disclosure requirements in confirmations provided to customers for 
transactions in SFPs in a futures account. This alternative information 
includes, the date the transaction was executed; the identity and 
number of shares or units bought or sold; the price and delivery month; 
the source and amount of broker remuneration; whether the broker 
received payment for order flow; and, the fact that other specified 
information about the execution of the transaction will be available 
upon written request. This information would be provided to a customer 
in the form of a confirmation.
2. Proposed Use of Information
    The purpose of the proposed amendments to Rule 10b-10 is to provide 
to investors the information necessary to evaluate their securities 
transactions and the broker-dealers effecting those transactions. In 
the absence of the Rule's requirements, investors may not be fully 
informed of important information relating to their securities 
transactions. In addition, the confirmations may be used by the 
Commission, self-regulatory organizations, and other securities 
regulatory authorities in the course of examinations, investigations, 
and enforcement proceedings. No governmental agency regularly would 
receive any of the information described above.
3. Respondents
    The proposed amendments to Rule 10b-10 potentially apply to all of 
the approximately 8,000 fully registered broker-dealers and the 
projected 1,399 notice registered broker-dealers registered with the 
Securities and Exchange Commission provided they effect transactions 
for customers. It is important to note, however, that the provisions of 
the Proposed Confirmation of Transactions Amendments would apply only 
to the approximately 5,600 fully registered broker-dealers that conduct 
business with the general public and the approximately 1,399 of the 
projected notice registered broker-dealers that conduct business with 
the general public.
4. Total Annual Reporting and Recordkeeping Burden
    We estimate that there will be 100 million confirmations during the 
first year of trading of security futures products. In our April 29, 
2002 order adjusting the fee rates under Section 31 of the Exchange 
Act, we estimated that we would collect $450,000 in assessments on 
round turn transactions in security futures in fiscal 2003.\64\ This 
estimate was based on the Congressional

[[Page 39653]]

Budget Office's August 28, 2001 estimate of collections for that fiscal 
year, adjusted to reflect the reduction in the assessment rate included 
in the Investor and Capital Markets Fee Relief Act.\65\ Dividing the 
estimated $450,000 in collections on round turn transactions in 
security futures by the assessment rate of $0.009 per round turn 
transaction yields 50 million round turn transactions. Because each of 
the estimated 50 million round turn transaction will involve at least 
two confirmations, we estimate that there will be approximately 100 
million confirmations.
---------------------------------------------------------------------------

    \64\ See Order Making 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 Securities Exchange 
Act of 1934, Release Nos. 33-8095 and 34-45842 (April 29, 2002).
    \65\ See Pub. L. 107-123, 115 Stat. 2390 (2002). In August 2001, 
the Congressional Budget Office estimated that the Commission would 
collect $1,000,000 in assessments on round turn transactions in 
security futures in fiscal 2003. This estimate was based on an 
assessment rate of $0.02 per round turn transaction. The Investor 
and Capital Markets Fee Relief Act reduced the assessment rate to 
$0.009 per round turn transaction. In our fee adjustment order, we 
adjusted the Congressional Budget Office's estimate to reflect the 
assessment rate reduction. $1,000,000 x 0.009/0.02 = $450,000.
---------------------------------------------------------------------------

    Because the process of generating a confirmation is automated, the 
Commission staff estimates from information provided by industry 
participants that it takes about one minute to generate and send a 
confirmation. The Commission staff also estimates from information 
provided by industry participants that broker-dealers effecting SFP 
transactions will spend 1.7 million hours complying with the proposed 
amendments to Rule 10b-10 (100 million confirmations at one minute per 
confirmation = 100 million minutes; 100 million minutes/60 minutes per 
hour = 1.7 million hours).
    Broker-dealers routinely use confirmations for billing purposes. In 
addition, broker-dealers would send customers some type of statement 
regardless of the requirements of the proposed amendments to Rule 10b-
10. The amount of confirmations sent and the cost of the confirmations 
vary from firm to firm. Smaller firms send fewer confirmations than 
larger firms because they effect fewer transactions.
    As stated earlier, the Commission staff estimates that broker-
dealers effecting SFP transactions will send approximately 100 million 
confirmations annually. According to the information provided by 
industry participants, the average cost per confirmation is estimated 
to be 89 cents, including postage. The annual cost to the industry for 
fiscal year 2003 is therefore estimated to be $89 million.
5. Collection of Information is Mandatory
    This collection of information is mandatory.
6. Confidentiality
    The collection of information pursuant to the proposed amendments 
to Rule 10b-10 would be provided by broker-dealers to customers, and 
also would be maintained by broker-dealers.
7. Record Retention Period
    Exchange Act Rule 17a-4(b)(1) \66\ requires broker-dealers to 
preserve confirmations for three years, the first two years in an 
accessible place.
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    \66\ 17 CFR 240.17a-4(b)(1).
---------------------------------------------------------------------------

8. Request for Comment
    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    (i) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information would have practical 
utility;
    (ii) Evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information;
    (iii) Enhance the quality, utility, and clarity of the information 
to be collected; and
    (iv) Minimize the burden of the collection of information on those 
required 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 should direct them to the Office of Management 
and Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC 20503, and should also send a copy of their comments to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW, Washington, DC 20549-0609, and refer to File No. S7-19-02. OMB is 
required to make a decision concerning the collections of information 
between 30 and 60 days after publication of this release in the Federal 
Register, therefore, comments to OMB are best assured of having full 
effect if OMB receives them within 30 days of this 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. S7-19-02, and be submitted to the Securities 
and Exchange Commission, Records Management, Office of Filings and 
Information Services, 450 Fifth Street, NW., Washington, DC 20549.

B. Rule 11d2-1

    For the reasons discussed above, new Exchange Act Rule 11d2-1 
provides an exemption from the capacity disclosure requirement in 
Exchange Act Section 11(d)(2) for Full FCM/Full BDs that are effecting 
transactions for customers in SFPs in futures accounts. This exemption 
from a statutory requirement does not impose recordkeeping or 
information collection requirements, or other collections of 
information that require approval of the Office of Management and 
Budget under 44 U.S.C. 3501, et seq. Accordingly, the Paperwork 
Reduction Act does not apply.

V. Costs and Benefits of Proposed Amendments

A. Introduction

    Passage of the CFMA in December of 2000 permitted the trading of 
SFPs and established a framework for joint regulation of SFPs by the 
CFTC and the SEC. This framework was necessary because the CFMA defined 
an SFP to be, at the same time, both a security and a contract for 
future delivery and therefore subject to both the CEA and the Exchange 
Act and the rules thereunder. Recognizing that some entities may be 
subject to duplicative or conflicting regulations, the CFMA amended the 
CEA and the Exchange Act to: (1) Exempt notice-registrants from certain 
(but not all) sections of the CEA, Exchange Act, and the rules 
thereunder, and (2) direct the CFTC and the SEC to issue rules, 
regulations, or orders, as necessary, to avoid certain duplicative or 
conflicting regulations relating to Full FCM/Full BDs.\67\ Consistent 
with these provisions, the SEC is proposing to amend Exchange Act Rule 
10b-10 by adding new paragraph (e) to Rule 10b-10, and proposing 
Exchange Act Rule 11d2-1.
---------------------------------------------------------------------------

    \67\ CEA section 4d(c) (7 U.S.C. 6d(c)) and Exchange Act section 
15(c)(3)(B) (15 U.S.C. 78o(c)(3)(B)) respectively.
---------------------------------------------------------------------------

B. Rule 10b-10

    The proposed amendments to Rule 10b-10 strive to avoid duplicate 
regulation by requiring disclosure of essentially the same type and 
nature of information currently required to be disclosed in 
confirmations of futures transactions at essentially the same time. 
Specifically, proposed Rule 10b-10(e) provides that a Full FCM/Full BD

[[Page 39654]]

and a Notice BD that effects transactions for customers in security 
futures products in a futures account (as that term is defined in 
Exchange Act Rule 15c3-3(a)(15)) does not have to comply with the 
disclosure requirements of paragraphs (a) and (b) of Rule 10b-10 if the 
Full FCM/Full BD or Notice BD discloses on the SFP transaction 
confirmations the date the transaction was executed; the identity and 
number of shares or units bought or sold; the price and delivery month; 
the source and amount of broker remuneration; and the fact that the 
time of the execution of the transaction, the identity of the other 
party to the contract, and the capacity in which the broker-dealer was 
acting in effecting the transaction will be available upon written 
request. The information to be made available upon written request is 
the same type of information that futures confirmations currently 
disclose is available to the customer upon written request. Proposed 
Rule 10b-10(e) also provides that Full FCM/Full BDs and Notice BDs must 
disclose whether they receive payment for order flow, and if so, must 
provide the source and nature of such remuneration upon request. In 
addition, proposed Rule 10b-10(e)(2) provides a phase-in period. Under 
that provision, broker-dealers are not required until June 1, 2003, to 
disclose in SFP confirmations information on payment for order flow and 
the fact that certain information will be provided upon request.
    In considering the potential costs and benefits of the proposed 
amendments to Rule 10b-10, we have considered the transaction 
confirmation practices of both the futures industry and the securities 
industry and our duty to protect consumers by requiring adequate 
disclosure on securities transactions. In addition, we have considered 
how Full FCM/Full BDs and Notice BDs effecting SFP transactions in 
futures accounts will have to restructure their confirmation 
technology. Finally, we have identified specific costs and benefits, 
and requested comment on additional costs or benefits that may stem 
from proposed Rule 10b-10(e).
1. Benefits
a. Elimination of Conflicting and Duplicative Regulation
    As stated previously, under the CFMA, Notice BDs and Full FCM/Full 
BDs effecting SFP transactions in futures accounts currently are 
required to meet the disclosure requirements of both the CEA and the 
Exchange Act and the rules thereunder. The proposed amendments to Rule 
10b-10 are designed to benefit Notice BDs and Full FCM/Full BDs by 
avoiding conflicting and duplicative regulation of the disclosure 
requirements of SFP transactions effected in futures accounts. The 
proposed amendments accomplish this benefit by clarifying the type and 
nature of information these entities must disclose under Rule 10b-10 in 
confirmations of SFP transactions effected in futures accounts. Without 
the proposed amendments to Rule 10b-10, all Notice BDs and Full FCM/
Full BDs would need to change their confirmation systems to comply with 
all of the disclosure requirements of Rule 10b-10.
    The amendments would require delivery of a confirmation at the same 
point in time and containing essentially the same type and nature of 
information these registrants currently provide in confirmations of 
transactions in futures accounts. In addition, the amendments would 
provide a phase-in period that gives the affected entities until June 
1, 2003, to disclose in SFP confirmations information on payment for 
order flow and the fact that certain information will be provided upon 
request. Because such information is not generally provided in 
confirmations of futures transactions, the transitional period will 
allow these broker-dealers time to make the necessary adjustments to 
their confirmation technology, not only to amend their confirmations to 
make the required additional disclosures, but also to ensure that their 
systems are capturing all of the information that customers are 
entitled to receive if they make a written request.
b. Customer Understanding
    The confirmations for SFP transactions effected in futures accounts 
pursuant to the proposed amendments of Rule 10b-10 should benefit 
customers who choose to effect SFP transactions in a futures account 
but have not previously traded in a futures account by providing them 
with information similar to the type of information they would receive 
if they receive confirmations of trades effected in a securities 
account. In addition, the confirmations of the SFP transactions 
effected in the futures accounts will disclose specific additional 
information that the customer may receive if he makes a written 
request. The amendments should also benefit customers that already have 
experience in the futures markets and decide to effect SFPs in a 
futures account by providing them with a confirmation that is similar 
in type and information to the kind of confirmations they are used to 
receiving on transactions effected in futures accounts. In addition, 
customers should also benefit from the proposed Rule 10b-10 requirement 
that, if entities begin to receive payment for order flow for SFP 
transactions executed in futures accounts, they must disclose that fact 
and disclose upon written request the source and nature of the 
remuneration.
2. Costs
    Pursuant to paragraph (e)(1)(i) of proposed Rule 10b-10, a Full 
FCM/Full BD and a Notice BD that effect transactions in SFPs in a 
customer's futures account will not be required to meet the disclosure 
requirements of Exchange Act Rule 10b-10(a) and (b), which broker-
dealers effecting securities transactions must generally meet. Rather, 
the Full FCM/Full BD and Notice BD would be required to disclose 
certain information in the confirmation and also disclose in the 
confirmation the fact that certain additional information is available 
upon a customer's written request.
    Subparagraphs (i) and (ii) of proposed Rule 10b-10(e)(1) require 
Full FCM/Full BDs and Notice BDs to give or send to the customer no 
later than the next business day after execution of any SFP 
transaction, written notification disclosing the date the transaction 
was executed, the identity of the single security or narrow-based 
security index underlying the contract for the security futures 
product, the number of shares or units (or principal amount) of such 
security futures product purchased or sold, the price, the delivery 
month, the source and amount of any remuneration received or to be 
received by the broker in connection with the transaction, including, 
but limited to, commissions, costs, fees, and other charges incurred in 
connection with the transaction. We understand that futures 
confirmations already provide this information.\68\ Therefore, the SEC 
does not believe that requiring this information on confirmations of 
SFP transactions effected in futures accounts generates any additional 
costs to the futures industry.
---------------------------------------------------------------------------

    \68\ See CME Rule 537; CBOT Rules 421.00 and 421.01; see also 
Memorandum to file number S7-17-01 regarding February 12, 2002 
conference call between Commission staff members and representatives 
of Morgan Stanley Dean Witter (March 13, 2002).
---------------------------------------------------------------------------

    Subparagraph (iii) of Rule 10b-10(e)(1) would require the Notice BD 
or Full FCM/Full BD to give or send to the customer no later than the 
next business day after execution of any futures securities product 
transaction, written notification disclosing the fact that certain 
information will be available upon written request of the customer.

[[Page 39655]]

This includes information about the time of the execution of the 
transaction, and the identity of the other party to the contract. We 
understand from discussions with industry representatives that futures 
confirmations generally disclose that this information is available 
upon the customer's request.\69\ Therefore, the SEC does not anticipate 
that this requirement will impose additional costs on the futures 
industry.
---------------------------------------------------------------------------

    \69\ See Memorandum to file number S7-17-01 regarding February 
12, 2002 conference call between Commission staff members and 
representatives of Morgan Stanley Dean Witter (March 13, 2002).
---------------------------------------------------------------------------

    Subparagraph (iii) of Rule 10b-10(e)(1) would also require the 
Notice BD or Full FCM/Full BD to give or send to the customer no later 
than the next business day after execution of any futures securities 
product transaction, written notification disclosing that information 
regarding whether the broker or dealer is acting as agent for such 
customer, as agent for some other person, as agent for both such 
customer and some other person, or as principal for its own account; 
and if the broker or dealer is acting as principal, whether it is 
engaging in a block transaction or an exchange of securities futures 
products for physical securities, will be available upon written 
request of the customer. From discussions with industry 
representatives, the SEC staff understands that Full FCM/Full BDs and 
Notice BDs would not incur substantial expense by adding a disclosure 
that information regarding the capacity in which the Full FCM/Full BD 
or Notice BD acted in effecting the transaction is available upon a 
customer's request.\70\ The SEC staff, however, understands from these 
discussions that there would be some expense involved in requiring the 
collection of information relating to the capacity in which the orders 
are executed in the trading systems, although industry representatives 
were unable to quantify the potential expenses.\71\ Because the futures 
industry has never previously been required to provide this type of 
information on a regular basis, it may need additional time to adjust 
its members' operational systems, not only to capture this information 
when necessary, but also to disclose on the confirmation itself that 
the information is available upon a customer's written request. Thus, 
the proposed rule contains a transitional provision. Under proposed 
Exchange Act Rule 10b-10(e)(2), broker-dealers have until June 1, 2003 
to disclose that certain information will be provided upon written 
request, as long as that information can be made available if a 
customer submits a written request. This transitional provision should 
provide the futures industry with sufficient time to make the necessary 
adjustments to their systems to comply with this provision of proposed 
Exchange Act Rule 10b-10(e)(1)(iv).
---------------------------------------------------------------------------

    \70\ See Memorandum to file number S7-17-01 regarding February 
27, 2002 and March 5, 2002 conversations between Securities and 
Exchange Commission staff member and representative of Morgan 
Stanley Dean Witter (March 12, 2002).
    \71\ See id.
---------------------------------------------------------------------------

    Subparagraph (iv) of proposed Rule 10b-10(e)(1) also requires that 
the Notice BD or Full FCM/Full BD give or send to the customer no later 
than the next business day after execution of any futures securities 
product transaction, written notification disclosing whether the entity 
receives payment for order flow for such transactions and, if it does, 
it must disclose the fact that the source and nature of the 
compensation will be furnished upon written request of the customer. 
The SEC staff understands from discussions with futures industry 
participants that payment for order flow is not currently a practice in 
the futures industry.\72\ Accordingly, if the practice does not arise 
in connection with SFP transactions effected in futures accounts, there 
would be no costs associated with the proposed disclosure requirement 
of subparagraph (iii) because there would be nothing to report.
---------------------------------------------------------------------------

    \72\ See Memorandum to file number S7-17-01 regarding February 
12, 2002 conference call between Commission staff members and 
representatives of Morgan Stanley Dean Witter (March 13, 2002); 
Memorandum to file number S7-17-01 regarding March 11, 2002, and 
March 12, 2002, conversations between Securities and Exchange 
Commission staff member and representative of Credit Suisse First 
Boston (March 12, 2002).
---------------------------------------------------------------------------

    If, however, Full FCM/Full BDS or Notice BDs begin to receive 
payment for order flow for SFP transactions effected in futures 
accounts then those entities would need to adjust their operating 
systems to capture this information. Based on discussions with industry 
representatives, the SEC understands that systems development costs 
should be relatively low given the fact that the rule allows for the 
use of a generic disclaimer, as opposed to information that would 
require a trade-by-trade coding change. The SEC also understands from 
these discussions that more extensive costs would be associated with 
providing specific disclosures upon request about the nature and source 
of any payment for order flow received in connection with a 
transaction. Industry representatives, however, could not quantify the 
potential costs, in part, perhaps, because the representatives were 
uncertain whether payment for order flow will become a practice in 
connection with SFP transactions.\73\
---------------------------------------------------------------------------

    \73\ See Memorandum to file number S7-17-01 regarding March 11, 
2002, and March 12, 2002, conversations between Securities and 
Exchange Commission staff member and representative of Credit Suisse 
First Boston (March 12, 2002).
---------------------------------------------------------------------------

    In considering the costs Notice BDs and Full FCM/Full BDs would 
have to make to their confirmation systems in order to comply with the 
proposed amendments, we understand from discussions with industry 
representatives that these costs are less than the costs these entities 
would incur if they would have to adjust their confirmation systems to 
meet all of the Rule 10b-10 disclosure requirements.\74\ Accordingly, 
the amendments to Rule 10b-10 actually reduce the costs to the affected 
entities.
---------------------------------------------------------------------------

    \74\ See Memorandum to file number S7-17-01 regarding February 
12, 2002 conference call between Commission staff members and 
representatives of Morgan Stanley Dean Witter (March 13, 2002); 
Memorandum to file number S7-17-01 regarding March 11, 2002, and 
March 12, 2002, conversations between Securities and Exchange 
Commission staff member and representative of Credit Suisse First 
Boston (March 12, 2002).
---------------------------------------------------------------------------

    We do not anticipate that the proposed amendments to Rule 10b-10 
will provide any benefits or costs to broker-dealers effecting SFP 
transactions in securities accounts because they do not apply to SFP 
transactions effected in securities accounts. Accordingly, we believe 
that broker-dealers effecting SFP transactions in securities accounts 
would use existing systems that currently conform to all of the 
disclosure requirements of Rule 10b-10 for securities transactions. 
However, we have solicited comment on that issue and may apply the 
proposed amendments to Rule 10b-10 to such broker-dealers if it would 
result in a significant cost savings.
    As we noted above, the proposed amendments to Rule 10b-10 would 
apply only to the approximately 5,600 fully registered broker-dealers 
that conduct business with the general public and the approximately 
1,399 of the projected notice registered broker-dealers that conduct 
business with the general public. Also, as noted above, we estimate 
that there will be 100 million confirmations during the first year of 
trading of security futures products. According to the information 
provided by industry participants, the average cost per confirmation is 
estimated to be 89 cents, including postage. Therefore,

[[Page 39656]]

we estimate that the annual paperwork cost to the industry for fiscal 
year 2003 will be $89 million.
    We request comments on the costs and benefits of the proposed 
amendments to Rule 10b-10. Commenters are strongly encouraged to 
identify and supply any relevant data, analysis, and estimates 
concerning the costs and/or benefits of the proposed amendments. 
Commenters should address in particular whether the proposed amendments 
to Rule 10b-10 will generate the anticipated benefits or impose the 
anticipated costs. As always, commenters are specifically invited to 
share additional quantifiable costs and benefits that they believe may 
be imposed or generated by the proposed amendments to Rule 10b-10.

C. Rule 11d2-1

    Proposed Exchange Act Rule 11d2-1 would provide to Full FCM/Full 
BDs that are effecting SFP transactions for customers futures accounts 
an exemption from the requirement in Exchange Act Section 11(d)(2) that 
a broker-dealer effecting a transaction for a customer disclose in 
writing, at or before the completion of the transaction, the capacity 
in which the broker-dealer acted when effecting the transaction. As we 
have previously explained, we believe that requiring Full FCM/Full BDs 
to comply with the capacity disclosure requirement of Exchange Act 
11(d)(2) would be inconsistent with the exemptive relief provided in 
proposed amendments to Rule 10b-10 that does not require automatic 
disclosure of capacity. Therefore, to provide consistent relief, we are 
proposing new Rule 11d2-1.
    We do not anticipate that this exemption will generate large 
benefits or impose great costs. However, we have identified some 
potential benefits and costs that could result from Rule 11d2-1.
1. Benefits
    This proposed exemption benefits Full FCM/Full BDs by avoiding any 
potential conflicting regulation regarding the disclosure of capacity 
when Full FCM/Full BDs effect SFP transactions for customers in futures 
accounts. This proposed exemption also is designed so that Notice BDs 
and Full FCM/Full BDs effecting SFP transactions in futures accounts 
will not have different disclosure requirements. Finally, if the 
Commission did not propose an exemption from Exchange Act Section 
11(d)(2), certain of the anticipated benefits of the proposed 
amendments to Rule 10b-10 would be undermined.
2. Costs
    Proposed Rule 11d2-1 would exempt Full FCM/Full BDS that effect SFP 
transactions in futures accounts from a statutory requirement to 
provide specific information to customers regarding the capacity those 
entities acted in when effecting such transactions. The exemption, 
therefore, prevents customers from learning this information from the 
confirmations they receive about these transactions. This cost, 
however, is ameliorated to a large extent by the fact that, pursuant to 
proposed amendments to Rule 10b-10, the confirmations of these 
transactions would inform the customers that information on capacity is 
available upon the customers' written request.
    We request comments on the costs and benefits of proposed Rule 
11d2-1 and ask commenters to provide supporting empirical data for any 
positions advanced. Commenters should address in particular whether 
proposed Rule 11d2-1 will generate the anticipated benefits or impose 
the anticipated costs. As always, commenters are specifically invited 
to share additionally quantifiable costs and benefits that they believe 
may be imposed or generated by proposed Rule 11d2-1.

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

    Section 3(f) of the Exchange Act\75\ requires the Commission, 
whenever it is engaged in rulemaking and is required 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. The proposed amendments to Rule 
10b-10 and proposed Rule 11d2-1 are intended to clarify the disclosures 
broker-dealers effecting SFPs in customer futures accounts must make in 
the confirmations sent to customers regarding those transactions. We 
preliminarily believe that delineating the broker-dealers' disclosure 
obligations regarding SFP products effected in futures accounts should 
serve as an efficient and cost-effective means for those entities to 
reconcile their conflicting confirmation disclosure requirements with 
respect to SFPs. The proposed amendments to Rule 10b-10 and proposed 
Rule 11d2-1 should promote efficiency because firms may still use their 
present confirmation systems, after making the required adjustments, 
rather than having to build new confirmation systems.
---------------------------------------------------------------------------

    \75\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    In addition, the proposed amendments to Rule 10b-10 and proposed 
new Rule 11d2-1 are designed to give investors the information 
necessary to evaluate their securities transactions and the broker-
dealers effecting those transactions. We preliminarily believe that our 
proposals would improve investor confidence and will therefore promote 
capital formation.
    Section 23(a)(2) of the Exchange Act\76\ requires the Commission, 
in making rules under the Exchange Act, to consider the impact that any 
such rule would have on competition. Exchange Act Section 23(a)(2) 
prohibits the Commission from adopting any rule that would impose a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act. As stated previously, the proposed 
amendments to Rule 10b-10 and new Rule 11d2-1 are designed to clarify 
the confirmation disclosure requirements only for broker-dealers 
effecting SFP transactions in customers' futures accounts and do not 
apply to broker-dealers effecting SFP transactions in customers' 
securities accounts. It is possible that the different disclosure 
requirements provided by the amendments to Rule 10b-10 and new Rule 
11d2-1 may place a competitive burden on broker-dealers who must comply 
with all of the disclosure requirements of Rule 10b-10 because they 
effect SFP transactions in securities accounts. However, we 
preliminarily believe that any competitive burden imposed by these 
amendments and new rule are necessary and appropriate in furtherance of 
the purposes of the Exchange Act. In addition, we have solicited 
comment on whether the amendments and new rule impose any costs on 
broker-dealers effecting SFP transactions in securities accounts, and 
if so, whether they should also apply to broker-dealers effecting SFP 
transactions in securities accounts.
---------------------------------------------------------------------------

    \76\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission requests comment on whether the proposed amendments 
are expected to promote efficiency, competition, and capital formation.

VII. Regulatory Flexibility Act Certification

    Section 3(a) of the Regulatory Flexibility Act \77\ requires the 
Commission to undertake an initial regulatory flexibility analysis of 
the effects of proposed rules and rule amendments on small entities, 
unless

[[Page 39657]]

the Chairman certifies that the rules and rule amendments, if adopted, 
would not have a significant economic impact on a substantial number of 
small entities.\78\
---------------------------------------------------------------------------

    \77\ 5 U.S.C. 603(a).
    \78\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    The proposed amendments to Rule 10b-10 and proposed Rule 11d2-1 
would apply only to broker-dealers that plan to effect security futures 
product transactions in futures accounts for the benefit of customers. 
The Commission's Office of Economic Analysis has determined that as of 
March 31, 2001, 90 broker-dealers were also registered with the CFTC as 
FCMs. None of those broker-dealers is a small entity.\79\ There are 
also 1,399 entities (which includes FCMs and introducing brokers) that 
may be eligible to be registered as Notice BDs.\80\ The CFTC has 
determined that FCMs are not small entities for the purposes of the 
RFA.\81\ In addition, the CFTC has stated that it would evaluate within 
the context of a particular rule proposal whether some or all of 
affected introducing brokers would be considered to be small entities 
and, if so, what economic impact that rule would have on them.\82\
---------------------------------------------------------------------------

    \79\ See 17 CFR Sec. 240.0-10.
    \80\ See Exchange Act Release No. 44730 (August 21, 2001), 66 FR 
45137 (August 27, 2001).
    \81\ Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618 (April 30, 1982).
    \82\ Id.
---------------------------------------------------------------------------

    Under the CFMA, all Notice BDs and Full FCM/Full BDs, regardless of 
size, that effect SFP transactions in futures accounts must comply with 
Rule 10b-10, and all Full FCM/Full BDs effecting SFP transactions in 
futures accounts must comply with the disclosure requirements of 
Section 11. These disclosure requirements are in addition to the 
disclosures required under the CEA. The proposed amendments to Rule 
10b-10 would conditionally exclude the affected firms from the general 
disclosure requirements of Rule 10b-10. Proposed Rule 11d2-1 would 
exempt affected Full FCM/Full BDs from the disclosure requirements of 
Section 11. Accordingly, all Notice BDs and Full FCM/Full BDs effecting 
SFP transactions in futures accounts would be able to send 
confirmations that are substantially similar to those confirmations 
they already provide to their customers for other futures transactions. 
Thus, the proposed amendments to Rule 10b-10 and proposed Rule 11d2-1, 
if adopted, would actually reduce the burden these entities face in 
meeting the disclosure requirements of both the Exchange Act and the 
CEA. Accordingly, we do not believe that the proposed amendments to 
Exchange Act Rule 10b-10 and proposed Rule 11d2-1 would have a 
significant economic impact on a substantial number of small entities.
    The Chairman has certified that the proposed rules and amendments, 
if adopted, would not have a significant economic impact on a 
substantial number of small entities. A copy of the certification is 
attached as Appendix A.
    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, the Commission is also requesting information regarding 
the potential impact of the proposed rules and rule amendments on the 
economy on an annual basis. Commenters should provide empirical data to 
support their views.

VIII. Statutory Authority

    The Commission is proposing amendments to Rule 10b-10 and proposing 
new Rule 11d2-1 under the Exchange Act pursuant to the authority 
conferred by the Exchange Act, including Sections 10, 11, 17, 23(a), 
and 36(a)(1). \83\
---------------------------------------------------------------------------

    \83\ 15 U.S.C. 78j, 78k, 78q, 78w(a), and 78mm(a)(1).
---------------------------------------------------------------------------

Text of Proposed Rule Amendments and Rule

List of Subjects in 17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, the Securities and Exchange 
Commission hereby proposes that Title 17, Chapter II, of the Code of 
Federal Regulation be 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, 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 240.10b-10 is amended by removing the authority citation 
following Sec. 240.10b-10, redesignating paragraph (e) as paragraph 
(f), and adding new paragraph (e) to read as follows:


Sec. 240.10b-10  Confirmation of transactions.

* * * * *
    (e) Security futures products. The provisions of paragraphs (a) and 
(b) of this section shall not apply to a broker or dealer registered 
pursuant to section 15(b)(11)(A) of the Act (15 U.S.C. 78o(b)(11)(A)) 
to the extent that it effects transactions for customers in security 
futures products in a futures account (as that term is defined in 
Sec. 240.15c3-3(a)(15)) and a broker or dealer registered pursuant to 
section 15(b)(1) of the Act (15 U.S.C. 78o(b)(1)) that is also a 
futures commission merchant registered pursuant to section 4f(a)(1) of 
the Commodity Exchange Act (7 U.S.C. 6f(a)(1)), to the extent that it 
effects transactions for customers in security futures products in a 
futures account (as that term is defined in Sec. 240.15c3-3(a)(15)), 
Provided that:
    (1) The broker or dealer that effects any transaction for a 
customer in security futures products in a futures account gives or 
sends to the customer no later than the next business day after 
execution of any futures securities product transaction, written 
notification disclosing:
    (i) The date the transaction was executed, the identity of the 
single security or narrow-based security index underlying the contract 
for the security futures product, the number of shares or units (or 
principal amount) of such security futures product purchased or sold, 
the price, and the delivery month;
    (ii) The source and amount of any remuneration received or to be 
received by the broker or dealer in connection with the transaction, 
including, but not limited to, markups, commissions, costs, fees, and 
other charges incurred in connection with the transaction;
    (iii) The fact that information about the time of the execution of 
the transaction, the identity of the other party to the contract, and 
whether the broker or dealer is acting as agent for such customer, as 
agent for some other person, as agent for both such customer and some 
other person, or as principal for its own account, and if the broker or 
dealer is acting as principal, whether it is engaging in a block 
transaction or an exchange of security futures products for physical 
securities, will be available upon written request of the customer; and
    (iv) Whether payment for order flow is received by the broker or 
dealer for such transactions and the fact that the source and nature of 
the compensation received in connection with the particular transaction 
will be furnished upon written request of the customer.
    (2) Transitional provision. (i) Broker-dealers are not required to 
comply with paragraph (e)(1)(iii) of this section until June 1, 2003, 
Provided that, if the broker-dealer receives a written request from a 
customer for the information paragraph (e)(1)(iii) of this section

[[Page 39658]]

requires the broker-dealer to disclose upon a customer's written 
request, the broker-dealer makes the information available to the 
customer; and
    (ii) Broker-dealers are not required to comply with paragraph 
(e)(1)(iv) of this section until June 1, 2003.
* * * * *
    3. Section 240.11d2-1 is added to read as follows:


Sec. 240.11d2-1  Exemption from Section 11(d)(2) for certain broker-
dealers effecting transactions for customers security futures products 
in futures accounts.

    A broker or dealer registered pursuant to section 15(b)(1) of the 
Act (15 U.S.C. 78o(b)(1)) that is also a futures commission merchant 
registered pursuant to section 4f(a)(1) of the Commodity Exchange Act 
(7 U.S.C. 6f(a)(1)), to the extent that it effects transactions for 
customers in security futures products in a futures account (as that 
term is defined in Sec. 240.15c3-3(a)(15)), is exempt from section 
11(d)(2) of the Act (15 U.S.C. 78k(d)(2)).

    By the Commission.

    Dated: May 31, 2002.
Jill M. Peterson,
Assistant Secretary.

Appendix A

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

Regulatory Flexibility Act Certification

    I, Harvey L. Pitt, Chairman of the Securities and Exchange 
Commission (the ``Commission''), based on the representations of the 
Division of Market Regulation provided to me, and the analysis of 
the Office of Economic Analysis and the Office of the General 
Counsel provided to me, hereby certify, pursuant to 5 U.S.C. 605(b), 
that the proposed amendments to Rule 10b-10 and proposed new Rule 
11d2-1 would not, if adopted, have a significant economic impact on 
a substantial number of small entities.

    Dated: May 31, 2002.
Harvey L. Pitt,
Chairman.
[FR Doc. 02-14294 Filed 6-7-02; 8:45 am]
BILLING CODE 8010-01-P