[Federal Register Volume 67, Number 111 (Monday, June 10, 2002)]
[Notices]
[Pages 39752-39753]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14295]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46015/May 31, 2002]


Order Granting Temporary Exemption of Broker-Dealers that are 
Futures Commission Merchants from the Disclosure Requirements of Rule 
10b-10 Promulgated under the Securities Exchange Act of 1934 and the 
Disclosure Requirements of Section 11(d)(2) of the Securities Exchange 
Act of 1934 in Connection with Security Futures Transactions Effected 
in Futures Accounts

    The Commodity Futures Modernization Act of 2000 (``CFMA'') permits 
the trading of securities futures, i.e., futures contracts on 
individual securities and on narrow-based security indexes (``security 
futures'').\1\ The CFMA regulates security futures both as 
``securities'' under the federal securities laws,\2\ and as futures 
contracts for purposes of the Commodity Exchange Act (``CEA'').\3\ As a 
result, the Securities and Exchange Commission (``Commission'') and the 
Commodity Futures Trading Commission (``CFTC'') have joint jurisdiction 
over security futures products (``SFPs'').
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    \1\ Pub. L. 106-554, 114 Stat. 2763. Under Section 3(a)(55)(A) 
of the Securities Exchange Act of 1934 (``Exchange Act''), 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 a 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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    The CFMA also amended the CEA and the Securities Exchange Act of 
1934 (``Exchange Act'') to require that the CFTC and the SEC provide 
notice registration procedures for trading facilities and 
intermediaries that are already registered with either the Commission 
or the CFTC to register with the other agency on an expedited basis for 
the limited purpose of trading security futures products.\4\ Section 
15(b)(11)(A) of the Exchange Act permits futures commission merchants 
and introducing brokers that are registered with the CFTC to register 
with the Commission as broker-dealers for the limited purpose of 
effecting transactions in certain security futures products by filing a 
written notice that is effective upon filing (``Notice BDs'').\5\ 
Similarly, Section 4f(a)(2) of the CEA (7 U.S.C. 6f(a)(2)) permits a 
broker-dealer registered with the Commission to register with the CFTC 
for the limited purpose of effecting transactions in certain security 
futures products by filing a written notice that is immediately 
effective (``Notice FCMs'').
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    \4\ Section 4f(a)(2) of the CEA (7 U.S.C. 6f(a)(2)) and rules 
adopted by the CFTC (see 66 FR 43080 (August 17, 2001)), and Section 
15(b)(11)(A)(i) of the Exchange Act (15 U.S.C. 78o(b)(11)(A)(i)) and 
the rules adopted by the SEC (see Exchange Act Release No. 44730 
(August 21, 2001), 66 FR 45137 (August 27, 2001)).
    \5\ 15 U.S.C. 78o(b)(11)(A).
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    Further, the CFMA amended the CEA and the Exchange Act to exempt 
Notice BDs \6\ from certain provisions of the Exchange Act and Notice 
FCMs \7\ from certain provisions of the CEA (including CFTC segregation 
requirements),\8\ so that they would not be subject to conflicting or 
duplicative regulation. Firms that are fully-registered with both the 
CFTC and the Commission (Full CFM/Full BDs) do not have these 
exemptions. Instead, under the CFMA, the CFTC and the Commission are 
required to consult with each other and issue such rules, regulations, 
or orders as are necessary to avoid certain duplicative or conflicting 
regulations applicable to such Full FCM/Full BDs.
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    \6\ An FCM registered with the SEC pursuant to Section 
15(b)(11)(A)(i) of the Exchange Act (15 U.S.C. 78o(b)(11)(A)(i)) and 
the rules adopted by the SEC (see Exchange Act Release No. 44730 
(August 21, 2001), 66 FR 45137 (August 27, 2001)).
    \7\ A broker-dealer registered with the CFTC pursuant to Section 
4f(a)(2) of the CEA (7 U.S.C. 6f(a)(2)) and rules adopted by the 
CFTC (see 66 FR 43080 (August 17, 2001)).
    \8\ CEA section 4f(a)(4)(A) (7 U.S.C. 6f(a)(4)(A)).
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    The CFMA, however, did not exempt Notice BDs from Exchange Act 
Section 10 \9\ and the rules promulgated under that section. 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, both Notice BDs and Full FCM/
Full BDs effecting SFP transactions in futures accounts currently are 
required to meet the

[[Page 39753]]

disclosure requirements of both the CEA and the Exchange Act and the 
rules thereunder. In particular, Notice BDs and Full FCM/Full BDs are 
required to meet the disclosure requirements of Exchange Act Rule 10b-
10 \10\ and CEA Rule 1.33(b).\11\ Also, unlike Notice BDs, Full FCM/
Full BDs, are not automatically exempt from Exchange Act Section 
11.\12\ Accordingly, Full FCM/Full BDs are subject to the disclosure 
requirements of Exchange Act Section 11(d)(2).\13\
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    \9\ 15 U.S.C. 78j.
    \10\ 17 CFR 240.10b-10.
    \11\ 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 * * * .''
    \12\ 15 U.S.C. 78k.
    \13\ 15 U.S.C. 78k(d)(2). Exchange Act Section 11(d)(2) 
generally prohibits a broker-dealer from effecting any securities 
transaction with a customer unless ``he 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.''
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    In an effort to avoid duplicative and conflicting regulation, the 
Commission has proposed amendments to Exchange Act Rule 10b-10 \14\ 
that, if adopted, would alter the disclosure requirements for Notice 
BDs and Full FCM/Full BDs effecting SFP transactions in customers' 
futures accounts. Similarly, the Commission has proposed Rule 11d2-1 
that will grant an exemption from Exchange Act Section 11(d)(2) \15\ 
for Full FCM/Full BDs effecting SFP transactions in customers' futures 
accounts. These proposed amendments and the proposed rule are designed 
to provide the least amount of disruption to the confirmation systems 
Notice BDs and Full FCM/Full BDs use when providing confirmations of 
transactions in customers' futures accounts while, at the same time, 
providing customers with adequate information about the SFP 
transactions effected in their futures accounts.
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    \14\ 17 CFR 240.10b-10.
    \15\ 15 U.S.C. 78k(d)(2).
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    The proposed amendments and the proposed new rule, however, may not 
be acted on by the Commission at the time trading in SFPs begins. 
Therefore, the Commission, through this order, is providing a period of 
exemption from Exchange Act Rule 10b-10 \16\ for Notice BDs and Full 
FCM/Full BDs effecting SFP transactions in customers' futures accounts 
and a period of exemption from Exchange Act Section 11(d)(2) \17\ for 
FCM/Full BDs effecting SFP transactions in customers' futures accounts.
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    \16\ 17 CFR 240.10b-10.
    \17\ 15 U.S.C. 78k(d)(2).
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    This exemptive period will allow the Commission to receive and 
consider comments and adopt appropriate amendments and rules while, at 
the same time, preventing any possible application of duplicative and 
conflicting regulation by the Commission or the CFTC regarding 
confirmations of SFP transactions effected in customers' futures 
accounts. In the absence of an exemptive period, the Commission 
believes that many Notice BDs and Full FCM/Full BDs would be precluded 
from commencing trading in SFPs only because their confirmation systems 
would be unable to process confirmations in accordance with the full 
disclosure requirements of Exchange Act Rule 10b-10.\18\ We believe the 
absence of many potential market participants at this critical time 
could affect the liquidity, and perhaps even the viability, of this new 
market. The Commission, therefore, finds that it is in the public 
interest to assure that all potential market participants are able to 
participate at the start of this new market. Accordingly, the 
Commission believes that it is consistent with the public interest and 
the protection of investors to provide this temporary exemptive relief.
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    \18\ 17 CFR 240.10b-10.
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    Accordingly, pursuant to Section 36(a)(1) of the Exchange Act,\19\
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    \19\ 15 U.S.C. 78mm(a)(1).
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    It is hereby ordered that Notice BDs and Full FCM/Full BDs are 
exempted from the requirements of Exchange Act Rule 10b-10 \20\ and 
Full FCM/Full BDs are exempted from the requirements of Exchange Act 
Section 11(d)(2) \21\ with respect to any SFP transaction effected in a 
customer's futures account until amendments to Exchange Act Rule 10b-10 
and a new Rule 11d2-1 become effective.
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    \20\ 17 CFR 240.10b-10.
    \21\ 15 U.S.C. 78k(d)(2).

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-14295 Filed 6-7-02; 8:45 am]
BILLING CODE 8010-01-P