[Federal Register Volume 67, Number 178 (Friday, September 13, 2002)]
[Rules and Regulations]
[Pages 58284-58300]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-23274]



[[Page 58283]]

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Part IV

Commodity Futures Trading Commission



17 CFR Parts 1, 41, and 190



Securities and Exchange Commission
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17 CFR Part 240



Applicability of CFTC and SEC Customer Protection, Recordkeeping, 
Reporting, and Bankruptcy Rules and the Securities Investor Protection 
Act of 1970 to Accounts Holding Security Futures Products; Joint Final 
Rules

  Federal Register / Vol. 67, No. 178 / Friday, September 13, 2002 / 
Rules and Regulations  

[[Page 58284]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 41 and 190

RIN 3038-AB76

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-46473; File No. S7-17-01]
RIN 3235-AI32


Applicability of CFTC and SEC Customer Protection, Recordkeeping, 
Reporting, and Bankruptcy Rules and the Securities Investor Protection 
Act of 1970 to Accounts Holding Security Futures Products

AGENCIES: Commodity Futures Trading Commission and Securities and 
Exchange Commission.

ACTION: Joint final rules.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the 
Securities and Exchange Commission (``SEC'') (collectively the 
``Commissions'') have adopted rules under the Commodity Exchange Act 
(``CEA'') and the Securities Exchange Act of 1934 (``Exchange Act'') as 
part of the joint regulatory framework under which futures commission 
merchants (``FCMs'') and brokers or dealers (``broker-dealers'' or 
``BDs'') may effect transactions in security futures products for 
customers. The rules require all firms conducting business in security 
futures products to make disclosures to customers that transact 
business in security futures products concerning the protections 
provided by both the CEA and Exchange Act regulatory schemes, the 
regulatory scheme that will be applicable to their accounts, and the 
alternative regulatory scheme that will not be applicable to their 
accounts. In addition, the rules require that every firm engaged in 
this business that is fully-registered both as an FCM and as a broker-
dealer establish written procedures regarding how customer security 
futures products will be held. The rules also specify how CEA and 
Exchange Act recordkeeping, reporting, and certain other rules will 
apply to security futures product transactions and accounts in which 
security futures products are held. These rules are adopted pursuant to 
the provisions of the Commodity Futures Modernization Act of 2000 
(``CFMA'') that direct the Commissions to address certain duplicative 
or conflicting regulations applicable to any firm fully-registered both 
as an FCM and as a broker-dealer. These rules also are intended to 
address certain other differences between the CEA and Exchange Act 
requirements, and reduce duplicative regulations applicable to firms 
that are notice-registered with either the CFTC or SEC.

EFFECTIVE DATE: September 13, 2002, except Sec.  240.17a-4(l) and (m) 
will be effective May 2, 2003.

FOR FURTHER INFORMATION CONTACT:
    CFTC: Lawrence B. Patent, Deputy Director, Robert B. Wasserman, 
Associate Director, or Helene D. Schroeder, Special Counsel, Division 
of Clearing and Intermediary Oversight, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581. Telephone: (202) 418-5430. E-mail: ([email protected]); 
([email protected]) or ([email protected]).
    SEC: Michael A. Macchiaroli, Associate Director, at (202) 942-0132; 
Thomas K. McGowan, Assistant Director, at (202) 942-4886; Bonnie L. 
Gauch, Attorney, at (202) 942-0765; or Matthew B. Comstock, Attorney, 
at (202) 942-0156, Division of Market Regulation, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Background
    A. Security Futures Products
    B. Regulation of FCMs and Broker-Dealers That Effect 
Transactions in Security Futures Products
III. The Proposed Rules
IV. Overview of the Comments Received
V. Final Rules and Rule Amendments
    A. General
    B. Amendments to CFTC Rule 1.55--Distribution of Risk Disclosure 
Statements by FCMs
    C. Rule 41.41 and Paragraph (o) of Rule 15c3-3
    1. Where SFPs May Be Held
    2. Requirements for Accepting Customer SFP Orders
    a. Disclosure Document Requirements
    b. Customer Acknowledgments
    3. Changes in Account Type
    D. Recordkeeping Requirements
    E. Customer Account Statements
    F. Confirmations
    G. CFTC Bankruptcy Treatment: Amendments to Part 190
    H. Arbitration
    I. Rule 15c3-3 Definitions
    J. Amendments to Reserve Formula Item 13 and Note F
    K. Exchange Act Recordkeeping Rules
    1. Amendment to Paragraph 17a-4(b)(9)
    2. New Paragraph 17a-4(k)
    L. Redesignation of Present Paragraphs (k) and (l) of Exchange 
Act Rule 17a-4
    M. Exchange Act Reporting, Notification, and Quarterly Count 
Requirements
VI. Administrative Procedures Act
VII. Paperwork Reduction Act
    CFTC
    SEC
VIII. Costs and Benefits of the Rules
    CFTC
    SEC
    A. Benefits
    1. Elimination of Conflicting and Duplicative Regulation
    2. Customer Understanding
    3. Examination Efficiencies
    B. Costs
    1. Addition of Paragraph 15c3-3(o)
    a. Establishment of a Written Policy
    b. Furnishing a Disclosure Document to Customers
    c. Changes of Account Type
    i. Record of Change of Account Type
    ii. Customer Notification of Effective Date of Change of Account 
Type
    2. Amendments to Rule 17a-4
    3. Systems Changes
IX. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition, and Capital Formation
X. Summary of Regulatory Flexibility Act Certification
    CFTC
    SEC
Text of Final Rules

I. Introduction

    The CFMA,\1\ which became law on December 21, 2000, amended the CEA 
and the Exchange Act to permit the trading of single stock and narrow-
based stock index \2\ futures (``security futures'') \3\ and to 
establish a framework for the joint regulation by the CFTC and the SEC 
of security futures products (``SFPs'').\4\ In addition, the CFMA

[[Page 58285]]

amended the CEA and the Exchange Act to require that the CFTC and SEC 
consult with each other and issue such rules, regulations, or orders as 
are necessary to avoid duplicative or conflicting rules applicable to 
firms that are ``fully-registered'' with both the CFTC \5\ and the SEC 
\6\ (``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.\7\
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    \1\ Pub. L. No. 106-554, 114 Stat. 2763 (2000).
    \2\ CEA section 1a(25)(A) (7 U.S.C. 1a(25)(A)) and Exchange Act 
section 3(a)(55)(B) and (C) (15 U.S.C. 78c(a)(55)(B) and (C)). See 
also 66 FR 44489 (August 23, 2001), Exchange Act Release No. 44724 
(August 20, 2001).
    \3\ The term ``security future'' means a contract of sale for 
future delivery of a single security or of a narrow-based security 
index, including any interest therein or base on the value thereof, 
except an exempted security under Section 3(a)(12) of the Exchange 
Act as in effect on the date of enactment of the Futures Trading Act 
of 1982 (other than any municipal security as defined in Section 
3(a)(29) of the Exchange Act as in effect on the date of enactment 
of the Futures Trading Act of 1982). The term ``security future'' 
does not include any agreement, contract, or transaction excluded 
from the CEA under Sections 2(c), (d), (f), or (g) of the CEA (as in 
effect on the date of enactment of the CFMA) or Title IV of the 
CFMA. CEA section 1a(31) (7 U.S.C. 1a(31)) and Exchange Act section 
3(a)(55) (15 U.S.C. 78c(a(55)).
    \4\ The term ``security futures product'' includes both a 
security future and any option on a security future. CEA section 
1a(32) (7 U.S.C. 1a(32)) and Exchange Act section 3(a)(56) (15 
U.S.C. 78c(a)(56)). Section 6(g)(5)(A) of the Exchange Act provides 
that it is unlawful for any person to execute or trade a security 
futures product until the later of: ``(i) 1 year after the date of 
enactment of the Commodity Futures Modernization Act of 2000; or 
(ii) such date that a futures association registered under Section 
17 of the Commodity Exchange Act has met the requirements set forth 
in section 15A(k)(2) of this title.'' 15 U.S.C. 78f(g)(5)(A). There 
is an exception to this provision, however, for principal-to-
principal transactions between eligible contract participants. 
Exchange Act section 6(g)(5)(B) (15 U.S.C. 78f(g)(5)(B)). The term 
``eligible contract participant'' is defined at CEA section 1a(12) 
(7 U.S.C. 1a(12)).
    \5\ FCMs that are registered pursuant to CEA section 4f(a)(1) (7 
U.S.C. 6f(a)(1)).
    \6\ Broker-dealers that are registered pursuant to Exchange Act 
section 15(b)(1) (15 U.S.C. 78 o(b)(1)).
    \7\ 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)).
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    The Commissions published for comment in the Federal Register 
proposed rules on October 4, 2001 (the ``Proposal'').\8\ The proposed 
rules were designed to reduce conflicting and duplicative regulations 
applicable to both Full FCM/Full BDs and firms notice registered \9\ 
with either the CFTC or the SEC, and to address certain differences 
between the CEA and Exchange Act rules.\10\
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    \8\ 66 FR 50785 (Oct. 4, 2001), Exchange Act Release No. 44854 
(Sept. 26, 2001).
    \9\ See infra notes 15 and 17.
    \10\ On October 29, 2001, the Commissions extended the comment 
period on the Proposal to December 5, 2001. 66 FR 55608 (November 2, 
2001), Exchange Act Release No. 44996 (Oct. 9, 2001).
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II. Background

A. Security Futures Products

    The CFMA amended the Exchange Act definitions of ``security'' and 
``equity security'' to include ``security future'' and ``any security 
future on any [stock or similar security],'' respectively.\11\ In 
addition, definitions of the terms ``security future'' \12\ and 
``security futures product'' \13\ were added to the CEA and the 
Exchange Act. Pursuant to these statutory changes, a security futures 
product is both a security and a futures contract and, therefore, is 
subject to the jurisdiction of both the CFTC and the SEC.
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    \11\ Exchange Act sections 3(a)(10) and (11), respectively (15 
U.S.C 78c(a)(10) and 15 U.S.C. 78c(a)(11)).
    \12\ See note 3.
    \13\ See note 4.
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B. Regulation of FCMs and Broker-Dealers that Effect Transactions in 
Security Futures Products

    As an SFP is both a security and a futures contract, a person must 
be registered both as an FCM or as an introducing broker (``IB'') with 
the CFTC and as a broker-dealer with the SEC to effect SFP 
transactions. The CFMA amended the CEA and the Exchange Act to require 
that the CFTC and SEC provide notice registration procedures for 
certain persons that may be required to register with the CFTC or the 
SEC solely because they are effecting SFP transactions.\14\ Further, 
the CFMA amended the CEA and the Exchange Act to exempt Notice FCMs 
\15\ from certain provisions of the CEA \16\ (including CFTC 
segregation requirements), and Notice BDs \17\ from certain provisions 
and rules of the Exchange Act \18\ (including Exchange Act Rule 15c3-3 
(``Rule 15c3-3'')), to avoid conflicting or duplicative regulation.
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    \14\ The CFTC implemented notice registration procedures on 
August 17, 2001 by adopting rules pursuant to Section 4f(a)(2) of 
the CEA (7 U.S.C. 6f(a)(2) (see 66 FR 43080 (August 17, 2001)). The 
SEC implemented notice registration procedures on August 21, 2001 by 
adopting rules pursuant to Section 15(b)(11) of the Exchange Act (15 
U.S.C. 78o(b)(11)(A)(i) (see 66 FR 45137 (August 27, 2001), Exchange 
Act Release No. 44730 (August 21, 2001)).
    \15\ A Notice FCM is a broker-dealer that registers with the 
CFTC as an FCM 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)).
    \16\ CEA section 4f(a)(4)(A) (7 U.S.C. 6f(a)(4)(A)).
    \17\ A Notice BD is an FCM or IB that registers with the SEC as 
a broker-dealer pursuant to section 15(b)(11) of the Exchange Act 
(15 U.S.C. 78o(b)(11)(A)(i)) and the rules adopted by the SEC (see 
66 FR 45137 (August 27, 2001), Exchange Act Release No. 44730 
(August 21, 2001)).
    \18\ Exchange Act section 15(b)(11(B) (15 U.S.C. 78o(b)(11)(B)).
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    Instead of providing similar exemptions for firms that are fully-
registered with both the CFTC and the SEC, the CFMA amended the CEA and 
the Exchange Act to require that the CFTC and SEC consult with each 
other and issue such rules, regulations, or orders as are necessary to 
avoid certain duplicative or conflicting regulations applicable to Full 
FCM/Full BDs. CFTC segregation rules and Rule 15c3-3 are examples of 
duplicative regulations referred to in the CFMA because these 
provisions provide similar protections for customers, but, when applied 
to SFPs, could cause a Full FCM/Full BD to maintain two separate and 
redundant reserves to satisfy both sets of requirements. In addition, 
the CFMA does not exempt notice registrants from certain CFTC and SEC 
recordkeeping, reporting, early-warning, and quarterly-count rules; 
thus, absent relief, both Full FCM/Full BDs and notice registrants are 
subject to both sets of rules in connection with SFPs.

III. The Proposed Rules

    The proposed rules would have required that all firms engaged in an 
SFP business make certain disclosures to every customer that places an 
order for an SFP regarding the nature and applicability of the 
protections that may be available to the customer pursuant to the 
segregation requirements of the CEA, or the provisions of Rule 15c3-3 
and the Securities Investor Protection Act of 1970 (``SIPA'').\19\ The 
Commissions also proposed new rules that would have: (1) Permitted a 
Full FCM/Full BD to choose (or let its customers choose) whether an 
account in which SFPs are held would be treated as a futures account 
subject to the segregation requirements of the CEA, or as a securities 
account subject to Rule 15c3-3 and SIPA; (2) required a Full FCM/Full 
BD that engages in an SFP business to establish written policies 
stating how customer SFP positions would be held; and (3) required a 
Full FCM/Full BD to obtain a signed acknowledgment from each SFP 
customer stating that the customer understands that the account will 
not be protected under the alternative regulatory scheme.
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    \19\ 15 U.S.C. 78aaa et seq.
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    The CFTC also proposed amendments to CFTC Rule 1.55 and the CFTC's 
Part 190 bankruptcy rules, and the SEC proposed amendments to SEC Rules 
15c3-3, 17a-3, 17a-4, 17a-5, 17a-7, 17a-11, and 17a-13 \20\ that were 
designed to eliminate duplicative regulation that may have been 
applicable to Full FCM/Full BDs and notice-registrants.
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    \20\ 17 CFR 240.15c3-3(a)(1), 240.17a-3, 240.17a-4, 240.17a-5, 
240.17a-7, 240.17a-11, and 240.17a-13, respectively.
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IV. Overview of the Comments Received

    In the Proposal, the Commissions not only requested comments 
generally, but also specifically solicited comment about a number of 
issues, including the disclosure document requirements, the 
acknowledgment requirement, the records requirements, whether the 
differences in the CEA and Exchange Act customer protection rules would 
cause any interested party to be placed at a disadvantage, and whether 
firms should be allowed to change the type of account in which customer 
SFPs are held.
    The Commissions each received three comment letters on the 
Proposal:\21\ one from the National Futures Association (``NFA''), a 
registered futures

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association; one letter submitted jointly by the Futures Industry 
Association (``FIA''), which is a trade association that represents 
FCMs, and the Securities Industry Association (``SIA''), which is a 
trade association that represents broker-dealers; and one letter 
submitted jointly by the Chicago Mercantile Exchange (``CME'') and the 
Chicago Board of Trade (``CBOT''), which are both designated contract 
markets. All of the commenters supported the overall approach of the 
rules in providing Full FCM/Full BDs with flexibility in choosing 
whether customer SFPs will be held in a securities account or in a 
futures account.\22\ In support of the Proposal, commenters stated, 
among other things, that the proposed approach would be protection 
scheme neutral and would allow firms to utilize the most cost-effective 
solutions when determining how to support SFPs.
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    \21\ Each commenter sent substantially the same letter to the 
CFTC and the SEC.
    \22\ However, one commenter stated that although the proposed 
rule amendments appeared to be flexible, Full FCM/Full BDs would 
likely be compelled to carry SFPs in securities accounts due to 
operational difficulties that would be created if the proposed 
customer margin rules published for comment on October 4, 2001 were 
adopted by the Commissions. See Customer Margin Rules Relating to 
Security Futures, 66 FR 50719 (October 4, 2001), Exchange Act 
Release No. 44853 (September 26, 2001).
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    On the other hand, the commenters uniformly opposed the requirement 
in the proposed rules that Full FCM/Full BDs obtain signed 
acknowledgments from customers stating that customers understand that 
account protections under the alternative regulatory scheme would not 
be available with respect to their accounts. The commenters questioned 
the need for such a requirement and expressed concerns about the costs 
and burdens of complying with this requirement.

V. Final Rules and Rule Amendments

A. General

    The Commissions have carefully reviewed the comments received, and 
have determined generally to adopt the rules as they were proposed, 
except that the proposed requirement that Full FCM/Full BDs obtain a 
signed acknowledgment from each SFP customer has not been adopted. In 
addition, the Commissions have made certain technical and clarifying 
changes to the proposed rules based upon the specific comments that 
have been received. Each of these changes from the rules as proposed 
are discussed below.\23\
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    \23\ The first five pages of NFA's comment letter provide 
further background and historical perspective upon the customer fund 
protection frameworks of the futures and securities industries. This 
letter may be accessed through the CFTC's Web site at http://www.cfc.gov/files/foia/comment01/foicf0119c002.pdf.
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    The new rules and amendments are intended to prevent conflicting or 
duplicative regulation with relation to certain customer protection, 
recordkeeping, and other rules. They were designed to satisfy 
requirements of the CEA and the Exchange Act that the CFTC and SEC 
consult with each other and issue such rules, regulations, or orders as 
are necessary to avoid duplicative or conflicting rules 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.\24\
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    \24\ See note 7.
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B. Amendments to CFTC Rule 1.55--Distribution of Risk Disclosure 
Statements by FCMs

    CFTC Rule 1.55 sets forth the general risk disclosure obligations 
of FCMs and IBs. New paragraph (h) requires FCMs to comply with the new 
disclosure obligations relating to SFPs that are set forth in new CFTC 
Rule 41.41.\25\ The CFTC received no comments concerning new paragraph 
(h) of CFTC Rule 1.55 and has adopted this paragraph as it was 
proposed.
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    \25\ The Proposal designated the CFTC's security futures 
products accounts rule as Rule 41.42. However, because the CFTC is 
adopting this rule and the rules pertaining to customer margin as 
Subpart E of Part 41, the CFTC has redesignated Rule 41.41 as Rule 
41.3 and adopted the SFP accounts rule as Rule 41.41.
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    In its comment letter, NFA recommended that CFTC Rule 1.55 be 
further amended to clarify that the existing basic risk disclosure 
obligations that apply to FCMs and IBs do not apply with respect to 
customers who trade only SFPs and whose positions are being held in 
securities accounts. According to NFA, these customers will be required 
by its rules and the rules of the National Association of Securities 
Dealers (``NASD'') to be provided with a ``uniform disclosure 
statement'' that ``will contain all of the disclosures that are 
currently required [under CFTC] Rule 1.55.'' \26\
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    \26\ See NFA Letter, pps. 6-7.
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    The CFTC fully supports the adoption of a model disclosure document 
that will contain all of the disclosures set forth under existing CFTC 
Rule 1.55 and commends the efforts of NFA and NASD in developing such a 
document. Because a customer whose only futures trading involves SFPs 
will receive a model disclosure document in accordance with NFA and 
NASD rules, and such document will include the basic risk disclosures 
required by CFTC Rule 1.55, the CFTC agrees that it is not necessary 
for this type of customer to be given a separate risk disclosure 
statement including the language set forth in CFTC Rule 1.55(b). 
Because CFTC Rule 1.55(a)(1) states that the basic risk disclosure 
obligations set forth therein apply to an FCM or IB only with respect 
to a commodity futures account for a customer, however, the CFTC does 
not believe that further amendment of the text of CFTC Rule 1.55 is 
necessary to achieve the result recommended by NFA. Customers of an FCM 
or IB whose only futures trading activity involves SFPs that are held 
in a securities account are not required under existing rules to 
receive the basic risk disclosure statement for futures under CFTC Rule 
1.55.\27\
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    \27\ As stated in the Proposal, 66 FR 50785 at 50795, the CFTC 
reiterates that if the model disclosure document incorporates a 
discussion of the segregation requirements and SIPA as required 
under Rule 41.41, the CFTC will not require the discussion to be set 
forth in a separate risk disclosure document. NFA supported this 
aspect of the proposal.
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C. Rule 41.41 and Paragraph (o) of Rule 15c3-3

1. Where SFPs May Be Held
    Paragraph (a) of new CFTC Rule 41.41 and corresponding paragraph 
(o)(1) of Rule 15c3-3 allow a Full FCM/Full BD to hold customer SFPs in 
either a futures account or a securities account.\28\ Under the final 
rules, a Full FCM/Full BD may choose either to maintain all customer 
SFPs in futures accounts, all customer SFPs in securities accounts, or 
some customers' SFP positions in futures accounts and other customers' 
SFP positions in securities accounts. One commenter suggested that the 
Commissions clarify whether a Full FCM/Full BD may allow a customer to 
hold certain SFPs in a securities account and other SFPs in a futures 
account. The commenter contended that a customer that is employing 
various trading strategies may want this type of flexibility. 
Accordingly, the CFTC has revised Rule 41.41(a)(1) to specifically 
provide that a Full FCM/Full BD may hold all of a customer's SFPs in a 
futures account or

[[Page 58287]]

in a securities account, or may hold some of the customer's SFPs in a 
securities account and other of the same customer's SFPs in a futures 
account. Paragraph (o) of Rule 15c3-3 also permits a Full FCM/Full BD 
to hold a customer's SFPs in a futures account and, at the same time, 
hold other SFPs for the same customer in a securities account. However, 
the firm's records must clearly indicate the type of account in which 
each position is held.
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    \28\ The terms ``futures account'' and ``securities account'' 
are defined in new paragraphs (vv) and (ww) of CFTC Rule 1.3, and 
corresponding paragraphs (a)(15) and (a)(14) of Rule 15c3-3. The 
Commissions did not receive any comments concerning these 
definitions in response to the Proposal.
    Separately, CFTC Rule 41.4(f) clarifies that money, securities, 
or property held to margin, guarantee or secure SFPs held in a 
futures account are subject to the segregation requirements of 
Section 4d of the CEA (7 U.S.C. 6d). No comments were received 
regarding this provision, and it has been adopted as proposed.
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    One commenter stated that ``customers who are given a choice [as to 
account type] should make that election in writing.'' As discussed 
below, the Commissions have determined not to require a written 
customer acknowledgment stating that the customer understands that the 
account will not be protected under the alternative regulatory scheme. 
The Commissions believe that a Full FCM/Full BD that provides its 
customers with a choice of account type should have discretion as to 
the manner in which a customer may elect the type of account in which 
SFPs will be held and how that election will be evidenced.
    As proposed, paragraph (a)(2) of CFTC Rule 41.41 and corresponding 
paragraph (o)(1)(ii) of Rule 15c3-3 would have required a Full FCM/Full 
BD to establish written policies describing whether customer SFPs and 
any customer assets used to margin them will be held in a futures 
account or a securities account.\29\ One commenter objected to the use 
of the term ``policy,'' suggesting that this term implies objective 
standards that may not be realistic in practice, and that firms might 
wish to exercise discretion with respect to the type of account in 
which SFPs will be held based on relevant considerations specific to 
each customer. Use of the term ``policy'' was not intended to limit a 
firm's discretion. Instead, this requirement was intended to compel 
firms to focus on establishing and documenting policies, procedures and 
processes to be applied when customers seek to open accounts for 
trading SFPs or to add SFPs to their existing portfolio. Accordingly, 
CFTC Rule 41.41(a)(2) and Rule 15c3-3(o)(1)(ii), as adopted, require 
Full FCM/Full BDs \30\ to establish written policies or procedures for 
determining whether customer SFPs (together with any associated 
customer margin) will be held in a futures account and/or a securities 
account. If a firm permits only certain customers to make an election 
as to account type, the firm's written policies or procedures must 
clearly explain which customers may or may not make an election.
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    \29\ To the extent that a Full FCM/Full BD allows a customer to 
choose the account type, this includes policies regarding the 
process by which a customer may elect the type or types of 
account(s) in which SFPs will be held (including the procedure to be 
followed if a customer fails to make an election of account type).
    \30\ NFA suggested a technical change to CFTC Rule 41.41(a)(2) 
to make clear that the reference therein to ``FCM'' that is fully 
registered with the CFTC pursuant to CEA Section 4(a)(1). The CFTC 
notes that the other type of FCM, i.e., a Notice FCM, does not have 
any discretion in determining where SFPs may be held. A Notice FCM 
may hold SFPs only in a securities account. See CFTC Rule 
41.41(a)(1). Accordingly, CFTC Rule 41.41(a)(2), which requires FCMs 
to establish policies or procedures for determining where SFPs can 
be held applies only to FCMs that are fully registered under CEA 
Section 4f(a)(1). Nevertheless, in the interest of providing clarity 
in the rules, the CFTC has incorporated the change suggested by NFA 
and, thus, CFTC Rule 41.41(a)(2), as adopted, provides that the 
requirement for establishing written policies or procedures applies 
only to Full FCM/Full BDs. No corresponding change has been made to 
Rule 15c3-3(o)(1)(ii), which was organized differently, and makes 
clear that the requirement for establishing written policies or 
procedures applies only to Full FCM/Full BDs.
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2. Requirements for Accepting Customer SFP Orders
    Paragraph (b) of Rule 41.41 and corresponding paragraph (o)(2) of 
Rule 15c3-3 set forth a number of requirements that a firm must meet 
before it accepts the first order for an SFP from or on behalf of a 
customer.\31\ Firms that do not engage in an SFP business with or for 
customers will not be affected by these requirements.
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    \31\ The Proposal referred to requirements that a firm would be 
required to meet before accepting an SFP order from a customer. The 
Commissions have adopted language that makes clear that these 
requirements are to be met before accepting the first SFP order from 
a customer and need not be repeated for each SFP order.
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a. Disclosure Document Requirements
    The disclosure obligations set forth in CFTC Rule 41.41(b) and Rule 
15c3-3(o)(2) have been adopted as proposed. Paragraph (b) of CFTC Rule 
41.41 and corresponding paragraph (o)(2) of Rule 15c3-3 establish 
certain disclosure requirements that apply to a firm that accepts 
customer SFP orders. The Commissions view these disclosure requirements 
as essential to address potential customer confusion regarding the 
nature of SFPs and the protections afforded to customers trading such 
products pursuant to the different rules of the Commissions. 
Specifically, these paragraphs require any firm that accepts customer 
SFP orders, including any Notice FCM or Notice BD, to provide each SFP 
customer with: (1) A description of the protections afforded futures 
accounts under section 4d of the CEA and securities accounts under Rule 
15c3-3 and SIPA; (2) a statement indicating whether a customer's SFPs 
will be held in a futures account or in a securities account and 
whether customers will be permitted to make or change an election 
concerning account type; and (3) a statement that the protections 
provided by the alternative regulatory framework will not be available 
in connection with that account.
    Firms are not required to furnish a disclosure document to every 
customer. The disclosure document is required to be provided only to 
customers that place orders for SFPs. This disclosure document may be 
provided to a customer either when an account is opened or at some 
later date when the customer expresses an interest in engaging in SFP 
transactions, but it must be provided before the customer's first order 
to buy or sell an SFP is accepted by the firm.
    The new rules do not prescribe specific language for the required 
disclosures.\32\ A firm may prepare its own disclosure statement or it 
could use a model disclosure statement.\33\ Further, these disclosures 
may be provided to customers in one or more documents.
---------------------------------------------------------------------------

    \32\ The Commissions requested comment on whether the rules 
should mandate specific language to be included in the disclosure 
document. None of the commenters suggested that any specific 
disclosure language be required.
    \33\ A group of industry participants, including the NFA and the 
NASD, is developing a uniform disclosure statement, See note 26 and 
accompanying text.
---------------------------------------------------------------------------

    New paragraphs (b)(2) of CFTC Rule 41.41 and (o)(2)(ii) of Rule 
15c3-3 allow a transferee firm that receives a transferred customer 
account with an open SFP position to accept an order from the customer 
as long as the firm provides the customer, no later than ten business 
days after the account is transferred, with the following statements: 
(1) A statement indicating whether a customer's SFPs will be held in a 
futures account and/or a securities account and whether the firm 
permits customers to make or change an election of account type; and 
(2) a statement that, with respect to the customer's SFPs that are held 
in a securities account or a futures account, the alternative 
regulatory scheme is not available to the customer in connection with 
that account.\34\ This exception will allow customers with open 
positions to close out those positions, if necessary, by allowing firms 
to accept an order from that customer even if the receiving firm

[[Page 58288]]

has not yet provided the disclosure statements to the customer.
---------------------------------------------------------------------------

    \34\ Firms may provide these statements to the customer prior to 
the transfer (e.g., in the case of a transfer initiated by the 
customer, the required disclosures may be provided to the customer 
when the customer initiates the transfer request).
---------------------------------------------------------------------------

    However, as discussed more fully in section V.C.3. below titled 
``Changes in Account Type,'' where a customer's account type changes as 
a result of the transfer, new paragraphs (c)(2) of CFTC Rule 41.41 and 
(o)(3)(ii) of Rule 15c3-3 require that the firm provide the disclosures 
described above regarding paragraphs (b)(2) of CFTC Rule 41.41 and 
(o)(2)(ii) of Rule 15c3-3, plus additional disclosures describing the 
protections afforded to futures accounts under section 4d of the CEA 
and the protections afforded to securities accounts under Rule 15c3-3 
and SIPA, at least ten days prior to the effective date of the 
transfer. This prior notification and disclosure will provide the 
customer with information necessary to make an informed decision 
regarding account type and an opportunity to transfer the account to 
another firm that provides the type of account with the regulatory 
protections the customer would prefer. If the customer's account type 
will not change as a result of the transfer, this prior notice is 
unnecessary and, pursuant to paragraphs (b)(2) of CFTC Rule 41.41 and 
(o)(2)(ii) of Rule 15c3-3, the firm may provide the disclosures to the 
customer subsequent to the transfer.
b. Customer Acknowledgments
    Proposed paragraph (b)(2) of CFTC Rule 41.41 and corresponding 
proposed paragraph (o)(2)(ii) of Rule 15c3-3 would have required that a 
Full FCM/Full BD obtain a signed acknowledgment from a customer before 
the firm could accept an order for an SFP from that customer, whereby 
the customer would affirm his or her understanding that the account 
would not be protected under the alternative regulatory scheme. The 
proposed rules would not have required that notice registrants obtain 
this acknowledgment from customers because they are subject to only one 
customer protection regulatory scheme.\35\
---------------------------------------------------------------------------

    \35\ See notes through and accompanying text.
---------------------------------------------------------------------------

    All three comment letters received in response to the Proposal 
opposed the requirement to obtain a signed acknowledgment from 
customers. Generally, the commenters opposed the requirement to obtain 
a signed acknowledgment because they believe it to be an unnecessary 
and overly burdensome method of ensuring that the customer received and 
understood the required disclosures. Further, one commenter contended 
that Full FCM/Full BDs are not presently required to provide 
disclosures to their customers to identify the protections afforded by 
different regulatory regimes, nor are they required to obtained signed 
acknowledgments from their customers.\36\ This commenter also stated 
that requiring Full FCM/Full BDs to obtain signed acknowledgments from 
customers, while not imposing the same requirement on notice-registered 
firms, ``has the effect of penalizing Full FCM/Full BDs vis a vis 
notice registrants because the cost and staff time required to 
administer and enforce the acknowledgment policy would be overly 
burdensome.'' \37\ The Commissions have reconsidered the customer 
acknowledgment requirement in light of the comments received and have 
determined not to adopt such a requirement.\38\ The requirements that 
firms provide each customer with disclosures before effecting any 
transactions for that customer \39\ and that Full FCM/Full BDs 
establish the above-described written policies should suffice to make 
customers aware of the protections of customer funds afforded by 
segregation under the CEA and those provided by Rule 15c3-3 and SIPA.
---------------------------------------------------------------------------

    \36\ See CME/CBOT Letter, p. 3.
    \37\ Id.
    \38\ When it considered adopting the final rules, the SEC also 
noted that the acknowledgement requirement could be misconstrued 
against customers and, therefore, should not be adopted as proposed.
    \39\ The Commissions have clarified that when an account is 
transferred and a customer's account type will change as a result of 
that transfer, the required disclosures must be provided to the 
customer at least ten days before the effective date of the transfer 
to allow the customer time to move the account to another firm (See 
infra note and accompanying text).
---------------------------------------------------------------------------

3. Changes in Account Type
    New paragraph (c) of CFTC Rule 41.41 and corresponding paragraph 
(o)(3) of Rule 15c3-3 set forth the general rule that a firm may change 
the type of account in which customer SFPs are held. This change of 
account type may be made pursuant to a customer's request, or it may be 
initiated by the firm.\40\ Regardless of whether the customer or the 
firm initiated the change, the firm must create a record concerning the 
change and notify the customer in writing of the date that the change 
will become effective.
---------------------------------------------------------------------------

    \40\ As discussed above, a firm would be required to establish 
procedures as to whether and when a customer or firm could change 
the account type (see section C.1. above).
---------------------------------------------------------------------------

    While all of the commenters supported the paragraph that allowed 
firms the ability to change a customer's account type, two of the 
commenters objected to the requirement that a firm must obtain a 
written acknowledgment from the customer before changing the customer's 
account type.\41\ These two commenters contended that this requirement 
``is overly burdensome'' \42\ and ``effectively vests in the customer * 
* * the ability to choose the type of account in which the customer's 
security futures products are held.'' \43\ As stated above, the 
Commissions have determined not to require that a firm obtain a signed 
acknowledgment from a customer prior to accepting the first SFP order 
from or on behalf of that customer, and have also determined not to 
require that a firm obtain a signed customer acknowledgment before 
changing the customer's account type.
---------------------------------------------------------------------------

    \41\ See infra notes and
    \42\ See CME/CBOT Letter, p. 4.
    \43\ See FIA/SIA Letter, p. 3.
---------------------------------------------------------------------------

    The amendments now require that a firm notify a customer in writing 
of the effective date of a change of account type, and provide the 
customer with the same statements specified in the new CFTC Rule 
41.41(b)(1) and Rule 15c3-3(o)(2)(i) disclosure document 
requirements,\44\ no less than ten business days prior to that 
effective date. This requirement was incorporated so that, in the 
absence of the proposed acknowledgment requirement, a customer is 
notified of which regulatory regime is applicable to the account. These 
rules also will apply if a customer's account type changes as part of a 
bulk transfer of accounts.
---------------------------------------------------------------------------

    \44\ Specifically, a customer must receive (1) a description of 
the protections afforded futures accounts under section 4d of the 
CEA and securities accounts under Rule 15c3-3 and SIPA; (2) a 
statement indicating whether a customer's SFPs will be held in a 
futures account or in a securities account and whether customers 
will be permitted to make or change an election concerning account 
type; and (3) a statement that the protections provided by the 
alternative regulatory framework will not be available with respect 
to that account.
---------------------------------------------------------------------------

    One commenter stated, ``[c]ustomers should be given adequate notice 
so they can move their accounts or positions to another firm if they do 
not want to change account types.''\45\ The required prior notification 
should provide the customer with time to move the account to another 
firm if the customer objects to the change of account type.
---------------------------------------------------------------------------

    \45\ See NFA Letter, p. 8.
---------------------------------------------------------------------------

    One commenter objected to the requirement that a firm provide the 
customer with a second written notice, subsequent to the change of 
account type, of the date an account-type change became effective.\46\ 
This commenter contended that prior notice of a change of account type 
should be sufficient, and that a customer troubled by the change could 
close the account and do business elsewhere.\47\ The Commissions

[[Page 58289]]

have eliminated the requirement that a firm notify a customer, 
subsequent to the change of account type, of the actual date of the 
change of account type because the prior notification will include the 
effective date of the change of account type.
---------------------------------------------------------------------------

    \46\ See CME/CBOT Letter, p. 4.
    \47\ Id.
---------------------------------------------------------------------------

    If a Full FCM/Full BD initiates a change of account type, it should 
consider the effect of its choices on its customers and the criteria 
used to make these choices in light of its obligations under the CEA, 
Exchange Act, and applicable self-regulatory organization rules.\48\
---------------------------------------------------------------------------

    \48\ See e.g., NASD Rule 2110 and NYSE Rule 2401. Generally, 
firms may initiate a change of account type for any reason, provided 
it does not violate the CEA, Exchange Act, and self-regulatory 
organization rules.
---------------------------------------------------------------------------

D. Recordkeeping Requirements

    The final rules adopted by the Commissions provide that the 
specific recordkeeping requirements under the CEA and the Exchange Act 
for SFPs be determined by the type of account in which the SFPs are 
held. Thus, new paragraph (d) of CFTC Rule 41.41 provides that the 
CFTC's recordkeeping rules do not apply to SFP transactions and 
positions in a securities account (provided that the SEC's 
recordkeeping rules apply to those transactions and positions). 
Corresponding paragraph (f) of Exchange Act Rule 17a-3 provides that 
SEC Rule 17a-3 does not apply to SFP transactions and positions in a 
futures account (provided that the CFTC's recordkeeping rules apply to 
those transactions and positions).\49\ These rules are designed to 
address the Commissions' obligations to avoid duplicative or 
conflicting regulations relating to the maintenance of books and 
records involving SFPs.
---------------------------------------------------------------------------

    \49\ Because many of the record retention obligations in 
Exchange Act Rule 17a-4 are dependant on the obligation to create 
the record under Exchange Act Rule 17a-3, the relief provided in 
paragraph (f) of Rule 17a-3 will also relieve firms from certain 
Rule 17a-4 record retention obligations.
---------------------------------------------------------------------------

    These final rules do not exempt firms from the books and records 
rules with relation to general firm records that do not relate to SFP 
transactions or positions (e.g., the firm's general ledger or corporate 
organization documents). Full FCM/Full BDs presently must comply with 
both the CFTC's and the SEC's books and records rules and may presently 
maintain one set of general firm records to comply with both sets of 
rules. The Commissions intend that the changes to the books and records 
rules will eliminate any duplicative requirements applicable to an SFP 
because of the fact that it is both a security and a future. However, 
Full FCM/Full BDs should maintain general firm records for SFPs in the 
same manner that they would under the present regulatory landscape.
    The Commissions solicited comment in the Proposal regarding certain 
differences between the CEA and Exchange Act (specifically, Rules 17a-3 
and 17a-4) recordkeeping requirements.\50\ All of the commenters 
expressed the view that application of the Commissions' recordkeeping 
requirements should be determined by the type of account in which the 
SFPs are held. However, one commenter suggested that CFTC Rule 41.41(d) 
specifically identify the recordkeeping rules under the CEA that will 
apply to SFPs held in a futures account. To address this comment, the 
language in CFTC Rule 41.41(d) was modified to provide more clarity. 
The rule now states that the CFTC's recordkeeping requirements set 
forth in CFTC Rules 1.31, 1.32, 1.35, 1.36, 1.37, 4.23, 4.33, 18.05 and 
190.06 shall apply to SFP transactions and positions in a futures 
account and the SEC's recordkeeping rules (e.g., Exchange Act Rule 17a-
3 and 17a-4) shall apply to SFP transactions and positions in a 
securities account.
---------------------------------------------------------------------------

    \50\ As noted in the Proposal, CFTC Rule 1.31 (17 CFR 1.31) 
requires that all books and records required to be kept by an FCM 
must be kept for a period of five years from the date thereof, and 
further, that the required books and records may be stored on 
micrographic or electronic storage media unless the documents are 
trading cards or other documents on which trade information is 
originally recorded in writing, whereas certain records required to 
be preserved pursuant to the Exchange Act Rule 17a-4 (17 CFR 
240.17a-4) must be held for either three or six years, depending 
upon the particular record.
---------------------------------------------------------------------------

E. Customer Account Statements

    Generally, FCMs must send account statements to customers 
monthly,\51\ whereas broker-dealers must send account statements to 
customers on a quarterly basis.\52\ Further, customer account statement 
requirements for broker-dealers are generally set by securities 
industry self-regulatory organization rules. The Commissions believe 
that application of the specific customer account statement delivery 
requirements under the CEA and Exchange Act should be determined by the 
type of account in which SFPs are held. Accordingly, new paragraph (e) 
of Rule 41.41 provides that the CFTC's reporting requirements, set 
forth in CEA Rules 1.33 and 1.46,\53\ shall not apply to SFP 
transactions and positions in a securities account.
---------------------------------------------------------------------------

    \51\ 17 CFR 1.33(a). FCMs may send a quarterly statement if the 
account has neither open positions at the end of the statement 
period nor any changes to the account balance since the prior 
statement period.
    \52\ See e.g., Exchange Act Rule 15c3-2 (17 CFR 240.15c3-2) and 
NYSE Rule 409. However, in some cases broker-dealers must send 
account statements to customers more frequently (see, e.g., NYSE 
Rule 730), and, as a general business practice, most broker-dealers 
send a monthly statement to each customer whose account has 
experienced activity during that month.
    \53\ 17 CFR 1.33 and 1.46.
---------------------------------------------------------------------------

F. Confirmations

    The Commissions requested comment on the application to 
transactions in SFPs of their confirmation rules, Rule 10b-10 under the 
Exchange Act and Rule 1.33(b) under the CEA. All three commenters 
stated that confirmation requirements should follow from the type of 
account in which SFPs are carried. As noted above, new CFTC Rule 
41.41(e) provides that CEA Rule 1.33, which includes confirmation 
statement requirements, shall not apply to SFP transactions and 
positions carried in a securities account. On May 31, 2002 the SEC 
separately proposed amendments to its Rule 10b-10,\54\ and issued an 
order to temporarily exempt firms carrying SFPs in futures accounts 
from SEC Rule 10b-10 until appropriate amendments to Exchange Act Rule 
10b-10 and a new Rule 11d2-1 could be adopted by the SEC.\55\ The SEC 
adopted amendments to Exchange Act Rule 10b-10 and new Rule 11d2-1 on 
August 27, 2002.\56\
---------------------------------------------------------------------------

    \54\ 67 FR 39647 (June 10, 2002), Exchange Act Release No. 46014 
(May 31, 2002).
    \55\ 67 FR 39752 (June 10, 2002), Exchange Act Release No. 46015 
(May 31, 2002).
    \56\ Exchange Act Release No. 46471 (September 6, 2002).
---------------------------------------------------------------------------

G. CFTC Bankruptcy Treatment: Amendments to Part 190

    The proposed amendments to Part 190 were intended to make clear 
that a customer that is trading SFPs that are held in a securities 
account at a broker-dealer would not be entitled to benefit from the 
priority treatment Part 190 affords to customers in the event of 
insolvency of the FCM. The proposed amendments would have excluded from 
the definition of ``specifically identifiable property,'' security 
futures products and any property received to margin, guarantee or 
secure such positions held in a securities account. Thus, SFP positions 
and associated margin held in such accounts would have been excluded 
from the net equity calculation and the definition of ``customer 
property.'' Consistent with these changes, claimants would have been 
required to signify on their proof of claim form whether SFP positions 
are held in a securities or futures account.
    NFA was the only commenter to address this issue and it supported 
the proposed rule changes, which the CFTC

[[Page 58290]]

has determined to adopt as proposed. NFA also stated that the CFTC 
should seek corresponding changes to the Bankruptcy Code. The CFTC will 
take the latter comment under advisement for possible further 
legislative recommendations, but the CFTC does not believe that 
Bankruptcy Code amendments are necessary before SFP trading may 
commence.

H. Arbitration

    The Commissions did not address the issue of arbitration in the 
Proposal. Nevertheless, NFA commented that SFPs carried in securities 
accounts should not be subject to the CFTC's general rule that 
prohibits the use of pre-dispute arbitration agreements as a condition 
of doing business. NFA stated that maintaining this prohibition with 
respect to SFPs carried in securities accounts would be inconsistent 
with the longstanding and accepted practice in the securities industry. 
NFA further stated that exempting SFPs carried in securities accounts 
from the prohibition would be consistent with the general principle 
that differing CFTC and SEC regulatory requirements should be 
determined by the type of account and would avoid operational 
difficulties. The CFTC may address the arbitration issue separately.

I. Rule 15c3-3 Definitions

    The SEC amended the definition of the term ``customer'' and has 
added definitions for the terms ``securities account'' and ``futures 
account.'' Certain technical changes were made to the definitions from 
what was proposed. Specifically, the SEC added a sentence to the Rule 
15c3-3(a)(1) definition of ``customer'' that states, ``[i]n addition, 
the term [customer] shall not include a person to the extent that the 
person has a claim for security futures products held in a futures 
account or in a `proprietary account' as defined by the Commodity 
Futures Trading Commission in section 1.3(y) of this chapter.'' This 
definition was revised to exclude a futures account or a ``proprietary 
account,'' which is specifically exempted from the definition of 
customer under the CFTC rules.\57\
---------------------------------------------------------------------------

    \57\ See 17 CFR 1.3(k) and 1.3(y).
---------------------------------------------------------------------------

    The term ``securities account'' is defined in Rule 15c3-3(a)(14) as 
an account that is maintained in accordance with the requirements of 
Section 15(c)(3) of the Exchange Act and Rule 15c3-3 thereunder, and 
Rule 15c3-3(a)(15) defines the term ``futures account'' as an account 
that is maintained in accordance with the segregation requirements of 
section 4d of the Commodities Exchange Act (7 U.S.C. 6d) and the rules 
thereunder. These definitions were changed from the Proposal to more 
closely mirror the definitions used by the CFTC so that certain 
customer accounts are not inadvertently omitted from coverage under 
either regulatory regime.

J. Amendments to Reserve Formula Item 13 and Note F

    One commenter noted that item 13 of Rule 15c3-3a (the ``Reserve 
Formula'') allows margin required and on deposit at The Options 
Clearing Corporation (``OCC'') for options contracts written or 
purchased in customer accounts to be included as a debit in the Reserve 
Formula calculation required under Rule 15c3-3(e).\58\ This commenter 
stated that in the near future, the OCC and other clearing 
organizations, including clearing organizations registered with the 
CFTC as derivatives clearing organizations pursuant to Section 5b of 
the CEA, may clear SFPs carried by broker-dealers in the securities 
accounts of customers. The commenter suggested that margin required and 
on deposit with the OCC and other clearing organizations relating to 
SFPs carried in customer securities accounts should also be included as 
a debit in the Reserve Formula. The SEC has decided to address this 
issue in a separate rulemaking.
---------------------------------------------------------------------------

    \58\ 17 CFR 240.15c3-3(e).
---------------------------------------------------------------------------

K. Exchange Act Recordkeeping Rules

1. Amendment to Paragraph 17a-4(b)(9)
    The SEC amended Rule 17a-4(b)(9) to provide that the records 
broker-dealers are required to create or obtain pursuant to new 
paragraph 15c3-3(o) \59\ must be maintained for at least three years, 
the first two in an easily accessible place.
---------------------------------------------------------------------------

    \59\ New paragraph 15c3-3(o) requires that when effecting a 
change of an SFP customer's account type a Full FCM/Full BD must 
make a record of the change.
---------------------------------------------------------------------------

    Present Rule 17a-4(b)(4) requires that a broker-dealer maintain 
``originals of all communications received and copies of all 
communications sent * * * relating to his business as such.'' Thus, the 
paragraph 15c3-3(o) requirements that a broker-dealer must furnish the 
customer with certain disclosures, and provide each customer with 
notice of the effective date of a change of account type is covered 
under the present rule.
2. New Paragraph 17a-4(k)
    New paragraph (k) to Exchange Act Rule 17a-4 parallels CFTC Rule 
1.35(a-2)(1). This paragraph requires a broker-dealer that engages in 
an SFP business, upon request of the SEC or of any self-regulatory 
organization of which it is a member, to obtain from its customers and 
provide to the SEC or the applicable self-regulatory organization 
documentation of cash transactions underlying exchanges of SFPs for the 
underlying security(ies). This type of transaction is also called an 
exchange of futures for physical (or an ``EFP''). The production of 
this documentation is necessary, among other things, to allow 
regulators to investigate claims of market manipulation.
    In the futures markets, an EFP is a transaction between two parties 
in which the first party buys a physical commodity from the second 
party and simultaneously sells (or gives up a long) a futures contract 
on that physical commodity to the second party. The CEA authorizes EFPs 
only to the extent that they are conducted in accordance with the rules 
of a contract market. EFPs traditionally served an important function 
by providing a means of pricing a cash transaction, or of making or 
taking delivery on their futures commitments outside the normal 
exchange delivery system, allowing parties to offset exchange positions 
through a privately negotiated transaction. EFPs are commonly used in 
the futures markets to enter or exit positions in the futures market 
after normal trading hours.\60\
---------------------------------------------------------------------------

    \60\ See Report of the CFTC's Division of Trading and Markets: 
Exchanges of Futures for Physicals (October 1987).
---------------------------------------------------------------------------

    Industry representatives have informed SEC staff that EFPs may be 
used with relation to SFPs. In the SFP market, an EFP would be a two 
party transaction in which the first party sells an SFP (or gives up a 
long) to the second party, while simultaneously buying or taking 
delivery on the underlying securities from the same second party. After 
the transaction, the first party will have the securities and the 
second party will be long, or own, the SFP. If the second party was 
short an SFP to hedge its long securities position, it may use its 
newly acquired SFP to offset that short position in the SFP. The two 
parties must then notify the firm or firms that hold their securities 
and SFPs of the EFP so that records as to the ownership of the 
transferred securities and SFPs can be amended, and the clearing agency 
or organization can be notified of the change.
    The SEC revised the proposed language of paragraph (k) of Rule 17a-
4 to account for the fact that Exchange Act Rules 17a-3 and 17a-4 
already require that certain records regarding securities transactions 
be created,

[[Page 58291]]

maintained, and made available to the SEC and self-regulatory 
organizations upon request. Accordingly, paragraph (k) does not require 
a broker-dealer to request and obtain from its customers or provide to 
a requesting regulator documentation regarding exchanges of security 
futures products for physical if the underlying cash transaction or 
exchange was effected through a registered broker-dealer and is of a 
type required to be recorded pursuant to Rule 17a-3.

L. Redesignation of Present Paragraphs (k) and (l) of Exchange Act Rule 
17a-4

    On October 26, 2001 the SEC adopted final rule amendments to 
Exchange Act Rule 17a-4 that included new paragraphs (k) and (l).\61\ 
However, those amendments do not become effective until May 2, 2003. As 
the present amendments will become effective before that date, the SEC 
chose to redesignate paragraphs (k) and (l) as paragraphs (l) and (m) 
and insert the new EFP requirements as paragraph (k). The effective 
date of the redesignated paragraphs will not change, but will continue 
to be May 2, 2003.
---------------------------------------------------------------------------

    \61\ 66 FR 55817, at 55841 (November 2, 2001), Exchange Act 
Release No. 44992 (Oct. 26, 2001).
---------------------------------------------------------------------------

M. Exchange Act Reporting, Notification, and Quarterly Count 
Requirements

    The SEC also is adopting final rule amendments to Rules 17a-5, 17a-
7, 17a-11, and 17a-13, to exempt certain Notice BDs from the 
requirements to file certain reports,\62\ maintain records at a place 
within the United States,\63\ send telegraphic notification to the 
SEC,\64\ and perform quarterly securities counts to verify 
positions.\65\ The CFTC has similar rules \66\ that would be applicable 
to Notice BDs, and if the SEC does not exempt Notice BDs from these 
rules, they would be subject to duplicative requirements. These 
amendments exempt only Notice BDs that are not members of a national 
securities exchange or national securities association fully-registered 
with the SEC pursuant to sections 6(a) or 15A(a) of the Exchange Act 
respectively (``Fully-registered National Securities Exchange'' and 
``Fully-registered National Securities Association'').\67\ A Notice BD 
that is a member of a Fully-registered National Securities Exchange or 
a Fully-registered National Securities Association is still subject to 
these rules.
---------------------------------------------------------------------------

    \62\ Broker-dealers are required to file monthly and/or 
quarterly reports (commonly referred to as FOCUS Reports), annual 
audited statements, and send financial statements to customers 
pursuant to Rule 17a-5 (17 CFR 240.17a-5).
    \63\ Non-resident brokers and dealers are required, pursuant to 
Rule 17a-7 (17 CFR 240.17a-7), to maintain certain records at a 
location, designated by the firm, within the United States, or 
provide the SEC with a signed undertaking stating that it will 
furnish such records to representatives of the SEC upon demand.
    \64\ See Rule 17a-11 (17 CFR 240.17a-11).
    \65\ See Rule 17a-13 (17 CFR 240.17a-13).
    \66\ See, e.g., 17 CFR 1.10 and 1.12.
    \67\ 15 U.S.C. 78f(a) and 15 U.S.C. 78o-3(a). This does not 
include any national securities exchanges or national securities 
associations that are registered pursuant to section 6(g) or 15A(k) 
of the Exchange Act (15 U.S.C. 78f(g) or 15 U.S.C. 78o-3(k)).
---------------------------------------------------------------------------

VI. Administrative Procedure Act

    Section 553(d) of the APA generally provides that, unless an 
exception applies, a substantive rule may not be made effective less 
than 30 days after notice of the rule has been published in the Federal 
Register.\68\ One exception to the 30-day requirement is an agency's 
finding of good cause for providing a shorter effective date.
---------------------------------------------------------------------------

    \68\ 5 U.S.C. 553(d).
---------------------------------------------------------------------------

    The CFMA became law on December 21, 2000. Since the passage of the 
CFMA, the Commissions have moved quickly to propose and adopt rules 
that would allow broker-dealers and other market participants to begin 
trading SFPs. The Commissions published for comment in the Federal 
Register proposed rules on October 4, 2001 (the ``Proposal'').\69\ The 
proposed rules were designed to reduce conflicting and duplicative 
regulations applicable to both Full FCM/Full BDs and firms notice 
registered \70\ with either the CFTC or the SEC, and to address certain 
differences between the CEA and Exchange Act rules. After reviewing and 
considering the comments received and making certain changes, the 
Commissions are adopting these rules, which allow firms to maintain 
customer SFPs in either a futures account subject to the CEA 
segregation requirements or a securities account subject to Rule 15c3-3 
and SIPA.
---------------------------------------------------------------------------

    \69\ See supra note .
    \70\ See supra notes 15 and 17.
---------------------------------------------------------------------------

    The primary purpose of the 30-day delayed effectiveness requirement 
is to give affected parties a reasonable period of time to adjust to 
the new rules. However, shortening the time period before the final 
rule amendments become effective will benefit, not harm, affected 
parties. The final rule amendments will reduce duplicative regulation 
applicable to firms that intend to effect transactions in and hold SFPs 
for the benefit of customers, and it may be impractical for those firms 
to engage in this business until the final rule amendments are 
effective. The final rule amendments, with one exception,\71\ are 
substantially the same as the proposed rules.
---------------------------------------------------------------------------

    \71\ The final rule amendments eliminated the proposed 
requirement that firms obtain a signed acknowledgement from a 
customer before accepting an SFP order.
---------------------------------------------------------------------------

    Allowing these rules to be effective prior to 30 days after 
publication would result in more cost-effective and efficient trading 
of SFPs. Intermediaries would be permitted to comply with the new 
rules, which are specifically designed for the trading of SFPs. If 
these rules are not effective on September 13, 2002 (the date that the 
rules pertaining to customer margin will be effective), SFP trading may 
begin and intermediaries would have to comply with two sets of 
requirements prior to these rules' effective date. Subsequent to the 
effective date, intermediaries then would be required to modify their 
systems to comply with these rules. For these reasons, the Commissions 
find that good cause exists for these rules to be effective on 
September 13, 2002, the effective date of the customer margin rules 
relating to security futures.

VII. Paperwork Reduction Act

    CFTC: This rulemaking contains information collection requirements. 
As required by the Paperwork Reduction Act of 1995 (``PRA''),\72\ the 
CFTC submitted a copy of the proposed rules to the Office of Management 
and Budget (``OMB'') for its review. No comments were received in 
response to the CFTC's invitation in the Proposal to comment on any 
potential paperwork burden associated with the rules.
---------------------------------------------------------------------------

    \72\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    SEC: The SEC revised certain collections of information under the 
title ``Amendments to Rules 15c3-3, 17a-3, 17a-4, 17a-5, 17a-7, 17a-11, 
and 17a-13 to Recognize Security Futures Products.'' The rules being 
amended contain currently approved collections of information under OMB 
control numbers 3235-0078, 3235-0033, 3235-0279, 3235-0123, 3235-0131, 
3235-0085 and 3235-0035, respectively.
    Presently, Rules 17a-3, 17a-5, 17a-7, 17a-11, and 17a-13 apply only 
to broker-dealers with relation to securities products. FCMs are 
subject to similar CFTC rules. Because an SFP is both a security and a 
future, without these amendments FCMs would be subject to these rules 
and the CFTC's similar rules. Therefore, the amendments to Rules 17a-3, 
17a-5, 17a-7, 17a-11, and 17a-13 will not change the paperwork burden 
for broker-dealers or for FCMs. Instead, by exempting certain Notice 
BDs from the requirements of those rules, no additional paperwork 
burden is created.

[[Page 58292]]

    The SEC submitted amendments to the information collection 
requirements contained in the proposed amendments to Rules 15c3-3 and 
17a-4 to OMB for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
Sec.  1320.11. In accordance with the clearance requirements of 44 
U.S.C. 3507, OMB notified the SEC on January 21, 2002 and February 8, 
2002 of its approval of the revisions to the collections of information 
contained in Rule 17a-4 and Rule 15c3-3, respectively.

A. Collection of Information Under These Amendments

    The amendments to Rule 15c3-3 require broker-dealers to provide 
each customer that wishes to engage in SFP activities with a disclosure 
document. The disclosure document will supply customers with 
information that can be used to understand the protections that the 
CFTC and SEC regulatory schemes provide to an account in which SFPs are 
held. Further, a Full FCM/Full BD must send a notification to any 
customer whose account type has been changed.
    The amendments to Rule 17a-4 specify the length of time that the 
records collected under new paragraph 15c3-3(o) must be maintained. In 
addition, the amendments to Rule 17a-4 require that, if requested by a 
Commission representative or a self-regulatory organization, a broker-
dealer must request and obtain certain documents underlying exchanges 
of SFPs for physical securities and provide them to the requesting 
regulator.

B. Proposed Use of Information

    The information collected pursuant to the amendments to Rules 15c3-
3 and 17a-4 will be used by the SEC, self-regulatory organizations, and 
other securities regulatory authorities during examinations and 
investigations to determine whether a broker-dealer is in compliance 
with these rules and with other, related customer protection 
requirements. The information collected pursuant to the amendments to 
the collections of information under Rules 15c3-3 and 17a-4 will be 
stored by the broker-dealer and made available to the various 
securities regulatory authorities as required to facilitate 
examinations and investigations.

C. Respondents

    These proposed amendments to Rules 15c3-3 and 17a-4 would only 
apply to firms that plan to effect transactions in and hold SFPs for 
the benefit of customers. In addition, these provisions would apply 
only to broker-dealers that carry customer funds, securities or 
property and do not claim an exemption from Rule 15c3-3 (``clearing 
firms''). As of December 31, 2001, there were 412 clearing firms. In 
addition, only firms that plan to effect transactions in and hold SFPs 
for the benefit of customers will be required to comply with this rule. 
As of December 31, 2001, 89 broker-dealers were registered with the 
CFTC as FCMs, 55 of which are clearing and carrying firms. Based upon 
conversations between the SEC and industry representatives regarding 
the number of firms that may conduct a SFP business, the Staff 
estimated that the number of firms likely to engage in this business, 
in addition to the broker-dealers already registered with the CFTC as 
FCMs, is 10% of the clearing and carrying firms not presently 
registered with the CFTC. Thus, the Staff estimates that approximately 
91 firms (55 + ((412 - 55) x 10%)) will be required to comply with 
these proposed amendments.\73\
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    \73\ As stated above, the SEC submitted amendments to the 
information collection requirements contained in the proposed 
amendments to Rules 15c3-3 and 17a-4 to OMB, and was notified of its 
approval of those amendments. The SEC's estimates in those 
submissions (100 respondent broker-dealers and 97.6 million customer 
accounts) were based on information provided by broker-dealers in 
their December 31, 2000 FOCUS filings. However, the SEC has received 
FOCUS filings since those submissions were made to OMB, and we have 
updated our estimates to include this new information.
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D. Total Annual Reporting and Recordkeeping Burden

1. Rule 15c3-3
    Pursuant to proposed new paragraphs (o)(2) and (o)(3) of Exchange 
Act Rule 15c3-3, a broker-dealer that effects transactions in SFPs for 
customers must provide each customer that plans to effect SFP 
transactions with a disclosure document containing certain information, 
and send each SFP customer notification of any change of account type. 
The SEC Staff estimates that broker-dealers engaging in an SFP business 
will spend approximately 2,867 hours (or 31\1/2\ hours \74\ each x 91 
clearing broker-dealers) to draft a disclosure document \75\ and a 
template notification of account type change.\76\ In addition, the SEC 
estimates that compliance with the amendments to Rule 15c3-3 will 
require an additional 82,240 hours per year.\77\ Further, the SEC Staff 
estimated the costs of printing and posting the disclosure documents 
and notifications of account type change as being approximately 
$986,880.\78\
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    \74\ See infra notes 75 and 76. ((20 hours + 8 hours for the 
disclosure document) + (3 hours + \1/2\ hour for the notification of 
account type change)) = 31\1/2\.
    \75\ The Staff estimates (based on its experience) that, on 
average, one attorney will spend approximately 20 hours to create 
the disclosure document, and one senior attorney will spend 
approximately 8 hours reviewing and editing the document.
    \76\ The Staff estimates (based on its experience) that, on 
average one attorney will spend approximately 3 hours to create the 
notification, and one senior attorney will spend approximately 30 
minutes reviewing and editing the document.
    \77\ Broker-dealers reported, in their December 31, 2001 FOCUS 
Schedule 1 filings, that they maintained 102,800,000 customer 
accounts. The SEC Staff estimates, based on the number of active 
options accounts and conversations with industry representatives, 
that 8% of these customers may engage in SFP transactions 
(102,800,000 accounts x 8% = 8,224,000) (this would include accounts 
transferred from one broker-dealer to another). Further, the Staff 
estimates that 20% per year may change account type. Thus, broker-
dealers would be required to create this record for 1,644,800 
accounts (or 8,224,000 accounts x 20%). The Staff believes that it 
will take approximately 3 minutes to create each record. Thus, the 
total annual burden associated with creating this record of change 
of account type, as required pursuant to new paragraph (o)(3)(i) of 
Rule 15c3-3, will be 82,240 hours (1,644,800 accounts x (3 min/60 
min)).
    \78\ The estimates of costs of printing the disclosure documents 
are based on the number of estimated customer accounts that will be 
opened to effect transactions in SFPs. The SEC Staff estimates that 
the cost of printing and sending each disclosure document will be 
approximately $.10 per document sent. This estimate is based on past 
conversations with industry representatives regarding other rule 
changes that required similar printing and postage costs: postage 
may be minimized by including the disclosure document with other 
information mailed to customers. Thus, the total cost to the 
industry of printing and sending disclosure documents will be 
approximately $822,400 (or (8,244,000 x $.10)). The SEC Staff 
estimates that the cost of printing and posting each notification of 
account type change will be approximately $.10 per document sent. 
Therefore, the SEC Staff estimates that the cost of sending this 
notification to customers will be $164,480 (1,644,800 accounts x 
$.10). (($822,400 + $164,480) = $986,880).
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2. Rule 17a-4
    The SEC Staff estimates that broker-dealers engaging in an SFP 
business will spend approximately 9,111 hours per year (91 hours \79\ + 
9,020 hours \80\ to

[[Page 58293]]

assure compliance with the amendments to Rule 17a-4.
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    \79\ Only broker-dealers that engage in SFP business will be 
subject to the changes to Rule 17a-4. The Staff believes that 91 
broker-dealers may decide to engage in a security futures product 
business (see text accompanying note). The Staff estimates that it 
will take, on average, one compliance person approximately 1 hour 
per year to assure that the broker-dealer is in compliance with the 
record maintenance provisions of Rule 17a-4(b)(9) as it relates to 
new paragraph 15c3-3(o). Thus, the total yearly burden of assuring 
compliance with the amendment to Rule 17a-4(b)(9) is approximately 
91 hours (1 hour x 91 broker-dealers).
    \80\ The SEC Staff believes this requirement is analogous to 
bluesheet requests made by the SEC to broker-dealers. Bluesheet 
requests are only sent to clearing firms, 661 of which were 
registered with the SEC as of December 31, 2000 (according to FOCUS 
Schedule 1 filings). The SEC sent 32,278 bluesheet request letters 
to 294 broker-dealers from January 1, 2000 to December 31, 2000. 
Thus, 45% of the broker-dealers that could be affected received 
letters (or 294 broker-dealers that received bluesheet requests/661 
total clearing firms), and those broker-dealers that did receive 
letters received, on average, 110 letters each (or 32,278 bluesheet 
requests/294 broker-dealers that received bluesheet requests). 
Therefore, the SEC Staff estimates that 41 clearing firms (45% x 91 
clearing firms that engage in SFP business) will receive 
approximately 110 requests each for the information required to be 
collected and provided pursuant to new paragraph (k) of Rule 17a-4, 
or a total of 4,510 requests (or 41 broker-dealers x 110 requests 
each). The SEC Staff estimates (based on its experience) that it 
will take approximately 2 hours for a broker-dealer to respond to a 
request to provide this information to a regulator. Therefore, the 
SEC Staff believes that it would take a total of approximately 9,020 
hours each year for broker-dealers to comply with this requirement 
(4,510 requests x 2 hours per request).
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    Finally, the SEC Staff estimates that it may cost the broker-
dealers engaging in this business approximately $2.4 million \81\ to 
update their systems to comply with the amendments to Rules 15c3-3, 
17a-3, 17a-4, 17a-5, 17a-7, 17a-11, and 17a-13.
---------------------------------------------------------------------------

    \81\ This estimate is based on representations made by industry 
representatives relating to other Commission rules that required 
similar systems modifications.
---------------------------------------------------------------------------

    In the Proposal, the Commissions solicited comments on the proposed 
collections of information. No comments were received that addressed 
the PRA submission.
    The collections and maintenance of information, and the reports 
made to the SEC and others that are required pursuant to Rules 15c3-3 
and 17a-4 are mandatory. 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.

VIII. Costs and Benefits of the Rules

    CFTC: Section 15 of the CEA, as amended by section 119 of the CFMA, 
requires the CFTC to consider the costs and benefits of its actions 
before promulgating new rules or issuing orders \82\ under the CEA. By 
its terms, section 15 does not require the CFTC to quantify the costs 
and benefits of a new rule or to determine whether the benefits of the 
proposed regulation outweigh the costs. Rather, section 15(a) simply 
requires the CFTC to ``consider the costs and benefits'' of its action.
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    \82\ Section 15(a)(3) sets forth three exceptions to the 
requirement for conducting a cost-benefit analysis, none of which 
would be applicable to these rules.
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    Section 15(a) further specifies that the costs and benefits of the 
proposed CFTC action shall be evaluated in light of the following five 
considerations: (1) Protection of market participants and the public; 
(2) efficiency, competitiveness, and financial integrity of futures 
markets; (3) price discovery; (4) sound risk management practices; and 
(5) other public interest considerations. The CFTC may, in its 
discretion, give greater weight to any one of the five enumerated areas 
of concern and may, in its discretion, determine that, notwithstanding 
its costs, a particular rule is necessary or appropriate to protect the 
public interest or to effectuate any of the provisions or to accomplish 
any of the purposes of the CEA.
    There are three considerations relevant to these rules. These are:
    (1) Protection of market participants and the public; (2) sound 
risk management practices; and (3) other public interest 
considerations. The CFTC has considered the costs and benefits of these 
rules in light of these three areas of concern.
    The rules include a disclosure requirement applicable to FCMs. 
Specifically, CFTC Rule 41.41 requires FCMs to make disclosure 
concerning the customer protections available under both the securities 
and futures regulatory systems. This requirement is specifically 
intended to ensure that SFP customers know what protections are, or are 
not, in place in the unlikely event of the insolvency of the firm. In 
addition, section 4d(c) of the CEA, as amended by the CFMA, requires 
the CFTC, in consultation with the SEC, to issue such rules, 
regulations, or orders as are necessary to avoid duplicative or 
conflicting regulations applicable to any firm that is fully-registered 
with both the CFTC and the SEC involving the application of relevant 
provisions of the CEA and the regulations relating to the treatment of 
customer funds. These rules are intended to focus Full FCM/Full BDs on 
the need to select which of the two regulatory regimes, the segregation 
requirements of the CEA or SIPA provisions, will provide coverage for 
SFP customer funds in the unlikely event that the firm becomes 
insolvent. This will be part of a firm's overall risk management 
structure to safeguard customer and firm assets.
    CFTC Rule 41.41 is intended to minimize the costs of compliance 
because it provides firms with maximum flexibility, consistent with 
legal requirements, in designing their own disclosure documents. The 
CFTC notes that industry representatives, in consultation with staffs 
of the CFTC and SEC, are developing a uniform disclosure statement 
concerning SFPs.\83\ The CFTC has expressed the view that the 
disclosure document should incorporate a discussion of the segregation 
requirements and SIPA, and that, if it does, the CFTC will not require 
the discussion to be set forth in another separate document.
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    \83\ See note 26 and accompanying text.
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    SEC: 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 consult with each 
other and issue rules, regulations, or orders, as necessary, to avoid 
certain 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.\84\ To this end, 
the SEC amended Exchange Act Rules 15c3-3 and 17a-4 by adding new 
paragraph (o) to Rule 15c3-3, and new paragraphs (b)(9) and (k) to Rule 
17a-4. The SEC also amended Exchange Act Rules 17a-3, 17a-5, 17a-7, 
17a-11, and 17a-13 to exempt certain Notice BDs from those rules.
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    \84\ See note 7.
---------------------------------------------------------------------------

    The amendments to Rule 15c3-3 allow a Full FCM/Full BD to choose 
whether to carry a customer's SFP positions in a securities account or 
a futures account. Whether an SFP is held by a Full FCM/Full BD in a 
securities or a futures account will determine whether the account will 
be subject to the CFTC's segregation requirements or the SEC's customer 
protection rule and SIPA. Paragraph (o) of Rule 15c3-3 strives both to 
identify the manner in which a firm holds SFPs and to assure that each 
customer understands which regulatory structure will govern an account 
in which SFPs are held. Accordingly, paragraph (o) of Rule 15c3-3 
requires that a firm establish written policies and procedures, and 
provide customers with specific disclosures. In addition, if a Full 
FCM/Full BD permits the account type to be changed, the firm must also 
create a detailed record of any change and notify the customer in 
writing of the effective date of the change.
    In the Proposal, the SEC solicited comments on all aspects of the 
cost-benefit analysis, including identification of any additional costs 
and/or benefits

[[Page 58294]]

of the proposed amendments. It also strongly encouraged commenters to 
identify and supply any relevant data, analysis and estimates. No 
comments were received that specifically addressed the cost-benefit 
analysis; however, all three comment letters the SEC received did 
mention certain costs and/or benefits. These comments were primarily 
qualitative in nature, and are described more specifically below.
    The SEC has identified below certain costs and benefits related to 
the Amendments to Rules 15c3-3, 17a-3, 17a-4, 17a-5, 17a-7, 17a-11, and 
17a-13. In addition, any comments received that refer to costs or 
benefits are discussed in the section about which the comment was 
directed.

A. Benefits

1. Elimination of Conflicting and Duplicative Regulation
    The amendments to Rule 15c3-3 benefit broker-dealers by eliminating 
certain conflicting regulations for Full FCM/Full BDs. More 
specifically, without these amendments, duplicative regulations would 
have required Full FCM/Full BDs to maintain two separate and redundant 
reserves to satisfy both CFTC segregation requirements and Rule 15c3-3 
reserve requirements. The amendments to Exchange Act Rules 17a-3 and 
17a-4 also eliminate duplicative regulations for Notice BDs, which 
would have been subject to more than one set of recordkeeping rules. In 
addition, Rules 17a-5, 17a-7, 17a-11 and 17a-13 were amended to 
eliminate duplicative regulation of Notice BDs.
    The simplicity of these amendments benefits broker-dealers as well. 
The CFTC and the SEC, in amending these rules to avoid duplicative and 
conflicting regulations, attempted to provide as much flexibility and 
create as few operational issues and additional costs as possible. 
Instead of creating a new structure to be used solely for SFPs, the 
amendments allow broker-dealers and FCMs to maintain the same 
operational structures they use presently for securities and for 
futures. A Full FCM/Full BD can determine which regulatory structure 
will be applicable to SFPs simply by choosing the type of account in 
which SFPs will be held. Notice registrants will simply continue to use 
the same organizational structure and be subject to the same 
regulations presently applicable to their business.
    Both the CFTC and SEC customer protection regimes cause firms to 
take certain steps to protect customer assets. The Commissions believe 
it is unlikely that firms would attempt regulatory arbitrage based on 
differences in customer protection regimes. Further, none of the 
commenters suggested that differences in the two regulatory regimes 
might lead to regulatory arbitrage.
    One commenter, in support of the amendments allowing a firm to 
choose whether to hold a customer's SFP position in a securities 
account or in a futures account, stated ``the Commissions' desire to 
maintain consistent reporting and recordkeeping procedures that follow 
the type of account in which the SFPs are held is a benefit to industry 
participants.'' \85\
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    \85\ See CME/CBOT Letter, p. 2.
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2. Customer Understanding
    The purpose of these two regulatory schemes is the protection of 
customer assets. The SEC believes it is important that customers are 
informed of what regulatory protections apply to the account in which 
their SFPs are held. If a firm does not allow customers to choose 
whether their SFP positions will be held in a securities account or a 
futures account, the disclosure document will help customers understand 
the regulatory protections applicable to their account. If a firm 
allows customers to choose whether their SFP positions will be held in 
a securities account or a futures account, the requirement that a 
disclosure document be sent to customers describing the protections 
afforded pursuant to Rule 15c3-3 and SIPA, as well as the protections 
afforded pursuant to CEA segregation rules, will assist the customer in 
making an informed decision as to which regulatory scheme will protect 
their account. Also, providing the customer with the required 
disclosures at least ten days prior to a change of account type will 
allow any customer not wanting their account type to change the 
opportunity to transfer his or her account to another broker-dealer. 
Without the disclosure document, it would be more difficult for the 
customer to obtain the information necessary to make an informed 
decision. In fact, one commenter voiced agreement with the requirement 
that firms provide customers with a disclosure document, stating, 
``[w]hether or not customers have a choice [as to account type], they 
should have a basic understanding of the protections that apply (or do 
not apply) to their account.''\86\
---------------------------------------------------------------------------

    \86\ See NFA Letter, p. 6.
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    The requirement that the broker-dealer send disclosure documents to 
customers also benefits the broker-dealer. By sending this disclosure 
document the broker-dealer has evidence that the customer has been 
notified of which regulatory scheme will be applicable, and which 
regulatory scheme will not be applicable, to his account.
3. Examination Efficiencies
    Certain of the requirements included in the amendments are designed 
to help examinations of broker-dealers proceed in an efficient and 
effective manner. If the regulatory agency staff cannot ascertain which 
regulatory structure applies to each customer account or what policies 
and procedures the broker-dealer employs in relation to the 
administration of those accounts, it must spend more time at the firm 
to research and evidence these issues. This increases the time of 
examinations and increases the costs to the broker-dealer, which must 
provide additional documentation and staff time to answer the 
regulatory agency staff's questions.

B. Costs

    The amendments were drafted to permit flexibility in the creation 
of records in order to reduce the costs to broker-dealers. In addition, 
records created pursuant to the amendments will be subject to the 
Exchange Act Rule 17a-4 maintenance requirements, which provide a 
number of options as to how a broker-dealer may maintain records. Rule 
17a-4 gives each broker-dealer the flexibility to choose for itself the 
most appropriate method to comply with the rules based upon its present 
processes and systems capabilities. In fact, one commenter stated, 
``[a]llowing firms to select how to carry the positions will enable 
firms to utilize the most cost-effective solutions when determining how 
to support this product.'' \87\
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    \87\ See FIA/SAI Letter, p. 2.
---------------------------------------------------------------------------

    In addition, the costs of these amendments is difficult to 
ascertain because they may vary widely due to differences both in the 
amount of SFP business in which a broker-dealer may engage and the 
current recordkeeping systems employed by the broker-dealer.
1. Addition of Paragraph 15c3-3(o)
a. Establishment of a Written Policy
    Pursuant to paragraph (o)(1)(ii) of Rule 15c3-3, a Full FCM/Full BD 
that effects transactions in SFPs for customers must establish written 
policies and procedures describing how customer SFP positions will be 
treated and, if applicable, the process by which a customer may elect 
the type of account in which SFPs will be carried. Only broker-dealers 
that effect transactions in SFPs for customers must

[[Page 58295]]

draft these policies and procedures. Self-regulatory organization rules 
presently require that a broker-dealer establish written procedures to 
supervise the types of business in which it engages.\88\ Thus, a Full 
FCM/Full BD would need to establish these policies and procedures 
regardless of this amendment to Rule 15c3-3. Accordingly, the SEC 
estimates there is no additional cost to a broker-dealer associated 
with this amendment.
---------------------------------------------------------------------------

    \88\ See e.g., NSD Rule 3010.
---------------------------------------------------------------------------

b. Furnishing a Disclosure Document to Customers
    Pursuant to new paragraph (o)(2) of Rule 15c3-3, a broker-dealer 
that effects transactions in SFPs for customers must provide each of 
those customers with a disclosure document containing certain 
information. The SEC believes there would be two costs associated with 
furnishing this disclosure document: the initial, one-time cost to 
create the document, and the cost of printing and sending the 
disclosure document to customers.
    One commenter indicated that it is an active member of a group of 
industry representatives that is developing a uniform disclosure 
statement for security futures products.\89\ The creation of a uniform 
disclosure statement should decrease the initial cost of developing 
such a document to broker-dealers; however, each broker-dealer that 
must provide the required disclosures to its customers will still need 
to review each available uniform statement to determine whether the it 
satisfies the requirements of the rule as applied to the broker-
dealer's own business, and whether it wants or needs to tailor the 
document for its own purposes.
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    \89\ See note 26 and accompanying text.
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    The SEC Staff estimates that approximately 91 firms \90\ will be 
required to create a disclosure document. In addition, the SEC Staff 
estimates that the hourly burden to create the disclosure document 
(discussed in the PRA section) will result in a one time cost to the 
industry of approximately $447,720.\91\ Further, as discussed in the 
PRA section, the SEC Staff estimates that the cost of printing and 
sending these disclosure documents will result in a the total annual 
cost to the industry of approximately $822,400.\92\
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    \90\ See text accompanying note 73.
    \91\ See note 75. According to the SIA's Report on Management 
and Professional Earnings in the Securities Industry 2000, Tables 
107, 108 and 110 (plus 35% overhead), the hourly cost of an attorney 
is approximately $156.00 and the hourly cost of a deputy general 
counsel is $225.00. ((($156.00 x 20 hours) + ($225.00 x 8 hours)) x 
91 broker-dealers).
    \92\ See note 78.
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c. Changes of Account Type
i. Record of Change of Account Type
    Pursuant to new paragraph (o)(3)(i) of Rule 15c3-3, a Full FCM/Full 
BD that changes the type of account in which a customer's SFPs are held 
must create a record of each change in account type that includes the 
name of the customer, the account number, the date the broker-dealer 
received the customer's request to change the account type, and the 
date the change in account type took place. The SEC Staff believes that 
not all Full FCM/Full BDs that effect transactions in SFPs for 
customers will allow for changes in account type. To the extent that a 
Full FCM/Full BD does permit changes of account type, these data items 
are the type of information that would be easily accessed or created 
and maintained; therefore, the SEC Staff believes the costs of 
maintaining this information will be minimal. The SEC Staff estimates 
that the hourly burden to create records of a change of account type, 
as discussed in the PRA, will result in a total annual cost to the 
industry of approximately $3.5 million.\93\
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    \93\ See note 77. According to Table 119 of the SIA's Report on 
Office Salaries In the Securities Industry 2000, the hourly cost of 
an operations specialist is approximately $42.00 (which includes an 
addition 35% to account for overhead costs) (82,240 hours x $42.00).
---------------------------------------------------------------------------

ii. Customer Notification of Effective Date of Change of Account Type
    Pursuant to new paragraph (o)(3)(ii) of Rule 15c3-3, a Full FCM/
Full BD that permits a change in the type of account in which a 
customer's SFPs are held must notify the customer in writing, at least 
ten days prior to the date of the change of account type, of the date 
the change will become effective. One commenter objected to this 
requirement, stating ``[r]equiring a firm to provide a customer with a 
[second] separate notice as to when the change became effective imposes 
unnecessary additional administrative costs and staffing burdens on 
such firms.'' \94\ The SEC believes that customers must be informed of 
the date changes of account type became effective. However there is no 
requirement that the notification be sent separately and the firm may 
choose to include the notification with other correspondence that the 
firm sends to the customer.
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    \94\ See note 47 and accompanying text.
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    The SEC Staff believes that there are two costs associated with 
providing this notification to customers: the initial, one-time cost to 
draft the form for notification, and the cost of printing and sending 
the notification to customers. The SEC Staff estimates that the hourly 
burden to create the customer notification (discussed in the PRA 
section) will result in a total one time cost to the industry of 
approximately $52,826.\95\
    The SEC Staff believes that firms will use the least costly method 
to comply with these requirements, and will probably include this 
notification with other mailings sent to the customer. As stated in the 
PRA section, the SEC Staff estimates that the total cost to the 
industry of printing and posting the acknowledgment will be 
approximately $164,480.\96\
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    \95\ See note 76. According to the SIA's Report on Management 
and Professional Earnings in the Securities Industry 2000, Tables 
107, 108 and 110 (and adding an additional 35% to account for 
overhead costs), the hourly cost of an attorney is approximately 
$156.00 and the hourly cost of a deputy general counsel is $225. 
((156.00 x 3 hours) + ($225 x (30 min/60 min))) x 91 broker-dealers.
    \96\ See note 78.
---------------------------------------------------------------------------

2. Amendments to Rule 17a-4
    The amendments to Rule 17a-4 clarify that the records required to 
be created pursuant to new paragraph (o) of Rule 15c3-3 must be 
maintained for at least three years, the first two in an easily 
accessible place. Once the broker-dealer files these records, the cost 
to maintain them is minimal. The SEC believes that the main cost would 
be the cost to assure that the broker-dealer complies with the rule. 
The SEC Staff estimates that the hourly burden to assure compliance 
with the amendment to Rule 17a-4 (discussed in the PRA section) will 
result in a total annual cost to the industry of approximately 
$9,214.\97\
---------------------------------------------------------------------------

    \97\ See note 79. Based on the SIA's Report on Management and 
Professional Earnings in the Securities industry 2000, Table 051 
(plus 35% overhead), the hourly cost of a compliance manager is 
approximately $101.25 (($101.25 x 1 hour per broker-dealer) x 91 
broker-dealers)).
---------------------------------------------------------------------------

    New paragraph (k) of Rule 17a-4 will require a broker-dealer that 
engages in a SFP business, upon request of the SEC or a self-regulatory 
organization, to request from its customers and provide to the 
regulator documentation of cash transactions underlying exchanges of 
security futures products for the underlying security(ies). In 
addition, this is not a record that the broker-dealer will be required 
to create or maintain on a regular basis but, instead, a broker-dealer 
will obtain these documents from a customer and provide them to the 
requesting regulator only when specifically requested.
    The SEC Staff estimates that the hourly burden to respond to 4,510

[[Page 58296]]

requests \98\ for documents relating to EFPs (discussed in the PRA 
section) will result in a total annual cost to the industry of 
approximately $913,275.\99\
---------------------------------------------------------------------------

    \98\ See note 80.
    \99\ Based on the SIA's Report on Management and Professional 
Earnings in the Securities Industry 2000, Table 051 (and adding an 
additional 35% to account for overhead costs), the hourly cost of a 
compliance manager is approximately $101.25 ($101.25 x 2 hours x 
4,510 requests).
---------------------------------------------------------------------------

3. Systems Changes
    The SEC Staff believes that broker-dealers may need to update their 
systems to provide for the printing and sending of disclosure documents 
and acknowledgments to SFP customers, and to create and maintain 
information as to changes of account type. The SEC Staff further 
believes, based on conversations with industry representatives, that 
many broker-dealers have not yet updated their systems to provide for 
the trading and processing of SFPs as certain specifications of these 
products have not been finalized. Consequently, the Staff believes that 
any systems coding changes needed to comply with the amendments to 
Rules 15c3-3 and 17a-4 could be incorporated into the initial coding 
for these products, thus greatly decreasing the costs generally 
associated with systems changes. Therefore, as stated in the PRA 
section, the SEC Staff estimates that it may cost the broker-dealers 
engaging in this business approximately $2.4 million \100\ to update 
their systems to comply with the amendments to Rules 15c3-3 and 17a-4.
---------------------------------------------------------------------------

    \100\ See note 81 and accompanying text.
---------------------------------------------------------------------------

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

    Section 3(f) of the Exchange Act \101\ provides that whenever the 
SEC engages in rulemaking and must consider or determine whether an 
action is necessary or appropriate in the public interest, the SEC 
shall consider whether the action will promote efficiency, competition, 
and capital formation. In addition, section 23(a)(2) of the Exchange 
Act \102\ requires the SEC, in adopting Exchange Act rules, to consider 
the impact any such rule would have on competition and to not adopt a 
rule that would impose a burden on competition not necessary or 
appropriate in furthering the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \101\ 15 U.S.C. 78c(f).
    \102\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    In the Proposal, the SEC solicited comments on the effect of the 
proposed rules and rule amendments on competition, efficiency, and 
capital formation. No comments were received that specifically 
addressed the effect the proposed rules and rule amendments may have on 
competition, efficiency, and capital formation. However, one commenter 
stated, ``requiring a signed acknowledgment from a customer trading 
through a Full FCM/Full BD [ * * * ] imposes inequitable burdens on a 
Full FCM/Full BD'' and ``[because] notice registrants are not required 
to obtain a signed acknowledgment from their customers [ * * * ] Full 
FCM/Full BDs [are penalized] vis a vis notice registrants.''\103\ As 
stated above, the Commissions determined not to adopt the 
acknowledgment requirement.
---------------------------------------------------------------------------

    \103\ See CME/CBOT Letter, p. 3.
---------------------------------------------------------------------------

    The SEC believes the amendments are necessary to eliminate 
conflicting or duplicative rules regarding customer protection and 
recordkeeping applicable to SFPs. These amendments, which provide Full 
FCM/Full BDs the flexibility to choose whether SFPs will be held in a 
futures account (subject to the CEA segregation requirements) or a 
securities account (subject to the Exchange Act and SIPA requirements), 
allow these entities to determine and apply the less burdensome 
regulatory scheme. Further, the amendments also exempt certain Notice 
BDs from Exchange Act Rules 17a-3, 17a-5, 17a-7, 17a-11, and 17a-13 
because the CFTC has similar rules that would apply to these firms.
    These amendments should provide an efficient and cost-effective 
means for Full FCM/Full BDs to reconcile their conflicting customer 
protection and segregation requirements with respect to SFPs. The 
amendments also should promote efficiency because they allow firms the 
flexibility to utilize their present systems for processing SFPs, allow 
firms and/or customers to choose the regulatory scheme that will be 
applied to accounts in which customer SFP positions are held, and help 
educate customers regarding the different regulatory schemes (which may 
be applicable to their accounts) that serve to protect their assets. 
The SEC believes that the amendments will not create any anti-
competitive effects and, in fact, should promote competition by 
decreasing the costs associated with engaging in an SFP business. 
Finally, the SEC does not believe that the amendments will hinder 
capital formation, as they harmonize SEC and CFTC customer protection 
rules to eliminate duplicative regulation that would have required 
duplication of reserves/segregated funds.

X. Summary of Regulatory Flexibility Act Certification

    CFTC: The Regulatory Flexibility Act (``RFA'') \104\ requires that 
agencies, in proposing rules, consider the impact of those rules on 
small businesses.\105\ These rules would apply to firms that are 
registered with the CFTC as FCMs. The CFTC has previously established 
certain definitions of ``small entities'' to be used by the CFTC in 
evaluating the impact of its rules on such entities in accordance with 
the RFA.\106\ The CFTC has previously determined that FCMs are not 
small entities for the purpose of the RFA.\107\ In defining ``small 
entities'' for the purpose of the RFA, the CFTC excluded FCMs based on 
the fiduciary nature of FCM-customer relationships and the minimum 
financial requirements that apply to FCMs.\108\ To the extent that the 
rule amendments concerning dispute settlement procedures affect other 
registrants, the amendments relieve existing requirements for the 
registrants. No comments were received concerning the impact of these 
rules on small entities.
---------------------------------------------------------------------------

    \104\ 5 U.S.C. 601 et seq.
    \105\ 5 U.S.C. 603(a)
    \106\ 47 FR 18618 (April 30, 1982).
    \107\ Id. at 18619.
    \108\ Id.
---------------------------------------------------------------------------

    SEC: Pursuant to section 605(b) of the Regulatory Flexibility Act, 
5 U.S.C. 605(b), the Chairman of the Commission has certified that the 
rules and rule amendments will not have a significant economic impact 
on a substantial number of small entities. This certification, 
including the reasons supporting the certification, was attached to the 
Proposal,\109\ as Appendix A.
---------------------------------------------------------------------------

    \109\ See note 8.
---------------------------------------------------------------------------

    In the Proposal the SEC solicited comments on potential impact of 
the rules and rule amendments on small entities. No comments were 
received that discussed the Regulatory Flexibility Act Certification.

Text of Final Rules

List of Subjects

17 CFR Part 1

    Consumer protection, Definitions, Reporting and recordkeeping 
requirements.

17 CFR Part 41

    Security futures products, Customer protection.

17 CFR Part 190

    Consumer protection, Definitions, Reporting and recordkeeping 
requirements.

[[Page 58297]]

17 CFR Part 240

    Broker, dealer, securities, customer protection.

17 CFR Chapter 1--Commodity Futures Trading Commission.

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

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for Part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 
13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity 
Futures Modernization Act of 2000, Appendix E of Pub. L. No. 106-
554, 114 Stat. 2763 (2000).


    2. Section 1.3 is amended by adding paragraphs (gg)(4), (vv) and 
(ww) to read as follows:


Sec.  1.3  Definitions.

* * * * *
    (gg) * * *
    (4) Notwithstanding paragraphs (gg)(1), (2) and (3) of this 
section, the term customer funds shall exclude money, securities or 
property held to margin, guarantee or secure security futures products 
held in a securities account, and all money accruing as the result of 
such security futures products.
* * * * *
    (vv) Futures account. This term means an account that is maintained 
in accordance with the segregation requirements of section 4d of the 
Commodity Exchange Act and the rules thereunder.
    (ww) Securities account. This term means an account that is 
maintained in accordance with the requirements of section 15(c)(3) of 
the Securities Exchange Act of 1934 and Rule 15c3-3 thereunder.

    3. Section 1.55 is amended by adding paragraph (h) to read as 
follows:


Sec.  1.55  Distribution of ``Risk Disclosure Statement'' by futures 
commission merchants and introducing brokers.

* * * * *
    (h) Notwithstanding any other provision of this section or Sec.  
1.65, a person registered or required to be registered with the 
Commission as a futures commission merchant pursuant to sections 
4f(a)(1) or 4f(a)(2) of the Commodity Exchange Act and registered or 
required to be registered with the Securities and Exchange Commission 
as a broker or dealer pursuant to sections 15(b)(1) or 15(b)(11) of the 
Securities Exchange Act of 1934 and rules thereunder must provide to a 
customer or prospective customer, prior to the acceptance of any order 
for, or otherwise handling any transaction in or in connection with, a 
security futures product for a customer, the disclosures set forth in 
Sec.  41.41(b)(1) of this chapter.

PART 41--SECURITY FUTURES PRODUCTS

    4. The authority citation for Part 41 is revised to read as 
follows:

    Authority: Sections 206, 251 and 252, Pub. L. 106-554, 114 Stat. 
2763, 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).


    5. Section 41.41 is added to Subpart E to read as follows:


Sec.  41.41  Security futures products accounts.

    (a) Where security futures products may be held. (1) A person 
registered with the Commission as a futures commission merchant 
pursuant to section 4f(a)(1) of the Commodity Exchange Act (``CEA'') 
and registered with the Securities and Exchange Commission (``SEC'') as 
a broker or dealer pursuant to section 15(b)(1) of the Securities 
Exchange Act of 1934 (``Securities Exchange Act'') (``Full FCM/Full 
BD'') may hold all of a customer's security futures products in a 
futures account, all of a customer's security futures products in a 
securities account, or some of a customer's security futures products 
in a futures account and other security futures products of the same 
customer in a securities account. A person registered with the 
Commission as a futures commission merchant pursuant to section 
4f(a)(2) of the CEA (a notice-registered FCM) may hold a customer's 
security futures products only in a securities account. A person 
registered with the SEC as a broker or dealer pursuant to section 
15(b)(11) of the Securities Exchange Act (a notice-registered broker-
dealer) may hold a customer's security futures products only in a 
futures account.
    (2) A Full FCM/Full BD shall establish written policies or 
procedures for determining whether customer security futures products 
will be placed in a futures account and/or a securities account and, if 
applicable, the process by which a customer may elect the type or types 
of account in which security futures products will be held (including 
the procedure to be followed if a customer fails to make an election of 
account type).
    (b) Disclosure requirements. (1) Except as provided in paragraph 
(b)(2), before a futures commission merchant accepts the first order 
for a security futures product from or on behalf of a customer, the 
firm shall furnish the customer with a disclosure document containing 
the following information:
    (i) A description of the protections provided by the requirements 
set forth under section 4d of the CEA applicable to a futures account;
    (ii) A description of the protections provided by the requirements 
set forth under Securities Exchange Act Rule 15c3-3 and the Securities 
Investor Protection Act of 1970 applicable to a securities account;
    (iii) A statement indicating whether the customer's security 
futures products will be held in a futures account and/or a securities 
account, or whether the firm permits customers to make or change an 
election of account type; and
    (iv) A statement that, with respect to holding the customer's 
security futures products in a securities account or a futures account, 
the alternative regulatory scheme is not available to the customer in 
connection with that account.
    (2) Where a customer account containing an open security futures 
product position is transferred to a futures commission merchant, that 
futures commission merchant may instead provide the statements 
described in paragraphs (b)(1)(iii) and (b)(1)(iv) above no later than 
ten business days after the date the account is transferred.
    (c) Changes in account type. A Full FCM/Full BD may change the type 
of account in which a customer's security futures products will be 
held; provided, that:
    (1) The firm creates a record of each change in account type, 
including the name of the customer, the account number, the date the 
firm received the customer's request to change the account type, if 
applicable, and the date the change in account type became effective; 
and
    (2) The firm, at least ten business days before the customer's 
account type is changed:
    (i) Notifies the customer in writing of the date that the change 
will become effective; and
    (ii) Provides the customer with the disclosures described in 
paragraph (b)(1) above.
    (d) Recordkeeping requirements. The Commission's recordkeeping 
rules set forth in Sec. Sec.  1.31, 1.32, 1.35, 1.36, 1.37, 4.23, 4.33, 
18.05 and 190.06 of this chapter shall apply to security futures 
product transactions and positions in a

[[Page 58298]]

futures account (as that term is defined in Sec.  1.3(vv) of this 
chapter). These rules shall not apply to security futures product 
transactions and positions in a securities account (as that term is 
defined in Sec.  1.3(ww) of this chapter); provided, that the SEC's 
recordkeeping rules apply to those transactions and positions.
    (e) Reports to customers. The Commission's reporting requirements 
set forth in Sec. Sec.  1.33 and 1.46 of this chapter shall apply to 
security futures product transactions and positions in a futures 
account (as that term is defined in Sec.  1.3(vv) of this chapter). 
These rules shall not apply to security futures product transactions 
and positions in a securities account (as that term is defined in Sec.  
1.3(ww) of this chapter); provided, that the SEC's rules set forth in 
Sec. Sec.  240.10b-10 and 240.15c3-2 of this chapter regarding delivery 
of confirmations and account statements apply to those transactions and 
positions.
    (f) Segregation of customer funds. All money, securities, or 
property held to margin, guarantee or secure security futures products 
held in a futures account, or accruing to customers as a result of such 
products, are subject to the segregation requirements of section 4d of 
the CEA and the rules thereunder.

PART 190--BANKRUPTCY

    6. The authority citation for Part 190 continues to read as 
follows:

    Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19 and 24, 
and 11 U.S.C. 362, 546, 548, 556, and 761-766, unless otherwise 
noted.


    7. Section 190.01 is amended by revising paragraph (f) and by 
adding paragraph (kk)(9) to read as follows:


Sec.  190.01  Definitions.

* * * * *
    (f) Commodity broker means any person who is registered or required 
to register as a futures commission merchant under the Commodity 
Exchange Act including a person registered or required to be registered 
as such under Parts 32 and 33 of this chapter, and a ``commodity 
options dealer,'' ``foreign futures commission merchant,'' ``clearing 
organization,'' and ``leverage transaction merchant'' with respect to 
which there is a ``customer'' as those terms are defined in this 
section, but excluding a person registered as a futures commission 
merchant under section 4f(a)(2) of the Commodity Exchange Act.
* * * * *
    (kk) * * *
    (9) Notwithstanding any other provision of this paragraph (kk), 
security futures products, and any money, securities or property held 
to margin, guarantee or secure such products, or accruing as a result 
of such products, shall not be considered specifically identifiable 
property for the purposes of Subchapter IV of the Bankruptcy Code or 
this part 190, if held in a securities account.
* * * * *

    8. Section 190.02 is amended by:
    a. Removing the period and in its place adding a ``;'' at the end 
of paragraph (d)(8);
    b. Redesignating paragraphs (d)(11) and (d)(12) as paragraphs 
(d)(12) and (d)(13), respectively; and
    c. Adding a new paragraph (d)(11).
    The revisions and additions read as follows:


Sec.  190.02  Operation of the debtor's estate subsequent to the filing 
date and prior to the primary liquidation date.

* * * * *
    (d) * * *
    (11) Whether the claimant's positions in security futures products 
are held in a futures account or a securities account, as these terms 
are defined in Sec. Sec.  1.3(vv) and (ww) of this chapter, 
respectively;
* * * * *

    9. Section 190.07 is amended by revising paragraph 
(b)(1)(iii)(B)(3) and removing the undesignated paragraph following 
paragraph (b)(1)(iii)(B)(3) to read as follows:


Sec.  190.07  Calculation of allowed net equity.

* * * * *
    (b) * * *
    (1) * * *
    (iii) * * *
    (B) * * *
    (3) The normal costs attributable to the payment of commissions, 
brokerage, interest, taxes, storage, transaction fees, insurance and 
other costs and charges lawfully incurred in connection with the 
purchase, sale, exercise, or liquidation of any commodity contract in 
such account. For purposes of this paragraph (b)(1), the open trade 
balance of a customer's account shall be computed by subtracting the 
unrealized loss in value of the open commodity contracts held by or for 
such account from the unrealized gain in value of the open commodity 
contracts held by or for such account. In calculating the ledger 
balance or open trade balance of any customer, exclude any security 
futures products, any gains or losses realized on trades in such 
products, any property received to margin, guarantee or secure such 
products (including interest thereon or the proceeds thereof), to the 
extent any of the foregoing are held in a securities account, and any 
disbursements to or on behalf of such customer in connection with such 
products or such property held in a securities account.
* * * * *

    10. Section 190.08 is amended by revising paragraphs (a)(2)(v) and 
(a)(2)(vi) and by adding paragraph (a)(2)(vii) to read as follows:


Sec.  190.08  Allocation of property and allowance of claims.

* * * * *
    (a) * * *
    (2) * * *
    (v) Property deposited by a customer with a commodity broker after 
the entry of an order for relief which is not necessary to meet the 
maintenance margin requirements applicable to the accounts of such 
customer;
    (vi) Property hypothecated pursuant to Sec.  1.30 of this chapter 
to the extent of the loan of margin with respect thereto; and
    (vii) Money, securities or property held to margin, guarantee or 
secure security futures products, or accruing as a result of such 
products, if held in a securities account.
* * * * *

    11. Section 190.10 is amended by adding paragraph (h) to read as 
follows:


Sec.  190.10  General.

* * * * *
    (h) Rule of construction. Contracts in security futures products 
held in a securities account shall not be considered to be ``from or 
for the commodity futures account'' or ``from or for the commodity 
options account'' of such customers, as such terms are used in section 
761(9) of the Bankruptcy Code.

    12. Appendix A to Part 190 is amended by adding Item III g. to 
Bankruptcy Appendix Form 4--Proof of Claim to read as follows:

Appendix A to Part 190--Bankruptcy Forms

* * * * *
Bankruptcy Appendix Form 4--Proof of Claim
* * * * *
    III. * * *
    g. Whether the claimant's positions in security futures products 
are held in a futures account or a securities account, as these terms 
are defined in Sec. Sec.  1.3(vv) and (ww) of this chapter, 
respectively.
* * * * *

    Dated: September 9, 2002.


[[Page 58299]]


    By the Commodity Futures Trading Commission.

Jean A. Webb,
Secretary of the Commission.

Securities and Exchange Commission

17 CFR Chapter II

    The amendments are adopted pursuant to the authority conferred on 
the SEC by the Exchange Act, including Sections 3(b), 4A, 15(c)(3), 
17(a), and 23(a).
    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is amended as follows:

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

    1. The authority citation for Part 240 is amended by adding the 
following citations to read 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.
* * * * *
    Section 240.15c3-3 is also issued under 15 U.S.C. 78o(c)(2), 
78(c)(3), 78q(a), 78w(a); sec. 6(c), 84 Stat. 1652; 15 U.S.C. 78fff.
    Section 240.15c3-3(o) is also issued under Pub. L. 106-554, 114 
Stat. 2763, section 203.
* * * * *

    2. Section 240.15c3-3 is amended by:
    a. Removing the authority citation following Sec.  240.15c3-3;
    b. Adding a new sentence following the fourth sentence in the 
introductory text of paragraph (a)(1);
    c. Adding paragraphs (a)(l4) and (a)(15); and
    d. Adding paragraph (o).
    The revisions and additions read as follows:


Sec.  240.15c3-3  Customer protection--reserves and custody of 
securities.

    (a) * * *
    (1) * * * In addition, the term shall not include a person to the 
extent that the person has a claim for security futures products held 
in a futures account, or any security futures product and any futures 
product held in a ``proprietary account'' as defined by the Commodity 
Futures Trading Commission in Sec.  1.3(y) of this chapter. * * *
* * * * *
    (14) The term securities account shall mean an account that is 
maintained in accordance with the requirements of section 15(c)(3) of 
the Act (15 U.S.C. 78o(c)(3)) and Sec.  240.15c3-3.
    (15) The term futures account (also referred to as ``commodity 
account'') shall mean an account that is maintained in accordance with 
the segregation requirements of section 4d of the Commodity Exchange 
Act (7 U.S.C. 6d) and the rules thereunder.
* * * * *
    (o) Security futures products.--(1) Where security futures products 
shall be held. A broker or dealer registered with the Commission 
pursuant to section 15(b)(1) of the Act (15 U.S.C. 78o(b)(1)) that is 
also a futures commission merchant registered with the Commodity 
Futures Trading Commission pursuant to section 4f(a)(1) of the 
Commodity Exchange Act (7 U.S.C. 6f(a)(1)):
    (i) Shall hold a customer's security futures products in either a 
securities account or a futures account; and
    (ii) Shall establish written policies or procedures for determining 
whether customer security futures products will be placed in a 
securities account or a futures account and, if applicable, the process 
by which a customer may elect the type or types of account in which 
security futures products will be held (including the procedure to be 
followed if a customer fails to make an election of account type).
    (2) Disclosure and record requirements.--(i) Except as provided in 
paragraph (o)(2)(ii), before a broker or dealer registered with the 
Commission pursuant to section 15(b)(1) of the Act (15 U.S.C. 
78o(b)(1)) accepts the first order for a security futures product from 
or on behalf of a customer, the broker or dealer shall furnish the 
customer with a disclosure document containing the following 
information:
    (A) A description of the protections provided by the requirements 
set forth under this section and the Securities Investor Protection Act 
of 1970 (15 U.S.C. 78aaa et seq.) applicable to a securities account;
    (B) A description of the protections provided by the requirements 
set forth under section 4d of the Commodity Exchange Act (7 U.S.C. 6d) 
applicable to a futures account;
    (C) A statement indicating whether the customer's security futures 
products will be held in a securities account or a futures account, or 
whether the firm permits customers to make or change an election of 
account type; and
    (D) A statement that, with respect to holding the customer's 
security futures products in a securities account or a futures account, 
the alternative regulatory scheme is not available to the customer with 
relation to that account.
    (ii) Where a customer account containing an open security futures 
product position is transferred to a broker or dealer registered with 
the Commission pursuant to section 15(b)(1) of the Act (15 U.S.C. 
78o(b)(1)), that broker or dealer may instead provide the statements 
described in paragraphs (o)(2)(i)(C) and (o)(2)(i)(D) of this section 
no later than ten business days after the date the account is received.
    (3) Changes in account type. A broker or dealer registered with the 
Commission 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)) may change the type of account in which a customer's security 
futures products will be held; provided that:
    (i) The broker or dealer creates a record of each change in account 
type, including the name of the customer, the account number, the date 
the broker or dealer received the customer's request to change the 
account type, if applicable, and the date the change in account type 
became effective; and
    (ii) The broker or dealer, at least ten days before the customer's 
account type is changed:
    (A) Notifies the customer in writing of the date that the change 
will become effective; and
    (B) Provides the customer with the disclosures described in 
paragraph (o)(2)(i) of this section.

    4. Section 240.17a-3 is amended by adding paragraph (f) to read as 
follows:


Sec.  240.17a-3  Records to be made by certain exchange members, 
brokers and dealers.

* * * * *
    (f) Security futures products. The provisions of this section shall 
not apply to security futures product transactions and positions in a 
futures account (as that term is defined in Sec.  240.15c3-3(a)(15)); 
provided, that the Commodity Futures Trading Commission's recordkeeping 
rules apply to those transactions and positions.

    5. Section 240.17a-4 is amended by:
    a. Revising paragraph (b)(9);
    b. Redesignating paragraphs (k) and (l), which become effective on 
May 2, 2003, as paragraphs (l) and (m); and
    c. Adding new paragraph (k).
    The revisions and addition read as follows:


Sec.  240.17a-4  Records to be preserved by certain exchange members, 
brokers and dealers.

* * * * *
    (b) * * *

[[Page 58300]]

    (9) The records required to be made pursuant to Sec.  240.15c3-
3(d)(4) and (o).
* * * * *
    (k) Exchanges of futures for physical.
    (1) Except as provided in paragraph (k)(2) of this section, upon 
request of any designee or representative of the Commission or of any 
self-regulatory organization of which it is a member, every member, 
broker or dealer subject to this section shall request and obtain from 
its customers documentation regarding an exchange of security futures 
products for physical securities, including documentation of underlying 
cash transactions and exchanges. Upon receipt of such documentation, 
the member, broker or dealer shall promptly provide that documentation 
to the requesting designee or representative.
    (2) This paragraph (k) does not apply to an underlying cash 
transaction(s) or exchange(s) that was effected through a member, 
broker or dealer registered with the Commission and is of a type 
required to be recorded pursuant to Sec.  240.17a-3.

    6. Section 240.17a-5 is amended by adding paragraph (l)(4) to read 
as follows:


Sec.  240.17a-5  Reports to be made by certain brokers and dealers.

* * * * *
    (l) * * *
    (4) The provisions of Sec.  240.17a-5 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)) that is not a member of either a national 
securities exchange pursuant to section 6(a) of the Act (15 U.S.C. 
78f(a)) or a national securities association registered pursuant to 
section 15A(a) of the Act (15 U.S.C. 78o-3(a)).
* * * * *

    7. Section 240.17a-7 is amended by:
    a. Removing from paragraphs (a)(1) and (a)(2) the words ``paragraph 
(b)'' and in their place adding ``paragraphs (b) and (c)''; and
    b. Redesignating paragraph (c) as paragraph (d) and adding new 
paragraph (c) to read as follows:


Sec.  240.17a-7  Records of non-resident brokers and dealers.

* * * * *
    (c) The provisions 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)) that is not a member of either a national 
securities exchange pursuant to section 6(a) of the Act (15 U.S.C. 
78f(a)) or a national securities association registered pursuant to 
section 15A(a) of the Act (15 U.S.C. 78o-3(a)).
* * * * *

    8. Section 240.17a-11 is amended by adding paragraph (i) to read as 
follows:


Sec.  240.17a-11  Notification provisions for brokers and dealers.

* * * * *
    (i) The provisions 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)) that is not a member of either a national 
securities exchange pursuant to section 6(a) of the Act (15 U.S.C. 
78f(a)) or a national securities association registered pursuant to 
section 15A(a) of the Act (15 U.S.C. 78o-3(a)).

    9. Section 240.17a-13 is amended by redesignating paragraph (e) as 
paragraph (f) and adding new paragraph (e) to read as follows:


Sec.  240.17a-13  Quarterly security counts to be made by certain 
exchange members, brokers, and dealers.

* * * * *
    (e) The provisions 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)) that is not a member of either a national 
securities exchange pursuant to section 6(a) of the Act (15 U.S.C. 
78f(a)) or a national securities association registered pursuant to 
section 15A(a) of the Act (15 U.S.C. 78o-3(a)).
* * * * *

    Dated: September 9, 2002.

    By the Securities and Exchange Commission.

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-23274 Filed 9-12-02; 8:45 am]
BILLING CODE 6351-01-P