[Federal Register Volume 67, Number 178 (Friday, September 13, 2002)]
[Rules and Regulations]
[Pages 58302-58313]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-23309]



[[Page 58301]]

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Part V





Securities and Exchange Commission





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17 CFR Part 240



Confirmation Requirements for Transactions of Security Futures Products 
Effected in Futures Accounts; Final Rule

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

[[Page 58302]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-46471; File No. S7-19-02]
RIN 3235-AI50


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

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: In accordance with the Commodity Futures Modernization Act of 
2000 (``CFMA''), the Securities and Exchange Commission (``SEC'' or 
``Commission'') is adopting rule amendments and a new rule under the 
Securities Exchange Act of 1934 (``Exchange Act''). The rule amendments 
and new rule are designed to clarify the disclosures broker-dealers 
effecting transactions in security futures products in futures accounts 
must make in the confirmations sent to customers regarding those 
transactions. The amendments provide that broker-dealers effecting 
transactions in security futures products in futures accounts do not 
have to disclose all of the information required by the SEC's 
confirmation disclosure rule, but rather require that the transaction 
confirmations for these accounts disclose specific information and 
notify customers that certain additional information will be available 
upon written request. The new rule also exempts broker-dealers 
effecting transactions for customers in security futures products in a 
futures account from the disclosure requirements of Exchange Act 
Section 11(d)(2).

DATES: Effective Date: October 15, 2002.
    Compliance Date: October 15, 2002 and June 1, 2003. Section V of 
this document contains more information on transition prior to June 1, 
2003.

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

SUPPLEMENTARY INFORMATION: The Commission today is adopting amendments 
to Rule 10b-10, 17 CFR 240.10b-10(e), and adopting new Rule 11d2-1, 17 
CFR 240.11d2-1, under the Exchange Act, which the Commission published 
for comment in the Federal Register on June 10, 2002.\1\
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    \1\ Exchange Act Release No. 46014 (May 31, 2002), 67 FR 39647 
(June 10, 2002).
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Table of Contents

I. Introduction
II. Background
III The Solicitation of General Comments and the Proposing Release
IV. Overview of the Comments Received
V. Discussion and Basis for Adoption
    A. Rule 10b-10
    B. Rule 10b-10 SIPC Disclosure Requirement
    C. Rule 11d2-1
    D. Technical Corrections to Rule 10b-10
VI. Paperwork Reduction Act
VII. Costs and Benefits of Amendments
VIII. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition, and Capital Formation
IX. Final Regulatory Flexibility Act
X. Statutory Authority Text of Final Rules

I. Introduction

    The CFMA permits the trading of security futures, i.e., futures 
contracts on individual securities and on narrow-based security 
indexes.\2\ Under the CFMA, security futures are both ``securities'' 
under the federal securities laws, \3\ and futures contracts for 
purposes of the Commodity Exchange Act (``CEA'').\4\ Accordingly, the 
SEC and the Commodity Futures Trading Commission (``CFTC'') have joint 
jurisdiction over the intermediaries and markets that trade security 
futures products (``SFPs'').
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    \2\ Pub. L. 106-554, 114 Stat. 2763 (2000). Under Exchange Act 
Section 3(a)(55)(A), the term ``security future'' is defined as a 
contract of sale for future delivery of a single security or of a 
narrow-based security index. 15 U.S.C. 78c(a)(55)(A). Under Exchange 
Act Section 3(a)(56), the term ``security futures product'' is 
defined as a security future or an option on security future. 15 
U.S.C. 78C(a)(56).
    \3\ See, e.g., Exchange Act Section 3(a)(10) (15 U.S.C. 
78c(a)(10)).
    \4\ The term ``security future'' is defined in CEA Section 
1a(31) (7 U.S.C. 1a(31)) as a contract of sale for future delivery 
of a single security or of a narrow-based security index. Under CEA 
Section 1a(33) (7 U.S.C. 1a(33)), the term ``security futures 
product'' is defined as a security future or an option on a security 
future.
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    Because they are subject to regulation both as securities and as 
futures contracts, SFPs must be traded on trading facilities and 
through intermediaries that are registered with both the SEC and the 
CFTC. The CFMA amended the CEA and the Exchange Act to provide notice 
registration procedures for persons that may be required to register 
with the SEC or the CFTC solely because they are effecting SFP 
transactions. Under the notice registration procedures, a futures 
commission merchant (``FCM'') may register with the SEC pursuant to 
Section 15(b)(11) of the Exchange Act and the rules adopted by the SEC 
\5\ (``Notice BD'') and a broker-dealer may register with the CFTC 
pursuant to Section 4f(a)(2) of the CEA and rules adopted by the CFTC 
\6\ (``Notice FCM'').
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    \5\ 15 U.S.C. 78o(b)(11)(A)(i) and Exchange Act Release No. 
44730 (August 21, 2001), 66 FR 45137 (August 27, 2001).
    \6\ 7 U.S.C. 6f(a)(2) and 66 FR 43080 (August 17, 2001).
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    Notice BDs are exempt from certain provisions of the Exchange 
Act,\7\ and Notice FCMs are exempt from certain provisions of the 
CEA.\8\ These statutory provisions were designed to allow persons that 
previously had engaged ``solely'' in either the securities or futures 
business to participate in SFP business without being subject to 
conflicting or duplicative regulation with regard to the specified 
provisions. The CFMA does not exempt firms that are authorized to do 
business in all securities and futures (``fully-registered'' with both 
the CFTC and the SEC (``Full FCMs/Full BDs'')) from any provisions of 
the Exchange Act or the CEA.
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    \7\ Exchange Act Section 15(b)(11)(B) (15 U.S.C. 78o(b)(11)(B)).
    \8\ CEA Section 4f(a)(4)(A) (7 U.S.C. 6f(a)(4)(A)).
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    The CFMA requires the SEC, in consultation with the CFTC, to issue 
such rules, regulations, or orders as are necessary to avoid 
duplicative or conflicting regulations applicable to Full FCMs/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.\9\ As a 
transitional measure, the Commission exempted Notice BDs and Full FCMs/
Full BDs from the requirements of Exchange Act Rule 10b-10 and exempted 
Full FCMs/Full BDs from the requirements of Exchange Act Section 
11(d)(2) with respect to any SFP transaction effected in a futures 
account until amendments to Exchange Act Rule 10b-10 and a new Rule 
11d2-1 become effective.\10\ But for the exemption, and in the absence 
of the rule amendments and the new rule we are adopting today, every 
firm effecting transactions in SFPs would need to comply with all of 
the confirmation disclosure requirements of the Exchange Act and the 
CEA, which would create the kind of duplicate regulation for SFPs that 
the CFMA attempts to avoid.
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    \9\ Exchange Act Section 15(c)(3)(B) (15 U.S.C. 78o(c)(3)(B)). 
Cf. CEA Section 4d(c) (7 U.S.C. 6d(c)) (providing the same 
requirement for the CFTC).
    \10\ Exchange Act Release No. 46015 (May 31, 2002).
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II. Background

    Exchange Act Rule 10b-10 generally requires broker-dealers that 
effect

[[Page 58303]]

transactions for customers in securities, other than U.S. savings bonds 
or municipal securities,\11\ to provide a confirmation, at or before 
the completion of each transaction, disclosing certain basic terms of 
the transaction. The confirmation must, among other things, disclose 
the date, identity, price, and number of shares bought or sold;\12\ the 
capacity of the broker-dealer;\13\ the net dollar price and yield of a 
debt security;\14\ and, under specified circumstances, the amount of 
compensation paid to the broker-dealer and whether payment for order 
flow is received.\15\ The customer confirmation requirement, portions 
of which have been in effect for over 60 years, provides basic investor 
protections by conveying information allowing investors to verify the 
terms of their transactions; alerting investors to potential conflicts 
of interest with their broker-dealers; acting as a safeguard against 
fraud; and providing investors a means to evaluate the costs of their 
transactions and the quality of their broker-dealer's execution.\16\
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    \11\ Municipal securities are covered by a parallel rule MSRB 
rule G-15, which applies to all municipal securities brokers and 
dealers--both bank and non-bank.
    \12\ 17 CFR 240.10b-10(a)(1). Subparagraph (1) also provides 
that the confirmation include either the time of the transaction or 
the fact that it will be furnished upon written request.
    \13\ 17 CFR 240.10b-10(a)(2) and (8).
    \14\ 17 CFR 240.10b-10(a)(5) and (6).
    \15\ See, e.g., 17 CFR 240.10b-10(a)(2)(i)(B), (C) and (D); 17 
CFR 240.10b-10(a)(8)(i)(A).
    \16\ Exchange Act Release No. 34962 (Novlember 10, 1994), 59 FR 
59612, 59613 (November 17, 1994).
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    Although the CFMA exempted Notice BDs from certain Exchange Act 
provisions, including Exchange Act Section 11,\17\ it did not exempt 
them from Exchange Act Sections 10 and 17(a) and the rules thereunder, 
including Exchange Act Rule 10b-10.\18\ In addition, as stated 
previously, the CFMA did not exempt Full FCMs/Full BDs from any 
provisions of the Exchange Act or the rules thereunder. Accordingly, 
without the rule and rule amendments we are adopting today, entities 
effecting SFP transactions in futures accounts would be required to 
meet the confirmation disclosure requirements of both the CEA and the 
Exchange Act and the rules thereunder.
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    \17\ See Exchange Act Section 15(b)(11)(B) (15 U.S.C. 
78o(b)(11)(B)).
    \18\ 17 CFR 240.10b-10.
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    CEA Rule 1.33(b)\19\ provides the disclosure requirements FCMs 
effecting futures transactions must follow. However, although CEA Rule 
1.33(b) requires an FCM to provide a customer with a ``written 
confirmation of each commodity futures transaction,''\20\ it does not 
specify what information must be included in the confirmation.\21\ The 
rules of certain futures exchanges, such as the Chicago Mercantile 
Exchange (``CME'') and the Chicago Board of Trade (``CBOT''),\22\ 
require an FCM to disclose in writing no later than the following 
business day after each transaction specific information regarding that 
transaction effected in a futures account. Information that must be 
disclosed includes the commodity bought or sold, the quantity, the 
price, and the delivery month.\23\ The CBOT also requires disclosure of 
the name of the other party to the contract (in other words, the FCM on 
the opposite side of the contract) or a notice disclosing that such 
information is available upon request.\24\
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    \19\ 17 CFR 1.33(b). Specifically, CEA Rule 1.33(b)(1) requires 
FCMs that effect futures transactions for customers to provide, no 
later than the next business day after the transaction, ``a written 
confirmation of each commodity futures transaction caused to be 
executed by it * * * *.''
    \20\ 17 CFR 1.33(b)(1).
    \21\ CEA Rule 1.33b(2) (17 CFR 1.33(b)(2)) does specify the 
detail required in a confirmation of a commodity option transaction. 
In addition, CEA Rule 1.46(a) (17 CFR 1.46(a)) requires an FCM to 
furnish a futures or options customer a purchase-and-sale statement 
when an offsetting transaction is executed showing the financial 
result of the transactions involved.
    \22\ See, e.g., CME Rule 537; CBOT Rules 421.00 & 421.01.
    \23\ CME Rule 537; CBOT Rules 421.00.
    \24\ See, e.g., CBOT Rules 421.00 & 421.01.
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III. The Solicitation of General Comments and the Proposing Release

    In a joint release issued by the SEC and the CFTC (``the 
Commissions'') proposing customer protection, recordkeeping, reporting, 
and bankruptcy rules for accounts holding SFPs,\25\ the Commissions 
requested comment on the application to transactions in SFPs of their 
confirmation rules (Rule 10b-10 under the Exchange Act \26\ and Rule 
1.33(b) under the CEA\27\). Of the three comment letters the 
Commissions received, two specifically addressed the Commissions' 
requests for comments on the subject of confirmations for SFPs.\28\
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    \25\ Exchange Act Release. No. 44854 (September 26, 2001), 66 FR 
50786 (October 4, 2001).
    \26\ 17 CFR 240.10b-10.
    \27\ 17 CFR 1.33(b).
    \28\ Letter dated December 5, 2001, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission; Letter dated December 5, 2001, from John M. Damgard, 
President, Futures Industry Association, and Mark E. Lackritz, 
President, Securities Industry Association, to Jonathan G. Katz, 
Secretary, U.S. Securities and Exchange Commission. The other 
letter, dated December 4, 2001, from James J. McNulty, Chicago 
Mercantile Exchange, Inc. and David J. Vitale, Board of Trade of the 
City of Chicago, Inc., to Jonathan G. Katz, Secretary, U.S. 
Securities and Exchange Commission, did not address the application 
of the confirmation requirements of the Commission and the CFTC but 
did support account specific recordkeeping requirements.
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    After carefully considering the comments received,\29\ the 
Commission published for comment proposed amendments to Rule 10b-10 and 
proposed new Rule 11d2-1 (the ``Proposing Release'').\30\ The proposed 
rule amendments and new rule were designed to clarify the disclosures 
broker-dealers effecting transactions in SFPs in futures accounts must 
make in the confirmations sent to customers regarding those 
transactions. The proposed amendments provided that certain broker-
dealers effecting transactions in SFPs in futures accounts do not have 
to disclose all of the information required by the SEC's confirmation 
disclosure rule, but rather required that the transaction confirmations 
for these accounts disclose specific information and notify customers 
that certain additional information will be available upon written 
request. Our proposals for specific confirmation disclosure were based 
on the type of information that is customarily required to be in 
confirmations for futures transactions. Our proposals for disclosure 
that certain information will be available upon written request of the 
customer were based on the Rule 10b-10 requirements that provide basic 
customer protection under the Exchange Act. The new rule we proposed 
provided that broker-dealers effecting transactions for customers in 
SFPs in a futures account are exempt from the disclosure requirements 
of Exchange Act Section 11(d)(2).
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    \29\ A discussion of these comments is found in the release 
proposing the rule amendments and the new rule. Exchange Act Release 
No. 46014 (May 31, 2002), 67 FR 39647 (June 10, 2002).
    \30\ Id.
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IV. Overview of the Comments Received

    The Commission received two comment letters on the Proposing 
Release. One letter was from the National Futures Association 
(``NFA'').\31\ The other letter was submitted jointly by the Futures 
Industry Association (``FIA''), a trade association that represents 
FCMs, and the Securities Industry Association (``SIA''), a trade 
association that represents broker-dealers (collectively,

[[Page 58304]]

the ``FIA/SIA'' or the ``Industry Associations'').\32\
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    \31\ Letter dated July 10, 2002, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission.
    \32\ Letter dated July 24, 2002, from Jonathan Barton, Chairman, 
FIA/SIA Steering Committee on Security Futures, to Jonathan G. Katz, 
Secretary, U.S. Securities and Exchange Commission.
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    Both the NFA and the FIA/SIA were generally supportive of the 
proposed amendments to Rule 10b-10 and proposed new Rule 11d2-1. The 
NFA stated that ``the SEC's proposed amendments to Rule 10b-10 are a 
reasonable response to the tension between the current provisions of 
Rule 10b-10 and futures industry practices, and we support those 
amendments.''\33\ Similarly, the Industry Associations stated that 
``the proposed rules strike an appropriate balance between the more 
prescriptive confirmation disclosure requirements set forth in Rule 
10b-10 for securities transactions effected in customer securities 
accounts and the disclosure requirements set forth in Commodity Futures 
Trading Commission Rule 1.33(b) * * * for futures transactions effected 
in customer futures accounts.'' \34\
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    \33\ Letter dated July 10, 2002, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission.
    \34\ Letter dated July 24, 2002, from Jonathan Barton, Chairman, 
FIA/SIA Steering Committee on Security Futures, to Jonathan G. Katz, 
Secretary, U.S. Securities and Exchange Commission.
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    Each commenter chose to address some of the specific questions the 
Commission asked in the Proposing Release; these comments are discussed 
below in Section V. Both commenters also made specific technical 
comments and asked for some minor clarifications regarding the 
interpretation of certain provisions of proposed Rule 10b-10(e). These 
technical comments and requests for clarification are discussed in 
Section V below. After carefully considering all of the comments 
received and with the exception of the modifications discussed below, 
the Commission is adopting the rule and the rule amendments as 
proposed.

V. Discussion and Basis for Adoption

A. Rule 10b-10

    As adopted today, new paragraph (e) of Rule 10b-10 clarifies the 
type and nature of information a Notice BD and a Full FCM/Full BD must 
disclose under Rule 10b-10 in confirmations of SFP transactions 
effected in futures accounts. In developing these requirements, we have 
taken into account the disclosure requirements of CEA Rule 1.33(b) and 
the disclosure rules of the CME and the CBOT.\35\
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    \35\ See CME Rule 537; CBOT Rules 421.00 and 421.01. As noted 
above, the exchanges that plan to trade SFPs have not yet proposed 
or adopted confirmation rules.
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    Rule 10b-10(e) requires essentially the same type and nature of 
information required under CEA Rule 1.33(b) and the above-described 
futures exchange rules, as well as additional information concerning 
the capacity in which the Notice BD or Full FCM/Full BD is acting when 
effecting an SFP transaction and, where appropriate, information 
regarding payment for order flow. It also conforms to the timing 
requirements that are customary for futures confirmations.
    Specifically, Rule 10b-10(e)(1) provides that, as long as certain 
conditions are met, the requirements of paragraphs (a) and (b) of Rule 
10b-10 will not apply to a Notice BD or a Full FCM/Full BD that effects 
transactions for customers in SFPs in a futures account (as that term 
is defined in proposed Exchange Act Rule 15c3-3(a)(15)).\36\ As 
adopted, under subparagraph (i) of amended paragraph (e)(1), the Notice 
BD or Full FCM/Full BD must give or send to the customer, no later than 
the next business day after execution of any SFP transaction, written 
notification disclosing: the date the transaction was executed, the 
identity of the single security or narrow-based security index 
underlying the contract for the SFP, the number of contracts of such 
SFP purchased or sold, the price, and the delivery month.
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    \36\ Exchange Act Release No. 44854 (September 25, 2001), 66 FR 
50785 (October 4, 2001).
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    The Industry Associations asked whether the term ``units'' in this 
provision as it was proposed should be interpreted to mean 
contracts.\37\ In particular, they suggested that the confirmation 
should disclose the number of contracts for a particular single 
security futures or narrow based index future the customer has 
purchased or sold, rather than the aggregate number of shares that 
underlie each contract. In light of this suggestion, we have modified 
the rule to make it clear that the confirmation must disclose the 
number of contracts rather than the aggregate number of shares or units 
or the principal amount underlying the contracts.
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    \37\ Letter dated July 24, 2002, from Jonathan Barton, Chairman, 
FIA/SIA Steering Committee on Security Futures, to Jonathan G. Katz, 
Secretary, U.S. Securities and Exchange Commission.
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    Under subparagraph (ii) of proposed paragraph (e)(1), the Notice BD 
or Full FCM/Full BD would have been required to give or send to the 
customer, no later than the next business day after execution of any 
SFP transaction, written notification disclosing the source and amount 
of any remuneration received or to be received in connection with the 
transaction. Remuneration includes, but is not limited to, any markup, 
commissions, costs, fees, and other charges incurred in connection with 
the transaction.
    As we noted in the Proposing Release, we understand that this 
information is routinely disclosed in confirmations on futures 
transactions.\38\ We also understand that customers in the futures 
markets may negotiate to pay commissions or fees on futures 
transactions based on the purchase and subsequent liquidating sale or 
based on the sale and subsequent covering purchase rather than paying 
the commissions or fees at both the initiating and closing trade.\39\ 
We believe that these confirmation statements should reflect how the 
customers have chosen to pay commissions and fees.
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    \38\ See Memorandum to file number S7-17-01 regarding February 
12, 2002 Conference call between Commission staff members and 
representatives of Morgan Stanley Dean Witter (March 13, 2002).
    \39\ See Memorandum to file number S7-17-01 regarding February 
27, 2002 and March 5, 2002 conversations between Securities and 
Exchange Commission staff member and representative of Morgan 
Stanley Dean Witter (March 12, 2002).
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    The NFA requested we clarify the requirements of this provision. 
Specifically, the NFA asserted that the proposed language would require 
disclosure in the confirmation for the initiating transaction of 
charges that are not payable until the liquidating transaction. The NFA 
explained that FCMs commonly charge commissions and fees for futures 
transactions when the position is liquidated rather than charging a 
portion when the transaction is initiated, and the confirmation 
includes these charges only when they are due.\40\ Hence, the NFA urged 
the Commission to modify the final rule to provide that remuneration 
does not have to appear in the confirmation until it is payable.\41\ To 
respond to the NFA's point, we modified paragraph 10b-10(e)(1)(ii) so 
that confirmations for SFPs will reflect industry practice. As adopted, 
paragraph 10b-10(e)(1)(ii) specifically provides that the amount of 
remuneration for such transactions may be disclosed solely in the 
confirmation for the liquidating transaction.
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    \40\ Letter dated July 10, 2002, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission.
    \41\ Id.
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    Subparagraph (iii) of Rule 10b-10(e)(1) also requires the Notice BD 
or Full FCM/Full BD to give or send to the customer no later than the 
next business

[[Page 58305]]

day after execution of any SFP transaction, written notification 
disclosing the fact that certain information will be available upon 
written request of the customer. This includes information about the 
time of the execution of the transaction and the identity of the other 
party to the contract. We believe that, while this information does not 
necessarily need to appear on the confirmation statement itself, the 
customer should have notice that it is available and will be provided 
upon written request.
    Subparagraph (iii) also requires the Notice BD or Full FCM/Full BD 
to disclose that it will provide upon written request of the customer 
information regarding whether the broker or dealer is acting as agent 
for such customer, as agent for some other person, as agent for both 
such customer and some other person, or as principal for its own 
account; and, if the broker or dealer is acting as principal, whether 
it is engaging in a block transaction or an exchange of SFPs for 
physical securities (``Exchange For Physicals'' or ``EFP''). Although 
Rule 10b-10(a)(2) requires this information to appear in a confirmation 
of a securities transaction, we note that confirmations of futures 
transactions do not generally include this information. The NFA has 
noted that customers would be aware of block trades and EFPs because 
these transactions require customer consent and that it would be unduly 
burdensome to require futures confirmations systems to capture and 
transmit this information.\42\
    Again, as we noted in the Proposing Release, the nature of the 
futures markets appears to provide the reasons for this disparity. 
Therefore, Rule 10b-10(e)(1)(iii) requires only that the information be 
made available upon written request of the customer.
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    \42\ Letter dated December 5, 2001, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission. See, e.g., CME Rules 526 and 538, BrokerTec Futures 
Exchange (``BTEX'') Rules 406 and 407; see also Chicago Board of 
Trade's Proposal to Adopt Block Trading Procedures, 65 FR 58051 
(September 27, 2000).
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    Finally, subparagraph (iv) of Rule 10b-10(e)(1), as proposed, would 
have required a Notice BD or Full FCM/Full BD to give or send to the 
customer no later than the next business day after execution of any SFP 
transaction, written notification disclosing whether it receives 
payment for order flow for effecting SFP transactions. It must also 
disclose the fact that the source and nature of any compensation 
received in connection with the particular transaction will be 
furnished upon the customer's written request. We understand, however, 
that payment for order flow is not currently practiced in the futures 
industry,\43\ and we have no reliable method to predict whether the 
practice of payment for order flow will develop in relation to SFP 
transactions.
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    \43\ Letter dated July 10, 2002, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission; see also Memorandum to file number S7-17-01 regarding 
March 11, 2002, and March 12, 2002, conversations between Securities 
and Exchange Commission staff member and representative of Credit 
Suisse First Boston (March 12, 2002).
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    The NFA, however, asked the Commission to revise section (e)(1)(iv) 
to clarify that disclosure of payment for order flow is required only 
if a Notice BD or a Full FCM/Full BD engages in this practice.\44\ The 
NFA confirmed the Commission's statement in the Proposing Release that 
payment for order flow does not currently exist in the futures 
industry, and acknowledged the Commission's concern that this practice 
could develop in connection with securities futures. The NFA generally 
supported the requirement that the confirmation statement should notify 
the customer if a Notice BD or Full FCM/Full BD receives payment for 
order flow for effecting security futures transactions.\45\ After 
considering the NFA's views, we are modifying the rule to make it clear 
that such a disclosure need not appear on confirmations unless and 
until an a Notice BD or a Full FCM/Full BD engages in the practice of 
receiving payment for order flow.\46\
    We are also adopting a conforming technical amendment to Rule 10b-
10(a)(2)(i)(C) to clarify the requirement for broker-dealers to 
disclose receipt of payment for order flow generally. When we revised 
Rule 10b-10 in 1994 to require payment for order flow disclosure, we 
explained that broker-dealers need not make such a confirmation 
disclosure if they never receive payment for order flow.\47\ Because 
the meaning of this provision appears to have been unclear--as 
demonstrated by the NFA's comments--we are amending the rule to clarify 
that broker-dealers that do not receive payment for order flow for any 
transactions have no disclosure requirement under Rule 10b-10.
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    \44\ Letter dated July 10, 2002, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission.
    \45\ Id.
    \46\ The National Association of Securities Dealers, Inc. also 
attempted to clarify this provision in the September 1997 issue of 
NASD Regulatory & Compliance Alert explaining that: ``[b]roker-
dealers that never receive payment-for-order flow have no disclosure 
requirement under SEC Rule 10b-10.'' Confirmation Disclosures: 
Payment-For-Order-Flow Practices And Yield-To-Maturity Calculations 
on Treasury Bills, Bonds, And Notes, NASD REGULATORY & COMPLIANCE 
ALERT, Vol. 11, No. 3 September 1997 at 30.
    \47\ Exchange Act Release No. 34902 (October 27, 1994) 59 FR 
55006 (November 2, 1994).
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    The futures industry may need additional time to make the necessary 
changes to comply with all of the requirements of Rule 10b-10(e)(1). 
Specifically, firms must implement a process to capture additional 
information when necessary, and also to disclose on the confirmation 
itself that the information is available upon a customer's written 
request. As proposed, Rule 10b-10(e)(2)(i) would have provided that 
broker-dealers would not be required to include in the confirmation the 
disclosures prescribed in proposed Rule 10b-10(e)(1)(iii) until June 1, 
2003, provided that if, ``the broker-dealer receives a written request 
from a customer for the information paragraph (e)(1)(iii) of this 
section requires the broker-dealer to disclose upon a customer's 
written request, the broker-dealer makes the information available to 
the customer.'' \48\
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    \48\ Proposed Rule 10b-10(e)(2)(i). See Exchange Act Release No. 
46014 (May 31, 2002), 67 FR 39647 (June 10, 2002).
---------------------------------------------------------------------------

    The Industry Associations, however, found the terms of this 
provision to be unclear. They asked the Commission to confirm that all 
broker-dealers will have until June 1, 2003 to revise their 
confirmations to provide the written disclosure required under 
paragraph (e)(1)(iii). In addition, they asked the Commission to 
clarify that, notwithstanding the delayed effective date of the written 
disclosure requirement, if a customer requests the information 
described in paragraph (e)(1)(iii) prior to June 1, 2003, the broker-
dealer must provide that information to the customer.\49\ We modified 
the transitional provision of this rule to make it clear that the 
Industry Associations' understanding is correct.
---------------------------------------------------------------------------

    \49\ Letter dated July 24, 2002, from Jonathan Barton, Chairman, 
FIA/SIA Steering Committee on Security Futures, to Jonathan G. Katz, 
Secretary, U.S. Securities and Exchange Commission.
---------------------------------------------------------------------------

    We also sought comment in the Proposing Release on whether broker-
dealers executing transactions in SFPs in futures accounts for certain 
sophisticated institutional investors should be exempt from the 
provisions of Rule 10b-10 entirely. The Industry Associations responded 
that such an

[[Page 58306]]

exemption would be of little value. They explained that from an 
operational point of view, it would be extremely expensive, if not 
impossible, to provide different types of confirmation statements 
depending on the nature of the sophistication of the customer.\50\ We 
have, therefore, determined not to further explore the possibility of 
crafting such an exemption at this time.
---------------------------------------------------------------------------

    \50\ Id.
---------------------------------------------------------------------------

    In adopting these amendments to Rule 10b-10, we believe it is 
important to remind broker-dealers that they continue to be subject to 
the antifraud provisions of the federal securities laws, including 
Exchange Act Rule 10b-5. We note in this regard that the preliminary 
note to Rule 10b-10 explains that the confirmation disclosure 
requirements of Rule 10b-10 are in addition to ``a broker-dealer's 
obligation under the general antifraud provisions of the federal 
securities laws to disclose additional information to a customer at the 
time of the customer's investment decision.'' In addition, broker-
dealers are still subject to self-regulatory organization rules that, 
in their current form, require broker-dealers to disclose information 
that would not be required by our amendments to Rule 10b-10.\51\
---------------------------------------------------------------------------

    \51\ See, e.g., Exchange Act Release No. 46186 (July 11, 2002), 
67 FR 47412 (July 18, 2002). This release proposed new rules and 
proposed amending existing rules to prepare for the trading of SFPs. 
For example, the release proposed amending Interpretative Material 
2310-2 (Fair Dealing with Customers) to refer to new proposed Rule 
2865 regarding security futures sales practices as well as creating 
new Rule 2865 to regulate security futures sales practices. See also 
National Association of Securities Dealers Rule 2230.
---------------------------------------------------------------------------

B. Rule 10b-10 SIPC Disclosure Requirement

    As noted in the Proposing Release, Exchange Act Rule 10b-
10(a)(9)\52\ generally requires a broker-dealer effecting securities 
transactions for a customer, or a broker-dealer clearing or carrying a 
customer's account, to disclose in the confirmation if such broker-
dealer is not a member of the SIPC.\53\ This requirement is intended to 
make clear when customers are not protected by SIPC.
---------------------------------------------------------------------------

    \52\ 17 CFR 240.10b-10(a)(9).
    \53\ See Exchange Act Release No. 34962 (November 10, 1994), 59 
FR 59612 (November 17, 1994).
---------------------------------------------------------------------------

    Under the Securities Investor Protection Act of 1970 (``SIPA''), 
most broker-dealers must be members of SIPC.\54\ However, notice 
registrants are not required to be SIPC members.\55\
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78ccc(a)(2) and 78ddd.
    \55\ 15 U.S.C. 78fff-3(a)(1). When a SIPC member is liquidated 
in a SIPC proceeding, due to bankruptcy or other financial 
difficulties, SIPC will return to customers their cash and 
securities held by the broker-dealer. To the extent that the broker-
dealer does not have sufficient resources to return the cash and 
securities to customers, SIPC will replace the missing assets, up to 
$500,000 per customer (including $100,000 for cash claims).
---------------------------------------------------------------------------

    We solicited comment in the Proposing Release on whether Notice BDs 
should be required, pursuant to Exchange Act Rule 10b-10(a)(9), to 
inform customers on a transaction-by-transaction basis that they are 
not members of SIPC. In addition, we requested comment on whether 
customers would benefit from being informed on a transaction-by-
transaction basis that the protections provided by Rule 15c3-3 and SIPA 
do not apply to SFPs held in futures accounts by Full FCMs/Full BDs. 
Both commenters stated that transaction-by-transaction disclosure was 
unnecessary. Instead, both commenters indicated that disclosure that 
transactions in futures accounts will not be covered by SIPC could be 
more efficiently addressed at the account opening stage. The Industry 
Associations pointed out that the National Association of Securities 
Dealers and the NFA are currently preparing a disclosure document that 
will be provided by their members to each customer that trades in 
SFPs.\56\ The NFA noted the Commission and the CFTC have proposed rules 
that would require firms carrying SFPs to provide disclosure regarding 
the operation of the segregation provisions under the CEA and the 
applicability of SIPC protection to accounts including SFPs.\57\ In 
light of these comments, we have not included a requirement for 
confirmation disclosure on a transaction-by-transaction basis 
concerning SIPC coverage.
---------------------------------------------------------------------------

    \56\ Letter dated July 24, 2002, from Jonathan Barton, Chairman, 
FIA/SIA Steering Committee on Security Futures, to Jonathan G. Katz, 
Secretary, U.S. Securities and Exchange Commission.
    \57\ Letter dated July 10, 2002, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission.
---------------------------------------------------------------------------

C. Rule 11d2-1

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

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

    As explained above, amended Rule 10b-10 provides Full FCMs/Full BDs 
and Notice BDs a conditional exception from the requirement in Exchange 
Act Rule 10b-10 to disclose the capacity in which they are acting when 
they effect SFP transactions for a customer in a futures account. 
Amended Rule 10b-10, however, does not provide an exception from the 
disclosure requirement of Exchange Act Section 11(d)(2). Under the 
CFMA, Notice BDs are exempt from the provisions of Exchange Act Section 
11.\60\ This exemption, however, does not apply to Full FCMs/Full BDs.
---------------------------------------------------------------------------

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

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

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

    We requested comment on whether this exemption for Full FCMs/Full 
BDs would have any anticompetitive effect on broker-dealers that are 
not eligible for this exemption. We received no comments on this issue. 
The Industry Associations, however, supported the rule as proposed.\62\ 
We are, therefore, adopting Rule 11d2-1 as proposed.
---------------------------------------------------------------------------

    \62\ (``The [Industry] Associations also support the adoption of 
proposed Rule 11d2-1 as published for comment.''). See Letter dated 
July 24, 2002, from Jonathan Barton, Chairman, FIA/SIA Steering 
Committee on Security Futures, to Jonathan G. Katz, Secretary, U.S. 
Securities and Exchange Commission fn. 3.
---------------------------------------------------------------------------

D. Technical Corrections to Rule 10b-10

    We are also adopting today several technical amendments to Rule 
10b-10 that are necessary to correct errors in the rule text resulting 
from previous amendments. These technical amendments are discussed 
below.

[[Page 58307]]

    First, the Commission adopted amendments to Rule 10b-10 in a 
release that was published in the Federal Register on November 17, 
1994.\63\ In that release, references to paragraph (c)(1) were 
incorrectly adopted in paragraphs (b)(2) and (b)(3). These references, 
however, should have been to paragraph (b)(1) of Rule 10b-10. We are 
correcting this error by amending both paragraphs 10b-10(b)(2) and 10b-
10(b)(3) so that these paragraphs properly refer to Rule 10b-10(b)(1).
---------------------------------------------------------------------------

    \63\ Exchange Act Release No. 34962 (November 10, 1994), 59 FR 
59612 (November 17, 1994).
---------------------------------------------------------------------------

    Second, in addition to the amendments to Rule 10b-10 that were 
published in the Federal Register on November 17, 1994,\64\ the 
Commission issued three other releases within five months that, among 
other things, either adopted amendments to Rule 10b-10, corrected 
amendments to Rule 10b-10, or delayed the effectiveness of amendments 
to Rule 10b-10. These releases were published in the Federal Register 
on November 2, 1994,\65\ November 25, 1994,\66\ and March 17, 1995,\67\ 
respectively. Due to the close proximity of these releases in time and 
the redesignation of certain paragraph numbers, the rule as published 
in the Code of Federal Regulations currently contains several redundant 
provisions. In addition, one provision that the Commission adopted in 
the release published in the Federal Register on November 17, 1994 was 
never published in the Code of Federal Regulations. We are, therefore, 
amending the rule, as described below, to eliminate these redundancies 
and codify the provision that was inadvertently omitted from the Code 
of Federal Regulations.
---------------------------------------------------------------------------

    \64\ Id.
    \65\ Exchange Act Release No. 34902 (October 27, 1994), 59 FR 
55006 (November 2, 1994).
    \66\ Exchange Act Release No. 34962A (November 18, 1994), 59 FR 
60555 (November 25, 1994).
    \67\ Exchange Act Release. No. 35473 (March 10, 1995), 60 FR 
14366 (March 17, 1995).
---------------------------------------------------------------------------

    In particular, we are deleting paragraph (a)(7)(iii) of Rule 10b-10 
because it is duplicative of paragraph (a)(2)(i)(C). In addition, we 
are deleting paragraph (a)(7)(iv) because it is duplicative of 
paragraph (a)(2)(i)(D). In light of these changes, we are also deleting 
paragraphs (a)(7)(i) and (a)(7)(ii), which had been reserved, as 
unnecessary.
    Moreover, we are deleting current paragraph (a)(8) of Rule 10b-10, 
because paragraphs (i)(A) and (B) of that paragraph are substantially 
duplicative of paragraphs (a)(2)(ii)(A) and (B), and paragraph 
(a)(8)(ii) is substantially duplicative of paragraph (a)(2). In lieu of 
deleted paragraph (a)(8), we are codifying new paragraph (a)(8) as 
adopted by the Commission in the release that was published in the 
Federal Register on November 17, 1994.\68\ This paragraph requires 
disclosure if a debt security, other than a government security, has 
not been rated by a nationally recognized statistical rating 
organization. As we explained when we adopted the paragraph, this 
disclosure is not intended to suggest that an unrated security is 
inherently riskier than a rated security. Rather, it is intended to 
alert customers that they may wish to obtain further information or 
clarification from their broker-dealers.\69\
---------------------------------------------------------------------------

    \68\ Exchange Act Release No. 34962 (November 10, 1994), 59 FR 
59612 (November 17, 1994).
    \69\ Id., 59 FR 59612, 59617.
---------------------------------------------------------------------------

    Under Section 553(b) of the Administrative Procedures Act, notice 
of proposed rulemaking is not required when the agency for good cause 
finds that notice and public procedure thereon are ``impracticable, 
unnecessary, or contrary to the public interest.''\70\ Because the 
amendments to Rule 10b-10 discussed in this section are technical 
corrections to eliminate redundancy, correct a cross reference, and add 
a paragraph that was adopted by the Commission, published in the 
Federal Register, and inadvertently never published in the Code of 
Federal Regulations, the Commission finds that publishing these 
amendments for comment would be unnecessary. The rules being amended 
were adopted after notice and the opportunity for public comment. The 
changes are responsive to concerns raised with the staff relating to 
ambiguity and redundancy in the current language of the rules.\71\
---------------------------------------------------------------------------

    \70\ 5 U.S.C. 553(b).
    \71\ See, e.g., Letter dated March 10, 1998, from Frederick 
Wertheim, Sullivan & Cromwell, to Catherine McGuire, Associate 
Director and Chief Counsel, Division of Market Regulation, U.S. 
Securities and Exchange Commission.
---------------------------------------------------------------------------

VI. Paperwork Reduction Act

    Certain provisions of the amendments to Exchange Act Rule 10b-10 we 
are adopting today contain ``collection of information'' requirements 
within the meaning of the Paperwork Reduction Act of 1995.\72\ 
Accordingly, the Commission submitted the proposed rule amendments and 
proposed new rule to the Office of Management and Budget (``OMB'') in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. OMB approved the 
new collection and assigned it OMB Control No. 3235-0444. An agency may 
not conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid OMB 
control number.
---------------------------------------------------------------------------

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

    In the Proposing Release, the Commission solicited comment on these 
collection of information requirements. The Commission received no 
comments that specifically addressed the Paperwork Reduction Act 
portion of the Proposing Release. Because Rule 10b-10(e) as adopted is 
substantially similar to the proposed amendments to Rule 10b-10, the 
SEC continues to believe that the estimates published in the Proposing 
Release regarding the proposed collection of information burdens 
associated with the new Rule 10b-10(e) are appropriate.
    As discussed above, pursuant to the enactment of the CFMA, SFPs are 
regulated both as securities and as futures contracts. Absent the 
action today by the Commission in adopting these amendments to Rule 
10b-10 and new Rule 11d2-1 and pursuant to the operation of the CFMA, 
once SFPs begin trading, Notice BDs and Full BD/Full FCMs would be 
required to comply with the existing requirements for 
confirmations.\73\ The rule amendments and new rule are designed to 
avoid both duplicate regulation and the requirement that SFP 
intermediaries conform their systems to satisfy the full requirements 
of Rule 10b-10 as it existed prior to these amendments. The 
Commission's action to adopt these amendments to Rule 10b-10 will 
eliminate major systems changes and significant costs that Notice BDs 
and Full BD/Full FCMs would have incurred, although we estimate that 
the amendments to Rule 10b-10 and new Rule 11d-1 likely will have 
little effect on the cost of each confirmation.
---------------------------------------------------------------------------

    \73\ As such, the Commission amended its estimate of the 
paperwork burden for Rule 10b-10 to reflect the additional 
transactions (and the resulting confirmations) the Commission 
estimated will be required once SFPs begin trading. We note, 
however, that this increase in the paperwork burden for Rule 10b-10 
is pursuant to the enactment of the CFMA and the expected increased 
trading brought about by the anticipated trading in SFPs.
---------------------------------------------------------------------------

A. Rule 10b-10

1. Collection of Information Under the Confirmation of Transactions 
Amendment
    As discussed previously in this release and in the Proposing 
Release, the amendments to Rule 10b-10 that we are adopting today 
permit alternative information disclosure requirements in confirmations 
provided to customers for transactions in SFPs in a futures account. 
This alternative information includes, the date the transaction was 
executed; the identity and number of

[[Page 58308]]

the contracts bought or sold; the price and delivery month; the source 
and amount of broker remuneration; whether the broker received payment 
for order flow and the amount of such payment; and, the fact that other 
specified information about the execution of the transaction will be 
available upon written request. This information will be provided to a 
customer in the form of a confirmation.
2. Use of Information
    Specifically, Rule 10b-10(e) provides that a Full FCM/Full BD or a 
Notice BD that effects transactions for customers in SFPs in a futures 
account (as that term is defined in Exchange Act Rule 15c3-3(a)(15)) 
does not have to comply with the disclosure requirements of paragraphs 
(a) and (b) of Rule 10b-10 if the Full FCM/Full BD or Notice BD 
discloses on the SFP transaction confirmations the date the transaction 
was executed; the identity and number of contracts bought or sold; the 
price and delivery month; the source and amount of broker remuneration; 
and the fact that the time of the execution of the transaction, the 
identity of the other party to the contract, and the capacity in which 
the broker-dealer was acting in effecting the transaction will be 
available to the customer upon written request. In addition, the 
information contained in the confirmations may be used by the 
Commission, self-regulatory organizations, and other securities 
regulatory authorities in the course of examinations, investigations, 
and enforcement proceedings. No governmental agency regularly would 
receive any of the information described above.
3. Respondents
    Rule 10b-10(e) will apply to the approximately 5,600 fully 
registered broker-dealers that conduct SFP business with the general 
public and the approximately 1,399 projected notice registered broker-
dealers that conduct SFP business with the general public.
4. Total Annual Reporting and Recordkeeping Burden
    We received no comments on our proposed estimates. Pursuant to the 
enactment of the CFMA, SFPs are regulated both as securities and as 
futures contracts. We estimate, as we did in the Proposing Release, 
that there will be 100 million confirmations during the first year of 
trading of SFPs.\74\
---------------------------------------------------------------------------

    \74\ In our April 29, 2002 order adjusting the fee rates under 
Section 31 of the Exchange Act, we estimated that we would collect 
$450,000 in assessments on round turn transactions in security 
futures in fiscal 2003. This estimate was based on the Congressional 
Budget Office's August 28, 2001 estimate of collections for that 
fiscal year, adjusted to reflect the reduction in the assessment 
rate included in the Investor and Capital Markets Fee Relief Act. 
Dividing the estimated $450,000 in collections on round turn 
transactions in security futures by the assessment rate of $0.009 
per round turn transaction yields 50 million round turn 
transactions. Because each of the estimated 50 million round turn 
transactions will involve at least two confirmations, we estimate 
that there will be approximately 100 million confirmations.
---------------------------------------------------------------------------

    Because the process of generating a confirmation is automated, the 
Commission staff estimates from information provided by industry 
participants that it takes about one minute to generate and send a 
confirmation. This is true for confirmations required to be sent for 
SFPs as well as for currently traded securities. The Commission staff 
also estimates from information provided by industry participants that 
broker-dealers effecting SFP transactions will spend 1.7 million hours 
complying with the amendments to Rule 10b-10 (100 million confirmations 
at one minute per confirmation = 100 million minutes; 100 million 
minutes/60 minutes per hour = 1.7 million hours). This burden results 
from the enactment of the CFMA and the anticipated trading of SFPs.
    Broker-dealers routinely use confirmations for billing purposes. In 
addition, broker-dealers would send customers some type of statement 
regardless of the requirements of Rule 10b-10(e). The number of 
confirmations sent and the cost of the confirmations vary from firm to 
firm. Smaller firms send fewer confirmations than larger firms because 
they effect fewer transactions.
    As stated earlier, the Commission staff estimates that, as a result 
of the enactment of the CFMA, broker-dealers effecting SFP transactions 
will send approximately 100 million confirmations annually. According 
to the information provided by industry participants, the average cost 
per confirmation is estimated to be 89 cents, including postage. The 
annual cost to the industry for Rule 10b-10 generally for fiscal year 
2003 is therefore estimated to be $89 million.
    This cost of $89 million, however, is simply the costs of complying 
with existing rules when SFPs begin to trade and thus is not 
attributable to paragraph (e) of Rule 10b-10. Like all transactions in 
securities and futures products, transactions in SFPs will need to have 
confirmations sent to customers. The paperwork costs of Rule 10b-10(e) 
are not measured as totals, but against a baseline of what the world 
would look like without the rule. In this case, the baseline is the 
cost that firms effecting transactions in SFPs in futures accounts 
would be subject to if the rule amendments to Rule 10b-10 were not 
adopted. As noted above, CEA Rule 1.33(b) already requires transactions 
in futures to be confirmed. Specifically, Rule 1.33(b)(1) requires that 
FCMs effecting transactions for customers provide, no later than the 
next business day after the transaction, ``a written confirmation of 
each commodity futures transaction caused to be executed by it for the 
customer.''\75\ Similarly, Exchange Act Rule 10b-10 generally requires 
a broker-dealer that effects a securities transaction for a customer to 
provide that customer with a confirmation, at or before the 
transaction. This confirmation must disclose certain basic terms of the 
transaction. Broker-dealers, therefore, would be required to send 
customers some type of confirmation statement regardless of the 
requirements of new paragraph (e) of Rule 10b-10. Therefore, the 
baseline cost against which the incremental costs of new paragraph (e) 
of Rule 10b-10 is measured is $89 million.
---------------------------------------------------------------------------

    \75\ 17 CFR 1.33(b)(1).
---------------------------------------------------------------------------

    The incremental costs of new paragraph (e) of Rule 10b-10 are 
difficult to quantify. The incremental costs of this rule amendment are 
the amounts that broker-dealers effecting transactions in SFPs in 
futures accounts must pay beyond merely generating and mailing a 
confirmation statement to their customers. In other words, the cost of 
the rule amendments is the cost of making the necessary programming and 
operational changes to capture the information required by new 
paragraph (e), e.g., capturing the capacity of the particular broker-
dealer effecting the transaction or whether the broker-dealer in 
question is receiving payment for order flow. We expect the cost of 
programming to comply with the rule amendments will be approximately 
the same as the costs firms would have otherwise incurred had the 
Commission not adopted the amendment.
5. Collection of Information Is Mandatory
    This collection of information is mandatory.
6. Confidentiality
    The collection of information pursuant to the amendments to Rule 
10b-10 will be provided by broker-dealers to customers, and also will 
be maintained by broker-dealers.

[[Page 58309]]

7. Record Retention Period
    Exchange Act Rule 17a-4(b)(1)\76\ requires broker-dealers to 
preserve confirmations for three years, the first two years in an 
accessible place.
---------------------------------------------------------------------------

    \76\ 17 CFR 240.17a-4(b)(1).
---------------------------------------------------------------------------

B. Rule 11d2-1

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

VII. Costs and Benefits of Amendments

A. Introduction

    Passage of the CFMA in December of 2000 permitted the trading of 
SFPs and established a framework for joint regulation of SFPs by the 
CFTC and the SEC. This framework was necessary because the CFMA defined 
an SFP to be, at the same time, both a security and a contract for 
future delivery and therefore subject to regulation under both the CEA 
and the Exchange Act and the rules thereunder. Recognizing that some 
entities may be subject to duplicative or conflicting regulations, the 
CFMA amended the CEA and the Exchange Act to: (1) Exempt notice-
registrants from certain (but not all) sections of the CEA, Exchange 
Act, and the rules thereunder, and (2) direct the CFTC and the SEC to 
issue rules, regulations, or orders, as necessary, to avoid certain 
duplicative or conflicting regulations relating to Full FCMs/Full 
BDs.\77\ Although not required under the CEA, the SEC is amending 
Exchange Act Rule 10b-10 by adding new paragraph (e) to Rule 10b-10, 
and is adopting new Exchange Act Rule 11d2-1.
---------------------------------------------------------------------------

    \77\ CEA section 4d(c) (7 U.S.C. 6d(c)) and Exchange Act section 
15(c)(3)(B) (15 U.S.C. 78[sigma](c)(3)(B)) respectively.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission considered preliminarily 
the costs and benefits of the amendments to Rule 10b-10 and requested 
comment on all aspects of its cost-benefit analysis, including 
identification of any additional costs or benefits of the proposed 
amendments to Rule 10b-10. Neither of the commenters provided estimates 
regarding the overall costs and benefits of the proposed amendments to 
Rule 10b-10.

B. Rule 10b-10

    Rule 10b-10(e) strives to avoid duplicative regulation by requiring 
disclosure of essentially the same type and nature of information 
currently required to be disclosed in confirmations of futures 
transactions at essentially the same time. Specifically, Rule 10b-10(e) 
provides that a Full FCM/Full BD or a Notice BD that effects 
transactions for customers in SFPs in a futures account (as that term 
is defined in Exchange Act Rule 15c3-3(a)(15)) does not have to comply 
with the disclosure requirements of paragraphs (a) and (b) of Rule 10b-
10 if the Full FCM/Full BD or Notice BD discloses on the SFP 
transaction confirmations the date the transaction was executed; the 
identity and number of contracts bought or sold; the price and delivery 
month; the source and amount of broker remuneration; and the fact that 
the time of the execution of the transaction, the identity of the other 
party to the contract, and the capacity in which the broker-dealer was 
acting in effecting the transaction will be available to the customer 
upon written request. The information to be made available upon written 
request is the same type of information that futures confirmations 
currently disclose is available to the customer upon written request. 
Rule 10b-10(e) also provides that Full FCMs/Full BDs and Notice BDs 
must disclose if they receive payment for order flow, and if so, 
require that the entity must provide the amount of payment and the fact 
that the source and nature of such remuneration will be furnished upon 
written request. In addition, new Rule 10b-10(e)(2) provides a phase-in 
period. Under that provision, broker-dealers are not required until 
June 1, 2003, to disclose in SFP confirmations information on payment 
for order flow and the fact that certain information will be provided 
upon request unless the broker-dealer receives a written request from a 
customer for the information described in subparagraph (e)(1)(iii) of 
Rule 10b-10(e)(2).
    In considering the potential costs and benefits of the new Rule 
10b-10(e), we have considered the existing legal obligations of Notice 
BDs and Full FCMs/Full BDs under the CFMA, the transaction confirmation 
practices of both the futures industry and the securities industry and 
our duty to protect consumers by requiring adequate disclosure on 
securities transactions. In addition, we have considered how Full FCMs/
Full BDs and Notice BDs effecting SFP transactions in futures accounts 
will have to restructure their confirmation technology. Finally, we 
have identified specific costs and benefits, and requested comment on 
additional costs or benefits that may stem from Rule 10b-10(e).
1. Benefits
a. Elimination of Conflicting and Duplicative Regulation
    As stated previously, under the CFMA, Notice BDs and Full FCMs/Full 
BDs effecting SFP transactions in futures accounts are currently 
required to meet the disclosure requirements of both the CEA and the 
Exchange Act and the rules thereunder. The amendments we are adopting 
to Rule 10b-10 are designed to benefit Notice BDs and Full FCMs/Full 
BDs by avoiding conflicting and duplicative regulation of the 
disclosure requirements of SFP transactions effected in futures 
accounts. The new amendments accomplish this benefit by clarifying the 
type and nature of information these entities must disclose under Rule 
10b-10 in confirmations of SFP transactions effected in futures 
accounts. Without the amendments to Rule 10b-10 we are adopting today, 
all Notice BDs and Full FCMs/Full BDs would need to change their 
confirmation systems to comply with all of the disclosure requirements 
of Rule 10b-10.
    New Rule 10b-10(e) requires delivery of a confirmation at the same 
point in time and containing essentially the same type and nature of 
information these registrants currently provide in confirmations of 
transactions in futures accounts. In addition, Rule 10b-10(e) provides 
a phase-in period that gives the affected entities until June 1, 2003 
to disclose in SFP confirmations information on payment for order flow, 
if it is received, and the fact that certain information will be 
provided upon request. Because such information is not generally 
provided in confirmations of futures transactions, the transitional 
period will allow these broker-dealers time to make the necessary 
adjustments to their confirmation technology, not only to amend their 
confirmations to make the required additional disclosures, but also to 
ensure that their systems are capturing all of the information that 
customers are entitled to receive if they make a written request.
b. Customer Understanding
    The confirmations for SFP transactions effected in futures accounts 
pursuant to the Rule 10b-10(e) should benefit customers who choose to 
effect SFP transactions in a futures account

[[Page 58310]]

but have not previously traded in a futures account by providing them 
with information similar to the type of information they would receive 
if they receive confirmations of trades effected in a securities 
account. In addition, the confirmations of the SFP transactions 
effected in the futures accounts will disclose the option to obtain 
specific additional information that the customer may receive if he 
makes a written request. The amendments should also benefit customers 
that already have experience in the futures markets and decide to 
effect SFPs in a futures account by providing customers with a 
confirmation that is similar in type and information to the kind of 
confirmations they are used to receiving on transactions effected in 
futures accounts. In addition, customers should also benefit from the 
new Rule 10b-10 requirement that, if entities begin to receive payment 
for order flow for SFP transactions executed in futures accounts, they 
must disclose that fact along with the amount of payment received and 
disclose upon written request the source and nature of the 
remuneration.
2. Costs
    But for the exemption issued as a transitional measure by the 
Commission on May 31, 2002,\78\ under the CFMA, Notice BDs and Full 
FCMs/Full BDs effecting SFP transactions in futures accounts must meet 
the requirements of the CEA and the Exchange Act, including 
confirmation requirements. However, pursuant to paragraph (e)(1)(i) of 
Rule 10b-10, a Full FCM/Full BD and a Notice BD that effect 
transactions in SFPs in a customer's futures account will not be 
required to meet the disclosure requirements of Exchange Act Rule 10b-
10(a) and (b), which broker-dealers effecting securities transactions 
must generally meet. Rather, the Full FCM/Full BD and Notice BD are 
required to disclose certain information in the confirmation and also 
disclose in the confirmation the fact that certain additional 
information is available upon a customer's written request.
---------------------------------------------------------------------------

    \78\ Exchange Act Release No. 46015 (May 31, 2002).
---------------------------------------------------------------------------

    Subparagraphs (i) and (ii) of Rule 10b-10(e)(1) require Full FCMs/
Full BDs and Notice BDs to give or send to the customer no later than 
the next business day after execution of any SFP transaction, written 
notification disclosing the date the transaction was executed, the 
identity of the single security or narrow-based security index 
underlying the contract for the SFP, the number of contracts of such 
SFP purchased or sold, the price, the delivery month, the source and 
amount of any remuneration received or to be received by the broker in 
connection with the transaction, including, but not limited to markups, 
commissions, costs, fees, and other charges incurred in connection with 
the transaction. We understand that futures confirmations already 
provide this information.\79\ Therefore, the SEC does not believe that 
requiring this information on confirmations of SFP transactions 
effected in futures accounts generates any additional costs to the 
futures industry.
---------------------------------------------------------------------------

    \79\ See CME Rule 537; CBOT Rules 421.00 and 421.01; see also 
Memorandum to file number S7-17-01 regarding February 12, 2002 
conference call between Commission staff members and representatives 
of Morgan Stanley Dean Witter (March 13, 2002).
---------------------------------------------------------------------------

    Subparagraph (iii) of Rule 10b-10(e)(1) requires the Notice BD or 
Full FCM/Full BD to give or send to the customer no later than the next 
business day after execution of any SFP transaction, written 
notification disclosing the fact that certain information will be 
available upon written request of the customer. This includes 
information about the time of the execution of the transaction, and the 
identity of the other party to the contract. We understand that futures 
confirmations generally disclose that this information is available 
upon the customer's request.\80\ Therefore, the SEC does not anticipate 
that this requirement will impose additional costs on the futures 
industry.
---------------------------------------------------------------------------

    \80\ See Memorandum to file number S7-17-01 regarding February 
12, 2002 conference call between Commission staff members and 
representatives of Morgan Stanley Dean Witter (March 13, 2002).
---------------------------------------------------------------------------

    Subparagraph (iii) of Rule 10b-10(e)(1) also requires a Notice BD 
or Full FCM/Full BD to give or send to the customer no later than the 
next business day after execution of any SFP transaction, written 
notification disclosing that information regarding whether the broker 
or dealer is acting as agent for such customer, as agent for some other 
person, as agent for both such customer and some other person, or as 
principal for its own account; and if the broker or dealer is acting as 
principal, whether it is engaging in a block transaction or an exchange 
of SFPs for physical securities, will be available upon written request 
of the customer. From discussions with industry representatives, the 
SEC staff understands that Full FCMs/Full BDs and Notice BDs will not 
incur substantial expense by adding a disclosure that information 
regarding the capacity in which the Full FCM/Full BD or Notice BD acted 
in effecting the transaction is available upon a customer's written 
request.\81\ We understand that there will be some expense involved in 
requiring the collection of information relating to the capacity in 
which the orders are executed in the trading systems, although industry 
representatives were unable to quantify the potential expenses.\82\ 
Because the futures industry has never previously been required to 
provide this type of information on a regular basis, it may need time 
to adjust its members' operational systems, not only to capture this 
information when necessary, but also to disclose on the confirmation 
itself that the information is available upon a customer's written 
request. Thus, Rule 10b-10(e) contains a transitional provision. Under 
Exchange Act Rule 10b-10(e)(2), Notice BDs and Full FCMs/Full BDs have 
until June 1, 2003 to disclose that specified information will be 
provided upon written request, as long as that information will be made 
available if a customer submits a written request. This transitional 
provision should provide the futures industry with sufficient time to 
make the necessary adjustments to their systems to comply with this 
provision of Exchange Act Rule 10b-10(e)(1)(iv).
---------------------------------------------------------------------------

    \81\ See Memorandum to file number S7-17-01 regarding February 
27, 2002 and March 5, 2002 conversations between Securities and 
Exchange Commission staff member and representative of Morgan 
Stanley Dean Witter (March 12, 2002).
    \82\ See id.
---------------------------------------------------------------------------

    If a Notice BD or a Full FCM/Full BD receives payment for order 
flow, subparagraph (iv) of Rule 10b-10(e)(1) also requires that the 
Notice BD or Full FCM/Full BD give or send to the customer no later 
than the next business day after execution of any SFPs transaction, 
written notification disclosing if the entity receives payment for 
order flow for such transactions and, if it does, it must disclose the 
amount of such payment and the fact that the source and nature of the 
compensation will be furnished upon written request of the customer. We 
understand that payment for order flow is not currently a practice in 
the futures industry.\83\

[[Page 58311]]

Accordingly, if the practice does not arise in connection with SFP 
transactions effected in futures accounts, there would be no costs 
associated with the disclosure requirement of subparagraph (iii) 
because there would be nothing to report.
---------------------------------------------------------------------------

    \83\ Letter dated July 10, 2002, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission. See also Memorandum to file number S7-17-01 regarding 
February 12, 2002 conference call between Commission staff members 
and representatives of Morgan Stanley Dean Witter (March 13, 2002); 
Memorandum to file number S7-17-01 regarding March 11, 2002, and 
March 12, 2002, conversations between Securities and Exchange 
Commission staff member and representative of Credit Suisse First 
Boston (March 12, 2002).
---------------------------------------------------------------------------

    If, however, Full FCMs/Full BDs or Notice BDs begin to receive 
payment for order flow for SFP transactions effected in futures 
accounts then those entities would need to adjust their operating 
systems to capture this information. Based on discussions with industry 
representatives, the SEC understands that systems development costs 
should be relatively low given the fact that the rule allows for the 
use of a generic disclaimer, as opposed to information that would 
require a trade-by-trade coding change. The SEC also understands from 
these discussions that more extensive costs would be associated with 
providing specific disclosures upon request about the nature and source 
of any payment for order flow received in connection with a 
transaction. Industry representatives, however, could not quantify the 
potential costs, in part, perhaps, because the representatives were 
uncertain whether payment for order flow will become a practice in 
connection with SFP transactions.\84\
---------------------------------------------------------------------------

    \84\ See Memorandum to file number S7-17-01 regarding March 11, 
2002, and March 12, 2002, conversations between Securities and 
Exchange Commission staff member and representative of Credit Suisse 
First Boston (March 12, 2002).
---------------------------------------------------------------------------

    In considering the costs Notice BDs and Full FCMs/Full BDs will 
incur to effect changes to their confirmation systems to comply with 
Rule 10b-10(e), we understand from discussions with industry 
representatives that these costs are less than the costs these entities 
would incur if they had to adjust their confirmation systems to meet 
all of the Rule 10b-10 disclosure requirements,\85\ which they would be 
required to do pursuant to the CFMA absent these amendments. 
Accordingly, the amendments to Rule 10b-10 actually reduce the costs to 
the affected entities.
---------------------------------------------------------------------------

    \85\ See Memorandum to file number S7-17-01 regarding February 
12, 2002 conference call between Commission staff members and 
representatives of Morgan Stanley Dean Witter (March 13, 2002); 
Memorandum to file number S7-17-01 regarding March 11, 2002, and 
March 12, 2002, conversations between Securities and Exchange 
Commission staff member and representative of Credit Suisse First 
Boston (March 12, 2002).
---------------------------------------------------------------------------

    As we noted above, the amendments to Rule 10b-10 we are adopting 
today will apply only to the approximately 5,600 Full FCMs/Full BDs 
that conduct business with the general public and the approximately 
1,399 of the expected Notice BDs that conduct business with the general 
public. Also, as noted above, we estimate that there will be 100 
million confirmations during the first year of trading of SFPs. 
According to the information provided by industry participants, the 
average cost per confirmation is estimated to be 89 cents, including 
postage. Therefore, we estimate that the annual paperwork cost to the 
industry for fiscal year 2003 will be $89 million.
    This paperwork cost results from the enactment of the CFMA and the 
fact that SFPs are regulated as both securities and futures contracts. 
It does not, however, result from the amendments to Rule 10b-10 adopted 
today.

C. Rule 11d2-1

    New Exchange Act Rule 11d2-1 provides Full FCMs/Full BDs that are 
effecting SFP transactions for customers in futures accounts with an 
exemption from the requirement in Exchange Act Section 11(d)(2) that a 
broker-dealer effecting a transaction for a customer disclose in 
writing, at or before the completion of the transaction, the capacity 
in which the broker-dealer acted when effecting the transaction. 
Requiring Full FCMs/Full BDs to comply with the capacity disclosure 
requirement of Exchange Act 11(d)(2) would be inconsistent with the 
exemptive relief provided in Rule 10b-10(e), which does not require 
automatic disclosure of capacity. Therefore, new Rule 11d2-1 provides 
consistent relief.
    As we noted in the Proposing Release, we do not anticipate that 
this exemption will generate large benefits or impose great costs. We 
have, however, identified some potential benefits and costs that could 
result from Rule 11d2-1.
1. Benefits
    This exemption benefits Full FCMs/Full BDs by avoiding any 
potential conflicting regulation regarding the disclosure of capacity 
when Full FCMs/Full BDs effect SFP transactions for customers in 
futures accounts. This exemption is also designed so that Notice BDs 
and Full FCMs/Full BDs effecting SFP transactions in futures accounts 
will not have different disclosure requirements. Finally, if the 
Commission did not adopt an exemption from Exchange Act Section 
11(d)(2), certain of the anticipated benefits of the new Rule 10b-10(e) 
would be undermined.
2. Costs
    Rule 11d2-1 will exempt Full FCMs/Full BDs that effect SFP 
transactions in futures accounts from a statutory requirement to 
provide specific information to customers regarding the capacity those 
entities acted in when effecting such transactions. The exemption, 
therefore, means that customers would not receive this information on 
the confirmations they receive about these transactions. This cost, 
however, is ameliorated to a large extent by the fact that, pursuant to 
the amendments to Rule 10b-10, the confirmations of these transactions 
will inform the customers that information on capacity is available 
upon the customers' written requests.

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

    Section 3(f) of the Exchange Act requires the SEC, when it is 
engaged in rulemaking and is required to consider or determine whether 
an action is necessary or appropriate in the public interest, to 
consider whether the action will promote efficiency, competition, and 
capital formation.\86\ Section 23(a)(2) of the Exchange Act requires 
the SEC, in adopting rules under the Exchange Act, to consider the 
impact such rule would have on competition.\87\ Further, Section 
23(a)(2) prohibits the SEC from adopting any rule that would impose a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act. In the Proposing Release, the SEC 
requested comments on these statutory considerations.
---------------------------------------------------------------------------

    \86\ 15 U.S.C. 78c(f).
    \87\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The SEC received no comments on the issues of efficiency and 
capital formation. We believe paragraph (e) of Rule 10b-10 and new Rule 
11d2-1 should promote efficiency. The rule amendments and rule, which 
were modeled in great part on the existing confirmation requirements of 
futures contracts, will allow Notice BDs and Full FCMs/Full BDs to use 
present confirmation systems, after making the required adjustments, 
rather than having to build new confirmation systems to meet their 
confirmation obligations for SFPs held in futures accounts.
    In addition, paragraph (e) of Rule 10b-10 and new Rule 11d2-1 are 
designed to give investors the information necessary to evaluate their 
securities transactions and the broker-dealers effecting those 
transactions. We

[[Page 58312]]

believe that these new rules will improve investor confidence and will 
therefore promote capital formation.
    The SEC also believes that the rules would not impose any 
significant burden on competition. The SEC received one comment on the 
issue of competition. The NFA stated that ``the proposed rule actually 
creates a more level playing field by alleviating the competitive 
burden that would exist if FCMs were required to modify their futures 
systems to include the transaction-by-transaction information currently 
required by Rule 10b-10(a)(2).''\88\ We therefore find that Rule 10b-
10(e) and Rule 11d2-1 should promote competition, improve efficiency 
and capital formation and should not impose any burden on competition 
not necessary or appropriate in furtherance of the purposes of the 
Exchange Act.
---------------------------------------------------------------------------

    \88\ Letter dated July 10, 2002, from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association, to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission.
---------------------------------------------------------------------------

IX. Final Regulatory Flexibility Act

    Pursuant to Section 605(b) of the Regulatory Flexibility Act,\89\ 
the Chairman of the Commission has certified, based on the 
representations of the Division of Market Regulation, and the analysis 
of the Office of Economic Analysis and Office of General Counsel, that 
the proposed amendments to Rule 10b-10 and new Rule 11d2-1 would not 
have a significant economic impact on a substantial number of small 
entities. This certification was attached to the Proposing Release No. 
34-46014 (May 31, 2001) as Appendix A. The Commission solicited 
comments concerning the impact on small entities and the Regulatory 
Flexibility Act certification, but received no comments.
---------------------------------------------------------------------------

    \89\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

X. Statutory Authority

    The Commission is adopting amendments to Rule 10b-10 and adopting 
new Rule 11d2-1 under the Exchange Act pursuant to the authority 
conferred by the Exchange Act, including Sections 10, 11, 17, 23(a), 
and 36(a)(1).\90\
---------------------------------------------------------------------------

    \90\ 15 U.S.C. 78j, 78k, 78q, 78w(a), and 78mm(a)(1).
---------------------------------------------------------------------------

Text of Final Rules

List of Subjects in 17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.


    In accordance with the foregoing, Title 17, Chapter II, of the Code 
of Federal Regulation is amended as follows.

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

    1. The authority citation for Part 240 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-l, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *

    2. Section 240.10b-10 is amended by:
    a. Revising the phrase, at the end of the paragraph (a)(2)(i)(C), 
``upon written request of the customer; and'' to read as follows ``upon 
written request of the customer; provided, however, that brokers or 
dealers that do not receive payment for order flow in connection with 
any transaction have no disclosure obligation under this paragraph; 
and'';
    b. Removing reserved paragraphs (a)(7)(i) and (a)(7)(ii), and 
removing paragraphs (a)(7)(iii), and (a)(7)(iv);
    c. Revising paragraph (a)(8);
    d. Revising the phrase ``paragraph (c)(1)'' to read ``paragraph 
(b)(1)'' in paragraph (b)(2);
    e. Revising the phrase ``paragraph (c)(1)'' to read ``paragraph 
(b)(1)'' in paragraph (b)(3); and
    f. Removing the authority citation following Sec.  240.10b-10, 
redesignating paragraph (e) as paragraph (f), and adding new paragraph 
(e).

    The revised and added paragraphs read as follows:


Sec.  240.10b-10  Confirmation of transactions.

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

[[Page 58313]]

(e)(1)(iii) of this section, the broker-dealer must make the 
information available to the customer; and
    (ii) Broker-dealers are not required to comply with paragraph 
(e)(1)(iv) of this section until June 1, 2003.
* * * * *

    3. Section 240.11d2-1 is added to read as follows:


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

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

    By the Commission.

    Dated: September 6, 2002.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-23309 Filed 9-12-02; 8:45 am]
BILLING CODE 8010-01-P