[Federal Register Volume 69, Number 11 (Friday, January 16, 2004)]
[Notices]
[Pages 2638-2639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-882]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 49038; January 8, 2004]


Securities Exchange Act of 1934; Order Granting Temporary 
Exemption for Security Futures Products From the Definition of Penny 
Stock

    The Commodity Futures Modernization Act of 2000 (``CFMA'') permits 
the trading of security futures, i.e., futures contracts on individual 
securities and on narrow-based security indexes (``security 
futures'').\1\ Under the CFMA, security futures are regulated both as 
``securities'' under the federal securities laws,\2\ and as futures 
contracts for the purposes of the Commodity Exchange Act (``CEA'').\3\ 
Accordingly, security futures products potentially fall within the 
statutory definition of penny stock.\4\ Thus, absent an exemption, 
security futures products could be subject to the Commission's 
regulatory scheme for penny stocks.\5\
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    \1\ Pub. L. 106-554, 114 Stat. 2763 (2000). Under Section 
3(a)(55)(A) of the Securities Exchange Act of 1934 (``Exchange 
Act''), the term ``security future'' is defined as a contract of 
sale for future delivery of a single security or of a narrow-based 
security index. 15 U.S.C. 78c(a)(55)(A). Under Exchange Act Section 
3(a)(56), the term ``security futures product'' is defined as a 
security future or an option on a security future. 15 U.S.C. 
78c(a)(56).
    \2\ See, e.g., Exchange Act Section 3(a)(10), 15 U.S.C. 
78c(a)(10).
    \3\ The term ``security future'' is defined in CEA Section 
1a(31) [7 U.S.C. 1a(31)] as a contract of sale for future delivery 
of a single security or of a narrow-based security index. Under CEA 
Section 1a(33) (7 U.S.C. 1a(33)), the term ``security futures 
product'' is defined as a security future or an option on a security 
future.
    \4\ 15 U.S.C. 78c(a)(51). This definition is supplemented by 
Exchange Act Rule 3a51-1, 17 CFR 240.3a51-1, which further defines 
the term ``penny stock.''
    \5\ Rules 15g-1 through 15g-9 under the Exchange Act 
(collectively known as the ``penny stock rules'') 17 CFR 240.15g-2 
through 15g-9.
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    We are proposing to amend the definition of penny stock in Exchange 
Act Rule 3a51-1 to exclude security futures listed on a national 
securities exchange or an automated quotation system sponsored by a 
registered national securities association.\6\ This

[[Page 2639]]

would be consistent with the treatment of exchange-traded options under 
the penny stock rules.\7\ Both exchange-traded options and security 
futures products are subject to special disclosure requirements.\8\ 
Subjecting security futures to the additional disclosure regime of the 
penny stock rules, therefore, would likely be duplicative and 
unnecessarily burdensome.
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    \6\ See Exchange Act Rel. No. 49037 (January 8, 2004). Section 
6(h)(1) of the Exchange Act makes it unlawful for any person to 
effect transactions in security futures products that are not listed 
on a national securities exchange or a national securities 
association registered pursuant to section 15A(a). 15 U.S.C. 
78f(h)(1).
    \7\ In particular, the term ``penny stock'' currently does not 
include any put or call option issued by the Options Clearing 
Corporation (``OCC''). See 17 CFR 240.3a51-1(c).
    \8\ Exchange Act Rel. No. 30608 (April 20, 1992) at n. 39, 57 FR 
18004 (April 28, 1992) (``In addition, because put and call options 
issued by the OCC are already subject to special disclosure 
requirements, they are separately excluded from the definition of 
penny stock in paragraph (c) of Rule 3a51-1.''). See also 17 CFR 
240.9b-1; CBOE Rules 9.1-9.23; NASD Rule 2860 (16).
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    Security futures commenced trading in the United States on November 
8, 2002 on the Nasdaq-Liffe and OneChicago markets.\9\ Therefore, the 
Commission, through this order, is providing an exemption from the 
penny stock rules for security futures such time as the Commission 
takes any further action on the proposed amendment to Rule 3a51-1 
outlined above. This exemption will allow the Commission to receive and 
consider comments while, at the same time, temporarily excluding 
security futures products from the penny stock rules.
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    \9\ Peter A. McKay, Single Stocks Futures Arrive in the U.S. 
With Room to Grow, Wall Street Journal, Nov. 11, 2002, at B6.
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    Because security futures are subject to an alternative regulatory 
scheme, and because the CFMA directs the Commission to issue such 
rules, regulations, or orders as are necessary to avoid duplicative or 
conflicting regulations for firms that are ``fully registered'' with 
both the Commodity Futures Trading Commission and the Commission,\10\ 
the Commission finds that it is appropriate in the public interest and 
consistent with the protection of investors to provide this temporary 
exemptive relief.
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    \10\ See Exchange Act Section 15(c)(3)(B), 15 U.S. 78o(c)(3)(B) 
(directing the Commission to avoid duplicative or conflicting rules 
relating to the treatment of customer funds, securities, or 
property, maintenance of books and records, financial reporting, or 
other financial responsibility rules, involving security futures).
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    Accordingly, pursuant to Section 36(a)(1) of the Exchange Act,\11\
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    \11\ 15 U.S.C. 78mm(a)(1).
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    It is hereby ordered that security futures products are exempted 
from the definition of penny stock set forth in Exchange Act Section 
3(a)(51)(A) and Rule 3a51-1 until such time as the Commission takes any 
further action on the proposed amendment to Rule 3a51-1.

    By the Commission.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-882 Filed 1-15-04; 8:45 am]
BILLING CODE 8010-01-P