[Federal Register Volume 69, Number 12 (Tuesday, January 20, 2004)]
[Notices]
[Pages 2806-2808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1078]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49054; File No. SR-NFA-2003-04]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Futures 
Association Regarding Proficiency Requirements for Security Futures 
Products

January 12, 2004.
    Pursuant to section 19(b)(7) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-7 under the Act,\2\ notice is hereby given 
that on December 15, 2003, the National Futures Association (``NFA'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule changes described in items I, II, and 
III below, which items have been prepared by the NFA. The Commission is 
publishing this notice to solicit comments on the proposed rule changes 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(7).
    \2\ 17 CFR 240.19b-7.
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    NFA, on December 12, 2003, submitted the proposed rule change to 
the Commodity Futures Trading Commission (``CFTC'') for approval and 
invoked the ``ten-day'' provision of section 21(j) of the Commodity 
Exchange Act (``CEA'') \3\. On December 18, 2003, the CFTC determined 
not to review the proposed rule change and permitted NFA to make the 
proposed rule change effective on December 24, 2003.\4\
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    \3\ 7 U.S.C. 21(j).
    \4\ See Letter from Lawrence B. Patent, Deputy Director, 
Compliance and Registration Section, Division of Clearing and 
Intermediary Oversight, CFTC to Thomas W. Sexton, III, Esq., General 
Counsel, NFA, dated December 18, 2003.
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I. Self-Regulatory Organization's Description of the Proposed Rule 
Change

    NFA's proficiency requirements for persons engaged in security 
futures activities allow current registrants to qualify to engage in 
these activities by taking an appropriate training program rather than 
a test. NFA anticipated updating the Series 3 examination \5\ and

[[Page 2807]]

Series 30 examination \6\ to include security futures questions, after 
which future registrants would qualify by testing. At the present time, 
however, testing is an inefficient option due to the low trading volume 
in these products and the relatively small number of individuals who 
are interested in qualifying to engage in security futures activities. 
Therefore, NFA proposes to postpone updating the tests until trading 
activity picks up.
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    \5\ The Series 3 is a comprehensive examination that qualifies 
registered associated persons to engage in all types of non-
supervisory activities requiring registration. NFA has other 
examinations that qualify individuals to engage in more limited 
activities, but these examinations are all subsets of the Series 3 
examination.
    \6\ The Series 30 examination is NFA's supervisory examination.
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    Section 15A(k) of the Exchange Act \7\ makes NFA a national 
securities association for the limited purpose of regulating the 
activities of NFA members (``Members'') who are registered as brokers 
or dealers in security futures products under section 15(b)(11) of the 
Exchange Act.\8\ The proficiency requirements for security futures 
products apply to these Members and their registered employees.
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    \7\ 15 U.S.C. 78o-3(k).
    \8\ 15 U.S.C. 78o(b)(11).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    NFA has prepared statements concerning the purpose of, and basis 
for, the proposed rule change, burdens on competition, and comments 
received from members, participants, and others. The text of these 
statements may be examined at the places specified in Item IV below. 
These statements are set forth in Sections A, B, and C below.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    An NFA Interpretive Notice titled ``NFA Compliance Rules 2-7 and 2-
24 and Registration Rule 401: Proficiency Requirements for Security 
Futures Products'' provides that new registrants can satisfy their 
proficiency requirements for security futures by taking an appropriate 
training program if they take the Series 3 examination and apply for 
registration before the Series 3 examination is updated to include 
security futures questions. The Interpretive Notice also provides that 
new branch office managers and current supervisory personnel can 
satisfy the proficiency requirements for designated security futures 
principals through training before the Series 30 examination is 
updated. Current registrants and branch office managers can also 
satisfy their proficiency requirements by training.
    Although the Interpretive Notice does not include a deadline for 
updating the Series 3 and Series 30 examinations, NFA anticipated 
updating these examinations by January 2004.\9\ In fact, NFA has 
already prepared the necessary questions and could easily add them to 
the question banks for the Series 3 and Series 30 examinations. Given 
the low trading volume in these products and the relatively small 
number of individuals who are interested in qualifying to engage in 
security futures activities, however, testing is an inefficient option 
at this time. Furthermore, the existing training program is an 
effective way to ensure that individuals who solicit accounts and 
orders from and manage accounts for customers trading in these markets 
have the necessary knowledge. Therefore, NFA proposes postponing the 
updated Series 3 and Series 30 examinations until activity increases to 
a point where a test becomes more practical.
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    \9\ The Interpretive Notice originally included a deadline of 
six months after the first security futures contract began trading, 
but the notice was previously amended, effective May 5, 2003, to 
eliminate that deadline. See Securities Exchange Act Release No. 
47825 (May 9, 2003); 68 FR 27128 (May 19, 2003) (SR-NFA-2003-03).
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    Security futures account for a very small amount of U.S. futures 
volume. Extrapolating from current volume figures, we estimate that 
annual trading volume on U.S. futures exchanges will be approximately 
1.3 billion contracts for calendar year 2003, while security futures 
volume will be approximately 2.5 million contracts.\10\
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    \10\ Total volume is based on information reported by the 
individual futures exchanges and compiled by the Futures Industry 
Association, and the security futures volume is based on information 
reported by the Options Clearing Corporation.
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    The number of individuals qualifying to engage in security futures 
activities is also a small percentage of those eligible to qualify. 
From January through November 2003, 1054 futures-only registrants have 
completed the web-based proficiency training offered by NFA and NASD. 
In the last four months, the number of individuals who completed the 
proficiency training has dropped significantly, averaging just under 50 
futures-only registrants per month.\11\ Since the proficiency training 
is used by existing registrants as well as new registrants, the number 
of new registrants taking the training should be considerably lower.
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    \11\ NFA's audits of notice-registered broker-dealers show that 
they are all using the Web-based training program to qualify their 
employees.
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    Looking at the same period, 2459 individuals took the Series 3 
examination from January through November. Unlike the training figures, 
however, the number of people taking the exam has remained relatively 
steady, with a monthly average of 241 for the last four months.\12\ 
These figures demonstrate that most individuals who take the Series 3 
exam are not interested in security futures at this time.
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    \12\ Dual registrants take the training through NASD, and these 
registrants are not reflected in the futures-only figures discussed 
in the text. Even when combining futures and securities registrants, 
however, fewer than 100 individuals have completed the proficiency 
training in each of the last four months.
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    The regulatory scheme for security futures is different from and 
more complex than the regulatory scheme for other futures contracts. As 
a result, when NFA adds security futures products questions to the 
Series 3 examination, the exam will be significantly longer and will 
require applicants to learn additional material. NFA does not believe 
it is cost-effective to impose a burden on all new entrants to learn 
this information when the vast majority of them do not appear to be 
interested in selling or trading these products. Similar considerations 
apply to updating the Series 30 examination.
    We have been coordinating with NASD and are aware that it has 
requested similar relief. NFA and NASD have the same regulatory aims 
and, in fact, the regulatory scheme for security futures products 
anticipates that the two entities will have comparable regulatory 
requirements. Postponing the testing requirement for both NFA and NASD 
promotes regulatory comparability and reduces the potential for 
regulatory arbitrage.
    For the reasons discussed above, NFA proposes to postpone the use 
of the revised exams indefinitely. In the meantime, we will continue to 
coordinate with NASD and will monitor the level of activity and the 
amount of interest in security futures products. In particular, we will 
review the following security futures information on an ongoing basis:
    [sbull] Volume,
    [sbull] Who is trading these products,
    [sbull] Number of associated persons completing the training 
program,
    [sbull] Number of accounts approved for trading,
    [sbull] Nature of those customers,
    [sbull] Customer complaints, and
    [sbull] Audit findings that indicate potential regulatory concerns.

[[Page 2808]]

    As noted above, we have already prepared test questions and can add 
them to the Series 3 and Series 30 question banks with a minimum of 
effort. We will be able to update the Series 3 and Series 30 
examinations quickly if our review indicates that it is either 
necessary or cost-effective or if either the SEC or the CFTC so 
requests. We will, of course, need enough lead-time for test 
preparation services to update their course materials so that new 
applicants can study the appropriate material before taking the 
examination, but the entire process should not take more than four 
months.
2. Statutory Basis
    The rule change is authorized by, and consistent with, section 
15A(k) of the Act.\13\
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    \13\ 15 U.S.C. 78o-3(k).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The rule change will not impose any burden on competition that is 
not necessary or appropriate in furtherance of the purposes of the Act 
and the Commodity Exchange Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    NFA did not publish the rule changes to the membership for comment. 
NFA did not receive comment letters concerning the rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The proposed rule change became effective on December 24, 2003.
    Within 60 days of the date of effectiveness of the proposed rule 
change, the Commission, after consultation with the CFTC, may summarily 
abrogate the proposed rule change and require that the proposed rule 
change be refiled in accordance with the provisions of section 19(b)(1) 
of the Exchange Act.\14\
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    \14\ 15 U.S.C. 78s(b)(1).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change conflicts with the Act. Persons making written submissions 
should file nine copies of the submission with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Comments may also be submitted electronically at the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. SR-NFA-2003-04. This file number should be 
included on the subject line if e-mail is used. To help the Commission 
process and review your comments more efficiently, comments should be 
sent in hardcopy or by e-mail but not by both methods. Copies of the 
submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for inspection and copying in the Commission's 
Public Reference Room. Copies of these filings also will be available 
for inspection and copying at the principal office of NFA. All 
submissions should refer to File No. SR-NFA-2003-04 and should be 
submitted by February 10, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(75).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1078 Filed 1-16-04; 8:45 am]
BILLING CODE 8010-01-P