[Federal Register Volume 74, Number 128 (Tuesday, July 7, 2009)]
[Notices]
[Pages 32200-32207]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-15890]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60194; International Series Release No. 1311]


Order Under Section 36 of the Securities Exchange Act of 1934 
Granting an Exemption From Exchange Act Section 6(h)(1) for Certain 
Persons Effecting Transactions in Foreign Security Futures and Under 
Exchange Act Section 15(a)(2) and Section 36 Granting Exemptions From 
Exchange Act Section 15(a)(1) and Certain Other Requirements

June 30, 2009.

I. Introduction and Background

    The Commodity Futures Modernization Act of 2000 (``CFMA'') \1\ 
authorized the trading of futures on individual stocks and narrow-based 
stock indexes, i.e., security futures.\2\ The CFMA defined security 
futures products \3\ as ``securities'' under the Exchange Act,\4\ the 
Securities Act of 1933 (``Securities Act''),\5\ the Investment Company 
Act of 1940,\6\ and the Investment Advisers Act of 1940,\7\ and as 
contracts of sale for future delivery under the CEA.\8\ Accordingly, 
the regulatory framework established by the CFMA provides the 
Securities and Exchange Commission (``Commission'') and the Commodity 
Futures Trading Commission (``CFTC'') with joint jurisdiction over 
security futures products. Futures on broad-based security indexes 
(security indexes that are not narrow-based), and options on such 
futures, remain under the exclusive jurisdiction of the CFTC. To 
distinguish between futures on narrow-based security indexes and 
futures on broad-based security indexes, the CFMA also amended the CEA 
and the Exchange Act to add an objective definition of a narrow-based 
security index.\9\ This definition applies both to security indexes 
that underlie futures contracts listed and traded in the United States 
and those that underlie futures contracts traded on or subject to the 
rules of a foreign board of trade.\10\
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    \1\ Public Law 106-554, 114 Stat. 2763 (2000).
    \2\ A security future is defined in Section 3(a)(55)(A) of the 
Securities Exchange Act of 1934 (``Exchange Act''), 15 U.S.C. 
78c(a)(55)(A), and Section 1a(31) of the Commodity Exchange Act 
(``CEA''), 7 U.S.C. 1a(31).
    \3\ A security futures product is defined as a security future 
or any put, call, straddle, option, or privilege on any security 
future. See Section 3(a)(56) of the Exchange Act, 15 U.S.C. 
78c(a)(56), and Section 1a(32) of the CEA, 7 U.S.C. 1a(32).
    \4\ Section 3(a)(10) of the Exchange Act, 15 U.S.C. 78c(a)(10).
    \5\ Section 2(a)(1) of the Securities Act of 1933 (``Securities 
Act''), 15 U.S.C. 77b(a)(1).
    \6\ Section 2(a)(36) of the Investment Company Act of 1940, 15 
U.S.C. 80a-2(a)(36).
    \7\ Section 202(a)(18) of the Investment Advisers Act of 1940, 
15 U.S.C. 80b-2(a)(18).
    \8\ Section 1a(31) of the CEA, 7 U.S.C. 1a(31).
    \9\ See Section 1a(25) of the CEA, 7 U.S.C. 1a(25), and Section 
3(a)(55)(B) and (C) of the Exchange Act, 15 U.S.C. 78c(a)(55)(B) and 
(C). See also Rules 3a55-1 and 3a55-2 under the Exchange Act, 17 CFR 
240.3a55-1 and 240.3a55-2; Rules 41.11, 41.12, and 41.13 under the 
CEA, 17 CFR 41.11, 41.12, and 41.13; and Securities Exchange Act 
Release No. 44724 (August 20, 2001), 66 FR 44490 (August 23, 2001).
    \10\ See Rule 3a55-3 under the Exchange Act, 17 CFR 240.3a55-3; 
Rule 41.13 under the CEA, 17 CFR 41.13; and Securities Exchange Act 
Release No. 44724, supra note 9.
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    The CFMA also added Section 6(h)(1) to the Exchange Act,\11\ which 
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) of the Exchange Act.\12\ Because of this prohibition, U.S. 
persons are currently unable to enter into contracts for narrow-based 
index or single stock futures traded on or subject to the rules of a 
foreign board of trade.
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    \11\ 15 U.S.C. 78f(h)(1).
    \12\ 15 U.S.C. 78o-3(a). The Exchange Act and the CEA also 
require that any security underlying a security future listed on a 
national securities exchange or national securities association, 
including each component security of a narrow-based security index, 
be registered under Section 12 of the Exchange Act. See Section 
6(h)(3)(A) of the Exchange Act, 15 U.S.C. 78f(h)(3)(A), and Section 
2(a)(1)(D)(i)(I) of the CEA, 7 U.S.C. 2(a)(1)(D)(i)(I). Accordingly, 
if the securities that compose foreign security indexes listed on or 
subject to the rules of a foreign board of trade are not registered 
under Section 12 of the Exchange Act, absent relief, a national 
securities exchange or national securities association would not be 
able to list and trade a security future based on such an index. The 
Exchange Act and CEA also require that securities underlying 
security futures be equity securities. Section 6(h)(3)(D) of the 
Exchange Act, 15 U.S.C. 78f(h)(3)(D), and Section 2(a)(1)(D)(i)(III) 
of the CEA, 7 U.S.C. 2(a)(1)(D)(i)(III). The Commission and the CFTC 
have exercised their authority pursuant to Sections 1a(25)(B)(vi) 
and 2(a)(1)(D) of the CEA and Sections 3(a)(55)(C)(vi), 3(b), 6(h), 
23(a), and 36 of the Exchange Act, to adopt rules to allow security 
futures on debt securities and debt securities indexes under certain 
conditions. 7 U.S.C. 1a(25)(B)(vi) and 2(a)(1)(D) and 15 U.S.C. 
78c(a)(55)(C)(vi), 78c(b), 78f(h), 78w(a), and 78mm. See Securities 
Exchange Act Release No. 54106 (July 6, 2006), 71 FR 39534 (July 13, 
2006).
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    The Food, Conservation and Energy Act of 2008 requires the 
Commission, the CFTC, or both, as appropriate, to take action under 
their existing authorities to permit, by June 30, 2009, the trading of 
futures on certain security indexes by resolving issues related to 
foreign security indexes.\13\ The exemption the Commission is issuing 
today fulfills this statutory directive on the part of the Commission.
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    \13\ Public Law 110-246, Sec. 13, 106, 122 Stat. 1651, 2197 
(2008), reprinted in Notes to 7 U.S.C.A. Sec. 2.
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    The Commission understands that institutional investors could use 
futures on foreign securities and foreign security indexes for, among 
other things, risk management and asset allocation. In particular, in 
connection with the Commission's rulemaking in 2001 relating to the 
definition of narrow-based security index and exclusions from that 
definition,\14\ commenters expressed strong views that U.S. investors, 
particularly institutional investors, need to be able to trade in 
futures on foreign security indexes for risk management, asset 
allocation, and other purposes, and would suffer substantial adverse 
impact and competitive disadvantage with respect to non-U.S. investors 
if they could not trade such products.\15\
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    \14\ See Securities Exchange Act Release Nos. 44288 (May 9, 
2001), 66 FR 27560 (May 17, 2001), and 44724, supra note 9.
    \15\ See e.g., Comment Letters from Barclay's Global Investors, 
N.A., dated July 17, 2001; Futures Industry Association, dated July 
18, 2001; General Motors Investment Management Corporation, dated 
June 11, 2001; The Goldman Sachs Group and its subsidiaries, dated 
July 18, 2001; and The Montreal Exchange, dated June 14, 2001 (cited 
in Securities Exchange Act Release No. 44724, supra note 9).

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[[Page 32201]]

    Under the federal securities laws, a primary mandate of the 
Commission is investor protection. In the Commission's view, the 
federal securities laws are intended to protect U.S. investors and 
capital markets (including purchasers in those markets, whether U.S. or 
foreign).\16\ For instance, in protecting the U.S. capital markets and 
investors purchasing in those markets, Congress and the Commission have 
recognized that the ongoing dissemination of accurate information by 
issuers about themselves and their securities is essential to the 
effective operation of the trading markets. The Exchange Act and 
underlying rules have established a system of ongoing disclosure about 
issuers that have offered securities to the public, or that have 
securities that are listed on a national securities exchange or are 
broadly held by the public.\17\ A public issuer's Exchange Act record 
provides the basic source of information to the market and to potential 
purchasers regarding the issuer and its management, business, financial 
condition, and prospects.\18\
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    \16\ For example, under the ``territorial approach'' to Section 
5 of the Securities Act, the registration of securities under the 
Securities Act is intended to provide that protection to U.S. 
markets and U.S. investors. Further, in order to ``protect investors 
and securities markets,'' under the Commission's territorial 
approach to Section 15 of the Exchange Act, absent an exemption, 
broker-dealer registration is generally required by ``foreign 
broker-dealers that, from outside the United States, induce or 
attempt to induce trades by any person in the United States.'' See 
Registration Requirements for Foreign Broker-Dealers, Securities 
Exchange Act Release No. 27017 (July 11, 1989), 54 FR 30013 (July 
18, 1989) at 30017.
    \17\ The Exchange Act rules require public issuers to make 
periodic disclosures at annual and quarterly intervals, with other 
important information reported on a more current basis. Because of 
the enactment of the Sarbanes-Oxley Act, 15 U.S.C. 7201 et seq., and 
the Commission's subsequent rulemaking and interpretive actions, the 
disclosure included in issuers' Exchange Act filings has been 
enhanced significantly. See, e.g., Securities Act Release Nos. 8124 
(August 28, 2002), 67 FR 57276 (September 9, 2002); 8220 (April 9, 
2003), 68 FR 18788 (April 16, 2003); 8238 (June 5, 2003), 68 FR 
36636 (June 18, 2003); and 8400 (March 16, 2004), 69 FR 15594 (March 
25, 2004). See also Foreign Issuer Reporting Enhancements, 
Securities Exchange Act Release No. 58620 (September 23, 2008), 73 
FR 58300 (October 6, 2008).
    \18\ Because an issuer's Exchange Act reports and other publicly 
available information form the basis for the market's evaluation of 
the issuer and the pricing of its securities, investors in the 
secondary market use that information in making their investment 
decisions.
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    In many circumstances, however, the reasonable expectation of 
participants in the global markets justifies reliance on laws 
applicable in jurisdictions outside the U.S. to establish requirements 
for transactions effected offshore. In this context, this ``territorial 
approach'' generally recognizes the primacy of the laws in which a 
market is located.\19\ Thus, the Exchange Act periodic reporting 
requirements for issuers, including foreign issuers, with securities 
traded in U.S. markets, do not extend to securities of foreign issuers 
traded only in foreign markets if such issuers are not otherwise 
subject to Exchange Act reporting requirements. The Commission 
historically has sought to balance the information needs of investors 
with the public interest served by opportunities to invest in a variety 
of securities, including foreign securities, and believes that such an 
approach is appropriate in the context of permitting certain persons to 
engage in security futures transactions involving foreign securities.
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    \19\ See Securities Act Release No. 6863 (April 24, 1990), 55 FR 
18306 (May 2, 1990) (``Regulation S Adopting Release''). This 
territorial approach to the application of the registration 
provisions, however, does not affect the broad reach of the 
antifraud provisions of the federal securities laws. As the 
Commission noted in the Regulation S Adopting Release, ``[t]he 
antifraud provisions have been broadly applied by the courts to 
protect U.S. investors and investors in U.S. markets where either 
significant conduct occurs within the United States * * * or the 
conduct occurs outside the United States but has a significant 
effect within the United States or on the interests of U.S. 
investors. * * *'' Id. at 18308-18309.
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    Generally, Section 36 of the Exchange Act \20\ authorizes the 
Commission--by rule, regulation, or order--to conditionally or 
unconditionally exempt any person, security, transaction (or any class 
or classes of persons, securities, or transactions) from any provision 
or provisions of the Exchange Act or any rule or regulation thereunder, 
to the extent such exemption is necessary or appropriate in the public 
interest and is consistent with the protection of investors. As 
discussed more fully below, pursuant to Section 36 the Commission is 
exempting, under certain conditions, from Section 6(h)(1) of the 
Exchange Act certain persons that effect transactions in security 
futures overlying foreign securities traded on or subject to the rules 
of a foreign board of trade. All other applicable provisions of the 
federal securities laws, including the antifraud provisions, will 
continue to apply to such transactions.
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    \20\ 15 U.S.C. 78mm.
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    In addition, as discussed more fully below, the Commission is 
exempting certain foreign brokers or dealers from the registration 
requirements of Section 15(a)(1) of the Exchange Act and certain other 
requirements. Such foreign brokers or dealers remain subject to all 
other applicable provisions of the federal securities laws, including, 
without limitation, Section 10(b) of the Exchange Act \21\ and Rule 
10b-5 thereunder.\22\ The Commission is granting the exemption pursuant 
to Section 15(a)(2) of the Exchange Act (which authorizes the 
Commission, by rule or order, as it deems consistent with the public 
interest and the protection of investors, to conditionally or 
unconditionally exempt from Section 15(a)(1) of the Exchange Act any 
broker or dealer or class of brokers or dealers specified in such rule 
or order) and Section 36 of the Exchange Act, in order to facilitate 
transactions contemplated by the exemption from Section 6(h)(1) of the 
Exchange Act.
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    \21\ 15 U.S.C. 78j(b).
    \22\ 17 CFR 240.10b-5.
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II. Exemption From Section 6(h)(1) of the Exchange Act

    The Commission finds that it is appropriate in the public interest 
and consistent with the protection of investors to grant an exemption 
from Section 6(h)(1) of the Exchange Act to permit certain persons to 
effect transactions in certain foreign security futures on foreign 
boards of trade. Specifically, the exemption permits, under certain 
conditions specified below, the following persons to effect 
transactions in security futures that are traded on or subject to the 
rules of a foreign board of trade: (1) Qualified institutional buyers 
(``QIBs'') as defined in Rule 144A under the Securities Act; \23\ (2) 
persons that are not U.S. persons under Rule 902 of Regulation S of the 
Securities Act (``non-U.S. persons''); \24\ (3) registered brokers or 
dealers that effect transactions on behalf of QIBs or non-U.S. persons; 
and (4) banks, as defined in Section 3(a)(6) of the Exchange Act,\25\ 
acting pursuant to an exception or exemption from the definition of 
``broker'' or ``dealer'' in Sections 3(a)(4)(B), 3(a)(4)(E), or 
3(a)(5)(C) of the Exchange Act or the rules thereunder (``Eligible 
Bank''),\26\ to effect transactions on behalf of QIBs or non-U.S. 
persons.
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    \23\ See Rule 144A(a)(1), 17 CFR 230.144A(a)(1).
    \24\ See Rule 902(k) of Regulation S, 17 CFR 230.902(k).
    \25\ 15 U.S.C. 78c(a)(6).
    \26\ 15 U.S.C. 78c(a)(4)(B), 15 U.S.C. 78c(a)(4)(E), or 15 
U.S.C. 78c(a)(5)(C).
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    As described more fully below, the exemption permits such persons 
to effect transactions in security futures that are not listed on a 
national securities exchange or a national securities association 
registered pursuant to Section 15A(a) of the Exchange Act, under the 
following conditions:
    Types of Security Futures.
     If the security future is on a single security:

[[Page 32202]]

     The underlying security must be (1) issued by a foreign 
private issuer and have its primary trading market outside the U.S., or 
(2) a note, bond, debenture, or evidence of indebtedness (``debt'') 
security issued or guaranteed by a foreign government that is eligible 
to be registered with the Commission under Schedule B of the Securities 
Act.\27\
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    \27\ See Schedule B, 15 U.S.C. 77aa.
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     If the security future is on a narrow-based security 
index:
     At least 90 percent of the underlying securities in the 
index, at the time of the transaction, both in terms of the number of 
underlying securities and their weighting in the index, must be (1) 
issued by foreign private issuers where the primary trading market of 
each such underlying security is outside the U.S., or (2) debt 
securities issued or guaranteed by a foreign government that are 
eligible to be registered with the Commission under Schedule B of the 
Securities Act; \28\ and
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    \28\ Id. See also infra notes 46-51 and accompanying text.
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     No more than 10 percent of the number and weighting of 
securities in the index at the time of the transaction can fail to meet 
the above criteria, and the issuers of such securities must be required 
to file reports with the Commission pursuant to Section 13 or Section 
15(d) of the Exchange Act.\29\
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    \29\ 15 U.S.C. 78m and 78o(d).
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    Foreign Exchange.
     The transaction must be effected on, or be subject to the 
rules of, an exchange or contract market that is not required to 
register with the Commission under Section 5 of the Exchange Act.\30\
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    \30\ See infra notes 52-53 and accompanying text.
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    Clearance and Settlement Outside the U.S.
     The security future must not result in physical delivery 
in the U.S. of the securities underlying the contract and must be 
cleared and settled outside the U.S.; and
     A position in the security future must not be able to be 
closed or liquidated by effecting an offsetting transaction on or 
through the facility of any exchange or association registered in the 
U.S. under Section 6 or 15A of the Exchange Act, respectively.

A. Types of Persons Covered by the Exemption

    The Commission believes that it is necessary and appropriate in the 
public interest and for the protection of investors to limit the 
persons who may rely on this exemption because it is possible that the 
securities underlying a foreign security future may not be registered 
under Section 12 of the Exchange Act. For this reason, only the 
following persons are exempt from Section 6(h)(1) of the Exchange Act:
     QIBs;
     Non-U.S. persons;
     Brokers or dealers registered under Section 15(b) of the 
Exchange Act \31\ to the extent that they effect transactions on behalf 
of QIBs or non-U.S. persons; and
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    \31\ A broker or dealer registered with the Commission pursuant 
to Section 15(b)(11) of the Exchange Act may rely on this exemption 
to engage in transactions in foreign security futures to the same 
extent as a broker or dealer registered with the Commission pursuant 
to Section 15(b)(1) of the Exchange Act. See infra notes 57-68 and 
accompanying text.
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     Eligible Banks \32\ to the extent that they effect 
transactions on behalf of QIBs or non-U.S. persons.\33\
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    \32\ See supra note 26 and accompanying text.
    \33\ A broker or dealer or Eligible Bank acting for its own 
account would not be able to rely on the exemption in this order 
unless such broker, dealer, or Eligible Bank is a QIB in its own 
right.
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For purposes of this exemption, a broker or dealer or Eligible Bank 
that effects transactions on behalf of a QIB or a non-U.S. person 
engaged in trading security futures must reasonably believe that such 
person is a QIB or a non-U.S. person.\34\
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    \34\ See Rule 144A under the Securities Act, 17 CFR 230.144A, 
for certain non-exclusive means to satisfy this condition for QIBs.
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    As discussed above,\35\ the registration requirements under Section 
12 of the Exchange Act, together with the reporting requirements under 
Section 13 of the Exchange Act, underlie the full disclosure regime 
administered by the Commission. These registration and reporting 
requirements are intended to benefit and protect all investors, both 
institutions and individual investors.
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    \35\ See supra notes 16-19 and accompanying text.
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    The Commission nevertheless believes that subject to certain 
conditions, it is appropriate to permit certain sophisticated investors 
to trade security futures based on securities of foreign private 
issuers that are not subject to the reporting requirements of the 
Exchange Act. In particular, the Commission believes that, with regard 
to transactions in security futures based on foreign security indexes 
that may include unregistered securities of foreign private issuers, 
some of which may be non-reporting issuers, QIBs are sufficiently 
sophisticated and have enough resources to identify the information 
that they require to make their investment decisions and to obtain that 
information, and to engage in transactions not subject to the 
registration requirements of the U.S. securities laws.\36\ The 
Commission also believes it is appropriate to exempt non-U.S. persons 
from Section 6(h)(1) of the Exchange Act because such persons do not 
have the expectation that the U.S. securities laws would apply to their 
transactions in such security futures traded on non-U.S. boards of 
trade.
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    \36\ For certain purposes, QIBs have been deemed to be within 
the classes of persons that have such knowledge and experience that 
they are capable of fending for themselves and thus do not need the 
full protections of the registration provisions of the Securities 
Act nor the benefits of the full issuer reporting provisions of the 
Exchange Act. See Resale of Restricted Securities; Changes to Method 
of Determining Holding Period of Restricted Securities under Rules 
144 and 145, Securities Act Release No. 6862 (April 23, 1990), 55 FR 
17933 (April 30, 1990) (``Rule 144A Adopting Release''). See also 
infra note 39.
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    The Commission reminds market participants that, absent 
registration under the Securities Act, when a QIB or non-U.S. person 
engages in a transaction pursuant to this exemption, the offer and sale 
of the security future must be exempt from such registration.\37\ The 
statutory exemption from registration in Section 3(a)(14) of the 
Securities Act is unavailable for offers and sales of security futures 
that are not cleared by a registered clearing agency or listed on a 
registered national securities exchange.\38\ The offer and sale of the 
security future must, therefore, be made in reliance on another 
exemption from registration, such as the exemption in Section 4(2) of 
the Securities Act for offerings not involving public offerings \39\ or 
the safe harbor provisions

[[Page 32203]]

of Regulation D or Regulation S, provided the conditions of those safe 
harbors, including the restrictions on general solicitation and general 
advertising, are satisfied.\40\
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    \37\ In addition, if the offer or sale of a security future is 
by or on behalf of the issuer of the underlying security, an 
affiliate of the issuer of the underlying security, or an 
underwriter, the offer or sale of the security future would be an 
offer or sale of the underlying security as well, as to which the 
registration provisions of the Securities Act would apply, unless an 
available exemption existed. See Section 2(a)(3) and Section 5 of 
the Securities Act, 15 U.S.C. 77b(a)(3) and 77e. See also Commission 
Guidance on the Application of Certain Provisions of the Securities 
Act of 1933, the Securities Exchange Act of 1934, and Rules 
thereunder to Trading in Security Futures Products, Securities Act 
Release No. 8107 (June 21, 2002), 67 FR 43234 (June 27, 2002).
    \38\ 15 U.S.C. 77c(a)(14).
    \39\ Transactions that do not involve any public offering are 
exempt from federal registration under Section 4(2) of the 
Securities Act. The Securities Act does not define these 
transactions. The U.S. Supreme Court, however, set the basic 
criteria for the Section 4(2) exemption in SEC v. Ralston Purina 
Co., 346 U.S. 119 (1953). The Court indicated that the application 
of the non-public offering exemption depended on whether the 
offerees were able to fend for themselves and had access to the same 
kind of information that would be disclosed in registration. The 
Court noted that such persons, by virtue of their knowledge, would 
not need to rely on the protections afforded by registration. See 
Securities Act Release No. 8041 (December 19, 2001), 66 FR 66839 
(December 29, 2001) at text accompanying note 22. In adopting Rule 
144A (which is a resale exemption from registration) in 1990, the 
Commission determined that QIBs were in the category of persons able 
to fend for themselves and had access to the same kind of 
information that would be disclosed in registration. See Rule 144A 
Adopting Release, supra note 36.
    \40\ See Regulation D, 17 CFR 230.501 et seq., and Regulation S, 
17 CFR 230.901 et seq. While the exemption in this order applies to 
transactions in foreign security futures by QIBs, as defined in Rule 
144A, as well as non-U.S. persons, as defined in Regulation S, the 
exemption or safe harbor relied on in offering or selling a foreign 
security future to such persons may, but need not, be Regulation S. 
Rule 144A would not apply to the offer and sale of a security future 
because Rule 144A only applies to resale transactions (see 17 CFR 
230.144A), whereas, the offer or sale of a security future is an 
offering by the clearing agency on or through the facilities of the 
exchange, not a resale transaction.
    In analyzing the availability of an exemption or safe harbor 
from such registration requirements, the Commission provided some 
guidance in the General Statement in Regulation S by providing that 
any offer, offer to sell, sale, or offer to buy that occurs within 
the United States is subject to Section 5 of the Securities Act, 
while any such offer or sale that occurs outside the United States 
is not subject to Section 5. The determination as to whether a 
transaction is outside the United States will be based on the facts 
and circumstances of each case. As the Commission stated in adopting 
Regulation S, ``[i]f it can be demonstrated that an offer or sale of 
securities occurs `outside the United States,' the registration 
provisions of the Securities Act will not apply, regardless of 
whether the conditions of [Regulation S] are met. For a transaction 
to qualify * * * both the sale and the offer pursuant to which it 
was made must be outside the United States.'' See Regulation S 
Adopting Release, supra note 19. Regulation S also contains 
restrictions on, among other matters, directed selling efforts into 
the U.S.--those activities that could reasonably be expected, or are 
intended, to condition the market with respect to the securities 
being offered in reliance on Regulation S. Id.
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B. Types of Security Futures in Which Transactions May Be Effected

    The exemption is conditioned on the type of security or securities 
underlying the security futures. In particular, the security future 
must overlie a single security of, or security index predominantly 
composed of securities of, foreign private issuers where the 
securities' primary trading market is outside the U.S., or debt 
securities of a government or political subdivision of a foreign 
country. This condition is intended to exclude from the exemption 
security futures based on unregistered securities that are more 
appropriately considered under the federal securities laws as 
securities of U.S. companies that should be registered under the 
federal securities laws. Moreover, the Commission intends this 
condition, which requires the security or securities underlying the 
security future to be foreign securities, to prevent this exemption 
from being used to avoid U.S. federal securities laws or facilitating a 
secondary market in the U.S. in securities that may not have been 
registered under the Securities Act or the Exchange Act.\41\
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    \41\ See supra notes 37-40 and accompanying text.
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1. Futures on Single Securities
    There are two types of foreign securities that may underlie a 
future on a single security within the terms of this exemption. First, 
a security future may overlie a security of a ``foreign private 
issuer,'' as defined under the Commission's rules,\42\ where such 
security's primary trading market is outside the U.S.\43\ These 
security futures are based on the securities of companies that are not 
considered under the federal securities laws as U.S. companies and that 
may not be reporting under the Exchange Act. Second, a security future 
may overlie a debt security issued or guaranteed by a foreign 
government \44\ that is eligible to be registered with the Commission 
under Schedule B of the Securities Act.\45\
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    \42\ See Securities Act Rule 405, 17 CFR 230.405, and Exchange 
Act Rule 3b-4, 17 CFR 240.3b-4.
    \43\ See infra notes 50-51 and accompanying text.
    \44\ Rule 405 under the Securities Act defines ``foreign 
government'' as the government of a foreign country or political 
subdivision of a foreign country. 17 CFR 230.405.
    \45\ See Schedule B, 15 U.S.C. 77aa. Existing exemptions for 
futures on foreign government debt do not cover all foreign 
governments. See Rule 3a12-8, 17 CFR 240.3a12-8. Under Section 7 of 
the Securities Act, Schedule B may be used by foreign governments 
and political subdivisions to register securities under the 
Securities Act. Certain entities that are closely associated with 
foreign governments may also be eligible to use Schedule B. The 
Commission intends that the exemption be available for all security 
futures on foreign government debt. As a result, for foreign 
government debt securities, the Commission has included the 
condition that the security be eligible to be registered pursuant to 
Schedule B so that security futures on foreign government debt that 
may be acquired pursuant to this exemption include all foreign 
government securities that are eligible to be registered with the 
Commission pursuant to Schedule B.
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2. Futures on Indexes
    If a foreign security future is based on a security index, the 
exemption is conditioned on at least 90 percent of the securities in 
the index, at the time of the transaction, both in terms of the number 
of underlying securities and their weighting in the index, being (1) 
securities issued by foreign private issuers, where each such 
security's primary trading market is outside the U.S.,\46\ or (2) debt 
securities issued or guaranteed by a foreign government that are 
eligible to be registered with the Commission under Schedule B of the 
Securities Act.\47\ The exemption permits up to 10 percent of the 
number and weighting of securities in the index to be securities of 
issuers that do not meet the above conditions \48\--i.e., the issuers 
either are not foreign private issuers or are foreign private issuers 
but the securities' primary trading market is in the U.S.--if such 
securities are issued by companies that are required to file reports 
pursuant to Section 13 or 15(d) of the Exchange Act.\49\ The Commission 
believes that 10 percent is an appropriate portion of an index that 
will allow an index to be considered ``foreign'' notwithstanding that a 
small proportion of securities of issuers in the index do not satisfy 
the criteria to be considered foreign under this exemption.\50\
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    \46\ See infra notes 50-51 and accompanying text for a 
discussion of ``primary trading market.''
    \47\ 15 U.S.C. 77aa.
    \48\ For other contexts in which a 10 percent threshold exists 
under the federal securities laws see, e.g., Exchange Act Section 
16(a)(1), 15 U.S.C. 78p(a)(1), and Regulation AB (Rule 1101(k), 17 
CFR 229.1101(k)).
    \49\ 15 U.S.C. 78m and 78o(d).
    \50\ For example, if the foreign index contains 30 securities, 
up to three securities could be the securities of an issuer that is 
not a foreign private issuer or that does not meet the primary 
market trading test (as discussed below), as long as the aggregate 
weighting of those securities also is no more than 10 percent of the 
index.
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    The Commission's intent is for the exemption to permit transactions 
in security futures trading on foreign markets that overlie securities 
of foreign issuers that, in many cases, are not subject to the Exchange 
Act reporting provisions. The exemption, however, does allow 
transactions in foreign security futures on foreign security indexes 
that contain a limited number and weighting of securities of issuers 
that either are not foreign private issuers or that do not have their 
primary trading market outside the U.S, provided such issuers are 
subject to the reporting requirements of the Exchange Act. Allowing a 
limited number and weighting of securities that do not satisfy the 
foreign private issuer or primary trading market condition will not 
result in a distribution of unregistered securities in the U.S. of non-
reporting issuers.
3. Primary Trading Market
    The exemption also is conditioned on the primary trading market of 
any foreign private issuer's security being outside the U.S. For 
purposes of this condition, a security's primary trading market will be 
deemed to be outside the U.S. if at least 55 percent of the worldwide 
trading volume in the security took place in, on, or through the 
facilities of a securities market or markets located either (i) in a 
single foreign jurisdiction, or (ii) in no more than two foreign 
jurisdictions during the issuer's most recently completed fiscal

[[Page 32204]]

year. If the trading in the foreign private issuer's security is in two 
foreign jurisdictions, the trading for the issuer's security in at 
least one of the two foreign jurisdictions must be greater than the 
trading in the U.S. for the same class of the issuer's securities in 
order for such security's primary trading market to be considered 
outside the U.S.\51\ Where a security's primary trading market is in 
the U.S., the Commission believes it is more appropriate, for these 
purposes, to require that the issuer of such security be subject to the 
reporting requirements under the Exchange Act. If 55 percent or more of 
the trading volume in a foreign private issuer's securities occurs 
through the facilities of a securities market or markets located 
outside the U.S., there is a greater likelihood that the foreign 
private issuer will be subject to a body of reporting and other 
securities regulatory requirements in a foreign jurisdiction and that 
the principal pricing determinants for the issuer's securities will be 
on a market within the jurisdiction of such other regulator.\52\
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    \51\ Security futures can be surrogates for the underlying 
security. Thus, for purposes of the exemption, the 55-percent test 
is important to ensure that the majority of trading in the foreign 
private issuer's securities occurs offshore. Under this exemption, 
for purposes of determining whether the 55-percent test is met, 
trading volume is measured by the foreign private issuer's most 
recently completed fiscal year. The Commission uses this same test 
to assess U.S. market interest in a foreign private issuer's 
securities. See Foreign Private Issuer's Exemption from 
Registration, Securities Exchange Act Release No. 58465 (September 
5, 2008), 73 FR 52752 (September 10, 2008) (``Release No. 34-
58465''). The Commission has previously adopted similar tests to 
assess U.S. market interest in a foreign private issuer's securities 
in other contexts. See Regulation S, Rule 902(j)(1)(ii), 17 CFR 
230.902(j)(1)(ii), and Termination of a Foreign Private Issuer's 
Registration of a Class of Securities Under Section 12(g) and Duty 
to File Reports Under Section 13(a) or 15(d), Securities Exchange 
Act Release No. 55540 (March 27, 2007), 72 FR 16934 (April 5, 2007).
    \52\ See Release No. 34-58465, supra note 51.
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4. Closing Transactions Only
    A security or securities underlying a security future may satisfy 
the conditions in this exemption described above at the time a 
transaction is effected, but may cease to satisfy such conditions while 
a security future position remains open. The exemption would allow 
persons who entered into positions in foreign security futures in 
compliance with this exemption to close such positions. For example, a 
person that opened a position in a foreign security future in 
compliance with the exemption could close such position even if the 
underlying index, because of changes in the value of the securities 
that compose the index, is now less than 90 percent composed of foreign 
private issues.

C. Exchange Registration

    The Commission is not granting an exemption from Section 5 of the 
Exchange Act for transactions pursuant to this exemption. To the extent 
exchanges are required to register in the U.S., the listing standards 
in Section 6(h) of the Exchange Act would apply to any security future 
trading on that exchange. This exemption is not intended to exempt a 
U.S. exchange from having to satisfy these listing standards. As a 
result, the only exchanges that can trade security futures that do not 
meet these listing standards are those not registered, or required to 
register, in the U.S.
    Accordingly, this exemption is conditioned on any transaction 
effected pursuant to this exemption being on an exchange that is not 
required to register with the Commission under Section 5 of the 
Exchange Act.\53\ Specifically, for purposes of this exemption, a 
transaction must be effected on, or subject to the rules of, an 
exchange or contract market that has its principal place of business 
outside the U.S. and that is regulated as an exchange or contract 
market in a country other than the U.S. The Commission believes that an 
exchange or contract market would be required to register under Section 
5 of the Exchange Act if it provides direct electronic access to 
persons located in the U.S.\54\
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    \53\ 15 U.S.C. 78e.
    \54\ Activities of a foreign exchange or contract market in the 
U.S. relating to security futures also will be subject to applicable 
Securities Act provisions regarding the offer or sale of securities. 
See supra notes 37-40 and accompanying text.
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D. Issuance, Clearance and Settlement Outside the United States

    A clearing agency is the issuer of the security future.\55\ Any 
offer or sale by the clearing agency would have to be registered or 
exempt under the Securities Act. The purpose of the exemption from 
Section 6(h)(1) of the Exchange Act is to allow certain persons to 
effect transactions in security futures overlying securities traded 
outside the U.S. Therefore, as a condition to this exemption, any 
transaction in a security future must be cleared and settled on a 
foreign exchange or contract market located outside the U.S., or, if 
transactions on such foreign exchange or contract market are cleared 
and settled through a separate clearing entity, the transaction must be 
cleared and settled with the clearing entity, which must be located 
outside the U.S.
---------------------------------------------------------------------------

    \55\ A clearing organization interposes itself in each 
transaction and adopts the position of buyer to every seller and 
seller to every buyer. Robert W. Kolb, Futures, Options, & Swaps, 16 
(3d ed. 2000).
---------------------------------------------------------------------------

    In addition, as a condition to the exemption, it must not be 
possible to close or liquidate a position in the foreign security 
future entered into on an exchange or contract market located outside 
the U.S. by effecting an offsetting transaction on or through the 
facility of any exchange or association registered in the U.S. under 
Section 6 or 15A of the Exchange Act, respectively.\56\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78f and 15 U.S.C. 78o-3.
---------------------------------------------------------------------------

    To limit the potential for an indirect distribution and development 
of a secondary market in the U.S. in securities that have not been 
registered under the Securities Act or the Exchange Act, this exemption 
is also conditioned on persons not taking delivery in the U.S. of the 
security or securities underlying the foreign security future in 
connection with settlement. Positions in foreign security futures 
cannot be transferred to another investor in the same manner as the 
underlying security, but can be disposed of only in an offsetting 
transaction on an exchange or contract market outside the U.S. This 
fact, together with the restriction on physical delivery in the U.S., 
is intended to help safeguard against development of a public market in 
the U.S. with respect to unregistered securities as a result of the 
ability to effect transactions in foreign security futures pursuant to 
this exemption.

III. Exemptions From Section 15(a)(1) of the Exchange Act and Certain 
Other Requirements

    A foreign broker or dealer effecting transactions in foreign 
security futures with persons exempt from Section 6(h)(1) of the 
Exchange Act under this order will need to determine whether it is 
required to register as a broker or dealer in the U.S. Such foreign 
broker or dealer can rely on any of the exemptions from U.S. broker-
dealer registration provided by Rule 15a-6 under the Exchange Act.\57\ 
The Commission is

[[Page 32205]]

today also issuing alternative exemptions, on which a foreign broker or 
dealer can rely, from Section 15(a)(1) of the Exchange Act and the 
reporting and other requirements of the Exchange Act (other than 
Sections 15(b)(4) and 15(b)(6)),\58\ and the rules and regulations 
thereunder, that apply specifically to a broker or dealer whether or 
not registered with the Commission, as discussed below.\59\
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    \57\ 17 CFR 240.15a-6. By way of background, Rule 15a-6 provides 
conditional exemptions from U.S. broker-dealer registration 
requirements for foreign brokers or dealers that: (1) Effect 
unsolicited transactions; (2) provide research reports to certain 
institutional investors; (3) effect transactions for certain 
institutional investors through a U.S. registered broker or dealer; 
and (4) execute transactions directly with registered brokers or 
dealers and certain specified other persons. Because the Commission 
construes solicitation broadly, it would expect few transactions 
effected in reliance on this exemptive order to qualify for the 
unsolicited exemption. See Registration Requirements for Foreign 
Broker-Dealers, Securities Exchange Act Release No. 27017 (July 11, 
1989), 54 FR 30013 (July 18, 1989). See also Statement of the 
Commission Regarding Use of Internet Web Sites to Offer Securities, 
Solicit Securities Transactions, or Advertise Investment Services 
Offshore, Securities Exchange Act Release No. 39779 (March 23, 
1998), 63 FR 14806 (March 27, 1998) at 14813 (``Foreign broker-
dealers that have Internet Web sites and that intend to rely on Rule 
15a-6's `unsolicited' exemption should ensure that the `unsolicited' 
customer's transactions are not in fact solicited, either directly 
or indirectly, through customers accessing their Web sites.''). 
Foreign brokers or dealers relying on the other exemptions in Rule 
15a-6 should take care to ensure that they meet all of the related 
conditions. In addition, foreign brokers or dealers should be aware 
of potential Securities Act implications arising from the 
distribution of research reports pursuant to Rule 15a-6(a)(2). 
Specifically, in connection with the distribution of the research 
report in the U.S., it is important to evaluate whether such 
distribution may affect the availability of an exemption from 
registration for the offer or sale of a foreign security future to a 
QIB or non-U.S. person pursuant to the terms of this order. For 
example, the research report may be an offer of the securities 
discussed in the report, a general solicitation of investors, or a 
directed selling effort for such securities for purposes of the 
Securities Act. A research report on the underlying security of a 
foreign security future can be distributed under the Securities Act 
without being considered a directed selling effort (for Regulation S 
purposes) or a general solicitation (for Rule 144A purposes) if the 
conditions of Rule 138 or Rule 139 under the Securities Act, 17 CFR 
230.138 and 17 CFR 230.139, are satisfied. Distributing a research 
report on the foreign security future itself in the U.S. would not, 
however, satisfy the conditions of those safe harbors.
    \58\ 15 U.S.C. 78o(b)(4) and 78o(b)(6).
    \59\ The Commission has issued a proposing release discussing 
possible amendments to Exchange Act Rule 15a-6. See Exchange Act 
Release No. 58047 (June 27, 2008), 73 FR 39182 (July 8, 2008). To 
date, the Commission has not taken final action with respect to the 
proposed amendments. Accordingly, the Commission is basing the 
exemption provided herein on the current requirements under Exchange 
Act Rule 15a-6.
---------------------------------------------------------------------------

A. Background

    Paragraph (a)(3) of Rule 15a-6 permits a foreign broker or dealer 
to effect certain transactions for institutional investors through a 
registered broker or dealer. A ``registered broker or dealer'' is 
defined in the rule as ``a person that is registered with the 
Commission under Sections 15(b), 15B(a)(2), or 15C(a)(2) of the 
[Exchange] Act.'' \60\ This term includes a broker or dealer registered 
with the Commission pursuant to Section 15(b)(11) of the Exchange Act 
(``Notice BD'').\61\ Rule 15a-6(a)(3) sets forth conditions that the 
foreign broker or dealer and the registered broker or dealer must meet 
in order for the foreign broker or dealer to rely on the rule. Because 
a Notice BD is subject to a specialized regulatory scheme, however, a 
foreign broker or dealer may find it difficult to rely on the rule if 
the registered broker or dealer through which it effects transactions 
in accordance with Rule 15a-6(a)(3) is a Notice BD.
---------------------------------------------------------------------------

    \60\ Rule 15a-6(b)(5) under the Exchange Act, 17 CFR 240.15a-
6(b)(5).
    \61\ A ``Notice BD'' is a futures commission merchant or 
introducing broker that registers with the Commission as a broker or 
dealer pursuant to Section 15(b)(11) of the Exchange Act, 15 U.S.C. 
78o(b)(11), and the rules adopted by the Commission. See Securities 
Exchange Act Release No. 44730 (August 21, 2001), 66 FR 45138 
(August 27, 2001).
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B. The Exemptions

    The Commission finds that it is consistent with the public 
interest, the protection of investors, and the purposes of the Exchange 
Act to provide a conditional exemption for foreign brokers or dealers 
from the registration requirement of Section 15(a)(1) of the Exchange 
Act. The Commission also finds that it is necessary and appropriate, in 
the public interest, and is consistent with the protection of investors 
to provide conditional exemptions for foreign brokers or dealers from 
the reporting and other requirements of the Exchange Act (other than 
Sections 15(b)(4) and 15(b)(6)),\62\ and the rules and regulations 
thereunder, that apply specifically to a broker or dealer whether or 
not registered with the Commission.
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    \62\ 15 U.S.C. 78o(b)(4) and 78o(b)(6).
---------------------------------------------------------------------------

    The conditional exemptions would be available to foreign brokers or 
dealers that induce or attempt to induce the purchase or sale of any 
foreign security futures by a QIB \63\ that is exempt from Section 
6(h)(1) of the Exchange Act under this order. The conditional 
exemptions also would extend exemptive relief to transactions that are 
intermediated by Notice BDs, recognizing the role that Notice BDs play 
with respect to security futures and the specialized regulatory scheme 
that applies to these particular brokers and dealers.
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    \63\ The conditional exemptions in this order from the 
registration requirements in Section 15(a)(1) of the Exchange Act 
and related requirements cover foreign brokers' or dealers' 
transactions with QIBs. The exemption in this order from Section 
6(h)(1) of the Exchange Act is applicable to persons that are QIBs. 
The Rule 15a-6(a)(3) exemption applies to a foreign broker's or 
dealer's transactions with U.S. institutional investors (see Rule 
15a-6(b)(7) under the Exchange Act, 17 CFR 240.15a-6(b)(7)) and 
major U.S. institutional investors (see Rule 15a-6(b)(4) under the 
Exchange Act, 17 CFR 240.15a-6(b)(4)). There is substantial overlap, 
however, between the definitions of major U.S. institutional 
investor and QIB. Therefore, the conditional exemptions in this 
order from the registration requirements in Section 15(a)(1) of the 
Exchange Act and related requirements should simplify the process 
for engaging in transactions in foreign security futures without 
substantially altering the class of persons with which foreign 
brokers or dealers (intermediated by registered brokers or dealers) 
may transact.
---------------------------------------------------------------------------

    A foreign broker or dealer may rely on the conditional exemptions 
to induce or attempt to induce the purchase or sale of any foreign 
security future by a QIB exempt from Section 6(h)(1), so long as the 
foreign broker or dealer and the registered broker or dealer, through 
which any resulting transactions are effected, comply with the 
requirements of paragraphs (a)(3)(i) through (iii) \64\ of Rule 15a-6 
under the Exchange Act, except as otherwise provided below.\65\ If the 
registered broker or dealer through which any resulting transactions 
with QIBs are effected is a Notice BD, then the Notice BD must comply 
with the alternative requirements, discussed below, in lieu of the 
requirements of paragraphs (a)(3)(iii)(A)(5) and (a)(3)(iii)(A)(6) of 
Rule 15a-6.\66\
---------------------------------------------------------------------------

    \64\ For purposes of this exemption, references in paragraphs 
(a)(3)(i) through (iii) and paragraph (b)(2) of Rule 15a-6 to major 
U.S. institutional investors shall be deemed to be references to 
QIBs. In addition, for purposes of this exemption, the reference in 
paragraph (a)(3)(iii)(D) to Form BD shall be deemed a reference to 
Form BD-N with respect to Notice BDs.
    \65\ In view of the experience and capabilities QIBs are likely 
to possess, the chaperoning requirement under paragraph 
(a)(3)(ii)(A)(1) may provide only limited benefits with respect to 
QIBs. Therefore, notwithstanding paragraph (a)(3)(ii)(A)(1) of the 
rule, in this context, foreign broker-dealers may engage in 
unchaperoned contacts with QIBs to the same extent as described in a 
1997 staff no-action letter. See Letter re: Certain Securities 
Activities of U.S. Affiliated Foreign Dealers, from Giovanni P. 
Prezioso, Cleary, Gottlieb, Steen & Hamilton, to Richard R. Lindsey, 
Director, Division of Market Regulation, Securities and Exchange 
Commission (Apr. 9, 1997). Specifically, foreign associated persons 
of the foreign broker or dealer may have in-person contacts (without 
the participation of an associated person of a registered broker or 
dealer) during visits to the United States with QIBs, so long as the 
number of days on which such in-person contacts occur does not 
exceed 30 per year and the foreign associated persons engaged in 
such in-person contacts do not accept orders to effect securities 
transactions while in the United States.
    \66\ A Notice BD intermediating a foreign broker or dealer that 
is relying on the exemption under Exchange Act Rule 15a-6(a)(3) 
would need to comply with the requirements in paragraphs 
(a)(3)(iii)(A)(5) and (a)(3)(iii)(A)(6) in a similar manner as any 
other registered broker or dealer even if the requirements in such 
paragraphs would not otherwise be applicable.
---------------------------------------------------------------------------

    Paragraphs (a)(3)(iii)(A)(5) and (a)(3)(iii)(A)(6) of Rule 15a-6 
require the registered broker or dealer to be responsible for (1) 
complying with Rule 15c3-1 under the Exchange Act \67\ with respect to 
the transaction, and (2) receiving, delivering, and safeguarding funds 
and securities in connection with the transaction in compliance with 
Rule

[[Page 32206]]

15c3-3 under the Exchange Act.\68\ However, Section 15(b)(11)(B)(iii) 
of the Exchange Act, exempts Notice BDs from Section 15(c)(3) of the 
Exchange Act and the rules thereunder. Instead, Notice BDs are subject 
to analogous requirements of the CEA. Accordingly, for purposes of this 
exemption, a Notice BD, in lieu of compliance with paragraphs 
(a)(3)(iii)(A)(5) and (a)(3)(iii)(A)(6) of Rule 15a-6, would need to 
comply with the analogous CEA requirements, including being responsible 
for receiving, delivering, and safeguarding funds and securities in 
connection with transactions on behalf of the QIB in compliance with 
the CEA segregation \69\ and net capital requirements.\70\ Consistent 
with the regulatory framework established by the CFMA, this relief will 
permit a foreign broker or dealer to be intermediated by a Notice BD 
without subjecting the Notice BD to duplicative regulatory 
requirements.
---------------------------------------------------------------------------

    \67\ 17 CFR 240.15c3-1.
    \68\ 17 CFR 240.15c3-3.
    \69\ For a discussion regarding analogous CEA provisions, see 
Applicability of CFTC and SEC Customer Protection, Recordkeeping, 
Reporting, and Bankruptcy Rules and the Securities Investor 
Protection Act of 1970 to Accounts Holding Security Futures 
Products, Joint Release by SEC and CFTC, Securities Exchange Act 
Release No. 46473 (September 9, 2002), 67 FR 58284 (September 13, 
2002) (``Joint September 2002 Release'') (noting that transactions 
involving a futures account shall be subject to the segregation 
requirements of the CEA and that transactions involving a securities 
account shall be subject to Rule 15c3-3 under the Exchange Act and 
Securities Investor Protection Act of 1970).
    \70\ 17 CFR 1.17.
---------------------------------------------------------------------------

IV. Rule 15c6-1 Under the Exchange Act (Settlement Cycle)

    Rule 15c6-1 under the Exchange Act \71\ prohibits a broker or 
dealer from effecting or entering into a contract for the purchase or 
sale of a security (other than an exempted security, government 
security, municipal security, commercial paper, bankers' acceptances, 
or commercial bills) that provides for payment of funds and delivery of 
securities later than the third business day after the date of the 
contract, unless otherwise expressly agreed to by the parties at the 
time of the transaction. The rule does not distinguish between U.S. 
securities and foreign securities. Thus, because security futures are 
considered securities under the Exchange Act,\72\ this rule by its 
terms would apply to transactions in foreign security futures. The 
Commission has, however, previously exempted from the scope of Rule 
15c6-1 under the Exchange Act all transactions that do not have 
transfer or delivery facilities in the U.S.\73\ In addition, the 
Commission has granted an exemption to make it clear that Rule 15c6-1 
does not apply to transactions that occur outside the U.S.\74\ 
Therefore, transactions in foreign security futures pursuant to the 
exemption from Section 6(h)(1) of the Exchange Act in this order would 
fall within the scope of the Commission's prior exemption from Rule 
15c6-1 under the Exchange Act.
---------------------------------------------------------------------------

    \71\ 17 CFR 240.15c6-1.
    \72\ See the definition of ``security'' in Section 3(a)(10) of 
the Exchange Act, 15 U.S.C. 78c(a)(10).
    \73\ See Securities Exchange Act Release No. 35750 (May 22, 
1995), 60 FR 27994 (May 26, 1995).
    \74\ Id. In particular, the Commission stated that if a U.S. 
broker-dealer were to execute a trade on a foreign exchange with a 
U.S. or foreign broker-dealer, the contract would not be subject to 
the rule. This exemption applies, however, only to the contract 
between the U.S. broker-dealer and the foreign broker-dealer. If the 
U.S. broker-dealer is executing the trade on a foreign exchange to 
satisfy its obligations to a U.S. customer, the contract with the 
U.S. customer is still subject to T+3 settlement unless that 
contract also is exempted. Id. At n. 9 and accompanying text.
---------------------------------------------------------------------------

V. Conditional Exemptions From Sections 6(h)(1) and 15(a)(1) of the 
Exchange Act and Certain Other Requirements

A. Conditional Exemption From Section 6(h)(1) of the Exchange Act

    For these reasons stated in, and by, this order, the Commission is 
exempting from Section 6(h)(1) of the Exchange Act \75\ any qualified 
institutional buyer (as defined in Rule 144A under the Securities Act) 
(``QIB''); \76\ any person who is not a ``U.S. person,'' as the term is 
defined in Rule 902(k) of Regulation S under the Securities Act (``non-
U.S. person''); \77\ any broker or dealer registered under Section 
15(b) of the Exchange Act \78\ to the extent such broker or dealer 
effects transactions on behalf of a QIB or a non-U.S. person; and any 
bank, as defined in Section 3(a)(6) of the Exchange Act,\79\ acting 
pursuant to an exception or exemption from the definition of ``broker'' 
or ``dealer'' in sections 3(a)(4)(B), 3(a)(4)(E), or 3(a)(5)(C) of the 
Exchange Act \80\ or the rules thereunder (``Eligible Bank'') to effect 
transactions on behalf of a QIB or a non-U.S. person; provided that any 
transaction effected:
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    \75\ 15 U.S.C. 78f(h)(1).
    \76\ 17 CFR 230.144A.
    \77\ 17 CFR 230.902(k).
    \78\ 15 U.S.C. 78o(b).
    \79\ 15 U.S.C. 78c(a)(6).
    \80\ 15 U.S.C. 78c(a)(4)(B), 15 U.S.C. 78c(a)(4)(E), or 15 
U.S.C. 78c(a)(5)(C).
---------------------------------------------------------------------------

    (1)(a) Is for a contract of sale for future delivery of:
    (i) (A) A security issued by a foreign private issuer (as defined 
in Rule 3b-4(c) of the Exchange Act and Rule 405 under the Securities 
Act) \81\ for which at least 55 percent of the worldwide trading volume 
in the security took place in, on, or through the facilities of a 
securities market or markets in a single foreign jurisdiction or in no 
more than two foreign jurisdictions during the issuer's most recently 
completed fiscal year. If the trading in the foreign private issuer's 
security is in two foreign jurisdictions, the trading for the issuer's 
securities in at least one of the two foreign jurisdictions must be 
greater than the trading in the U.S. for the same class of the issuer's 
securities in order for such security's primary trading market to be 
considered outside the U.S.; or
---------------------------------------------------------------------------

    \81\ 17 CFR 240.3b-4(c) and 17 CFR 230.405.
---------------------------------------------------------------------------

    (B) A security that is a note, bond, debenture or evidence of 
indebtedness (``debt security'') issued or guaranteed by a foreign 
government as defined in Rule 405 of the Securities Act \82\ that is 
eligible to be registered with the Commission under Schedule B of the 
Securities Act; \83\ or
---------------------------------------------------------------------------

    \82\ 17 CFR 230.405. Rule 405 defines ``foreign government'' as 
the government of a foreign country or political subdivision of a 
foreign country.
    \83\ See Schedule B, 15 U.S.C. 77aa.
---------------------------------------------------------------------------

    (ii) A ``narrow-based security index'' of which:
    (A) At least 90 percent of the underlying securities in the index, 
at the time of the transaction, both in terms of the number of 
underlying securities and their weighting in the index, are: (1) 
Securities issued by a foreign private issuer for which at least 55 
percent of the worldwide trading volume in the security took place in, 
on, or through the facilities of a securities market or markets located 
in a single foreign jurisdiction, or in no more than two foreign 
jurisdictions during the issuer's most recently completed fiscal year. 
If the trading in the foreign private issuer's security is in two 
foreign jurisdictions, the trading for the issuer's security in at 
least one of the two foreign jurisdictions must be greater than the 
trading in the U.S. for the same class of the issuer's securities in 
order for such security's primary trading market to be considered 
outside the U.S.; or (2) debt securities issued or guaranteed by a 
foreign government as defined in Rule 405 of the Securities Act\84\ 
that are eligible to be registered with the Commission under Schedule B 
of the Securities Act; \85\ and (B) no more than 10 percent of the 
underlying securities in the index, at the time of the transaction, 
both in terms of the number of underlying securities and their 
weighting in the index, do not meet the criteria in (1)(a)(ii)(A) above 
and, as to any such security, the issuer of such

[[Page 32207]]

security is required to file reports with the Commission pursuant to 
Section 13 or Section 15(d) of the Exchange Act; \86\
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    \84\ 17 CFR 230.405.
    \85\ See Schedule B, 15 U.S.C. 77aa.
    \86\ 15 U.S.C. 78m and 78o(d).
---------------------------------------------------------------------------

    (b) Is a closing transaction to offset a position in a contract of 
sale for future delivery that satisfied the conditions in paragraph 
(1)(a) of this order at the time such position was opened.
    (2) Is executed on, or subject to the rules of, an exchange or 
contract market that has its principal place of business outside the 
U.S., that is regulated as an exchange or contract market in a country 
other than the U.S., and that is not required to register with the 
Commission under Section 5 of the Exchange Act; \87\
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78e.
---------------------------------------------------------------------------

    (3) Is cleared and settled on, and with respect to such clearance 
and settlement subject to the rules of, an exchange, contract market, 
or clearing entity that is regulated as an exchange, contract market, 
or clearing entity in a country other than the U.S. and that is not 
required to register with the Commission under Section 5 or Section 17A 
of the Exchange Act;\88\
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78e and 78q-1.
---------------------------------------------------------------------------

    (4) Is for a security future, that cannot be closed or liquidated 
by effecting an offsetting transaction on or through the facility of 
any exchange or association registered in the U.S. under Section 6 or 
Section 15A of the Exchange Act,\89\ respectively; and
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    \89\ 15 U.S.C. 78f and 15 U.S.C. 78o-3.
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    (5) Does not result in such person taking physical delivery of the 
underlying security in the U.S. in connection with settlement;

B. Conditional Exemptions From Section 15(a)(1) of the Exchange Act and 
Certain Other Requirements

    For the reasons stated in, and by, this order, the Commission is 
exempting foreign brokers or dealers (as defined in Rule 15a-6(b)(3) 
under the Exchange Act) \90\ that induce or attempt to induce the 
purchase or sale of any foreign security futures by a QIB that is 
subject to the exemption from Section 6(h)(1) of the Exchange Act, from 
the registration requirements of Section 15(a)(1) of the Exchange Act 
\91\ and the reporting and other requirements of the Exchange Act 
(other than Sections 15(b)(4) and 15(b)(6)),\92\ and the rules and 
regulations thereunder, that apply specifically to a broker or dealer 
whether or not registered with the Commission; provided that the 
foreign broker or dealer and the registered broker or dealer (as 
defined in Rule 15a-6(b)(5) under the Exchange Act), through which any 
resulting transactions with QIBs are effected, comply with the 
requirements of paragraphs (a)(3)(i) through (iii) \93\ of Rule 15a-6 
under the Exchange Act, except as otherwise provided below.\94\ If the 
registered broker or dealer through which any resulting transactions 
with QIBs are effected is a broker or dealer registered with the 
Commission pursuant to Section 15(b)(11) of the Exchange Act (``Notice 
BD''), then:
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    \90\ 17 CFR 240.15a-6(b)(3).
    \91\ 15 U.S.C. 78o(a)(1).
    \92\ 15 U.S.C. 78o(b)(4) and 78o(b)(6).
    \93\ For purposes of this exemption, references in paragraphs 
(a)(3)(i) through (iii) and paragraph (b)(2) of Rule 15a-6 to major 
U.S. institutional investors shall be deemed to be references to 
QIBs. In addition, for purposes of this exemption, the reference in 
paragraph (a)(3)(iii)(D) to Form BD shall be deemed a reference to 
Form BD-N with respect to Notice BDs.
    \94\ Notwithstanding paragraph (a)(3)(ii)(A)(1) of the rule, 
foreign associated persons of the foreign broker or dealer may have 
in-person contacts (without the participation of an associated 
person of a registered broker or dealer) during visits to the United 
States with QIBs, so long as the number of days on which such in-
person contacts occur does not exceed 30 per year and the foreign 
associated persons engaged in such in-person contacts do not accept 
orders to effect securities transactions while in the United States. 
See supra note 65.
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    (1) In lieu of the requirement in paragraph (a)(3)(iii)(A)(5) of 
Rule 15a-6, the Notice BD shall be responsible for complying with Rule 
1.17 under the Commodity Exchange Act (``CEA'') (17 CFR 1.17) with 
respect to the transactions; and
    (2) In lieu of the requirement in paragraph (a)(3)(iii)(A)(6) of 
Rule 15a-6, the Notice BD shall be responsible for receiving, 
delivering, and safeguarding funds and securities in connection with 
transactions on behalf of the QIB in compliance with the segregation 
requirements of the CEA and the regulations thereunder.
    Accordingly,
    It is hereby ordered, pursuant to Section 36 of the Exchange 
Act,\95\ that certain persons are exempt from the provisions of Section 
6(h)(1) of the Exchange Act \96\ that prohibit persons from effecting 
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) of the Exchange Act,\97\ subject 
to the conditions set forth above.
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    \95\ 15 U.S.C. 78mm.
    \96\ 15 U.S.C. 78f(h)(1).
    \97\ 15 U.S.C. 78o-3(a).
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    It is hereby further ordered, pursuant to Section 15(a)(2) of the 
Exchange Act,\98\ that a foreign broker or dealer as defined in Rule 
15a-6(b)(3) \99\ is exempt, with respect only to the activities 
described above in Section V.B. of this order, from the registration 
requirements of Section 15(a)(1) of the Exchange Act, subject to the 
conditions set forth above.\100\
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    \98\ \\ 15 U.S.C. 78o(a)(2).
    \99\ 17 CFR 240.15a-6(b)(3).
    \100\ 15 U.S.C. 78o(a)(1).
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    It is hereby further ordered, pursuant to Section 36 of the 
Exchange Act,\101\ that a foreign broker or dealer as defined in Rule 
15a-6(b)(3) \102\ is exempt, with respect only to the activities 
described above in Section V.B. of this order, from the reporting and 
other requirements of the Exchange Act (other than Sections 15(b)(4) 
and 15(b)(6)),\103\ and the rules and regulations thereunder, that 
apply specifically to a broker or dealer whether or not registered with 
the Commission, subject to the conditions set forth above.
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    \101\ 15 U.S.C. 78mm.
    \102\ 17 CFR 240.15a-6(b)(3).
    \103\ 15 U.S.C. 78o(b)(4) and 78o(b)(6).

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-15890 Filed 7-6-09; 8:45 am]
BILLING CODE 8010-01-P