[Federal Register Volume 76, Number 136 (Friday, July 15, 2011)]
[Rules and Regulations]
[Pages 41676-41685]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-18009]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-64874; File No. S7-30-11]
RIN 3235-AL19


Retail Foreign Exchange Transactions

AGENCY: Securities and Exchange Commission.

ACTION: Interim final temporary rule; request for comments.

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SUMMARY: Under section 742(c) of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (``Dodd-Frank Act''), certain foreign exchange 
transactions with persons who are not ``eligible contract 
participants'' (commonly referred to as ``retail forex transactions,'' 
and as further defined below) with a registered broker or dealer 
(``broker-dealer'') will be prohibited as of July 16, 2011, in the 
absence of the Commission adopting a rule to allow such transactions 
under terms and conditions prescribed by the Commission. The Commission 
is adopting interim final temporary Rule 15b12-1T to allow a registered 
broker-dealer to engage in a retail forex business until July 16, 2012, 
provided that the broker-dealer complies with the Securities Exchange 
Act of 1934 (``Exchange Act''), the rules and regulations thereunder, 
and the rules of the self-regulatory organization(s) of which the 
broker-dealer is a member (``SRO rules''), insofar as they are 
applicable to retail forex transactions.

DATES: Effective Date: Rule 15b12-1T is effective on July 15, 2011 and 
will remain in effect until July 16, 2012.
    Comment Date: Comments on the interim final temporary rule should 
be received on or before September 13, 2011.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/interim-final-temp.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number S7-30-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549.

All submissions should refer to File Number S7-30-11. This file number 
should be included on the subject line if e-mail is used. To help the 
Commission to process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on its Web 
site: (http://www.sec.gov/rules/interim-final-temp.shtml). Comments are 
also available for Web site viewing and printing in the Commission's 
Public Reference Room, 100 F Street, NE., Washington, DC 20549 on 
official business days between the hours of 10 a.m. and 3 p.m. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Jo Anne Swindler, Assistant Director; 
Richard Vorosmarti, Special Counsel; or Angie Le, Special Counsel, at 
(202) 551-5777, Division of Trading and Markets, Securities and 
Exchange Commission, 100 F Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting new Rule 15b12-1T 
under the Exchange Act as an interim final temporary rule. The rule 
will expire and no longer be effective on July 16, 2012. The Commission 
is soliciting comments on all aspects of this interim final temporary 
rule. The Commission will carefully consider any comments received and 
intends to take further action if it determines that further action is 
necessary or appropriate, either prior to or following the expiration 
of the rule. In making this determination, the Commission may consider 
a number of alternative approaches with respect to retail forex 
transactions, including proposing new rules for public comment; issuing 
a final rule amending the interim final temporary rule; issuing a final 
rule adopting the interim final temporary rule as final; or allowing 
the interim final temporary rule to expire without further action, 
which would allow the statutory prohibition to take effect.

I. Background

    On July 21, 2010, President Obama signed into law the Dodd-Frank 
Act.\1\ As amended by the Dodd-Frank Act,\2\ the Commodity Exchange Act 
(``CEA'') provides that a person for which there is a Federal 
regulatory agency,\3\ including a broker-dealer registered under 
section 15(b) (except pursuant to paragraph (11) thereof) or 15C of the 
Exchange Act,\4\ shall not enter into, or offer to enter into, a 
transaction described in section 2(c)(2)(B)(i)(I) of the CEA with a 
person who is not an ``eligible contract participant'' \5\ except

[[Page 41677]]

pursuant to a rule or regulation of a Federal regulatory agency 
allowing the transaction under such terms and conditions as the Federal 
regulatory agency shall prescribe \6\ (``retail forex rule'').\7\ 
Transactions described in CEA section 2(c)(2)(B)(i)(I) include ``an 
agreement, contract, or transaction in foreign currency that * * * is a 
contract of sale of a commodity for future delivery (or an option on 
such a contract) or an option (other than an option executed or traded 
on a national securities exchange registered pursuant to section 6(a) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78f(a)).'' \8\ A 
Federal regulatory agency's retail forex rule must treat all 
agreements, contracts, and transactions in foreign currency described 
in CEA section 2(c)(2)(B)(i)(I) and all agreements, contracts, and 
transactions in foreign currency that are functionally or economically 
similar to agreements, contracts, or transactions described in CEA 
section 2(c)(2)(B)(i)(I), similarly.\9\ Any retail forex rule also must 
prescribe appropriate requirements with respect to disclosure, 
recordkeeping, capital and margin, reporting, business conduct, and 
documentation, and may include such other standards or requirements as 
the Federal regulatory agency determines to be necessary.\10\
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    \1\ Public Law 111-203, 124 Stat. 1376.
    \2\ Public Law 111-203, Sec.  742(c)(2) (to be codified at 7 
U.S.C. 2(c)(2)(E)).
    \3\ 7 U.S.C. 2(c)(2)(E)(i), as amended by Sec.  742(c) of the 
Dodd-Frank Act, defines a ``Federal regulatory agency'' to mean the 
Commodity Futures Trading Commission (``CFTC''), the Securities and 
Exchange Commission, an appropriate Federal banking agency, the 
National Credit Union Association, and the Farm Credit 
Administration.
    \4\ 7 U.S.C. 2(c)(2)(B)(i)(II).
    \5\ ``Eligible contract participant'' (``ECP'') is defined in 
CEA section 1a(18), as re-designated and amended by section 721 of 
the Dodd-Frank Act. See Public Law 111-203, Sec.  721 (amending CEA 
section 1a). The CEA's definition of ECP generally is comprised of 
regulated persons; entities that meet a specified total asset test 
(e.g., a corporation, partnership, proprietorship, organization, 
trust, or other entity with total assets exceeding $10 million) or 
an alternative monetary test coupled with a non-monetary component 
(e.g., an entity with a net worth in excess of $1 million and 
engaging in business-related hedging; or certain employee benefit 
plans, the investment decisions of which are made by one of four 
enumerated types of regulated entities); and certain governmental 
entities and individuals that meet defined thresholds. The 
Commission and the CFTC recently have proposed rules under the CEA 
that further define ``eligible contract participant'' with respect 
to transactions with major swap participants, swap dealers, major 
security-based swap participants, security-based swap dealers, and 
commodity pools. See Exchange Act Release No. 63452 (Dec. 7, 2010), 
75 FR 80174 (Dec. 21, 2010). Because transactions that are the 
subject of this release are commonly referred to as ``retail forex 
transactions,'' this release uses the term ``retail customer'' to 
describe persons who are not ECPs.
    \6\ 7 U.S.C. 2(c)(2)(E)(ii)(I).
    \7\ As used in this release, ``retail forex rule'' refers to any 
rule proposed or adopted by a Federal regulatory agency pursuant to 
section 742(c)(2) of the Dodd-Frank Act.
    \8\ 7 U.S.C. 2(c)(2)(B)(i)(I).
    \9\ 7 U.S.C. 2(c)(2)(E)(iii)(II).
    \10\ 7 U.S.C. 2(c)(2)(E)(iii)(I).
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    This amendment to the CEA takes effect on July 16, 2011, which is 
360 days from the date of enactment of the Dodd-Frank Act.\11\ After 
that date, for purposes of CEA section 2(c)(2)(B), broker-dealers for 
which the Commission is the ``Federal regulatory agency'' may not 
engage in off-exchange retail forex futures and options with a customer 
except pursuant to a retail forex rule issued by the Commission.\12\ 
This prohibition will not apply to (1) forex transactions with a 
customer who qualifies as an ECP, or (2) transactions that are spot 
forex contracts or forward forex contracts irrespective of whether the 
customer is an ECP.\13\ However, consistent with other Federal 
regulatory agencies' retail forex rules, Rule 15b12-1T applies to 
``rolling spot'' transactions in foreign currency by broker-
dealers.\14\ The discussion of the definition of ``retail forex 
transaction'' below addresses the distinctions between rolling spot 
forex transactions and spot and forward forex contracts.
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    \11\ See Public Law 111-203, Sec.  754.
    \12\ See 7 U.S.C. 2(c)(2)(B)(i)(II) and 7 U.S.C. 
2(c)(2)(E)(ii)(I). On September 10, 2010, the CFTC adopted a retail 
forex rule for persons subject to its jurisdiction. See Regulation 
of Off-Exchange Retail Foreign Exchange Transactions and 
Intermediaries, 75 FR 55410 (Sept. 10, 2010) (``Final CFTC Retail 
Forex Rule''). The CFTC had proposed its rules regarding retail 
forex transactions prior to the enactment of the Dodd-Frank Act. See 
Regulation of Off-Exchange Retail Foreign Exchange Transactions and 
Intermediaries, 75 FR 3282 (Jan. 20, 2010) (``Proposed CFTC Retail 
Forex Rule''). The Federal Deposit Insurance Corporation (``FDIC'') 
and the Office of the Comptroller of the Currency (``OCC'') 
subsequently proposed similar rules. See Retail Foreign Exchange 
Transactions, 76 FR 28358 (May 17, 2011); Retail Foreign Exchange 
Transactions, 76 FR 22633 (Apr. 22, 2011) (``Proposed OCC Retail 
Forex Rule''). On July 6, 2011, the FDIC adopted final retail forex 
rules. See Retail Foreign Exchange Transactions, 76 FR 40779 (July 
12, 2011) (``Final FDIC Retail Forex Rule'').
    \13\ See 7 U.S.C. 2(c)(2)(C)(i)(I) and 7 U.S.C. 
2(c)(2)(C)(i)(II); see also Final FDIC Retail Forex Rule, supra note 
12; Proposed OCC Retail Forex Rule, supra note 12.
    \14\ See Final FDIC Retail Forex Rule, supra note 12 (explaining 
that its retail forex rule applies to rolling spot forex 
transactions); Proposed OCC Retail Forex Rule, supra note 12 
(stating that rolling spot forex transactions should be regulated as 
retail forex transactions); Final CFTC Retail Forex Rule, supra note 
12 (stating that the CFTC has the authority to fully regulate 
``look-alike,'' leveraged forex contacts, also called off-exchange 
Zelener contracts; as discussed below, Zelener contracts are also 
called rolling spot transactions); Proposed CFTC Retail Forex Rule, 
supra note 12 (``The [CFTC Reauthorization Act of 2008] amends the 
[CEA] to require that certain intermediaries for forex futures and 
options and for look-alike contracts (i.e., those at issue in 
Zelener) register in such capacity as the Commission shall 
determine. * * * '').
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    Prior to June 2011, the Commission had not been made aware of 
industry concerns with respect to the operation of section 742 of the 
Dodd-Frank Act in the absence of Commission rulemaking. In mid-June 
2011, however, market participants for the first time brought to the 
attention of Commission staff the possibility that section 742 of the 
Dodd-Frank Act may have serious adverse consequences for certain 
securities markets in the absence of rulemaking by the Commission 
before the impending effective date of the provision (i.e., July 16, 
2011).\15\ Although this correspondence from market participants 
brought this issue to the attention of Commission staff, the Commission 
understands that this is in fact a wider concern shared by several 
other market participants. One potential consequence concerns the 
ability of broker-dealers to facilitate the settlement of foreign 
securities transactions for retail customers. For example, a broker-
dealer may purchase a foreign currency or exchange a foreign currency 
for U.S. dollars on behalf of a retail customer in connection with the 
customer's purchase or sale of a security listed on a foreign exchange 
and denominated in the foreign currency. In particular, a 
representative of certain market participants informed the staff that 
section 742 could operate to preclude broker-dealers from continuing to 
engage in certain foreign exchange transactions that are inherent in 
certain of their customers' securities transactions, and that serve to 
minimize their customers' risk exposure to changes in foreign currency 
rates.\16\
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    \15\ See Memorandum from P. Georgia Bullitt, Morgan Lewis, on 
Pershing LLC--Proposed Relief regarding transactions in Retail 
Foreign Exchange to James Brigagliano et al. (June 17, 2011) 
(available at http://www.sec.gov/comments/other/other-initiatives/otherinitiatives-56.pdf) (``Morgan Lewis Memo'').
    \16\ See id.
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    The Commission further understands that there may be other 
situations in which broker-dealers engage in foreign exchange 
transactions in connection with facilitating the ordinary execution, 
clearance, or settlement of customers' securities transactions and that 
may warrant rulemaking by the Commission in order to avoid market 
disruption due to the potential application of section 742 of the Dodd-
Frank Act. At the same time, the Commission notes that media coverage 
over the past few years has highlighted potentially abusive practices 
by some intermediaries in connection with retail forex 
transactions.\17\ The Commission also notes that other regulators have 
expressed concerns with regard to the retail forex practices of the 
entities that they regulate.\18\
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    \17\ See Gregory Zuckerman, Carrick Mollenkamp & Lingling Wei, 
Suspicion of Forex Gouging Spreads, The Wall Street Journal (Feb. 
10, 2011) at A1 (describing allegations of overcharging of customers 
by custody banks in currency trades).
    \18\ See, e.g., Press Release, CFTC, CFTC Releases Final Rules 
Regarding Retail Forex Transactions (Aug. 30, 2010) (available at 
http://www.cftc.gov/PressRoom/PressReleases/pr5883-10.html?dbk) 
(noting that retail forex is the largest area of retail fraud that 
the CFTC oversees); see also the Financial Industry Regulatory 
Authority's (``FINRA'') Regulatory Notice 08-66, (Retail Foreign 
Currency Exchange) (November 2008) (``FINRA Forex Notice'') 
(describing the retail forex market as opaque, volatile, and risky).
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    In order to provide the Commission with the opportunity to receive 
comments regarding practices in this area and to consider prescribing 
additional rules to address investor protection concerns (e.g., abusive 
sales practices, volatility and riskiness of the

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forex market) \19\ as they affect the regulatory treatment of retail 
forex transactions by broker-dealers--while also preserving potentially 
beneficial market practices identified to the Commission only weeks 
before the July 16, 2011 effective date for section 742 of the Dodd-
Frank Act--the Commission today is adopting interim final temporary 
Rule 15b12-1T under the Exchange Act to enable broker-dealers to engage 
in a retail forex business under the existing regulatory regime for one 
year. By receiving comments regarding practices in this area, the 
Commission will be better positioned to determine, for example, the 
scope of retail forex business conducted by broker-dealers that may be 
beneficial and poses limited risk to customers and any aspects of the 
business that may pose substantial undue risks to customers. The 
Commission will carefully consider comments on what additional 
rulemaking may be necessary, if any.
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    \19\ In one of its notices to members, FINRA identified several 
investor protection concerns, including, among other things, the 
following: ``[t]he retail customer typically does not having pricing 
information and cannot determine whether the price quoted by the 
dealer is fair''; ``the dealer acts as counterparty and establishes 
the price, which means that the dealer has a conflict of interest in 
the transaction''; ``[p]rice comparisons are also complicated by 
different compensation structures''; and ``[t]he currency market is 
extremely volatile and retail forex customers are exposed to 
substantial currency risk.'' See FINRA Forex Notice, supra note 18.
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II. Discussion

    The Commission is adopting interim final temporary Rule 15b12-1T to 
maintain the ability of broker-dealers to engage in a retail forex 
business during a one-year period under the existing regulatory 
framework that now applies to broker-dealers providing these services. 
The Commission solicits comment on each aspect of the rule and the 
nature and circumstances surrounding retail forex business conducted by 
broker-dealers. The Commission intends to carefully consider comments 
received to determine what further regulatory action, if any, would be 
appropriate. In making this determination, the Commission may consider 
a number of alternatives with respect to retail forex transactions, 
including proposing new rules for public comment; issuing a final rule 
amending the interim final temporary rule; issuing a final rule 
adopting the interim final temporary rule as final; or allowing the 
interim final temporary rule to expire without further action, which 
would allow the statutory prohibition to take effect.

A. Rule 15b12-1T(a): Definitions

    Rule 15b12-1T(a) sets forth the definitions of terms specific to 
the interim final temporary rule. Many of the terms (i.e., broker, 
dealer, person, registered broker or dealer, and self-regulatory 
organization) have the same meanings as in the Exchange Act. The term 
``Act,'' as used in the rule, refers to the Exchange Act.\20\ The 
Commission chose these terms and definitions because their meanings are 
readily understood in the industry.
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    \20\ Exchange Act Rule 15b12-1T(a)(1).
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    The term ``retail forex business'' is defined as ``engaging in one 
or more retail forex transactions with the intent to derive income from 
those transactions, either directly or indirectly.'' \21\ This 
definition mirrors the definition contained in the FDIC's final retail 
forex rules and the OCC's proposed rules.\22\ This term is intended to 
include retail forex transactions that may not generate income to the 
broker-dealer or a retail forex business that is ultimately not 
profitable. The Commission chose this definition because it focuses on 
the intent to engage in a series of forex transactions with a business 
purpose, whether or not the transactions result in income or profits.
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    \21\ Exchange Act Rule 15b12-1T(a)(2).
    \22\ See Final FDIC Retail Forex Rule, supra note 12; Proposed 
OCC Retail Forex Rule, supra note 12 (each defining ``retail forex 
business'').
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    The term ``retail forex transaction'' is defined as ``any account, 
agreement, contract or transaction in foreign currency that is offered 
or entered into by a broker or dealer with a person that is not an 
eligible contract participant as defined in section 1a(18) of the 
Commodity Exchange Act (7 U.S.C. 1a(18)) and that is: (i) A contract of 
sale of a commodity for future delivery or an option on such a 
contract; (ii) an option, other than an option executed or traded on a 
national securities exchange registered pursuant to section 6(a) of the 
Act (15 U.S.C. 78(f)(a)); or (iii) offered, or entered into, on a 
leveraged or margined basis, or financed by a broker or dealer or any 
person acting in concert with the broker or dealer on a similar basis, 
other than: (A) a security that is not a security futures product as 
defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 
1a(47)); or (B) a contract of sale that: (1) Results in actual delivery 
within two days; or (2) creates an enforceable, obligation to deliver 
between a seller and buyer that have the ability to deliver and accept 
delivery, respectively, in connection with their line of business.'' 
\23\ This definition is based on the CEA, incorporates the terms 
described in CEA sections 2(c)(2)(B) and 2(c)(2)(C),\24\ and is 
substantially the same as the definition in the FDIC's final section 
349.2 \25\ and the OCC's proposed section 48.2.\26\ This definition has 
at least two important features.
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    \23\ Exchange Act Rule 15b12-1T(a)(3).
    \24\ 7 U.S.C. 2(c)(2)(B) and 7 U.S.C. 2(c)(2)(C).
    \25\ See Final FDIC Retail Forex Rule, supra note 12 (defining 
``retail forex transaction'').
    \26\ See Proposed OCC Retail Forex Rule, supra note 12 (defining 
``retail forex transaction'').
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    First, certain transactions in foreign currency are excluded from 
the definition of the term ``retail forex transaction.'' For example, 
the CEA expressly excludes ``a contract of sale [in foreign currency] 
that * * * results in actual delivery within 2 days.'' \27\ As defined 
by court decisions as well as the retail forex rules of other Federal 
regulatory agencies, this term refers to a ``spot'' forex transaction, 
in which one currency is purchased for another, the transaction is 
settled within two days, and actual delivery occurs as soon as 
practicable.\28\ Similarly, based upon the language in the CEA,\29\ a 
``retail forex transaction'' does not include a contract of sale that 
creates an enforceable obligation to deliver between a buyer and seller 
that have the ability to deliver and accept delivery, respectively, in 
connection with their line of business.\30\ This statutory language 
refers to a retail forex forward contract with a commercial entity that 
creates an enforceable obligation to make or take delivery, provided 
the commercial counterparty has the ability to make delivery and accept 
delivery in connection with its line of business.\31\ In

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addition, consistent with the approach of other Federal regulatory 
agencies' retail forex rules, the definition does not include forex 
transactions executed or traded on an exchange or designated contract 
market.\32\
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    \27\ See 7 U.S.C. 2(c)(2)(C)(i)(II).
    \28\ See generally CFTC v. Int'l Fin. Servs. (New York), Inc., 
323 F. Supp. 2d 482, 495 (S.D.N.Y. 2004) (distinguishing between 
foreign exchange futures contracts and spot contracts in foreign 
exchange, and noting that spot transactions--unlike futures 
contracts--ordinarily call for settlement within two days); see also 
Bank Brussels Lambert v. Intermetals Corp., 779 F. Supp. 741, 748 
(S.D.N.Y. 1991) (noting that the spot market is essentially the 
current market rather than the market for future delivery); Final 
FDIC Retail Forex Rule, supra note 12 (explaining that its retail 
forex rule does not apply to spot forex contracts); Proposed OCC 
Retail Forex Rule, supra note 12 (explaining that its retail forex 
rule does not apply to spot forex contracts); Final CFTC Retail 
Forex Rule, supra note 12 (defining ``retail forex transaction'' as 
any account, agreement, contract or transaction described in section 
2(c)(2)(B) or 2(c)(2)(C) of the CEA; as discussed above, by its 
terms, CEA section 2(c)(2)(C)(i)(II) excludes what are referred to 
as spot forex transactions).
    \29\ See 7 U.S.C. 2(c)(2)(C)(i)(II).
    \30\ Exchange Act Rule 15b12-1T(a)(3)(iii)(B)(2).
    \31\ See generally CFTC v. Int'l Fin. Servs. (New York), Inc., 
323 F. Supp. 2d at 495 (distinguishing between forward contracts in 
foreign exchange and foreign exchange futures contracts); see also 
William L. Stein, The Exchange-Trading Requirement of the Commodity 
Exchange Act, 41 Vand. L. Rev. 473, 491 (1988). In contrast to 
forward contracts, futures contracts generally include several or 
all of the following characteristics: (i) Standardized nonnegotiable 
terms (other than price and quantity); (ii) parties are required to 
deposit initial margin to secure their obligations under the 
contract; (iii) parties are obligated and entitled to pay or receive 
variation margin in the amount of gain or loss on the position 
periodically over the period the contract is outstanding; (iv) 
purchasers and sellers are permitted to close out their positions by 
selling or purchasing offsetting contracts; and (v) settlement may 
be provided for by either (a) cash payment through a clearing entity 
that acts as the counterparty to both sides of the contract without 
delivery of the underlying commodity; or (b) physical delivery of 
the underlying commodity. See Edward F. Greene et al., U.S. 
Regulation of International Securities and Derivatives Markets Sec.  
14.08[2] (8th ed. 2006). See also Final FDIC Retail Forex Rule, 
supra note 12; Proposed OCC Retail Forex Rule, supra note 12 (each 
explaining that their retail forex rule would not apply to forex 
forward contracts).
    \32\ See Final CFTC Retail Forex Rule, supra note 12; Final FDIC 
Retail Forex Rule, supra note 12; Proposed OCC Retail Forex Rule, 
supra note 12.
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    Second, a ``rolling spot'' forex transaction (also known as a 
Zelener contract),\33\ including without limitation such a transaction 
traded on the Internet, through a mobile phone, or on an electronic 
platform, falls within the definition of ``retail forex transaction,'' 
\34\ and thus is not excluded from the definition as a ``spot'' 
transaction. This interpretation is consistent with the approach of 
other Federal regulatory agencies acting pursuant to section 742 of the 
Dodd-Frank Act to treat all agreements, contracts, and transactions in 
foreign currency described in CEA section 2(c)(2)(B)(i)(I) and all 
agreements, contracts, and transactions in foreign currency that are 
functionally or economically similar to agreements, contracts, or 
transactions described in CEA section 2(c)(2)(B)(i)(I), similarly.\35\ 
Like a spot forex transaction, a rolling spot forex transaction with a 
retail customer may initially require delivery of currency within two 
days. In practice, however, contracts with a retail customer for a 
rolling spot forex transaction may be indefinitely renewed every other 
day, and no currency is actually delivered until one party 
affirmatively closes out the position.\36\ The Commission preliminarily 
believes that a contract with a retail customer for a rolling spot 
forex transaction is economically more similar to a retail forex 
future, as described in CEA section 2(c)(2)(B)(i)(I), than a spot forex 
contract.
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    \33\ See CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004); see also 
CFTC v. Erskine, 512 F.3d 309 (6th Cir. 2008) (discussing Zelener 
contracts).
    \34\ CEA section 2(c)(2)(E)(ii) refers to agreements, contracts, 
or transactions described in CEA section 2(c)(2)(B)(i)(I) (which is 
incorporated into subparts (i) and (ii) of the Commission's 
definition of ``retail forex transaction''). In addition, CEA 
section 2(c)(2)(E)(iii)(II) requires the Commission to treat 
similarly all agreements, contracts, and transactions in foreign 
currency described in CEA section 2(c)(2)(B)(i)(I) and all 
agreements, contracts, and transactions that are functionally or 
economically similar to agreements, contracts, or transactions 
described in CEA section 2(c)(2)(B)(i)(I). The Commission 
preliminarily believes that agreements, contracts, and transactions 
described in CEA section 2(c)(2)(C)(i) (including rolling spot forex 
transactions) are functionally or economically similar to 
agreements, contracts, or transactions described in CEA section 
2(c)(2)(B)(i)(I). Therefore, the Commission is defining ``retail 
forex transaction'' to encompass the types of agreements, contracts, 
and transactions described in CEA section 2(c)(2)(C)(i), such as 
rolling spot forex transactions, and is reflected in subpart (iii) 
of the Commission's definition. See also Final FDIC Retail Forex 
Rule, supra note 12; Proposed OCC Retail Forex Rule, supra note 12 
(both concluding that rolling spot forex transactions are more like 
futures than spot contracts). Some courts have held these contracts 
to be spot contracts in form. See, e.g., CFTC v. Erskine, 512 F.3d 
309, 326 (6th Cir. 2008); CFTC v. Zelener, 373 F.3d 861, 869 (7th 
Cir. 2004).
    \35\ 7 U.S.C. 2(c)(2)(E)(iii)(II); see also Final FDIC Retail 
Forex Rule, supra note 12; Proposed OCC Retail Forex Rule, supra 
note 12.
    \36\ For example, in Zelener, the retail forex dealer retained 
the right, at the date of delivery of the currency, to deliver the 
currency, roll the transaction over, or offset all or a portion of 
the transaction with another open position held by its customer. See 
CFTC v. Zelener, 373 F.3d 861, 868 (7th Cir. 2004).
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B. Rule 15b12-1T(b): Broker-Dealers Engaged in a Retail Forex Business

    Rule 15b12-1T(b) allows any registered broker or dealer to engage 
in a retail forex business provided that such broker or dealer complies 
with the Exchange Act, the rules and regulations thereunder, and the 
SRO rules, including, but not limited to, the disclosure, recordkeeping 
(or documentation), capital and margin, reporting, and business conduct 
requirements, insofar as they are applicable to retail forex 
transactions. In order for broker-dealers to engage in retail forex 
transactions after July 16, 2011, the Commission must adopt rules 
prescribing appropriate requirements with respect to disclosure, 
recordkeeping, capital and margin, reporting, business conduct, 
documentation,\37\ and such other standards or requirements that the 
Commission determines to be necessary.\38\ Because broker-dealers 
engaging in a retail forex business are already subject to numerous 
regulatory requirements with respect to this business under the 
Exchange Act, the rules and regulations thereunder, and SRO rules, the 
Commission does not intend to create any new obligations under this 
interim final temporary rule for broker-dealers that are engaged in a 
retail forex business. The Commission provides below illustrative 
examples of obligations, including certain SRO requirements, applicable 
to broker-dealers' retail forex transactions.\39\
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    \37\ The Commission considers the documentation requirements as 
a subset of recordkeeping requirements. To avoid confusion, the 
Commission will refer to these requirements collectively as 
recordkeeping requirements.
    \38\ See Public Law 111-203, Sec.  742(c)(2) (amending CEA 
section 2(c)(2)).
    \39\ In this connection, the Commission notes that in the FINRA 
Forex Notice, FINRA described specific FINRA rules that apply to 
retail forex activities of broker-dealers, which are referenced 
below. See FINRA Forex Notice, supra note 18.
---------------------------------------------------------------------------

Disclosure Requirements
    Broker-dealers that engage in a retail forex business must comply 
with the disclosure requirements in NASD Rule 2210.\40\ NASD Rule 2210 
requires all communications with the public by members of FINRA--
including forex-related communications--to be based on principles of 
fair dealing and good faith, to be fair and balanced, and to provide a 
sound basis for evaluating the facts regarding the market generally and 
a customer's specific transaction.\41\ NASD Rule 2210 further prohibits 
broker-dealers from making ``any false, exaggerated, unwarranted or 
misleading statement or claim in any communication with the public.'' 
As stated in the FINRA Forex Notice, a broker-dealer's communications 
with the public ``must adequately disclose the risks associated with 
forex trading, including the risks of highly leveraged trading,'' and a 
broker-dealer ``must also make sure that [its] communications with the 
public are not misleading regarding, among other things: [t]he 
likelihood of profits or the risks of forex trading, including 
leveraged trading; [t]he firm's role in or compensation from the trade; 
[t]he firm's or the customer's access to the interbank currency market; 
or [t]he performance or accuracy of electronic trading platforms or 
software sold or licensed by or through the firm to customers in 
connection with forex trading, including falsely advertising claims 
regarding slippage rates.'' \42\
---------------------------------------------------------------------------

    \40\ See id.
    \41\ See id.
    \42\ Id.
---------------------------------------------------------------------------

    Further, FINRA stated in its regulatory notice to members that 
FINRA Rule 2010 (formerly NASD Rule 2110), which requires broker-
dealers, in the conduct of their business, to observe high standards of 
commercial honor and just and equitable principles of trade, applies to 
all of a broker-dealer's

[[Page 41680]]

business, including its retail forex business.\43\ FINRA stated, for 
example, that to comply with FINRA Rule 2010, a member firm must 
adequately disclose to its retail customers that the firm is acting as 
a counterparty to a transaction, the risks associated with forex 
trading, and the risks and terms of leveraged trading.\44\
---------------------------------------------------------------------------

    \43\ Id.
    \44\ Id.
---------------------------------------------------------------------------

Recordkeeping Requirements
    Exchange Act Rules 17a-3 and 17a-4 require a broker-dealer to make, 
keep current, and preserve records regarding its business. For example, 
Exchange Act Rules 17a-3(a)(2) and 17a-3(a)(11) require a broker-dealer 
to make and keep current a general ledger, which provides details 
relating to all assets, liabilities, and nominal accounts.
    A broker-dealer is also required to preserve, for a period of not 
less than three years, originals of all communications received and 
copies of all communications (and any approvals thereof) sent by the 
broker-dealer relating to its business as such, including all 
communications that are subject to SRO rules regarding communications 
with the public.\45\ As discussed above, communications with the public 
regarding retail forex are subject to NASD Rule 2210.\46\ In addition, 
Exchange Act Rule 17a-4(b)(7) requires a broker-dealer to preserve, for 
a period of not less than three years, all written agreements (or 
copies thereof) entered into by the broker-dealer relating to its 
business as such, including agreements with respect to any account. 
Accordingly, broker-dealers must preserve, for a period of not less 
than three years, originals of all communications received and copies 
of all communications (and any approvals thereof) sent by the broker-
dealer and any written agreements with respect to retail forex 
transactions.
---------------------------------------------------------------------------

    \45\ Exchange Act Rule 17a-4(b)(4). See Exchange Act Release No. 
44992 (Oct. 26, 2001), 66 FR 55818 (Nov. 23, 2001).
    \46\ See supra note 40 and accompanying text regarding NASD Rule 
2210 (communications with the public).
---------------------------------------------------------------------------

    Another example of recordkeeping requirements applicable to retail 
forex transactions derives from the Bank Secrecy Act (``BSA''), as 
amended by the USA PATRIOT Act and implemented under rules promulgated 
by the U.S. Treasury Department's Financial Crimes Enforcement Network 
(``FinCEN''), which requires broker-dealers to make, keep, retain, and 
report certain records that have a high degree of usefulness for the 
purposes of criminal, tax, or regulatory matters.\47\ Exchange Act Rule 
17a-8 requires broker-dealers to comply with the reporting, 
recordkeeping, and record retention requirements of the BSA's 
implementing regulations.\48\
---------------------------------------------------------------------------

    \47\ See 31 CFR Chapter X (formerly 31 CFR Part 103); see also 
67 FR 44048 (July 1, 2002) (amendments to BSA regulations requiring 
that a broker-dealer report suspicious transactions).
    \48\ See Exchange Act Release No. 18321 (Dec. 10, 1981); 46 FR 
61454 (Dec. 17, 1981); see also FINRA Rule 3310 (formerly NASD Rule 
3011) (requiring FINRA member firms to establish and implement 
policies and procedures that can be reasonably expected to detect 
and cause the reporting of suspicious transactions). As FINRA noted, 
``FINRA member firms engaging in retail forex activities should 
ensure their Anti-Money Laundering Program addresses the risks 
associated with the business and includes procedures for monitoring, 
detecting, and reporting suspicious transactions associated with 
their retail forex activities.'' FINRA Forex Notice, supra note 18.
---------------------------------------------------------------------------

Net Capital and Margin Requirements
    Each broker-dealer must comply with Exchange Act Rule 15c3-1, which 
prescribes minimum regulatory net capital requirements for broker-
dealers and is applicable to all business activities of the broker-
dealer, including forex. The Commission notes that, under Exchange Act 
Rule 15c3-1, any uncollateralized current exposure by a broker-dealer 
to retail forex transactions must be deducted when computing the firm's 
net capital. The provisions of the net capital rule dealing with 
contractual commitment charges under Rule 15c3-1(c)(2)(viii) also apply 
to commitments with respect to foreign currency. Further, pursuant to 
Exchange Act section 7, broker-dealer margin requirements are generally 
set according to Regulation T \49\ and SRO margin rules.\50\
---------------------------------------------------------------------------

    \49\ 12 CFR Part 220.
    \50\ In 2009, FINRA solicited comment on proposed FINRA Rule 
2380 to establish a leverage limitation for retail forex. 
Specifically, proposed FINRA Rule 2380, as modified by Amendment No. 
2, would prohibit any member firm from permitting a customer to: (1) 
initiate any forex position with a leverage ratio of greater than 4 
to 1; and (2) withdraw money from an open forex position that would 
cause the leverage ratio for such position to be greater than 4 to 
1. In addition, it would exempt from the proposed leverage 
limitation any security as defined in Exchange Act section 3(a)(10). 
See FINRA Regulatory Notice 09-06 (Retail Forex) (January 2009). 
FINRA filed Amendment No. 1 to the proposed rule change on August 
27, 2009. See Letter from Gary L. Goldsholle, Vice President and 
Associate General Counsel, FINRA, to Elizabeth M. Murphy, Secretary, 
Commission (Aug. 27, 2009). On November 12, 2009, FINRA filed 
Amendment No. 2 to the proposed rule. Amendment No. 2 replaced and 
superseded Amendment No. 1 in its entirety. The proposed rule 
change, as modified by Amendment No. 2, was published for comment in 
the Federal Register on December 8, 2009. Exchange Act Release No. 
61090 (Dec. 1, 2009), 74 FR 64776 (Dec. 8, 2009).
---------------------------------------------------------------------------

Reporting Requirements
    A broker-dealer is required to file with the Commission periodic 
financial and operational reports (i.e., FOCUS Reports), as prescribed 
in Exchange Act Rule 17a-5, that include relevant information regarding 
the broker-dealer, including information regarding its retail forex 
business, if any. In addition, FINRA has advised its member firms that 
a broker-dealer's expansion of its business to include retail forex 
transactions constitutes a material change in business operations 
pursuant to NASD Rule 1017(a), and broker-dealers must first apply for 
and receive approval from FINRA to conduct this activity.\51\ 
Additionally, as discussed above, Exchange Act Rule 17a-8 requires 
broker-dealers to report to FinCEN certain enumerated types of 
transactions, including suspicious transactions in foreign currencies 
and foreign currency futures and options.\52\
---------------------------------------------------------------------------

    \51\ See FINRA Forex Notice, supra note 18 (emphasizing that a 
broker-dealer's expansion of business into retail forex constitutes 
a material change in business operations under NASD rules).
    \52\ See supra note 48 and accompanying text.
---------------------------------------------------------------------------

Business Conduct Requirements
    In the course of complying with certain Exchange Act requirements, 
rules and regulations thereunder, and SRO rules relating to business 
conduct, broker-dealers must address their retail forex business. For 
example, as discussed above, FINRA Rule 2010 (formerly NASD Rule 2110), 
which requires broker-dealers, in the conduct of their business, to 
observe high standards of commercial honor and just and equitable 
principles of trade, applies to all of a broker-dealer's business, 
including its retail forex business.\53\ FINRA has noted that the 
following examples of conduct in relation to a retail forex business 
are prohibited under FINRA Rule 2010, including: Misappropriating or 
mishandling customer funds; using, selling, or leasing electronic 
trading platforms that allow ``slippage'' of trade executions in a 
manner that disproportionately or unfairly affects the customer; 
manipulating or displaying false quotes; offering mock, or 
``demonstration,'' accounts that do not accurately reflect the risks of 
forex trading; making post-execution price adjustments that are 
inappropriate and unfavorable to the customer; soliciting business for 
and introducing customers to a forex dealer without conducting adequate 
due diligence on the forex dealer, or in a way that misleads the 
customer about the forex dealer or forex trading, including how 
customer funds will be held; failing to conduct due diligence on any 
solicitors that introduce forex customers to the broker-

[[Page 41681]]

dealer; and accepting forex-related trades from an entity or individual 
that solicits retail forex business on behalf of the firm in a 
misleading or deceptive way.\54\
---------------------------------------------------------------------------

    \53\ See FINRA Forex Notice, supra note 18.
    \54\ See id.
---------------------------------------------------------------------------

    Broker-dealers also need to address retail forex transactions in 
connection with the customer reserve bank account requirements under 
Exchange Act Rule 15c3-3. In calculating what amount, if any, a broker-
dealer must deposit on behalf of its customers in a reserve bank 
account pursuant to Exchange Act Rule 15c3-3(e), the broker-dealer must 
use the formula set forth in Exchange Act Rule 15c3-3a. Specifically, 
the Commission staff has interpreted Exchange Act Rule 15c3-3 to 
require that the broker-dealer must include the net balance due to 
customers in non-regulated commodity accounts, reduced by any deposits 
of cash or securities with any clearing organization or clearing broker 
in connection with the open contracts in such accounts.\55\
---------------------------------------------------------------------------

    \55\ See Division of Market Regulation's Interpretations of Rule 
15c3-3 under the Securities Exchange Act of 1934, Exchange Act 
Release No. 9922 (Jan. 2, 1973); see also FINRA Forex Notice, supra 
note 18 (stating that the requirement in Exchange Act Rule 15c3-3 
applies to forex transactions).
---------------------------------------------------------------------------

    Furthermore, Exchange Act section 15(b)(4)(E) authorizes the 
Commission to impose sanctions against a broker-dealer for failing 
reasonably to supervise another person subject to the firm's 
supervision who committed a violation of specified laws, including the 
CEA, unless the broker-dealer established procedures, and a system for 
applying such procedures, that would reasonably be expected to prevent 
and detect, insofar as practicable, the violation of law.\56\ Thus, 
broker-dealers engaged in a retail forex business should include in 
their policies and procedures mechanisms to prevent and detect 
potential violations of applicable laws and regulations in connection 
with that business.
---------------------------------------------------------------------------

    \56\ See 15 U.S.C. 78o(b)(4)(E).
---------------------------------------------------------------------------

    The examples provided above are not inclusive of all regulatory 
requirements administered by the Commission that are implicated by 
retail forex business conducted by broker-dealers. By providing these 
examples, the Commission does not intend to suggest that other 
provisions, rules and regulations, including antifraud provisions and 
SRO rules, may not apply to retail forex business. At the same time, 
this interim final temporary rule is not intended to impose new 
regulatory obligations for broker-dealers, in connection with such 
business.

C. Rule 15b12-1T(c): Broker-Dealers Deemed To Be Acting Pursuant to a 
Commission Rule

    Rule 15b12-1T(c) provides that any registered broker or dealer that 
engages in a retail forex business in compliance with paragraph (b) of 
this rule on or after the effective date of this rule will be deemed, 
until July 16, 2012, to be acting pursuant to rule or regulation 
described in CEA section 2(c)(2)(E)(ii)(I), as amended by section 742 
of the Dodd-Frank Act. This rule will allow broker-dealers that engage 
in a retail forex business to do so until July 16, 2012, subject to 
compliance with existing applicable requirements.
    Rule 15b12-1T(c) applies to broker-dealers that prior to the 
effective date of the rule had entered into retail forex transactions 
that continue after the effective date. The rule also applies to 
broker-dealers that begin after the rule's effective date to engage in 
retail forex transactions. As the Commission explained above, FINRA has 
advised its member firms that a broker-dealer that expands into a 
retail forex business must first apply for and receive approval to 
conduct this activity, as a change in business operations pursuant to 
NASD Rule 1017(a).\57\
---------------------------------------------------------------------------

    \57\ See FINRA Forex Notice, supra note 18.
---------------------------------------------------------------------------

D. Rule 15b12-1T(d): Expiration

    Rule 15b12-1T(d) provides that the rule will expire and no longer 
be effective on July 16, 2012. The Commission believes that the sunset 
date is appropriate because it will allow the existing regulatory 
framework for a retail forex business to continue for a defined period 
and thereby give the Commission sufficient time to determine what 
further appropriate steps, if any, to take with respect to a retail 
forex business.

III. Request for Comment

    The Commission is requesting comments from all members of the 
public regarding all aspects of the interim final temporary rule and 
the current market practices involving retail forex transactions, as 
well as any investor protection or other concerns that should be 
addressed by Commission rulemaking. The Commission particularly 
requests comments from the point of view of broker-dealers that are 
presently engaged in a retail forex business, broker-dealers that plan 
to engage in such a business, customers that use retail forex 
transactions, and ECPs. Together with continued discussions with market 
participants and other regulators, the Commission considers this 
rulemaking to be an important avenue for gathering more information 
from affected parties about the current scope and nature of retail 
forex transactions. Such information will inform the Commission's 
thoughtful review of the appropriate regulatory framework for retail 
forex transactions before or beyond the expiration of the interim final 
rule. The Commission also seeks comment on the particular questions 
below, which have been designed to elicit a robust discussion of the 
uses and reasons for such transactions as they occur today, as well as 
the potential need for additional regulation. The Commission will 
carefully consider all comments received, and will benefit especially 
from detailed comments and comments responding to other commentary in 
the public file for this rulemaking.

Interim Final Temporary Rule

    1. Should the Commission clarify or modify any of the definitions 
included in Rule 15b12-1T? If so, which definitions and what specific 
modifications are appropriate or necessary?
    2. Are the requirements in Rule 15b12-1T sufficiently clear? Is 
additional guidance from the Commission necessary?
    3. Rule 15b12-1T is an interim final temporary rule that is set to 
expire on July 16, 2012. Should the Commission extend the expiration 
date of the rule and if so, for how long?

Possible Permanent Rule Regulating a Retail Forex Business

    4. Should the Commission propose new rules relating to the retail 
forex business operated by broker-dealers for public comment, issue a 
final rule amending the interim final temporary rule, issue a final 
rule adopting the interim final temporary rule as final, or allow the 
interim final temporary rule to expire without further action, which 
would allow the statutory prohibition to take effect? If further 
rulemaking is appropriate, what should those rules provide?
    5. Should the Commission prohibit a broker-dealer from engaging in 
retail forex transactions altogether? Alternatively, should the 
Commission prohibit a broker-dealer from engaging in retail forex 
transactions other than forex transactions engaged in solely (1) to 
effect the purchase or sale of a foreign security or in order to clear 
or settle such purchase or sale, or (2) to facilitate distribution to 
customers of monies or securities received through corporate actions 
(e.g., coupons, dividends, class action settlements, and rights 
offerings)

[[Page 41682]]

with respect to foreign securities? Should the Commission permit other 
retail forex transactions that otherwise facilitate customers' 
securities transactions and minimize risk exposure to customers from 
changes in foreign currency rates? Do investors have adequate recourse 
against broker-dealers for any misconduct related to retail forex 
transactions? Would retail forex customers be harmed if broker-dealers 
were unable to provide them with certain forex-related services? Which 
services? What benefits might retail forex customers receive in 
connection with forex-related services offered by broker-dealers, as 
compared to other intermediaries? Would the benefits outweigh potential 
harm?
    6. Should the Commission adopt rules modeled on the Final CFTC 
Retail Forex Rule, the Final FDIC Retail Forex Rule, or the Proposed 
OCC Retail Forex Rule? If so, which aspects of those rules should the 
Commission consider adopting? What would be the associated costs and 
benefits?
    7. Should the Commission adopt final permanent rules governing 
retail forex transactions? If so, what should those rules address?
    8. Are there any requirements or prohibitions not covered in the 
Final CFTC Retail Forex Rule, the Final FDIC Retail Forex Rule, or the 
Proposed OCC Retail Forex Rule that the Commission should address? Do 
existing Exchange Act provisions, rules and regulations thereunder, and 
SRO rules governing broker-dealers appropriately protect retail forex 
customers of broker-dealers? Should the Commission consider rulemaking 
to address any concerns that are not adequately addressed under the 
current regulatory framework?
    9. What distinctive characteristics of retail forex transactions 
should the Commission take into consideration if it were to engage in 
further rulemaking relating to such transactions? Are there certain 
types of retail forex transactions (e.g., rolling spot transactions) 
that warrant Commission rulemaking to address specific disclosure and 
other investor protection concerns? \58\
---------------------------------------------------------------------------

    \58\ See, e.g., Gregory Zuckerman, Carrick Mollenkamp & Lingling 
Wei, Suspicion of Forex Gouging Spreads, The Wall Street Journal 
(Feb. 10, 2011) at A1 (describing allegations of overcharging of 
customers by custody banks in currency trades).
---------------------------------------------------------------------------

Business Practices of Broker-Dealers Engaged in Retail Forex 
Transactions

    10. What is the extent of the retail forex business currently 
conducted by broker-dealers? Does the retail forex business currently 
conducted by broker-dealers consist solely or primarily of forex 
transactions to facilitate customers' securities transactions and 
minimize risk exposure to customers from changes in foreign currency 
rates? In general, what proportion of the retail forex business 
currently conducted by broker-dealers do such transactions account for? 
Please provide as comprehensive of a description as possible of the 
retail forex activities of broker-dealers.
    11. For what other reasons do broker-dealers engage in retail forex 
transactions and what proportion of the retail forex business currently 
conducted by broker-dealers do such transactions account for? What 
benefits do these transactions provide to customers? What risks do 
customers face by engaging in such transactions?
    12. Provide estimates of the absolute size of the retail forex 
business (in both dollar amounts and numbers of transactions) conducted 
by the broker-dealer. What does this business represent as an estimated 
percent of the broker-dealer's total business? As an estimated percent 
of its total forex business?
    13. What is the estimated absolute size of the retail forex 
business (in both dollar amounts and numbers of transactions) conducted 
by broker-dealers overall? What does this business represent as a 
percent of their total business? As a percent of their total forex 
business?
    14. What types of customers engage in retail forex transactions, 
including rolling spot forex transactions?
    15. Is the existing regulatory framework for retail forex business 
as currently conducted by broker-dealers consistent with the protection 
of investors, the maintenance of fair, orderly, and efficient markets, 
and the facilitation of capital formation?
    16. What disclosures do broker-dealers provide to their customers 
regarding forex transactions that are conducted to facilitate 
settlement of securities transactions? What disclosures do broker-
dealers provide to customers regarding forex transactions that are 
conducted for other purposes (e.g., at the customer's request to hedge 
against currency exchange risk exposure associated with securities 
transactions, or to engage in speculative activity)? Do broker-dealers 
adequately and fully disclose the risks associated with forex trading? 
Do broker-dealers provide information to customers regarding pricing of 
forex transactions (e.g., pricing methodology, exchange rates for 
foreign currencies, how the price was calculated)? If so, is this 
information provided in advance of or following the forex transactions?
    17. On what basis do broker-dealers price retail forex 
transactions? For example, do broker-dealers use the end-of-day 
currency exchange rate or some other benchmark? Do broker-dealers 
maintain policies and procedures that govern how forex transactions are 
handled and priced for retail forex customers? If broker-dealers do not 
provide pricing information to retail customers, what documentation 
does the broker-dealer maintain to demonstrate the price provided in 
retail forex transactions?
    18. Are transaction-time records for retail forex transactions 
currently created and provided to retail customers? If not, what would 
be the cost to create transaction-time records for retail forex 
transactions? What would be the cost to report to customers the 
transaction time and/or the source or basis for the currency exchange 
rate provided on retail forex transactions?
    19. For broker-dealers that provide custody services to retail 
customers, please describe any retail forex business conducted with 
respect to these custody services. What disclosures are provided to 
retail customers in connection with custody services? What pricing 
information is provided to retail customers in connection with forex 
transactions conducted in relation to custody services (e.g., pricing 
methodology, exchange rates for foreign currencies, how the price was 
calculated)? If pricing information is provided, is this information 
provided in advance of or following the forex transactions? On what 
basis do broker-dealers price retail forex transactions conducted in 
connection with custody services? Do broker-dealers maintain policies 
and procedures that govern how forex transactions are handled and 
priced in connection with custody services for retail forex customers? 
If broker-dealers do not provide pricing information to retail 
customers in connection with their custody business, what documentation 
do broker-dealers maintain to demonstrate to examiners the price 
provided in retail forex transactions?
    20. Do broker-dealers provide retail customers alternatives for 
obtaining prevailing prices on retail forex transactions? For example, 
do broker-dealers inform customers that the customer can choose whether 
the broker-dealers will handle retail forex transactions at rates set 
under a ``standing instruction'' (i.e., non-negotiated trades, where a 
customer provides the broker-dealer discretion with respect to handling 
the forex transaction) or as a negotiated trade? Where a broker-dealer 
provides a

[[Page 41683]]

``standing instruction'' process for customers, what methods are used 
to determine the appropriate exchange rate? Do retail customers receive 
the interbank rate or some other rate?
    21. What conflicts of interest exist in connection with broker-
dealers handling and pricing of retail forex transactions? How do 
broker-dealers manage these conflicts of interest? Do broker-dealers 
disclose when they are acting as a counterparty to a forex transaction 
with a retail customer?
    22. What compensation structures do broker-dealers apply to retail 
forex transactions (e.g., per trade commissions, spreads, both)? Do 
broker-dealers charge retail forex customers rolling fees or additional 
transaction fees, such as maintenance charges, software licensing fees, 
commissions paid to introducing brokers or other third-party service 
providers? Are there breakpoints offered to retail customers based on, 
for example, volume or number of trades? If so, are the breakpoints 
available to all retail customers?
    23. What fees are charged by broker-dealers for each type of retail 
forex trade? What is the prevailing market rate for retail forex 
transactions? How does this differ from the prevailing market rate for 
forex transactions with ECPs? Does the prevailing market rate differ 
for standing instruction fees and negotiated trade fees?
    24. Do broker-dealers disclose all compensation charged to retail 
customers? At what point during the customer relationship are 
compensation disclosures made (e.g., prior to any forex transactions, 
following a forex transaction)? What is the scope and breadth of those 
disclosures? Should the Commission consider rules that would expand 
broker-dealers' disclosure obligations?
    25. In light of the authority provided under section 742 of the 
Dodd-Frank Act for the Commission to consider any other standards or 
requirements in connection with retail forex transactions that it 
determines to be necessary, when a broker-dealer solicits business for 
and introduces customers to a forex dealer, what due diligence does the 
broker-dealer conduct about the forex dealer? What policies and 
procedures do broker-dealers have in place, if any, regarding 
supervision of unregistered solicitors that introduce forex customers 
to the broker-dealer and that are employees or agents of the broker-
dealer?
    26. What policies and procedures do broker-dealers have in place 
regarding advertisements and marketing materials related to forex 
services offered to retail customers?
    27. Do broker-dealers provide information to customers regarding 
access to the interbank currency market?
    28. What disclosures do broker-dealers make to retail customers 
regarding the performance and accuracy (including slippage rates) of 
electronic trading platforms or software sold or licensed by or through 
the firm to customers in connection with forex trading?
    29. What information do retail customers believe is important for 
them to receive from broker-dealers regarding their forex transactions?
    30. What business conduct concerns do retail customers have 
regarding the manner in which their broker-dealers handle and price 
forex transactions?
    31. Do broker-dealers provide structured products to retail 
customers that require forex transactions at maturity? In connection 
with these types of products, how are the foreign exchange conversion 
fees calculated and disclosed? Is the cost of the conversion embedded 
in the transaction itself, or must investors pay additional fees for 
conversion?
    32. What alternatives for handling forex transactions outside of 
broker-dealers are available to retail investors? Would a transition of 
retail forex business out of broker-dealers be efficient or costly from 
the standpoint of customers?

IV. Other Matters

    The Administrative Procedure Act generally requires an agency to 
publish notice of a proposed rulemaking in the Federal Register.\59\ 
This requirement does not apply, however, if the agency ``for good 
cause finds * * * that notice and public procedure are impracticable, 
unnecessary, or contrary to the public interest.'' \60\ Further, the 
Administrative Procedure Act also generally requires that an agency 
publish an adopted rule in the Federal Register 30 days before it 
becomes effective.\61\ This requirement, however, does not apply if the 
agency finds good cause for making the rule effective sooner.\62\ The 
Commission, for the reasons discussed above and below, finds that 
notice and solicitation of comment before the effective date of Rule 
15b12-1T is impracticable, unnecessary, and contrary to the public 
interest.\63\
---------------------------------------------------------------------------

    \59\ See 5 U.S.C. 553(b).
    \60\ Id.
    \61\ See 5 U.S.C. 553(d).
    \62\ Id.
    \63\ This finding also satisfies the requirements of 5 U.S.C. 
808(2), allowing the rules to become effective notwithstanding the 
requirement of 5 U.S.C. 801 (if a federal agency finds that notice 
and public comment are ``impractical, unnecessary or contrary to the 
public interest,'' a rule ``shall take effect at such time as the 
federal agency promulgating the rule determines'').
---------------------------------------------------------------------------

    It was not until mid-June 2011 that market participants first 
informed the Commission of a possible disruption of a potentially 
important forex service provided by broker-dealers to retail investors 
if the Commission did not act swiftly to adopt a rule allowing retail 
forex transactions by July 16, 2011, the effective date of section 742 
of the Dodd-Frank Act.\64\ As noted above, one representative of 
certain market participants stated that ``it would expose both broker-
dealers and their retail customers to needless operational, price, 
credit and other risks if the [Commission did] not allow broker-dealers 
to engage in foreign exchange activity that is ancillary to the broker-
dealer's ordinary securities execution, clearing, settlement and 
booking activity.'' \65\ The Commission believes that Congress, in 
enacting section 742 of the Dodd-Frank Act, may not have intended to 
prohibit certain types of foreign exchange activity, which might be 
beneficial to retail investors. To allow the existing regulatory 
framework for retail forex transactions to continue for a defined 
period, to avoid potentially unintended consequences from broker-
dealers immediately discontinuing their retail forex business, and to 
provide the Commission sufficient time to determine the appropriate 
regulatory framework regarding retail forex transactions, the 
Commission is adopting on an interim final temporary basis Rule 15b12-
1T. The Commission does not intend to create new regulatory obligations 
for broker-dealers in adopting this interim final temporary rule. The 
Commission further emphasizes that it is requesting comment on all 
aspects of the rule. The Commission will carefully consider the 
comments it receives.
---------------------------------------------------------------------------

    \64\ See Morgan Lewis Memo, supra note 15.
    \65\ Id.
---------------------------------------------------------------------------

V. Paperwork Reduction Act

    The Commission notes that interim final temporary Rule 15b12-1T 
does not create new regulatory obligations for broker-dealers, and 
therefore does not impose any new ``collections of information'' within 
the meaning of the Paperwork Reduction Act of 1995 (``PRA''),\66\ nor 
does it create any new filing, reporting, recordkeeping, or disclosure 
reporting requirements for broker-dealers that are or plan to be 
engaged in a retail forex business.

[[Page 41684]]

Accordingly, the Commission did not submit the interim final temporary 
rule to the Office of Management and Budget for review in accordance 
with the PRA. The Commission requests comment on its conclusion that 
there are no collections of information.
---------------------------------------------------------------------------

    \66\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

VI. Economic Analysis

A. Introduction

    Exchange Act section 23(a)(2) requires the Commission, when 
adopting rules under the Exchange Act, to consider the impact that any 
new rule would have on competition, and prohibits the Commission from 
adopting any rule that would impose a burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. Furthermore, section 2(b) of the Securities Act of 1933 and 
Exchange Act section 3(f) require the Commission, when engaging in 
rulemaking where it is required to consider or determine whether an 
action is necessary or appropriate in the public interest, to also 
consider, in addition to the protection of investors, whether the 
action will promote efficiency, competition, and capital formation.
    As noted above, section 742(c) of the Dodd-Frank Act amended the 
CEA to prohibit broker-dealers from engaging in retail forex 
transactions after July 16, 2011, absent rulemaking by the Commission 
to allow such transactions. If there is no such rulemaking in place, 
then certain transactions that may be considered beneficial to retail 
investors, such as hedging transactions and securities conversion 
trades that take more than two days to settle, may no longer be 
conducted by broker-dealers. Retail investors who transact in foreign 
securities through a broker-dealer may find it difficult to minimize 
their currency risk exposure if risk-minimizing hedging transactions 
are moved outside the broker-dealer.
    The Commission is adopting interim final temporary Rule 15b12-1T to 
allow broker-dealers to engage in a retail forex business for one year. 
This rule keeps in place the regulatory framework that currently exists 
for broker-dealers, and preserves the ability of broker-dealers to 
provide, among other services, hedging and conversion trades, to retail 
investors while the Commission considers what further appropriate steps 
to take, if any.

B. Benefits and Impact on Efficiency, Competition, and Capital 
Formation

    Rule 15b12-1T is intended to minimize market disruptions that may 
occur when section 724(c) of the Dodd-Frank Act goes into effect. 
Absent rulemaking by the Commission, broker-dealers would be required 
to exit the retail forex business. Consequently, retail customers who 
transact with a broker-dealer for their foreign investments may need to 
find another service provider for their foreign exchange transactions, 
which could interrupt the customers' ability to trade in forex, 
depending on the availability of retail forex-related services outside 
of broker-dealers.
    The interim final temporary rule preserves retail customers' access 
to the forex markets through broker-dealers. To the extent that this 
provides hedging opportunities for foreign investments or otherwise 
promotes an efficient investment opportunity set by, for example, 
permitting the continued use of forex in connection with clearing 
trades in foreign securities, economic benefits accrue to retail 
investors, assuming that no close substitutes exist or that retail 
access to forex is not easily available elsewhere.
    Furthermore, by preserving a channel for retail customers to access 
forex transactions, the interim final temporary rule prevents any loss 
of competition in the retail forex space that could result if broker-
dealers were required to exit the business. Potential effects of 
reduced competition include, but are not limited to, higher customer 
fees for retail forex transactions charged by remaining service 
providers, as well as reduced availability of forex services to retail 
customers if customers no longer have access to these transactions 
through broker-dealers.

C. Costs and Impact on Efficiency, Competition, and Capital Formation

    Because Rule 15b12-1T preserves the regulatory regime that is in 
place prior to the effective date of section 742(c) of the Dodd-Frank 
Act, the rule imposes no new regulatory burdens beyond those that 
already exist for broker-dealers engaged in a retail forex business. 
The Commission recognizes, however, that broker-dealers will face 
regulatory costs and requirements associated with operating in the 
retail forex market, which are costs and requirements that they already 
shoulder from doing business. These include costs related to 
disclosure, recordkeeping and documentation, capital and margin, 
reporting, and business conduct. For example, a broker-dealer that 
presently engages in forex transactions with retail customers incurs 
costs associated with establishing, maintaining, and implementing 
policies and procedures to comply with regulatory requirements; 
preparing disclosure documents; establishing and maintaining forex-
related business records; and preparing filings with the Commission, 
which may include legal and accounting fees.
    As discussed above, the Commission is aware of potentially abusive 
practices that may be occurring in the retail forex market. To the 
extent that such practices continue, for example, lack of disclosure 
about fees and forex pricing, or insufficient capital or margin 
requirements, the retail forex market may bear costs associated with 
the inefficient provision of retail forex services. The Commission 
believes, however, that the cost of market disruption that may occur if 
the Commission does not promulgate the interim final temporary rule is 
greater than the cost of maintaining the current regulatory regime 
while the Commission seeks comment and evaluates whether a more 
comprehensive regulatory regime is necessary.
    Because the regulatory requirements for broker-dealers operating in 
the retail forex market will remain unchanged, Rule 15b12-1T will 
impose no new burden on competition. Similarly, since the rule 
preserves an existing regulatory structure, the Commission does not 
expect any potential impairment of the capital formation process. 
Finally, because the rule allows hedging transactions, securities 
conversions, and other transactions that allow investors to continue to 
have access to these vehicles, the Commission believes that the interim 
temporary final rule will promote efficiency.

VII. Regulatory Flexibility Certification

    The Commission hereby certifies that pursuant to 5 U.S.C. 605(b) 
the interim final temporary rule contained in this release will not 
have a significant economic impact on a substantial number of small 
entities. The interim final temporary rule applies to broker-dealers 
that may engage in retail forex transactions. However, the Commission 
does not intend for the interim final temporary rule to impose new 
regulatory obligations, costs, or burdens on such broker-dealers. While 
the rule applies to broker-dealers that may be small businesses, any 
costs or regulatory burdens incurred as a result of the rule are the 
same as those incurred by small broker-dealers prior to the effective 
date of section 742 of the Dodd-Frank Act. Broker-dealers have already 
incurred those costs and regulatory burdens through establishing 
compliance with the rules adopted by the Commission under the Exchange 
Act applicable to broker-dealers. Further, the interim final temporary 
rule does not change the burdens on small broker-dealers relative to 
large broker-dealers. Accordingly, the

[[Page 41685]]

interim final temporary rule should not have a significant economic 
impact on a substantial number of small entities. The Commission 
requests comment on its conclusion that Rule 15b12-1T should not have a 
significant economic impact on a substantial number of small entities.

VIII. Statutory Basis and Text of Amendments

    The Commission is adopting Exchange Act Rule 15b12-1T pursuant to 
section 2(c)(2) of the Commodity Exchange Act, as well as pursuant to 
the Exchange Act, as amended.

List of Subjects in 17 CFR Part 240

    Brokers, Consumer protection, Currency, Reporting and recordkeeping 
requirements.

    In accordance with the foregoing, the Securities and Exchange 
Commission is amending Title 17, chapter II of the Code of Federal 
Regulations as follows:

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

0
1. The general authority citation for part 240 is revised to read as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 78p, 78q, 
78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 
80b-3, 80b-4, 80b-11, and 7201 et. seq.; 18 U.S.C. 1350; 12 U.S.C. 
5221(e)(3); and 7 U.S.C. 2(c)(2)(E), unless otherwise noted.
* * * * *

0
2. Add Sec.  240.15b12-1T to read as follows:


Sec.  240.15b12-1T  Brokers or dealers engaged in a retail forex 
business.

    (a) Definitions. In addition to the definitions in this section, 
the following terms have the same meaning as in the Securities Exchange 
Act of 1934 (15 U.S.C. 78a et seq.): ``broker,'' ``dealer,'' 
``person,'' ``registered broker or dealer,'' and ``self-regulatory 
organization.''
    (1) Act means the Securities Exchange Act of 1934 (15 U.S.C. 78a et 
seq.).
    (2) Retail forex business means engaging in one or more retail 
forex transactions with the intent to derive income from those 
transactions, either directly or indirectly.
    (3) Retail forex transaction means any account, agreement, contract 
or transaction in foreign currency that is offered or entered into by a 
broker or dealer with a person that is not an eligible contract 
participant as defined in section 1a(18) of the Commodity Exchange Act 
(7 U.S.C. 1a(18)) and that is:
    (i) A contract of sale of a commodity for future delivery or an 
option on such a contract;
    (ii) An option, other than an option executed or traded on a 
national securities exchange registered pursuant to section 6(a) of the 
Act (15 U.S.C. 78(f)(a)); or
    (iii) Offered, or entered into, on a leveraged or margined basis, 
or financed by a broker or dealer or any person acting in concert with 
the broker or dealer on a similar basis, other than:
    (A) A security that is not a security futures product as defined in 
section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)); or
    (B) A contract of sale that:
    (1) Results in actual delivery within two days; or
    (2) Creates an enforceable obligation to deliver between a seller 
and buyer that have the ability to deliver and accept delivery, 
respectively, in connection with their line of business.
    (b) Any registered broker or dealer may engage in a retail forex 
business provided that such broker or dealer complies with the Act, the 
rules and regulations thereunder, and the rules of the self-regulatory 
organization(s) of which the broker or dealer is a member, including, 
but not limited to, the disclosure, recordkeeping, capital and margin, 
reporting, business conduct, and documentation requirements, insofar as 
they are applicable to retail forex transactions.
    (c) Any registered broker or dealer that is engaged in a retail 
forex business in compliance with paragraph (b) of this section on or 
after the effective date of this section shall be deemed, until the 
date specified in paragraph (d) of this section, to be acting pursuant 
to a rule or regulation described in section 2(c)(2)(E)(ii)(I) of the 
Commodity Exchange Act (7 U.S.C. 2(c)(2)(E)(ii)(I)).
    (d) This section will expire and no longer be effective on July 16, 
2012.

    By the Commission.

    Dated: July 13, 2011.
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-18009 Filed 7-13-11; 4:15 pm]
BILLING CODE 8011-01-P