July 26, 2001
BY CERTIFIED MAIL AND E-MAIL
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D. C. 20549-0609
Re: File No. S7 - 13 - 01
Release No. 34-44455- Registration of Broker-Dealers Pursuant to
Section 15(b)(11) of the Securities Exchange Act of 1934 - 66 Fed.
Reg. 34041 (June 26, 2001)
Dear Mr. Katz:
The Board of Trade of the City of Chicago, Inc. ("CBOT®") appreciates the opportunity to comment on the above-captioned Release. The Securities and Exchange Commission ("Commission") has proposed amendments to its broker-dealer registration requirements and to Form BD, in order to implement Section 203 of the Commodity Futures Modernization Act of 2000 ("CFMA"). Section 203 permits futures commission merchants ("FCMs") and introducing brokers ("IBs") that are registered with the Commodity Futures Trading Commission ("CFTC") to register as broker-dealers for the limited purpose of trading in security futures products by filing a notice with the Commission.
Proposed Rule 15b-11 would require a CFTC Registrant to file a Form BD to become a notice-registered Security Futures Product Broker-Dealer. This is the same application form used for full broker-dealer registration, and it requires an applicant to provide detailed information concerning the nature of its business, and concerning its principals, controlling persons, and employees. The proposed rule would also require a notice-registrant to indicate on Form BD that it meets the statutory conditions for notice-registration.
The Commission has requested comment regarding whether CFTC Registrants should be permitted to notice-register on a form other than Form BD. The Commission has further requested comment regarding whether the Commission can rely on information filed with the CFTC and the NFA if it needs information regarding Security Futures Product Broker-Dealers.
The CFTC has also proposed to amend its Rule 3.10, to provide for notice-registration of broker-dealers registered with the Commission, as FCMs or IBs, for the purpose of trading security futures products. 66 Fed. Reg. 27476 (May 17, 2001). Specifically, the CFTC has proposed that these broker-dealers would be required to follow procedures for notice-registration that are specified by the National Futures Association. The NFA has proposed to amend its rules to permit broker-dealers to file a Notice Form 7-R to become notice-registered as an FCM or an IB. Unlike the Form 7-R that is required for full FCM or IB registration, the proposed Notice Form 7-R is a one-page document. This proposal stands in stark contrast to the Commission's proposal to require notice-registered Security Futures Product Broker-Dealers to complete a full Form BD.
The CBOT believes that the requirements for notice-registration as a broker-dealer should not be any more onerous than the requirements for notice-registration as an FCM or an IB. Moreover, the Commission should be able to rely upon the information contained in the Form 7-R, and any other information filed with the CFTC and the NFA, along with appropriate assurances by a Security Futures Product Broker-Dealer that it meets the statutory eligibility requirements for notice-registration. Furthermore, the CBOT agrees with the Commission that it is not necessary to apply its rule regarding inspection of newly registered broker-dealers to Security Futures Product Broker-Dealers.
Significantly, through Rule 15a-10, the Commission has proposed to make notice-registration available to FCMs and IBs only for the purpose of effecting trades in security futures on Security Futures Product Exchanges, i.e., designated contract markets and registered derivatives transaction execution facilities. Although a notice-registrant would be permitted to trade security futures products on a registered national securities exchange or a registered national securities association, the proposal would require that such trades be effected through a fully-registered broker-dealer.
Section 203(a)(1) of the CFMA amended Section 15(b) of the Exchange Act to permit a broker or dealer to notice-register if it is only required to register because it effects transactions in security futures products on an exchange registered pursuant to Section 6(g). Section 6(g) provides for notice-registration of contract markets and registered derivatives transaction execution facilities as Security Futures Product Exchanges. Section 252(b) of the CFMA amended Section 4f(a) of the Commodity Exchange Act ("CEA") to provide that a broker or dealer that is registered with the Commission may be notice-registered as an FCM or IB if it limits its activities related to transactions on a contract market or registered derivatives transaction execution facility to those involving security futures products. The statute thus explicitly permits notice-registration of broker-dealers as FCMs or IBs, and notice-registration of FCMs and IBs as broker-dealers, for the purpose of security futures trading on contract markets and registered derivatives transaction execution facilities. It does not address the ability of notice-registered broker-dealers to trade security futures on a registered national securities exchange or a registered national securities association.
However, as the Commission has acknowledged, "[t]he CFMA's system of joint regulation of security futures products is intended to prevent competitive advantages from arising solely out of differences between futures regulation and securities regulation." 66 Fed. Reg. 34045. If notice-registered FCMs were permitted to trade security futures on both futures exchanges and securities exchanges, and notice-registered broker-dealers were only permitted to trade security futures on futures exchanges, notice-registered FCMs would have a competitive advantage over notice-registered broker-dealers, even though both would be fully registered with their primary regulators.
Therefore, the anomaly caused by the omission in the statutory language of a specific provision for notice-registered broker-dealers to effect trades on securities exchanges appears to have been a drafting oversight rather than a reflection of Congressional intent. Any contrary conclusion would be inconsistent with the overriding statutory goal of leveling the playing field and would frustrate the purpose of the provisions of the CFMA relating to the joint regulation of security futures products. Therefore, the CBOT strongly urges the Commission to use its exemptive authority to correct this disparity and to reconsider its proposal to require that an FCM or IB obtain full broker-dealer registration, or trade through a fully-registered broker-dealer, in order to trade security futures products on a registered national securities exchange or a registered national securities association.
David J. Vitale