August 10, 2001
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Notice Registration as a Broker-Dealer With Respect to Transactions in Security
Futures Products - 66 Fed. Reg. 34041 (June 26, 2001); SEC File No. S7-13-01
Dear Mr. Katz:
The Commodity Futures Trading Commission (CFTC) appreciates the opportunity to comment upon the rules proposed by the SEC that would permit persons registered with the CFTC as futures commission merchants (FCMs) or as introducing brokers (IBs) (collectively, CFTC Registrants) to notice register as broker-dealers with the SEC for the purpose of engaging in transactions in security futures products (SFPs). These proposals were made under the Commodity Futures Modernization Act of 2000 (CFMA), which establishes a framework to permit transactions in SFPs in the United States.
Under the CFMA, jurisdiction over these transactions is given jointly to the CFTC and the SEC. Several provisions of the CFMA are intended to avoid duplicative regulation of SFPs and to permit intermediaries to compete freely for this business in any market that offers these products. CFTC Registrants are subject to the primary oversight of the CFTC with respect to transactions in SFPs and are exempted by statute from all but the core provisions of the securities laws. The CFTC is concerned that the SEC proposals for notice registration may undermine the goals of avoiding duplicative regulation and permitting free competition.
Proposed Rule 15b11-1 would require CFTC Registrants to complete the entire Form BD required of full-service BDs as their "notice" registration. The first question posed in the SEC release asks, "Should CFTC Registrants be permitted to register . . . on a form other than Form BD?" The answer is "yes." Form BD is a 24-page form with an additional four pages of instructions, and amendments must be filed when information originally reported changes or becomes inaccurate. The SEC proposal recognizes, in its Paperwork Reduction Act (PRA) analysis, that a CFTC Registrant is already required to submit information to the CFTC on Form 7-R that is substantially similar to the information required by Form BD. One of the Congressional goals in enacting the PRA was to eliminate any information collections that seek to obtain information available from other sources within the federal government.1 Requiring CFTC registrants to supply through Form BD, information that is substantially similar to the information supplied through Form 7-R, would be duplicative and contrary to this purpose of the PRA and to the CFMA.
Rather than completing the entire Form BD, CFTC registrants could supply the information requested by the SEC's new, proposed Form BD line items, which specifically relate to SFPs, as well as any necessary identifying information. This request for information could be gathered on one side of a form, with appropriate instructions on the back. That is the approach taken by the National Futures Association (NFA), a registered futures association authorized by the CFTC to perform registration functions in the futures industry. Pursuant to CFTC rules in this area,2 the NFA has designed such a notice registration form for use by BDs whose only futures-related activity will involve SFPs. In accordance with the CFMA, such a form would give the SEC all of the information needed to monitor CFTC Registrants engaged in SFP transactions and therefore should be all that is required.
If any further information is needed, including amendments to information originally filed on Form 7-R, the SEC can rely on data that CFTC Registrants file with the NFA. Much of this information is available on the Internet and other information filed by CFTC Registrants with the NFA can be made available through computer linkages with the SEC and/or the National Association of Securities Dealers, Inc., and its affiliates.3 Thus, the response to the SEC's second question, which asks, "Can the [SEC] rely on information that CFTC Registrants file with the CFTC and the NFA if it needs information regarding [CFTC Registrants]?" is again "yes."
Restrictions on CFTC Registrants
The SEC proposes to place more restrictions on CFTC Registrants who notice register as BDs, than the CFTC has placed on BDs who notice register as FCMs. Unlike the CFTC's notice registration rules for BDs, which place no special restrictions on BDs conducting SFP activities on CFTC-regulated markets, proposed Rule 15a-10 provides that a notice registered FCM conducting SFP activities on SEC-regulated markets "could act in the capacity of [an FCM], but would have to effect [i.e., execute] and clear the [security futures] transactions through a full [BD]."4 This requirement would put unreasonable restraints upon the activities of CFTC Registrants, would disadvantage their customers, and would be inconsistent with the Congressional intent to permit free competition among intermediaries with respect to SFP transactions.
SFPs will likely trade substantially, if not exclusively, in an electronic trading environment, where nanoseconds can count with respect to obtaining the best price for an order. If the SEC requires the orders of customers of CFTC Registrants to pass through an additional intermediary prior to execution, these orders could suffer in comparison with the orders of customers of full-service BDs. Customers of CFTC Registrants would then have to weigh this impact against the burden of opening a new account and establishing a new relationship with an additional intermediary, or consider moving all of their futures business, including SFPs, to a dually registered BD/FCM to avoid the necessity of multiple accounts. If proposed Rule 15a-10 is adopted, it could force CFTC Registrants to incur extra fees for the execution and clearing of their SFP business, which will put these firms at a competitive disadvantage to full-service BDs who notice register as FCMs and to dually-registered BD/FCMs. Customers also may be disadvantaged if additional clearing and execution fees are passed on to them, or if they are forced to seek out new intermediaries to handle their business because their existing firms find SFP transactions not worth pursuing.5 Adoption of Rule 15a-10 could thus create a competitive advantage for BDs and dually registered BD/FCMs, and would be inconsistent with the CFMA's recognition that CFTC Registrants and BDs are subject to comparable regulatory oversight. The proposed additional layer of intermediation is unwarranted and should not be imposed on CFTC Registrants conducting SFP activities on SEC-regulated markets.
The CFTC supports two aspects of the SEC proposals: (1) the exemption of CFTC Registrants from the general requirement that newly-registered BDs be inspected by the SEC or a securities industry SRO within six months of becoming registered; and (2) the provision that CFTC Registrants subject to and in compliance with the CFTC's privacy rules would also be in compliance with SEC privacy rules. The latter proposal is consistent with the treatment of SEC regulatees that are also subject to CFTC jurisdiction under the "substituted compliance" provision of the CFTC's privacy rules.6
If SEC staff would like to discuss this matter further, they should contact Acting Deputy
General Counsel Elizabeth L.R. Fox at 418-5120 or Associate Chief Counsel of the Division of Trading and Markets Lawrence B. Patent at 418-5439.
Very truly yours,
Jean A. Webb
Secretary of the Commission
|1||See H. R. Rep. No. 96-835 at 28 (1980); see also, 44 U.S.C. §§ 3501(3), 3505(a)(3)(B)(i), and 3510.|
|2||See 66 Fed. Reg. 27476 (May 17, 2001) (proposed rules). The Commission adopted the rules as proposed on August 10, 2001.|
|3||Reliance upon the database maintained by the NFA would also be consistent with the requirement that the SEC use reports of the CFTC or a futures industry self-regulatory organization (SRO) before conducting an examination of a CFTC Registrant. See Section 204(5) of the CFMA, adding a new Section 17(b)(3) of the Securities Exchange Act of 1934 (Exchange Act); see also, 66 Fed. Reg. 34041 at 34046 & nn. 49-50.|
|4||66 Fed. Reg. 34041 at 34046 n.46.|
|5||Requiring FCMs to execute and clear SFP business through full-service BDs could also create an unworkable or at least a cumbersome situation concerning the treatment of customer funds.|
|6||CFTC Rule 160.2(b)(1); 66 Fed. Reg. 21236, 21238, 21252 (April 27, 2001).|