Securities and Exchange Commission
Securities Exchange Act of 1934
Release No. 49038 ; January 8, 2004
Order Granting Temporary Exemption for Security Futures Products from the Definition of Penny Stock
The Commodity Futures Modernization Act of 2000 ("CFMA") permits the trading of security futures, i.e., futures contracts on individual securities and on narrow-based security indexes ("security futures").1 Under the CFMA, security futures are regulated both as "securities" under the federal securities laws,2 and as futures contracts for the purposes of the Commodity Exchange Act ("CEA").3 Accordingly, security futures products potentially fall within the statutory definition of penny stock.4 Thus, absent an exemption, security futures products could be subject to the Commission's regulatory scheme for penny stocks.5
We are proposing to amend the definition of penny stock in Exchange Act Rule 3a51-1 to exclude security futures listed on a national securities exchange or an automated quotation system sponsored by a registered national securities association.6 This would be consistent with the treatment of exchange-traded options under the penny stock rules.7 Both exchange-traded options and security futures products are subject to special disclosure requirements.8 Subjecting security futures to the additional disclosure regime of the penny stock rules, therefore, would likely be duplicative and unnecessarily burdensome.
Security futures commenced trading in the United States on November 8, 2002 on the Nasdaq-Liffe and OneChicago markets.9 Therefore, the Commission, through this order, is providing an exemption from the penny stock rules for security futures such time as the Commission takes any further action on the proposed amendment to Rule 3a51-1 outlined above. This exemption will allow the Commission to receive and consider comments while, at the same time, temporarily excluding security futures products from the penny stock rules.
Because security futures are subject to an alternative regulatory scheme, and because the CFMA directs the Commission to issue such rules, regulations, or orders as are necessary to avoid duplicative or conflicting regulations for firms that are "fully registered" with both the Commodity Futures Trading Commission and the Commission,10 the Commission finds that it is appropriate in the public interest and consistent with the protection of investors to provide this temporary exemptive relief.
Accordingly, pursuant to Section 36(a)(1) of the Exchange Act,11
IT IS HEREBY ORDERED THAT security futures products are exempted from the definition of penny stock set forth in Exchange Act Section 3(a)(51)(A) and Rule 3a51-1 until such time as the Commission takes any further action on the proposed amendment to Rule 3a51-1.
By the Commission.
J. Lynn Taylor
1 Pub. L. No. 106-554, 114 Stat. 2763 (2000). Under Section 3(a)(55)(A) of the Securities Exchange Act of 1934 ("Exchange Act"), the term "security future" is defined as a contract of sale for future delivery of a single security or of a narrow-based security index. 15 U.S.C. 78c(a)(55)(A). Under Exchange Act Section 3(a)(56), the term "security futures product" is defined as a security future or an option on a security future. 15 U.S.C. 78c(a)(56).
2 See, e.g., Exchange Act Section 3(a)(10), 15 U.S.C. 78c(a)(10).
3 The term "security future" is defined in CEA Section 1a(31) [7 U.S.C. 1a(31)] as a contract of sale for future delivery of a single security or of a narrow-based security index. Under CEA Section 1a(33) (7 U.S.C. 1a(33)), the term "security futures product" is defined as a security future or an option on a security future.
4 15 U.S.C. 78c(a)(51). This definition is supplemented by Exchange Act Rule 3a51-1, 17 CFR 240.3a51-1, which further defines the term "penny stock."
5 Rules 15g-1 through 15g-9 under the Exchange Act (collectively known as the "penny stock rules") 17 CFR 240.15g-2 through 15g-9.
6 See Exchange Act Rel. No. 49037 (January 8, 2004). Section 6(h)(1) of the Exchange Act makes it unlawful for any person to effect transactions in security futures products that are not listed on a national securities exchange or a national securities association registered pursuant to section 15A(a). 15 U.S.C. 78f(h)(1).
7 In particular, the term "penny stock" currently does not include, any put or call option issued by the Options Clearing Corporation ("OCC"). See 17 CFR 240.3a51-1(c).
8 Exchange Act Rel. No. 30608 (April 20, 1992) at n. 39, 57 FR 18004 (April 28, 1992) ("In addition, because put and call options issued by the OCC are already subject to special disclosure requirements, they are separately excluded from the definition of penny stock in paragraph (c) of Rule 3a51-1."). See also 17 CFR 240.9b-1; CBOE Rules 9.1-9.23; NASD Rule 2860 (16).
9 Peter A. McKay, Single Stock Futures Arrive in the U.S. With Room to Grow, Wall Street Journal, Nov. 11, 2002, at B6.
10 See Exchange Act Section 15(c)(3)(B), 15 U.S. 78o(c)(3)(B) (directing the Commission to avoid duplicative or conflicting rules relating to the treatment of customer funds, securities, or property, maintenance of books and records, financial reporting, or other financial responsibility rules, involving security futures).
11 15 U.S.C. 78mm(a)(1).