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Code · REGISTER · 2005-07-21 · SECURITIES AND EXCHANGE COMMISSION · Notices

Notices. SECURITIES AND EXCHANGE COMMISSION

18,053 words·~82 min read·/register/2005/07/21/05-14444·

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BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52032; File No. SR-CBOE-2002-03] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving a Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Customer Portfolio and Cross-Margining Requirements July 14, 2005. I. Introduction On January 15, 2002, the Chicago Board Options Exchange, Incorporated (“CBOE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b- 4 2 thereunder, a proposed rule change seeking to amend its rules, for certain customer accounts, to allow member organizations to margin listed, broad-based, market index options, index warrants, futures, futures options and related exchange-traded funds according to a portfolio margin methodology.
The CBOE seeks to introduce the proposed rule as a two-year pilot program that would be made available to member organizations on a voluntary basis. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. The proposed rule change was published in the **Federal Register** on March 29, 2002. 3 The Commission received two comment letters in response to the March 29, 2002 **Federal Register** notice. 4 On April 2, 2004, the Exchange filed Amendment No. 1 to the proposed rule change. 5 The proposed rule change and Amendment No. 1 were published in the **Federal Register** on December 27, 2004. 6 The Commission received eleven comment letters in response to the December 27, 2004 **Federal Register** notice. 7 3 *See* Securities Exchange Act Release No. 45630 (March 22, 2002), 67 FR 15263 (March 29, 2002). 4 *See* letter from Carl E.
Vander Wilt, Federal Reserve Bank of Chicago, to Jonathan G. Katz, Secretary, Commission, dated July 18, 2002 (“Vander Wilt Letter”); and e-mail from Mike Ianni, Private Investor to *rule-comments@sec.gov* , dated November 7, 2002 (“Ianni E-mail”). 5 *See* letter from Richard Lewandowski, Vice President, Division of Regulatory Services, CBOE, to Michael A. Macchiaroli, Associate Director, Division of Market Regulation (“Division”), Commission, dated April 1, 2004 (“Amendment No. 1”).
The CBOE proposed Amendment No. 1 to make corrections or clarifications to the proposed rule, or to reconcile differences between the proposed rule and a parallel filing by the NYSE. *See* Securities Exchange Act Release No. 46576 (October 1, 2002), 67 FR 62843 (October 8, 2002) (File No. SR-NYSE-2002-19). 6 *See* Securities Exchange Act Release No. 50886 (December 20, 2004), 69 FR 77275 (December 27, 2004); *see also* Securities Exchange Act Release No. 50885 (December 20, 2004), 69 FR 77287 (December 27, 2004). 7 *See* letter from Anthony J.
Saliba, President, LiquidPoint, LLC, to Jonathan G. Katz, Secretary, Commission, dated January 21, 2005 (“Saliba Letter”); letter from Barbara Wierzynski, Executive Vice President and General Counsel, Futures Industry Association (“FIA”), and Gerard J. Quinn, Vice President and Associate General Counsel, Securities Industry Association (“SIA”), to Jonathan G. Katz, Secretary, Commission, dated January 14, 2005 (“Wierzynski/Quinn Letter”); letter from Craig S. Donohue, Chief Executive Officer, Chicago Mercantile Exchange, to Jonathan G.
Katz, Secretary, Commission, dated January 18, 2005 (“Donohue Letter”); letter from Robert C. Sheehan, Chairman, Electronic Brokerages Systems, LLC, to Jonathan G. Katz, Secretary, Commission, dated January 19, 2005 (“Sheehan Letter”); letter from William O. Melvin, Jr., President, Acorn Derivatives Management, to Jonathan G. Katz, Secretary, Commission, dated January 19, 2005 (“Melvin Letter”); letter from Margaret Wiermanski, Chief Operating & Compliance Officer, Chicago Trading Company, to Jonathan G.
Katz, Secretary, Commission, dated January 20, 2005 (“Wiermanski Letter”); e-mail from Jeffrey T. Kaufmann, Lakeshore Securities, L.P., to Jonathan G. Katz, Secretary, Commission, dated January 24, 2005 (“Kaufmann Letter”); letter from J. Todd Weingart, Director of Floor Operations, Mann Securities, to Jonathan G. Katz, Secretary, Commission, dated January 25, 2005 (“Weingart Letter”); letter from Charles Greiner III, LDB Consulting, Inc., to Jonathan G. Katz, Secretary, Commission, dated January 26, 2005 (“Greiner Letter”); letter from Jack L.
Hansen, Chief Investment Officer and Principal, The Clifton Group, to Jonathan G. Katz, Secretary, Commission, dated February 1, 2005 (“Hansen Letter”); and letter from Barbara Wierzynski, Executive Vice President and General Counsel, Futures Industry Association, and Ira D. Hammerman, Senior Vice President and General Counsel, Securities Industry Association, to Jonathan G. Katz, Secretary, Commission, dated March 4, 2005 (“Wierzynski/Hammerman Letter”). On April 15, 2005, the Exchange filed Amendment No. 2 8 to the proposed rule change.
The proposed rule change and Amendment Nos. 1 and 2 were published in the **Federal Register** on May 3, 2005. 9 The Commission received one comment in response to the May 3, 2005 **Federal Register** notice. 10 8 *See* Partial Amendment No. 2 (“Amendment No. 2”). The Exchange submitted this partial amendment, pursuant to the request of Commission staff, to remove the paragraph under which any affiliate of a self-clearing member organization could participate in portfolio margining, without being subject to the $5 million equity requirement. 9 *See* Securities Exchange Act Release No. 34-51614 (April 26, 2005), 70 FR 22935 (May 3, 2005); *see also* Securities Exchange Act Release No. 34-51615 (April 26, 2005), 70 FR 22953 (May 3, 2005). 10 *See* letter from William H.
Navin, Executive Vice President, General Counsel, and Secretary, The Options Clearing Corporation, to Jonathan G. Katz, Secretary, Commission, dated May 27, 2005 (“Navin Letter”). The comment letters and the Exchange's responses to the comments 11 are summarized below. This Order approves the proposed rule, as amended. 12 11 *See* letter from Timothy H. Thompson, Senior Vice President, Chief Regulatory Officer, Regulatory Services Division, CBOE, to Michael A. Macchiaroli, Associate Director, Division of Market Regulation, Commission, dated May 2, 2005 (“CBOE Response”).
The Commission received the CBOE Response on June 1, 2005; *see also* letter from Timothy H. Thompson, Senior Vice President, Chief Regulatory Officer, Regulatory Services Division, CBOE, to Michael A. Macchiaroli, Associate Director, Division of Market Regulation, Commission, dated June 29, 2005. 12 By separate orders, the Commission also is approving a parallel rule filing by the NYSE [SR-NYSE-2002-19], and a related rule filing by the Options Clearing Corporation (“OCC”) [SR-OCC-2003-04].
See Securities Exchange Act Release No. 52031 (July 14, 2005) and Securities Exchange Act Release No. 52030 (July 14, 2005). In addition, the staff of the Division of Market Regulation is issuing certain no-action relief related to the OCC's rule filing. *See* letter from Bonnie Gauch, Attorney, Division of Market Regulation, Commission, to William H. Navin, General Counsel, OCC, dated July 14, 2005. II. Description a. Summary of Proposed Rule Change The CBOE has proposed to amend its rules, for certain customer accounts, to allow member organizations to margin listed broad-based securities index options, warrants, futures, futures options and related exchange-traded funds according to a portfolio margin methodology.
The CBOE seeks to introduce the proposed rule as a two-year pilot program that would be made available to member organizations on a voluntary basis. b. Overview—Portfolio Margin Computation
(1)Portfolio Margin Portfolio margining is a methodology for calculating a customer's margin requirement by “shocking” a portfolio of financial instruments at different equidistant points along a range representing a potential percentage increase and decrease in the value of the instrument or underlying instrument in the case of a derivative product. For example, the calculation points could be spread equidistantly along a range bounded on one end by a 10% increase in market value of the instrument and at the other end by a 10% decrease in market value. Gains and losses for each instrument in the portfolio are netted at each calculation point along the range to derive a potential portfolio-wide gain or loss for the point. The margin requirement is the amount of the greatest portfolio-wide loss among the calculation points. Under the Exchange's proposed rule, a portfolio would consist of, and be limited to, financial instruments in the customer's account within a given broad-based US securities index class ( *e.g.* , the S&P 500 or S&P 100). 13 The gain or loss on each position in the portfolio would be calculated at each of 10 equidistant points (“valuation points”) set at and between the upper and lower market range points. The range for non-high capitalization indices would be between a market increase of 10% and a decrease of 10%. High capitalization indices would have a range of between a market increase of 6% and a decrease of 8%. 14 A theoretical options pricing model would be used to derive position values at each valuation point for the purpose of determining the gain or loss. The amount of margin (initial and maintenance) required with respect to a given portfolio would be the larger of:
(1)The greatest loss amount among the valuation point calculations; or
(2)the sum of $.375 for each option and future in the portfolio multiplied by the contract's or instrument's multiplier. The latter computation establishes a minimum margin requirement to ensure that a certain level of margin is required from the customer. The margin for all other portfolios of broad based US securities index instruments within an account would be calculated in a similar manner. 13 A“portfolio” is defined in the rule as “options of the same options class grouped with their underlying instruments and related instruments.” 14 These are the same ranges applied to options market makers under Appendix A to Rule 15c3-1 (17 CFR 240.15c3-1a), which permits a broker-dealer when computing net capital to calculate securities haircuts on options and related positions using a portfolio margin methodology. *See* 17 CFR 240.15c3-1a(b)(1)(iv)(A); Letter from Michael Macchiaroli, Associate Director, Division of Market Regulation, Commission, to Richard Lewandowski, Vice President, Regulatory Division, The Chicago Board Options Exchange, Inc. (Jan. 13, 2000). Certain portfolios would be allowed offsets such that, at the same valuation point, for example, 90% of a gain in one portfolio may reduce or offset a loss in another portfolio. 15 The amount of offset allowed between portfolios would be the same as permitted under Rule 15c3-1a for computing a broker-dealer's net capital. 16 15 These offsets would be allowed between portfolios within the High Capitalization, Broad Based Index Option product group and the Non-High Capitalization, Broad Based Index product group. 16 17 CFR 240.15c3-1a. 16 Under the Exchange's proposed rule, the theoretical prices used for computing profits and losses must be generated by a theoretical pricing model that meets the requirements in Rule 15c3-1a. 17 These requirements include, among other things, that the model be non-proprietary, approved by a Designated Examining Authority (“DEA”) and available on the same terms to all broker-dealers. 18 Currently, the only model that qualifies under Rule 15c3-1a is the OCC's Theoretical Intermarket Margining System (“TIMS”). 17 *See* 17 CFR 240.15c3-1a(b)(1)(i)(B). 18 *Id.*
(2)Cross-Margining The Exchange's proposed rule permits futures and futures options on broad-based US securities indices to be included in the portfolios. Consequently, futures and futures options would be permitted offsets to the securities positions in a given portfolio. Operationally, these offsets would be achieved through cross-margin agreements between the OCC and the futures clearing organizations holding the customer's futures positions. Cross-margining would operate similar to the cross-margin program that the Commission and the Commodity Futures Trading Commission (“CFTC”) approved for listed options market-makers and proprietary accounts of clearing member organizations. 19 For determining theoretical gains and losses, and resultant margin requirements, the same portfolio margin computation program will be applied to portfolio margin accounts that include futures. Under the proposed rule, a separate cross-margin account must be established for a customer. 19 *See* Securities Exchange Act Release 26153 (Oct. 3, 1988), 53 FR 39567 (Oct. 7, 1988). c. Margin Deficiency Under the Exchange's proposed rule, account equity would be calculated and maintained separately for each portfolio margin account and a margin call would need to be met by the customer within one business day (T+1), regardless of whether the deficiency is caused by the addition of new positions, the effect of an unfavorable market movement, or a combination of both. The portfolio margin methodology, therefore, would establish both the customer's initial and maintenance margin requirement. d. $5.0 Million Equity Requirement The Exchange's proposed rule would require a customer (other than a broker-dealer or a member of a national futures exchange) to maintain a minimum account equity of not less than $5.0 million. This requirement can be met by combining all securities and futures accounts owned by the customer and carried by the broker-dealer (as broker-dealer and futures commission merchant), provided ownership is identical across all combined accounts. The proposed rule would require that, in the event account equity falls below the $5 million minimum, additional equity must be deposited within three business days (T+3). e. Net Capital The Exchange's proposed rule would provide that the gross customer portfolio margin requirements of a broker-dealer may at no time exceed 1,000 percent of the broker-dealer's net capital (a 10:1 ratio), as computed under Rule 15c3-1. 20 This requirement is intended to place a ceiling on the amount of portfolio margin a broker-dealer can extend to its customers. 20 17 CFR 240.15c3-1. f. Internal Risk Monitoring Procedures The Exchange's proposed rule would require a broker-dealer that carries portfolio margin accounts to establish and maintain written procedures for assessing and monitoring the potential risks to capital arising from portfolio margining. g. Margin at the Clearing House Level The OCC will compute clearing house margin for the broker-dealer using the same portfolio margin methodology applied at the customer level. The OCC will continue to require full payment for all customer long option positions. These positions, however, would be subject to the OCC's lien. This would permit the long options positions to offset short positions in the customer's portfolio margin account. In conjunction with the Exchange's rule proposal, the OCC proposed amending OCC Rule 611 and establishing a new type of omnibus account to be carried at the OCC and known as the “customer's lien account.” 21 In order to unsegregate the long option positions, the Commission staff would have to grant certain relief from some requirements of Commission Rules 8c-1, 15c2-1, and 15c3-3. 22 The OCC requested such relief on behalf of its members. 23 21 *See* SR-OCC-2003-04, Securities Exchange Act Release No. 51330 (March 8, 2005). As noted above, the Commission is approving the OCC's rule filing. *See* Securities Exchange Act Release No. 52030 (July 14, 2005). 22 17 CFR 240.8c-1, 17 CFR 240.15c2-1 and 17 CFR 240.15c3-3, respectively. 23 *See* Letter from William H. Navin, Executive Vice President, General Counsel, and Secretary, The Options Clearing Corporation, to Michael A. Macchiaroli, Associate Director, Division of Market Regulation, Commission, dated January 13, 2005. As noted above, the staff of the Division of Market Regulation is issuing a no-action letter providing such relief. *See* letter from Bonnie Gauch, Attorney, Division of Market Regulation, Commission, to William H. Navin, General Counsel, OCC, dated July 14, 2005. h. Risk Disclosure Statement and Acknowledgement The Exchange's proposed rule would require a broker-dealer to provide a portfolio margin customer with a written risk disclosure statement at or prior to the initial opening of a portfolio margin account. This disclosure statement would highlight the risks and describe the operation of a portfolio margin account. The disclosure statement would be divided into two sections, one dealing with portfolio margining and the other with cross-margining. The disclosure statement would note that additional leverage is possible in an account margined on a portfolio basis in relation to existing margin requirements. The disclosure statement also would describe, among other things, eligibility requirements for opening a portfolio margin account, the instruments that are allowed in the account, and when deposits to meet margin and minimum equity requirements are due. Further, there would be a summary list of the special risks of a portfolio margin account, including the increased leverage, time frame for meeting margin calls, potential for involuntary liquidation if margin is not received, inability to calculate future margin requirements because of the data and calculations required, and the OCC lien on long option positions. The risks and operation of the cross-margin account are outlined in a separate section of the disclosure statement. Further, at or prior to the time a portfolio margin account is initially opened, the broker-dealer would be required to obtain a signed acknowledgement concerning portfolio margining from the customer. A separate acknowledgement would be required for cross-margining. The acknowledgements would contain statements to the effect that the customer has read the disclosure statement and is aware of the fact that long option positions in a portfolio margin account are not subject to the segregation requirements under the Commission's customer protection rules, and would be subject to a lien by the OCC. An additional acknowledgement form would be required for a cross-margin account. It would contain similar statements as well as statement to the effect that the customer is aware that futures positions are being carried in a securities account, which would make them subject to the Commission's customer protection rules, and Securities Investor Protection Act of 1970 (“SIPA”) 24 in the event the broker-dealer becomes financially insolvent. The Exchange would prescribe the format of the written disclosure statements and acknowledgements, which would allow a broker-dealer to develop its own format, provided the acknowledgement contains substantially similar information and is approved by the Exchange in advance. 24 24 5 U.S.C. 78aaa *et seq.* i. Rationale for Portfolio Margin Theoretical options pricing models have become widely utilized since Fischer Black and Myron Scholes first introduced a formula for calculating the value of a European style option in 1973. 25 Other formulas, such as the Cox-Ross-Rubinstein model have since been developed. Option pricing formulas are now used routinely by option market participants to analyze and manage risk. In addition, as noted, a portfolio margin methodology has been used by broker-dealers since 1994 to calculate haircuts on option positions for net capital purposes. 26 25 *See* Securities Exchange Act Release No. 34-38248 (Feb. 6, 1997), 62 FR 6474 (Feb. 12, 1997) (discussing the development of the options pricing approach to capital); see also Securities Exchange Act Release No. 33761 (March 15, 1994), 59 FR 13275 (March 21, 1994). 26 *See* letter from Brandon Becker, Director, Division, Commission, to Mary Bender, First Vice President, Division of Regulatory Services, CBOE, and Timothy Hinkes, Vice President, OCC, dated March 15, 1994; see also “Net Capital Rule,” Securities Exchange Act Release No. 38248 (February 6, 1997), 62 FR 6474 (February 12, 1997). The Board of Governors of the Federal Reserve System (the “Federal Reserve Board” or “FRB”) in its amendments to Regulation T in 1998 permitted SROs to implement portfolio margin rules, provided they are approved by the Commission. 27 27 *See* Federal Reserve System, “Securities Credit Transactions; Borrowing by Brokers and Dealers”; Regulations G, T, U and X; Docket Nos. R-0905, R-0923 and R-0944, 63 FR 2806 (January 16, 1998). More recently, the FRB encouraged the development of a portfolio margin approach in a letter to the Commission and the CFTC delegating authority to the agencies to jointly prescribe margin regulations for security futures products. *See* letter from the FRB to James E. Newsome, Acting Chairman, CFTC, and Laura S. Unger, Acting Chairman, Commission, dated March 6, 2001. Portfolio margining brings a more risk sensitive approach to establishing margin requirements. For example, in a diverse portfolio some positions may appreciate and others depreciate in response to a given change in market prices. The portfolio margin methodology recognizes offsetting potential changes among the full portfolio of related instruments. This links the margin required to the risk of the entire portfolio as opposed to the individual positions on a position-by-position basis. Professional investors frequently hedge listed index options with futures positions. Cross-margining would better align their margin requirements with the actual risks of these hedged positions. This could reduce the risk of forced liquidations. Currently, an option (securities) account and futures account of the same customer are viewed as separate and unrelated. Moreover, an option account currently must be liquidated if the risk in the positions has increased dramatically or margin calls cannot be met, even if gains in the customer's futures account offset the losses in the options account. If the accounts are combined ( *i.e.* , cross-margined), unnecessary liquidation may be avoided. This could lessen the severity of a period of high volatility in the market by reducing the number of liquidations. III. Summary of Comments Received and CBOE Response The Commission received a total of fourteen comment letters to the proposed rule. 28 The comments, in general, were supportive. One commenter stated that “portfolio margining would enable CBOE to more accurately reflect the risk exposure of options and related positions-potentially reducing the trading costs of market participants and increasing the liquidity and efficiency of the market.” 29 Some commenters, however, recommended changes to specific provisions of the proposed rule change. 28 *See supra* notes 4, 7 and 10. 29 *See* Vander Wilt Letter. Seven of the comment letters specifically objected to the $5.0 million equity requirement. 30 Three commenters noted that the requirement blocks certain large institutions from participating in portfolio margining because these institutions hold assets at a custodian bank and, consequently, would not hold $5.0 million in an account with a broker-dealer. 31 Five commenters raised the issue that securities index options will be at a disadvantage compared with economically similar CFTC regulated index futures, because futures accounts have no minimum equity requirement. 32 30 *See* Ianni Letter; Weingart Letter; Wiermanski Letter; Hansen Letter; Greiner Letter; Saliba Letter; and Melvin Letter. 31 *See* Weingart Letter; Wiermanski Letter; and Melvin Letter. 32 *See* Weingart Letter, Wiermanski Letter; Hansen Letter; Saliba Letter; and Sheehan Letter. The Exchange believes that the comments directed at the $5.0 million equity requirements have merit, particularly with respect to certain types of accounts that must hold assets at a custodial bank. 33 The Exchange, however, stated that these comments should not delay implementation of the proposed rule change and noted that it intends to file a proposed rule amendment that would offer alternative methods for meeting the minimum equity requirement after the industry becomes acclimated to the portfolio margin methodology and its operational aspects. 33 *See* CBOE Response. Several commenters stated that other products should be eligible for portfolio margining, 34 such as equities, 35 as well as OCC-cleared equity derivatives. 36 One commenter stated that other risk-based algorithms, such as SPAN, 37 that are recognized by other clearing organizations should be permitted for calculating the portfolio margin requirement, in addition to the OCC's TIMS. 38 34 *See* Wiermanski Letter; Saliba Letter; and Donohue Letter. 35 *See* Saliba Letter. 36 *See* Sheehan Letter. 37 SPAN is the Chicago Mercantile Exchange's Standard Portfolio Analysis System, which is used by many futures exchanges to calculate margin. 38 *See* Donohue Letter. In addition, one commenter stated that the Securities Investor Protection Corporation (“SIPC”) would need to amend its rules in order to provide SIPA protection to futures and options on futures in a securities account. 39 The Exchange disagrees and notes that the proposed rule change was amended, at the request of Commission staff, to require the immediate transfer to another broker-dealer or the liquidation of a cross-margin account in the event that a broker-dealer becomes insolvent. In addition, the Exchange believes that amendments to Commission Rule 15c3-3 could provide customers holding both securities and futures with protection under SIPA. 39 *See* Wierzynski/Hammerman Letter. One commenter, the OCC, strongly urged the Commission to move forward promptly with the approval of the proposed rule changes, and contended that additional regulatory actions are necessary in order to implement the proposed pilot programs. 40 These other regulatory actions include: Commission approval of SR-OCC-2003-04; a Commission “no-action” letter in connection with SR-OCC-2003-04; an exemptive order from the CFTC; and amendments to Commission Rule 15c3-3. The Exchange agrees with the OCC that approval of the OCC rule filing and issuance of the “no-action” letter are necessary to enable portfolio margining, including cross-margining, to be utilized. 41 The Exchange also urged the Commission to complete all regulatory actions necessary to enable portfolio margining along with the cross-margin component. 40 *See* Navin Letter. 41 *See supra* notes 21 and 23. IV. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. 42 In particular, the Commission believes that the proposed rule change is consistent with Section 6(b)(5) of the Act 43 in particular, in that it is designed to perfect the mechanism of a free and open market and to protect investors and the public interest. The Commission notes that the proposed portfolio margin rule change is intended to promote greater reasonableness, accuracy and efficiency with respect to Exchange margin requirements for complex listed securities index option strategies. The Commission further notes that the cross-margining capability with related index futures positions in eligible accounts may alleviate excessive margin calls, improve cash flows and liquidity, and reduce volatility. Moreover, the Commission notes that approving the proposed rule change would be consistent with the FRB's 1998 amendments to Regulation T, which sought to advance the use of portfolio margining. 42 In approving this proposed rule change, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 43 15 U.S.C. 78f(b)(5). Under the proposed rule changes, the Commission notes that a broker-dealer choosing to offer portfolio margining to its customers must employ a methodology that has been approved by the Commission for use in calculating haircuts under Rule 15c3-1a. As stated above, currently, TIMS is the only approved methodology. While some commenters recommended expanding the choice of models, the Commission believes that requiring a broker-dealer to use a model that qualifies for calculating haircuts under Commission Rule 15c3-1a maintains a consistency with the Commission's net capital rule and across potential portfolio margin pricing models. As a result, portfolio margin requirements would vary less from firm to firm. The Commission notes, however, that like Rule 15c3-1a, the proposed rule permits the use of another theoretical pricing model, should one be developed in the future. 44 44 *See also* Securities Exchange Act Release No. 34-38248 (February 6, 1997), 62 FR 6474 (February 12, 1997) (discussing in Part II.A. the use of TIMS versus other pricing models). The Commission notes the objections of certain commenters to the $5 million minimum equity requirement. The Commission believes that the requirement circumscribes the number of accounts able to participate and adds safety in that such accounts are more likely to be of significant financial means and investment sophistication. Finally, the Commission notes that several commenters recommended expanding the products eligible for portfolio margining. The Exchange's proposed rule limits the instruments eligible for portfolio margining to listed products based on broad-based US securities indices, which tend to be less volatile than narrow-based indices and non-index equities. The Commission believes this limitation is appropriate for the pilot program, which should serve as a first step toward the possible expansion of portfolio margining to other classes of securities. V.Conclusion *It is therefore ordered* , pursuant to Section 19(b)(2) of the Act, 45 that the proposed rule change (File No. SR-CBOE-2002-03), as amended, is approved on a pilot basis to expire on July 31, 2007. 45 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 46 46 17 CFR 200.30-3(a)(12). J. Lynn Taylor, Assistant Secretary. [FR Doc. E5-3870 Filed 7-20-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52043; File Nos. SR-DTC-2005-04, SR-FICC-2005-10, and SR-NSCC-2005-05] Self-Regulatory Organizations; The Depository Trust Company, Fixed Income Clearing Corporation, and National Securities Clearing Corporation; Notice of Filing of Proposed Rule Changes To Establish a Fine for Members Failing To Conduct Connectivity Testing July 15, 2005. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 1 notice is hereby given that on May 13, 2005, The Depository Trust Company (“DTC”), on May 3, 2005, the Fixed Income Clearing Corporation (“FICC”), and on May 4, 2005, the National Securities Clearing Corporation (“NSCC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule changes described in Items I, II, and III below, which items have been prepared primarily by DTC, FICC, and NSCC. On June 7, 2005, NSCC amended its proposed rule change. 2 The Commission is publishing this notice to solicit comments on the proposed rule changes from interested parties. 1 15 U.S.C. 78s(b)(1). 2 The NSCC amendment proposes to amend NSCC Rule 48, Section 1, to increase the maximum disciplinary fine for a single offense from $10,000 to $20,000. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change DTC, FICC, and NSCC are seeking to establish a fine for members who fail to conduct connectivity testing for business continuity purposes. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, DTC, FICC, and NSCC included statements concerning the purpose of and basis for the proposed rule changes and discussed any comments they received on the proposed rule changes. The text of these statements may be examined at the places specified in Item IV below. DTC, FICC, and NSCC have prepared summaries, set forth in sections (A), (B), and
(C)below, of the most significant aspects of such statements. 3 3 The Commission has modified the text of the summaries prepared by DTC, FICC, and NSCC.
(A)Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change The purpose of these filings is to modify the rules of DTC, FICC, and NSCC to provide that DTC, FICC, and NSCC may impose a fine on any member that is required to conduct connectivity testing for business continuity purposes and fails to do so. In the aftermath of September 11, 2001, and in conjunction with a financial industry white paper, DTC, FICC, and NSCC require connectivity testing for critical (“Top Tier”) members. 4 The criteria used by DTC, FICC, and NSCC to identify their respective Top Tier members were revenues, clearing fund contributions, settlement amounts, and trading volumes. Connectivity testing for the Top Tier members was initiated on January 1, 2004. Due to the critical importance of being able to assess whether a Top Tier member has sufficient operational capabilities, DTC, FICC, and NSCC have determined that they need the ability to fine any Top Tier member that does not test. 5 4 The Federal Reserve, Office of the Comptroller of the Currency, and the Commission issued “Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System.” [68 FR 17809 (April 11, 2003)]. This document provided guidelines that required core clearing and settlement organizations, such as DTC, FICC, and NSCC, and others in the financial industry to manage business continuity capabilities. DTC, FICC, and NSCC developed their testing of Top Tier firms based on the guidelines outlined in the white paper. 5 Pursuant to DTC Rule 2, “Participants and Pledgees,” participants must furnish, upon DTC's request, information sufficient to demonstrate operational capability. In addition, DTC Rule 21, “Disciplinary Sanctions,” allows DTC to impose fines on participants for any error, delay or other conduct detrimental to the operations of DTC. Pursuant to GSD Rule 3, “Responsibility, Operational Capability, and Other Membership Standards of Comparison-Only Members and Netting Members,” the GSD may require members to fulfill operational testing requirements as the GSD may at any time deem necessary. Pursuant to MBSD Rule 1, Section 3 of Article III, all MBSD applicants and members agree to fulfill operational testing requirements and related reporting requirements that may be imposed to ensure the continuing operational capability of the applicant. Pursuant to NSCC Rule 15, “Financial Responsibility and Operational Capability,” members must furnish to NSCC adequate assurances of their financial responsibility and operational capability as NSCC may at any time deem necessary. In addition, NSCC Rule 48, “Disciplinary Procedures”, allows NSCC to impose a fine on participants for any error, delay, or other conduct that is determined to be detrimental to the operations of NSCC. Currently, each member of DTC, FICC, and NSCC that is designated as Top Tier is advised of this status and is provided with information on the testing requirements. Under DTC, FICC, and NSCC's current procedures, if testing is not completed by a Top Tier member by the end of June, a reminder notice is sent to the member. Thereafter, another reminder notice is sent in October and, if necessary, again in December. The reminder notice sent in December would advise that if testing is not completed by December 31, a fine of $10,000 will be imposed. These fines would be collected from members in January of the following year. The Membership and Risk Management Committee would be notified of all members that were fined for failing to complete connectivity testing. In the event that any member fails to complete connectivity testing for two successive years, the fine that would be imposed at that time would be $20,000. Failure to complete testing for more than two successive years would result in disciplinary action, including potential termination of membership. DTC, FICC, and NSCC believe that the proposed rule changes are consistent with the requirements of Section 17A of the Act 6 and the rules and regulations thereunder because the implementation of the proposals should help DTC, FICC, and NSCC to enforce compliance with their connectivity testing rules for business continuity purposes and as a result should better enable them to ensure the safeguarding of securities and funds which are in their custody or control. 6 15 U.S.C. 78q-1.
(B)Self-Regulatory Organization's Statement on Burden on Competition DTC, FICC, and NSCC do not believe that the proposed rule changes will have any impact or impose any burden on competition.
(C)Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others DTC, FICC, and NSCC have not solicited or received any written comments on these proposals. DTC, FICC, and NSCC will notify the Commission of any written comments they receive. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within thirty-five days of the date of publication of this notice in the **Federal Register** or within such longer period
(i)as the Commission may designate up to ninety days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii)as to which the self-regulatory organization consents, the Commission will:
(A)By order approve such proposed rule change or
(B)Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule changes are consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ) or • Send an E-mail to *rule-comments@sec.gov.* Please include File Number SR-DTC-2005-04, SR-FICC-2005-10, and SR-NSCC-2005-05 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-0609. All submissions should refer to File Number SR-DTC-2005-04, SR-FICC-2005-10, and SR-NSCC-2005-05. These file numbers should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule changes that are filed with the Commission, and all written communications relating to the proposed rule changes between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Section, 100 F Street, NE, Washington, DC 20549. Copies of such filings also will be available for inspection and copying at the principal offices of DTC, FICC, and NSCC and on DTC's Web site at *http://www.dtc.org* , and on FICC's Web site at *http://www.ficc.com* , and on NSCC's Web site at *http://www.nscc.com.* 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. All submissions should refer to File Number SR-DTC-2005-04, SR-FICC-2005-10, and SR-NSCC-2005-05 and should be submitted on or before August 5, 2005. For the Commission by the Division of Market Regulation, pursuant to delegated authority. 7 J. Lynn Taylor, Assistant Secretary. 7 17 CFR 200.30-3(a)(12). [FR Doc. E5-3871 Filed 7-20-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52045; File No. SR-NASD-2005-023] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating to Representation in Arbitration and Mediation July 15, 2005. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that the National Association of Securities Dealers, Inc. (“NASD”), through its wholly owned subsidiary, NASD Dispute Resolution, Inc. (“NASD Dispute Resolution”), filed with the Securities and Exchange Commission (“SEC” or “Commission”), on February 9, 2005 and on July 8, 2005 (Amendment No. 1), the proposed rule change as described in items I, II, and III below, which items have been prepared by NASD Dispute Resolution. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 1. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change NASD Dispute Resolution is proposing to amend Rule 10316 and to adopt Rule 10408 of the NASD Code of Arbitration Procedure (“Code”), to address attorney representation in arbitration and mediation. 3 Below is the text of the proposed rule change. Proposed new language is in italics; proposed deletions are in brackets. 3 These provisions will be renumbered as appropriate following Commission approval of the following proposed rule changes published on June 23, 2005: Revision of Customer Portion of Code of Arbitration Procedure, Exchange Act Rel. No. 51856 (June 15, 2005), 70 FR 36442 (June 23, 2005) (SR-NASD-2003-1580); Revision of Industry Portion of Code of Arbitration Procedure, Exchange Act Rel. No. 51857 (June 15, 2005), 70 FR 36430 (June 23, 2005) (SR-NASD-2004-011); and the NASD Arbitration Rules for Mediation Proceedings, Exchange Act Rel. No. 51855 (June 15, 2005), 70 FR 36440 (June 23, 2005) (SR-NASD-2004-013). 10316. Representation *in Arbitration* [by Counsel]
(a)Representation by a Party * Parties may represent themselves in an arbitration held in a United States hearing location. A member of a partnership may represent the partnership; and a bona fide officer of a corporation, trust, or association may represent the corporation, trust, or association. *
(b)Representation by an Attorney *At any stage of an arbitration proceeding held in a United States hearing location* , [A] *a* ll parties shall have the right to [representation by counsel at any stage of the proceedings.] *be represented by an attorney at law admitted to practice before the Supreme Court of the United States or the highest court of any state of the United States, the District of Columbia, or any commonwealth, territory, or possession of the United States.*
(c)Qualification of Representative *Issues regarding the qualifications of a person to represent a party in arbitration are governed by applicable law and may be determined by an appropriate court or other regulatory agency. In the absence of a court order, the arbitration proceeding shall not be stayed or otherwise delayed pending resolution of such issues.* 10408. Representative in Mediation
(a)Representation by Party *Parties may represent themselves in mediation held in a United States hearing location. A member of a partnership may represent the partnership; and a bona fide officer of a corporation, trust, or association may represent the corporation, trust, or association.*
(b)Representation by an Attorney *At any stage of a mediation proceeding held in a United States hearing location, all parties shall have the right to be represented by an attorney at law admitted to practice before the Supreme Court of the United States or the highest court of any state of the United States, the District of Columbia, or any commonwealth, territory, or possession of the United States.*
(c)Qualifications of Representatives *Issues regarding the qualifications of a person to represent a party in mediation are governed by applicable law and may be determined by an appropriate court or other regulatory agency. In the absence of a court order, the mediation proceeding shall not be delayed pending resolution of such issues.* II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NASD included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. NASD has prepared summaries, set forth in Sections (A), (B), and
(C)below, of the most significant aspects of such statements.
(A)Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
(a)Purpose *Background.* NASD Dispute Resolution believes a rule is needed to address the issue of multi-jurisdictional practice of law in arbitration and mediation. 4 The multi-jurisdictional practice of law occurs when attorneys, licensed in one United States jurisdiction, practice law in a jurisdiction in which they are not licensed. In the area of arbitration, for example, it is common for an attorney licensed to practice law in one state to represent a client in an arbitration proceeding in another state in which the attorney is not licensed. Although this practice is common, it can be a violation of state unauthorized practice of law provisions. Until recently, most states had taken no action against this practice. However, recent case law developments suggest that some states may be reconsidering this position. For example, three state court rulings have found that an out-of-state attorney providing representation in an arbitration proceeding is engaging in the practice of law in the state in which the proceeding occurs, and that it is a violation of the state's unauthorized practice of law statute to participate in such a proceeding without being licensed in that jurisdiction. 5 4 The proposed rule change is intended to address the issue of multi-jurisdictional practice of law by attorneys. The proposed rule change does not address the issue of representation by non-attorneys in arbitration and medication cases. 5 *See Birbrower, Montalbano, Condo & Frank* v. *Superior Court,* 949 P.2d 1 (Cal. 1998); *see also Florida Bar* v. *Rapoport,* 845 Sα. 2d 874, 2003 Fla. LEXIS 250 (Fla. 2003) and *Disciplinary Council* v. *Alexicole, Inc.,* et al., 2004 Ohio LEXIS 3032 (Ohio 2004). In light of these developments and the trend toward multi-jurisdictional practice, the American Bar Association
(ABA)amended its Model Rule of Professional Conduct 5.5 (Model Rule 5.5) to permit an attorney to represent a client in a United States jurisdiction in which he or she is not licensed without violating the jurisdiction's unauthorized practice of law rules, so long as the representation is related to an arbitration or medication. 6 While Model Rule 5.5 establishes a new standard for certain types of legal activity, it can be enforced only if a state adopts it into law. Fourteen states have either adopted Model Rule 5.5 or a similar version of the rule. 7 Other states have adopted a temporary practice rule, similar to Model 5.5, which allows an attorney not licensed in a state to provide certain types of legal services in the state on a limited basis. 8 In those states where a temporary practice rule has yet to be adopted, the state bar associations appear willing to grant requests from attorney not licensed in those states to represent clients in an arbitration in those states. 9 6 Model Rule 5.5, as amended, would allow a United States lawyer, admitted in one United States jurisdiction, to engage in certain types of legal activity in another United States jurisdiction where he is not licensed to practice, without being deemed to be engaging in the unauthorized practice of law. As amended, Model Rule 5.5 states that a lawyer may provide legal services on a temporary basis in an out-of-state jurisdiction that:
(1)Are undertaken in association with a lawyer who is admitted to practice in the jurisdiction and who actively participates in the matter;
(2)are in or reasonably related to a pending or potential proceeding before a tribunal in the jurisdiction or another jurisdiction, if the lawyer, or a person the lawyer is assisting, is authorized by law or order to appear in such proceeding or reasonably expects to be so authorized;
(3)are in or reasonably related to a pending or potential arbitration, mediation, or other alternative dispute resolution proceeding in the jurisdiction or another jurisdiction, if the services arise out of or are reasonably related to the lawyer's practice in a jurisdiction in which the lawyer is admitted to practice and are not services for which the forum requires *pro hac vice* admission; or
(4)are not within paragraphs 2 or 3, and arise out of or are reasonably related to the lawyer's practice in a jurisdiction in which the lawyer is admitted to practice. This rule is sometimes referred to as the temporary practice rule. 7 Seven additional states have recommendations pending in their states' highest courts to adopt a rule identical or similar to Rule 5.5. American Bar Association, *Commission on Multijurisdictional Practice, State Implementation of ABA Model Rule 5.5* (visited Jan. 31, 2005) *http://www.abanet.org/cpr/mjp-home.html.* 8 The laws of Michigan and Virginia specifically authorize occasional or incidental practice of out-of-state lawyers. *See* Mich. Comp. Law Ann. sec. 600.916 and Va. State Bar Rule, Pt. 6, sec. 1(C). 9 *See* Philadelphia Bar Association, Ethics Opinions, Opinion 2003-13 (December 2003) (advising an attorney not licensed in Pennsylvania that he could conduct an arbitration in Philadelphia). *Representation by an Attorney in NASD Arbitration Forum.* The proposed rule change would clarify that a party may be represented by an attorney admitted to practice by the United States Court, the highest court of any state of the United States, the District of Columbia, or any commonwealth, territory, or possession of the United States. 10 The proposed rule change also explicitly states that, as is currently permitted, parties may represent themselves in NASD arbitration proceedings. 10 The proposed rule change would apply only to hearing locations in the United States, which include any commonwealth, territory, or possession of the United States. The proposed rule change states that a party has the right to be represented by an attorney at law admitted to practice before the United States Supreme Court, the highest court of any state of the United States, the District of Columbia, or any commonwealth, territory, or possession of the United States. Representation by an attorney is not required under this proposal. However, NASD believes that representation by an attorney will protect the public and benefit investors by ensuring that a party's representative has a minimum level of skill, training, and character to provide effective representation in arbitration. 11 11 While not addressed in the proposed rule change, the NASD continues to be concerned about the on-going problems that are caused by the practice of non-attorney representatives in the forum. These problems, which have been well documented, may have negative implications for parties in arbitration. *See Securities Arbitration Reform, Report of the Arbitration Policy Task Force to the Board of Governors, National Association of Securities Dealers, Inc.* (January 1996); *see also Report of the Securities Industry Conference on Arbitration on Representation of Parties in Arbitration by Non-Attorneys,* 22 Fordham Urb. L. J. 507 (1995). Under the proposed rule change, attorneys could represent a client in an NASD arbitration or mediation, held in any United States hearing location, regardless of the jurisdiction in which the attorneys are licensed. The attorney's qualifications to participate as representatives in a jurisdiction in which they are not licensed would be subject to the applicable law of that jurisdiction. NASD believes the proposed rule change would assist attorneys in addressing the issue of multi-jurisdictional practice without encroaching on the states' rights to determine what activities violate the states' unauthorized practice of law provisions. The proposed rule change is not intended to prevent a state from deciding that an out-of-state attorney may have violated a state's unauthorized practice of law provision by representing a party in an NASD arbitration or mediation. It is intended, however, to reflect current practice in the forum, which, based on experience, shows that the level of knowledge, training and skill of an attorney affects the outcome of an arbitration or medication proceeding more than the jurisdiction from which the attorney received his license to practice. Further, NASD believes that the proposed rule change sets a standard of practice for the arbitration forum that is consistent with the other rules and proceedings of NASD. Rule 9141(b) of the NASD Code of Procedure states, in relevant part, that a person may be represented in any disciplinary proceeding by an attorney at law admitted to practice before the highest court of any state of the United States, the District of Columbia, or any commonwealth, territory, or possession of the United States. 12 12 This rule has been enforced in NASD Enforcement proceedings. In two similar cases, a respondent's answer was stricken from the record because the respondent's representative had not indicated that he was a licensed attorney. *See* NASDR Office of the Hearing Officers, OHO Order 97-15 (C01970032); *see also* OHO Order 98-10 (C10970176). Moreover, the SEC (as well as other federal agencies) also has a similar practice rule. Rule 102(b) of the SEC Rules of Practice states that, in any proceeding, a person may be represented by an attorney at law admitted to practice before the Supreme Court of the United States or the highest court of any State. 13 13 *See* SEC Rules of Practice, 17 CFR § 201.102(b) (2004).
(b)Statutory Basis NASD believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act, which requires, among other things, that the Association's rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. NASD believes that the proposed rule change clarifies a standard of practice in its arbitration forum, which will foster uniformity and consistency in arbitration proceedings. As a result, NASD believes that the proposed rule change will enhance the administration and operation of the arbitration process, thereby protecting investors and the public interest.
(B)Self-Regulatory Organization's Statement on Burden on Competition NASD does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, as amended.
(C)Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the **Federal Register** or within such longer period
(i)as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii)as to which the self-regulatory organization consents, the Commission will: A. By order approve such proposed rule change, or B. Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number SR-NASD-2005-023 on the subject line. Paper Comments Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-9303. All submissions should refer to File Number SR-NASD-2005-023. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of NASD. 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. All submissions should refer to the File Number SR-NASD-2005-023 and should be submitted on or before August 11, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 14 14 17 CFR 200.30-3(a)(12). J. Lynn Taylor, Assistant Secretary. [FR Doc. 05-14444 7-20-05; 8:45 am] BILLING CODE 8010-01-M SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52046A; File No. SR-NASD-2004-183] Self-Regulatory Organizations; National Association of Securities Dealers; Notice of Filing of Proposed Rule and Amendment No. 1 Thereto Relating to Sales Practice Standards and Supervisory Requirements for Transactions in Deferred Variable Annuities; Corrected July 19, 2005. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on December 14, 2004, the National Association of Securities Dealers, Inc. (“NASD”) filed with the Securities and Exchange Commission (“SEC” or “Commission”), the proposed rule as described in Items I, II, and III below, which Items have been prepared by NASD. On July 8, 2005, NASD filed Amendment No. 1 to the proposed rule. 3 The Commission is publishing this notice to solicit comments on the proposed rule from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 The amendment clarified the rule's text and provided additional explanations of that text. I. Self-Regulatory Organization's Statement of the Terms of the Substance of the Proposed Rule NASD is proposing to adopt a new rule, proposed NASD Rule 2821, to create recommendation requirements (including a suitability obligation), principal review and approval requirements, and supervisory and training requirements tailored specifically to transactions in deferred variable annuities. The text of the proposed rule is available on NASD's Web site ( *http://www.nasd.com* ), at NASD's principal office, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule In its filing with the Commission, NASD included statements concerning the purpose of and basis for the proposed rule and discussed any comments it received on the proposed rule. The text of these statements may be examined at the places specified in Item IV below. NASD has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule 1. Purpose NASD is proposing a new rule, proposed Rule 2821, that would impose specific sales practice standards and supervisory requirements on members for transactions in deferred variable annuities. 4 NASD has been concerned about deferred variable annuity transactions for some time. In part, this concern stems from the complexities of the products, which can cause confusion both for persons associated with members who sell deferred variable annuities and for customers who purchase or exchange them. 4 In general, a variable annuity is a contract between an investor and an insurance company, whereby the insurance company promises to make periodic payments to the contract owner or beneficiary, starting immediately (an immediate variable annuity) or at some future time (a deferred variable annuity). *See* Joint SEC and NASD Staff Report on Broker-Dealer Sales of Variable Insurance Products (June 2004) (“Joint Report”); NASD *Notice to Members* 99-35 (May 1999). The proposed rule focuses exclusively on transactions in *deferred* variable annuities. NASD recognizes that transactions involving immediate variable annuities have begun to increase recently, and NASD will continue to monitor sales practices relating to these products. Currently, however, deferred variable annuities make up the majority of variable annuity transactions. Moreover, to date, most of the problems associated with transactions in variable annuities that NASD has uncovered involve the purchase or exchange of deferred variable annuities. Deferred variable annuities are hybrid investments containing both securities and insurance features. They offer choices among a number of complex contract features ( *e.g.* , deferred variable annuity contracts may offer various types of death benefits, rebalancing features, dollar cost averaging options, and optional riders such as a guaranteed minimum income benefit, estate protection enhancements, or long-term care insurance, in addition to a range of choices among investment options). 5 The amount that will accumulate and be paid to the investor pursuant to a deferred variable annuity will fluctuate depending on the investment options that the investor chooses. Investors also can be subject to the following fees or charges: *Surrender charges* (which the investor owes if he or she withdraws money from the annuity before a specified period); *mortality and expense risk charges* (which the insurance company charges for the insurance risk it takes under the contract); *administrative fees* (which are used for recordkeeping and other administrative expenses); *underlying fund expenses* (which relate to the investment options); and *charges for special features and riders* . Moreover, an investor's withdrawal of earnings before he or she reaches the age of 59 1/2 is generally subject to a 10-percent penalty under the Internal Revenue Code. 5 *See* Joint Report, *supra* , note 4. In addition to the complexity of the product—and perhaps, in part, because of it—NASD examinations and investigations have uncovered various questionable sales practices. In some instances, associated persons sold deferred variable annuities to elderly customers for whom such long-term, illiquid products were not suitable. In others, associated persons sold deferred variable annuities without explaining (and, in some cases, without knowing) the characteristics of the products. On a number of occasions, associated persons recommended that customers exchange one deferred variable annuity for another without ensuring that such exchanges were beneficial for their customers or properly disclosing costs. NASD also determined that a number of firms had, in general, failed to adequately train and supervise associated persons regarding deferred variable annuity sales. When NASD first began noticing these problems, it acted quickly and persistently to address them on several fronts. NASD issued *Notices to Members* that provided guidelines and reminders about members' suitability and supervisory obligations regarding variable annuities. 6 NASD also issued *Investor Alerts* and *Regulatory & Compliance Alerts* , strengthened its examination program and brought a number of significant enforcement actions concerning deferred variable annuities. 7 6 *See, e.g.* , NASD *Notice to Members* 99-35 (May 1999) (providing guidance to assist members in developing appropriate procedures relating to variable annuity transactions); *Notice to Members* 96-86 (Dec. 1996) (reminding members of their suitability obligations regarding variable annuity transactions). 7 In 2001, NASD issued an *Investor Alert* entitled “Should You Exchange Your Variable Annuity?” highlighting important issues that investors should consider before agreeing to exchange a variable annuity. In 2002, NASD issued a *Regulatory & Compliance Alert* , entitled “NASD Regulation Cautions Firms for Deficient Variable Annuity Communications,” that, among other things, discussed NASD's discovery of unacceptable sales practices regarding variable annuities. In another *Regulatory & Compliance Alert* in 2002, entitled “Reminder—Suitability of Variable Annuity Sales,” NASD emphasized, in part, that an associated person must be knowledgeable about a variable annuity before he or she can determine whether a recommendation to purchase, sell or exchange the variable annuity is appropriate. In 2003, NASD issued an *Investor Alert* , entitled “Variable Annuities: Beyond the Hard Sell,” which cautioned investors about certain inappropriate sales tactics and highlighted the unique features of these products. For a discussion of some of the disciplinary cases that NASD has brought involving deferred variable annuities, see Joint Report, *supra* , note 4. Despite these efforts, problematic sales practices continued. At present, NASD is still seeing some of the same problems that it first noticed in the late 1990s. In June 2004, NASD and the SEC issued a Joint Report on examination findings regarding broker-dealer sales of variable insurance products. 8 As discussed in the Joint Report, recent NASD and SEC examinations uncovered a number of problem areas, including suitability, disclosure, supervision, books/records and training. In addition to the NASD and SEC examinations discussed in the Joint Report, NASD's Variable Annuity Task Force, an organization-wide initiative, is in the process of conducting special exams of various members and, although the analyses of those exams are not complete, NASD has discovered problems similar to those reported in the Joint Report at some members. Moreover, NASD has received a number of customer complaints indicating that the customers did not understand the unique features of the deferred variable annuities and raising suitability concerns based on the customers' investment objectives and liquidity needs. 8 *See* Joint Report, *supra* , note 4. In light of these issues, NASD determined that it needed to create a rule specifically covering deferred variable annuities. In general, NASD's guidelines on deferred variable annuity transactions, developed with substantial input from industry participants and published in *Notice to Members* 99-35 (May 1999), served as the basis for the proposed rule. The proposed rule would apply to the purchase or exchange of a deferred variable annuity and the subaccount allocations. 9 The proposed rule would not apply to reallocations of subaccounts made after the initial purchase or exchange of a deferred variable annuity. However, other NASD rules would continue to apply. For instance, NASD's suitability rule, Rule 2310, would apply to any recommendations to reallocate subaccounts. 9 NASD notes that the proposed rule focuses on customer purchases and exchanges of deferred variable annuities, areas that, to date, have given rise to many of the problems NASD has uncovered. The proposed rule does not include requirements for customer sales of deferred variable annuities because NASD believes that such transactions are fully and adequately covered by Rule 2310, NASD's general suitability rule. Rule 2310 requires that, when recommending that a customer purchase, sell or exchange a security, an associated person determine whether the recommendation is suitable for the customer. In general, deferred variable annuities are suitable only as long-term investments and are inappropriate short-term trading vehicles. As part of any analysis under Rule 2310 regarding the suitability of a recommendation that a customer sell a deferred variable annuity, the associated person must consider significant tax consequences, surrender charges and loss of death or other benefits. As NASD emphasized in a *Regulatory & Compliance Alert* in 2002, entitled “Reminder—Suitability of Variable Annuity Sales,” members and their associated persons “must keep in mind that the suitability rule applies to any recommendation to sell a variable annuity regardless of the use of the proceeds, including situations where the member recommends using the proceeds to purchase an unregistered product such as an equity-indexed annuity. Any recommendation to sell the variable annuity must be based upon the financial situation, objectives and needs of the particular investor.” NASD, however, will continue to monitor customer sales of deferred variable annuities and will pursue additional rulemaking or other action as necessary. The proposed rule also would not apply to deferred variable annuities sold to certain tax-qualified, employer-sponsored retirement or benefit plans but would apply to the purchase or exchange of deferred variable annuities to fund IRAs. In part, NASD determined not to exclude IRAs from the proposal's coverage because, unlike transactions for tax-qualified, employer-sponsored retirement or benefit plans, investors funding IRAs are not limited to the options provided by a plan. However, even in the case of a tax-qualified, employer-sponsored retirement or benefit plan, if a member makes recommendations to individual plan participants regarding a deferred variable annuity, the proposed rule would apply as to the individual plan participants to whom the member makes such recommendations (but would not apply as to the plan sponsor, trustee or custodian regarding the plan-level selection of investment vehicles and options for such plans). The proposed rule has four main requirements. First, the proposal has requirements governing recommendations, including a suitability obligation, specifically tailored to deferred variable annuity transactions. 10 Second, the proposal includes various principal review and approval obligations. 11 The proposal would require that a registered principal review and approve the transaction prior to transmitting a customer's application for a deferred variable annuity contract to the issuing insurance company for processing. 12 However, the timeframe for principal review and approval would depend on whether the principal's review occurs before or after the customer provides the member with the purchase payment for the deferred variable annuity. That is, if principal review occurs after payment has been made, additional rules may be implicated. NASD Rule 2820(d), for instance, requires members to promptly transmit the application and the purchase payment for a variable contract to the issuing insurance company. Similarly, various financial responsibility obligations under SEC Rules 15c3-1 and 15c3-3 require certain members to promptly transfer/forward funds. On the other hand, if principal review and approval occurs before payment has been made, NASD Rule 2820(d) and SEC Rules 15c3-1 and 15c3-3 would not affect the principal review and approval obligations under the proposed new rule. 10 *See* proposed Rule 2821(b); and Part C, *infra* . 11 *See* proposed Rule 2821(c). 12 As part of his or her review, a principal would be required to consider all of the factors listed in section (c)(1) of the proposed rule. Third, members would be required to establish and maintain specific written supervisory procedures reasonably designed to achieve compliance with the standards set forth in the proposed rule. 13 Pursuant to the proposed supervisory-procedure requirements, members would need to establish certain standards that are reasonably designed to ensure that transactions in deferred variable annuities are appropriately supervised. NASD also emphasizes that the member must have policies and procedures in place that are reasonably designed to ensure that an associated person promptly sends the original application or a copy thereof to a principal for review, consistent with the requirements of proposed Rule 2821(c). 13 *See* proposed Rule 2821(d). Fourth, the proposal has a training component. 14 Members would be required to develop and document specific training policies or programs designed to ensure that associated persons who effect and registered principals who review transactions in deferred variable annuities comply with the requirements of the proposal and that they understand the material features of deferred variable annuities. 14 *See* proposed Rule 2821(e). NASD will announce the effective date of the proposed rule in a *Notice to Members* to be published no later than 60 days following Commission approval. The effective date will be 120 days following publication of the *Notice to Members* announcing Commission approval. 2. Statutory Basis NASD believes that the proposed rule is consistent with the provisions of Section 15A(b)(6) of the Act, which requires, among other things, that NASD rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade and, in general, to protect investors and the public interest. NASD believes that the proposed rule is consistent with the provisions of the Act noted above in that it will enhance members' compliance and supervisory systems and provide more comprehensive and targeted protection to investors in deferred variable annuities. As such, the proposed rule will decrease the likelihood of fraud and manipulative acts and increase investor protection. B. Self-Regulatory Organization's Statement on Burden on Competition NASD does not believe that the proposed rule will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Received From Members, Participants, or Others The proposed rule was published for comment in NASD Notice to Members 04-45 (June 2004). A copy of the Notice to Members was submitted as part of the original rule filing as Exhibit 2a. NASD received 1,129 comments in response to the Notice. A copy of the index to comment letters received in response to the Notice was submitted as part of the original rule filing as Exhibit 2b (submitted in hard copy). Copies of the comment letters received in response to the Notice were submitted as part of the original rule filing as Exhibit 2c (submitted in hard copy). The overwhelming majority of commenters opposed the proposal. Fourteen commenters fully supported the proposal and an additional 20 commenters offered partial or qualified support for the proposal. Most commenters questioned the need for the proposal described in the Notice, stating that the proposal is duplicative of existing rules and that NASD should simply enforce those existing rules. NASD disagrees. Certainly, NASD can and does vigorously pursue those who engage in misconduct, but after-the-fact enforcement actions simply do not appear to be sufficiently effective at combating the problems NASD has uncovered. Moreover, the proposed rule does not merely aggregate existing requirements. The proposed rule is tailored to deferred variable annuities and addresses issues not currently covered by existing rules. For instance, the proposed rule explicitly requires that an associated person have reasonable grounds for believing that the customer has been informed of the material features of the deferred variable annuity. 15 The proposed rule describes the type of information that an associated person must consider in determining the suitability of an investment in a deferred variable annuity. The proposed rule highlights the important factors that registered principals must consider before approving a deferred variable annuity transaction. The proposed rule also requires members to provide training to associated persons and registered principals regarding the unique features of deferred variable annuities. 15 *See* proposed Rule 2821(b)(1)(A). Pursuant to this requirement, the associated person should, at a minimum, highlight for the customer the following material features of the deferred variable annuity:
(1)The surrender period;
(2)potential surrender charge;
(3)potential tax penalty if the customer sells or redeems the deferred variable annuity before he or she reaches the age of 59 1/2 ;
(4)mortality and expense fees;
(5)investment advisory fees;
(6)charges for and features of enhanced riders, if any;
(7)the insurance and investment components of the deferred variable annuity; and
(8)market risk. *Cf.* Joint Report, *supra* , note 4 (“Registered representatives should discuss with the customer all relevant facts such as fees and expenses * * *, the lack of liquidity of these products * * *, and market risk”); NASD *Notice to Members* 99-35 (May 1999) (same); *see also Larry Ira Klein* , 52 S.E.C. 1030, 1036
(1996)(“Klein's delivery of a prospectus to Towster does not excuse his failure to inform her fully of the risks of the investment package he proposed.”). A number of commenters also questioned the need for point-of-sale disclosures, stating in particular that the transaction-specific, written-disclosure requirements proposed in the Notice were unhelpful and unworkable. NASD has not included the written-disclosure requirements contained in its Notice in the current proposed rule, but will continue to explore this issue and will separately consider whether to propose such requirements in the future. NASD notes, however, that proposed Rule 2821(b) (Recommendation Requirements) continues to provide, as in the Notice, that no member or associated person shall recommend to a customer the purchase or exchange of a deferred variable annuity unless the member or associated person has a reasonable basis to believe that, among other things, the customer has been informed of the material features of the deferred variable annuity. 16 This provision will promote increased customer awareness of the material terms and features of the deferred variable annuity, although, unlike the written-disclosure requirements contained in the Notice, the “Recommendation Requirements” do not prescribe the specific form of disclosure. 17 NASD further notes that the Commission has proposed a rule that would require point-of-sale disclosure of certain fee information regarding, among other products, variable annuities. 18 Numerous commenters argued that the timing of principal review in the Notice was unreasonable and could actually prohibit principals from thoughtfully reviewing transactions. The Notice stated that a principal had to review and approve the transaction no later than one business day following the date when the customer signed the application. NASD has modified the timing of principal review. The proposed rule now would require principal review and, if appropriate, approval before the member or person associated with the member transmits the customer's application for a deferred variable annuity contract to the issuing insurance company. NASD believes that this requirement provides members with some flexibility while at the same time ensuring that a principal reviews the application before a contract is issued. 16 *See* proposed Rule 2821(b)(1)(A). 17 *See* proposed Rule 2821(b)(1)(A). 18 *See* SEC Proposed Rule Regarding Confirmation Requirements and Point of Sale Disclosure Requirements for Transactions in Certain Mutual Funds and Other Securities, Rel. Nos. 33-8358, 34-49148, IC-26341 (Jan. 29, 2004), 69 FR 6438 (Feb. 10, 2004); SEC Proposed Rule, Reopening of Comment Period and Supplemental Request for Comment Regarding Confirmation Requirements and Point of Sale Disclosure Requirements for Transactions in Certain Mutual Funds and Other Securities, Rel. Nos. 33-8544, 34-51274, IC-26778 (Feb. 28, 2005), 70 FR 10521 (Mar. 4, 2005). NASD disagrees with those commenters who suggested that state-required “free look” periods make early principal review unnecessary. In general, a “free look” period allows the customer to terminate the contract without paying any surrender charges and receive a refund of the purchase payments or the contract value, as required by applicable state law. Free-look periods, which vary by state law, typically range from 10 to 30 days. Allowing a suitability analysis, for instance, to be reviewed by a principal long after an insurance company issues a deferred variable annuity contract would be inconsistent with an adequate supervisory system (which must be reasonably designed to detect and prevent problematic sales). A delayed principal review would make it difficult for a member to quickly identify problematic trends, such as mini-replacement campaigns (a practice in which registered representatives exchange a high percentage of their customers' existing contracts for new contracts, in some cases to meet production requirements or to generate commissions). Allowing principal review to occur after a significant delay also would be contrary to the normal practice for review of transactions involving other types of investments. Moreover, NASD believes that members should contact customers as soon as possible if a principal discovers a problem with the transaction, and this prompt contact could not occur if the principal does not review the transaction for a prolonged period. Further, there may very well be disincentives to reject transactions as time elapses, especially if a contract has already been issued. 19 Finally, some customers may not be aware of or fully comprehend free-look periods. For these reasons, it would be inappropriate to allow for principal review beyond the period stated in the current proposed rule. 19 It has come to NASD's attention that some issuing insurance companies process applications for deferred variable annuities in a very short time period (one or two days). In addition, certain rules require relatively quick processing of certain aspects of deferred variable annuities. *See* SEC Rule 22c-1(c) under the Investment Company Act of 1940. A number of commenters also called for the elimination of the principal review requirements for non-recommended transactions. Due to the complexity of the products, NASD believes that it is appropriate to require firms to review both recommended and non-recommended deferred variable annuity transactions. The proposed rule creates standards that will ensure that firms perform a consistent, baseline analysis of transactions, regardless of whether the particular transaction has been recommended, thereby enhancing investor protection for all customers. NASD, moreover, is aware of instances where associated persons have told their firms that deferred variable annuity transactions were not recommended in order to bypass their firms' compliance requirements for recommended or solicited sales. The proposed rule's principal-review requirements for non-recommended transactions should reduce the incentive for persons to engage in such conduct. Finally, a number of commenters stated that the proposed rule should not apply to transactions involving tax-qualified, employer-sponsored retirement or benefit plans. After further analysis, NASD agrees with these commenters and has created an exception for transactions involving such plans under certain circumstances. NASD emphasizes, however, that members should pay close attention to deferred variable annuity transactions in IRAs, which do not qualify for the proposed exception for tax-qualified, employer-sponsored retirement or benefit plans. A deferred variable annuity purchased for an IRA does not provide any additional tax deferred treatment of earnings beyond the treatment provided by the IRA itself. Moreover, unlike transactions for tax-qualified, employer-sponsored retirement or benefit plans, investors funding IRAs are not limited to the options provided by the plan. Sales of deferred variable annuities to unsophisticated customers in IRAs are of particular concern to NASD, especially in light of certain fees and charges associated with many deferred variable annuities. Thus, principals must ensure that the deferred variable annuity's features other than tax deferral make the purchase of the deferred variable annuity for the IRA appropriate. In this regard, members should note that paragraph (b)(1)(C) of the proposed rule requires associated persons and paragraphs (c)(1)(A) and (d)(1) of the proposed rule require principals to determine whether the customer appears to have a need for the features of a deferred variable annuity as compared with other investment vehicles. 20 20 NASD notes that, in the context of a customer's *purchase* of a deferred variable annuity, paragraphs (b)(1)(C), (c)(1)(A) and (d)(1) of proposed Rule 2821 do not require members to perform a side-by-side comparison of the deferred variable annuity with other investment vehicles. Instead, these provisions require associated persons and principals to make reasonable efforts to ensure that the customer has some need for the unique features of the deferred variable annuity ( *e.g.* , tax-deferred growth, a guaranteed future income stream, and/or death benefit protection). This, of course, might necessitate a general comparison with other types of investment products (if the customer does not need the insurance feature or tax deferral, for instance, then another product might be more appropriate for the customer, depending on his or her objectives and financial situation and needs), but it would not have to be a side-by-side comparison with other investment vehicles. A side-by-side comparison of two deferred variable annuity contracts being *exchanged* (or at least a side-by-side comparison of their material features, *see, e.g.* , the factors discussed *supra* at note 15) would be necessary, however. III. Date of Effectiveness of the Proposed Rule and Timing for Commission Action Within 35 days of the date of publication of this notice in the **Federal Register** or within such longer period
(i)as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii)as to which the self-regulatory organization consents, the Commission will:
(A)By order approve such proposed rule, or
(B)Institute proceedings to determine whether the proposed rule should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov* . Please include File Number SR-NASD-2004-183 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-9303. All submissions should refer to File Number SR-NASD-2004-183. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule that are filed with the Commission, and all written communications relating to the proposed rule between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549-9303. Copies of such filing also will be available for inspection and copying at the principal office of NASD. 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. All submissions should refer to File Number SR-NASD-2004-183 and should be submitted on or before August 11, 2005. V. Conclusion For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 21 J. Lynn Taylor, Assistant Secretary. 21 17 CFR 200.30-3(a)(12). [FR Doc. E5-3903 Filed 7-20-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52031; File No. SR-NYSE-2002-19] Self-Regulatory Organizations; New York Stock Exchange, Inc.; Order Approving a Proposed Rule Change and Amendment Nos. 1, 2 and 3 Thereto Relating to Customer Portfolio and Cross-Margining Requirements July 14, 2005. I. Introduction On May 13, 2002, the New York Stock Exchange, Inc. (“NYSE” or “Exchange” filed with the Securities and Exchange Commission (“Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 2 thereunder, a proposed rule change seeking to amend its rules, for certain customer accounts, to allow member organizations to margin listed, broad-based, market index options, index warrants, futures, futures options and related exchange-traded funds according to a portfolio margin methodology. The NYSE seeks to introduce the proposed rule as a two-year pilot program that would be made available to member organizations on a voluntary basis. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. On August 21, 2002, the NYSE field Amendment No. 1 to the proposed rule change. 3 The Proposed rule change and Amendment No. 1 were published in the **Federal Register** On October 8, 2002. 4 The Commission received three comment letters in response to the October 8, 2002 **Federal Register** notice. 5 On June 21, 2004, the Exchange field Amendment No. 2 to the proposed rule change. 6 The proposed rule change and Amendment Nos. 1 and 2 were published in the **Federal Register** on December 27, 2004. 7 The Commission received ten comment letters in response to the December 27, 2004 **Federal Register** notice. 8 3 *See* letter from Mary Yeager, Assistant Secretary, NYSE, to T.R. Lazo, Senior Special Counsel, Division of Market Regulation, Commission, dated August 20, 2002 (“Amendment No. 1”). In Amendment No. 1, the NYSE made technical corrections to its proposed rule language to eliminate any inconsistencies between its proposal and the CBOE proposal pursuant to the the Rule 431 Committee's (“Committee”) recommendations. *See* Securities Exchange Act Release No. 45630 (March 22, 2002), 67 FR 15263 (March 29, 2002) File No. SR-CBOE-2002-03). 4 *See* Securities Exchange Act Release No. 46576 (October 1, 2002) 67 FR 62843 (October 8, 2002). 5 *See* letter from R. Allan Martin, President, Auric Trading Enterprises, Inc., to Secretary, Commission, dated October 9, 2002 (“Martin Letter”); Phupinder S. Gill, Managing Director and President, Chicago Mercantile Exchange Inc., to Jonathan G. Katz, Secretary, Commission, dated October 21, 2002 (“CME Letter”); and E-mail from Mike Ianni, Private Investor to *rule-comments@sec.gov* , dated November 7, 2002 (“Ianni E-mail”). 6 *See* letter from Darla C. Stuckey, Corporate Secretary, NYSE, to Michael A. Macchiaroli, Associate Director, Division of Market Regulation (“Division”), Commission, dated June 17, 2004 (“Amendment No. 2”). the NYSE filed Amendment No. 2 for the purpose of eliminating inconsistencies between the proposed NYSE and CBOE rules, and to incorporate certain substantive amendments requested by Commission staff. 7 *See* Securities Exchange Act Release No. 50885 (December 20, 2004) 69 FR 77287 (December 27, 2004); *see also* Securities Exchange Act Release No. 50886 (December 20, 2004) 69 FR 77275 (December 27, 2004). 8 *See* letter from Barbara Wierzynski, Executive Vice President and General Counsel, Futures Industry Association (“FIA”), and Gerard J. Quinn, Vice President and Associate General Counsel, Securities Industry Association (“SIA”), to Jonathan G. Katz, Secretary, Commission, dated January 14, 2005 (“Wierzynski/Quinn Letter”); letter from Craig S. Donohue, Chief Executive Officer, Chicago Mercantile Exchange, to Jonathan G. Katz, Secretary, Commission, dated January 18, 2005 (“Donohue Letter”); letter from Robert C. Sheehan, Chairman, Electronic Brokerages Systems, LLC, to Jonathan G. Katz, Secretary, Commission, dated January 19, 2005 (“Sheehan Letter”) letter from William O. Melvin, Jr., President, Acorn Derivatives Management, to Jonathan G. Katz, Secretary, Commission, dated January 19, 2005 (“Melvin Letter”); letter from Margaret Wiermanski, Chief Operating & Compliance Officer, Chicago Trading Company, to Jonathan G. Katz, Secretary, Commission, dated January 20, 2005 (“Wiermanski Letter”); e-mail from Jeffrey T. Kaufmann, Lakeshore Securities, L.P., to Jonathan G. Katz, Secretary, Commission, dated January 24, 2005 (“Kaufmann Letter”); letter from J. Todd Weingart, Director of Floor Operations, Mann Securities, to Jonathan G. Katz, Secretary, Commission, dated January 25, 2005 (“Weingart Letter”); letter from Charles Greiner III, LDB Consulting, Inc., to Jonathan G. Katz, Secretary, Commission, dated January 26, 2005 (“Greiner Letter”); letter from Jack L. Hansen, Chief Investment Officer and Principal, The Clifton Group, to Jonathan G. Katz, Secretary, Commission, dated February 1, 2005 (“Hansen Letter”); and letter from Barbara Wierzynski, Executive Vice President and General Counsel, Futures Industry Association, and Ira D. Hammerman, Senior Vice President and General Counsel, Securities Industry Association, to Jonathan G. Katz, Secretary, Commission, dated March 4, 2005 (“Wierzynski/Hammerman Letter”). On March 18, 2005, the Exchange filed Amendment No. 3 9 to the proposed rule change. The proposed rule change and Amendment Nos. 1, 2 and 3 were published in the **Federal Register** on May 3, 2005. 10 The Commission received two comments in response to the May 3, 2005 **Federal Register** notice. 11 9 *See* Partial Amendment No. 3 (“Amendment No. 3”). The Exchange submitted this partial amendment, pursuant to the request of Commission staff, to remove the paragraph under which any affiliate of a self-clearing member organization could participate in portfolio margining, without being subject to the $5 million equity requirement. 10 *See* Securities Exchange Act Release No. 51615 (April 26, 2005) 70 FR 22953 (May 3, 2005); *see also* Securities Exchange Act Release No. 51614 (April 26, 2005), 70 FR 22935 (May 3, 2005). 11 *See* E-mail from Walter Morgenstern, Tradition-Asiel Securities, to *rule-comments@sec.gov* , dated May 16, 2005 (“Morgenstern E-mail”); and letter from William H. Navin, Executive Vice President, General Counsel, and Secretary, The Options Clearing Corporation, to Jonathan G. Katz, Secretary, Commission, dated May 27, 2005 (“Navin Letter”). The comment letters and the Exchange's responses to the comments 12 are summarized below. This Order approves the proposed rule, as amended. 13 12 *See* letter from Grace B. Vogel, Executive Vice President, Member Firm Regulation, NYSE, to Michael A. Macchiaroli, Associate Director, Division of Market Regulation, Commission, dated June 27, 2005 (“NYSE Response”). 13 By separate orders, the Commission also is approving a parallel rule filing by the CBOE (SR-CBOE-2002-03), and a related rule filing by the Options Clearing Corporation (“OCC”) (SR-OCC-2003-04). *See* Securities Exchange Act Release No. 52030 (July 14, 2005) and Securities Exchange Act Release No. 52032 (July 14, 2005). In addition, the staff of the Division of Market Regulation is issuing certain no-action relief related to the OCC's rule filing. *See* letter from Bonnie Gauch, Attorney, Division of Market Regulation, Commission, to William H. Navin, General Counsel, OCC, dated July 14, 2005. II. Description a. Summary of Proposed Rule Change The NYSE has proposed to amend its rules, for certain customer accounts, to allow member organizations to margin listed broad-based securities index options, warrants, futures, futures options and related exchange-traded funds according to a portfolio margin methodology. The NYSE seeks to introduce the proposed rule as a two-year pilot program that would be made available to member organizations on a voluntary basis. NYSE Rule 431 generally prescribes minimum maintenance margin requirements for customer accounts held at members and member organizations. In April 1996, the Exchange established the Rule 431 Committee to assess the adequacy of NYSE Rule 431 on an ongoing basis, review margin requirements, and make recommendations for change. A number of proposed amendments resulting from the Committee's recommendations have been approved by the Exchange's Board of Directors since the Committee was established, including the proposed rule change. b. Overview—Portfolio Margin Computation
(1)Portfolio Margin Portfolio margining is a methodology for calculating a customer's margin requirement by “shocking” a portfolio of financial instruments at different equidistant points along a range representing a potential percentage increase and decrease in the value of the instrument or underlying instrument in the case of a derivative product. For example, the calculation points could be spread equidistantly along a range bounded on one end by a 10% increase in market value of the instrument and at the other end by a 10% decrease in market value. Gains and losses for each instrument in the portfolio are netted at each calculation point along the range to derive a potential portfolio-wide gain or loss for the point. The margin requirement is the amount of the greatest portfolio-wide loss among the calculation points. Under the Exchange's proposed rule, a portfolio would consist of, and be limited to, financial instruments in the customer's account within a given broad-based US securities index class ( *e.g.* , the S&P 500 or S&P 100). 14 The gain or loss on each position in the portfolio would be calculated at each of 10 equidistant points (“valuation points”) set at and between the upper and lower market range points. The range for non-high capitalization indices would be between a market increase of 10% and a decrease of 10%. High capitalization indices would have a range of between a market increase of 6% and a decrease of 8%. 15 A theoretical options pricing model would be used to derive position values at each valuation point for the purpose of determining the gain or loss. The amount of margin (initial and maintenance) required with respect to a given portfolio would be the larger of:
(1)The greatest loss amount among the valuation point calculations; or
(2)the sum of $.375 for each option and future in the portfolio multiplied by the contract's or instrument's multiplier. The latter computation establishes a minimum margin requirement to ensure that a certain level of margin is required from the customer. The margin for all other portfolios of broad based US securities index instruments within an account would be calculated in a similar manner. Certain portfolios would be allowed offsets such that, at the same valuation point, for example, 90% of a gain in one portfolio may reduce or offset a loss in another portfolio. 16 The amount of offset allowed between portfolios would be the same as permitted under Rule 15c3-1a for computing a broker-dealer's net capital. 17 14 A “portfolio” is defined in the rule as “options of the same options class grouped with their underlying instruments and related instruments.” 15 These are the same ranges applied to options market makers under Appendix A to Rule 15c3-1 (17 CFR 240.15c3-1a), which permits a broker-dealer when computing net capital to calculate securities haircuts on options and related positions using a portfolio margin methodology. *See* 17 CFR 240 15c3-1a(b)(1)(iv)(A); Letter from Michael Macchiaroli, Associate Director, Division of Market Regulation, Commission, to Richard Lewandowski, Vice President, Regulatory Division, The Chicago Board Options Exchange, Inc. (Jan. 13, 2000). 16 These offsets would be allowed between portfolios within the High Capitalization, Broad Based Index Option product group and the Non-High Capitalization, Board Based Index product group. 17 17 CFR 240.15c3-1a. Under the Exchange's proposed rule, the theoretical prices used for computing profits and losses must be generated by a theoretical pricing model that meets the requirements in Rule 15c3-1a. 18 These requirements include, among other things, that the model be non-proprietary, approved by a Designated Examining Authority (“DEA”) and available on the same terms to all broker-dealers. 19 Currently, the only model that qualifies under Rule 15c3-1a is the OCC's Theoretical Intermarket Margining System (“TIMS”). 18 *See* 17 CFR 250.15c3-1a(b)(1)(i)(B). 19 *Id.*
(2)Cross-Margining The Exchange's proposed rule permits futures and futures options on broad-based US securities indices to be included in the portfolios. Consequently, futures and futures options would be permitted offsets to the securities positions in a given portfolio. Operationally, these offsets would be achieved through cross-margin agreements between the OCC and the futures clearing organizations holding the customer's futures positions. Cross-margining would operate similar to the cross-margin program that the Commission and the Commodity Futures Trading Commission (“CFTC”) approved for listed options market-makers and proprietary accounts of clearing members organizations. 20 For determining theoretical gains and losses, and resultant margin requirements, the same portfolio margin computation program will be applied to portfolio margin accounts that include futures. Under the proposed rule, a separate cross-margin account must be established for a customer. 20 *See* Securities Exchange Act Release 26153 (Oct. 3, 1988), 53 FR 39567 (Oct. 7, 1988). c. Margin Deficiency Under the Exchange's proposed rule, account equity would be calculated and maintained separately for each portfolio margin account and a margin call would need to be met by the customer within one business day (T + 1), regardless of whether the deficiency is caused by the addition of new positions, the effect of an unfavorable market movement, or a combination of both. The portfolio margin methodology, therefore, would establish both the customer's initial and maintenance margin requirement. d. $5.0 Million Equity Requirement The Exchange's proposed rule would require a customer (other than a broker-dealer or a member of a national futures exchange) to maintain a minimum account equity of not less than $5.0 million. This requirement can be met by combining all securities and futures accounts owned by the customer and carried by the broker-dealer (as broker-dealer and futures commission merchant), provided ownership is identical across all combined accounts. The proposed rule would require that, in the event account equity falls below the $5 million minimum, additional equity must be deposited within three business days (T + 3). e. Net Capital The Exchange's proposed rule would provide that the gross customer portfolio margin requirements of a broker-dealer may at no time exceed 1,000 percent of the broker-dealer's net capital (a 10:1 ratio), as computed under Rule 15c3-1. 21 This requirement is intended to place a ceiling on the amount of portfolio margin a broker-dealer can extend to its customers. 21 17 CFR 240.15c3-1. f. Internal Risk Monitoring Procedures The Exchange's proposed rule would require a broker-dealer that carries portfolio margin accounts to establish and maintain written procedures for assessing and monitoring the potential risks to capital arising from portfolio margining. g. Margin at the Clearing House Level The OCC will compute clearing house margin for the broker-dealer using the same portfolio margin methodology applied at the customer level. The OCC will continue to require full payment for all customer long option positions. These positions, however, would be subject to the OCC's lien. This would permit the long options positions to offset short positions in the customer's portfolio margin account. In conjunction with the Exchange's rule proposal, the OCC proposed amending OCC Rule 611 and establishing a new type of omnibus account to be carried at the OCC and known as the “customer's lien account.” 22 In order to unsegregate the long option positions, the Commission staff would have to grant certain relief from some requirements of Commission Rules 8c-1, 15c2-1, and 15c3-3. 23 The OCC requested such relief on behalf of its members. 24 22 *See* SR-OCC-2033-04, Securities Exchange Act Release No. 51330 (March 8, 2005). As noted above, the Commission is approving the OCC's rule filing. *See* Securities Exchange Act Release No. 52030 (July 14, 2005). 23 17 CFR 240.8c-1, 17 CFR 240.15c2-1 and 17 CFR 240.15c3-3, respectively. 24 *See* Letter from William H. Navin, Executive Vice President, General Counsel, and Secretary, The Options Clearing Corporation, to Michael A. Macchiaroli, Associate Director, Division of Market Regulation, Commission, dated January 13, 2005. As noted above, the staff of the Division of Market Regulation is issuing a no-aciton letter providing such relief. *See* letter from Bonnie Gauch, Attorney, Division of Market Regulation, Commission, to William H. Navin, General Counsel, OCC, dated July 14, 2005. h. Risk Disclosure Statement and Acknowledgement The Exchange's proposed rule would require a broker-dealer to provide a portfolio margin customer with a written risk disclosure statement at or prior to the initial opening of a portfolio margin account. This disclosure statement would highlight the risks and describe the operation of a portfolio margin account. The disclosure statement would be divided into two sections, one dealing with portfolio margining and the other with cross-margining. The disclosure statement would note that additional leverage is possible in an account margined on a portfolio basis in relation to existing margin requirements. The disclosure statement also would describe, among other things, eligibility requirements for opening a portfolio margin account, the instruments that are allowed in the account, and when deposits to meet margin and minimum equity requirements are but. Further, there would be a summary list of the special risks of a portfolio margin account, including the increased leverage, time frame for meeting margin calls, potential for involuntary liquidation if margin is not received, inability to calculate future margin requirements because of the data and calculations required, and the OCC lien on long option positions. The risks and operation of the cross-margin account are outlined in a separate section of the disclosure statement. Further, at or prior to the time a portfolio margin account is initially opened, the broker-dealer would be required to obtain a signed acknowledgement concerning portfolio margining from the customer. A separate acknowledgement would be required for cross-margining. The acknowledgements would contain statements to the effect that the customer has read the disclosure statement and is aware of the fact that long option positions in a portfolio margin account are not subject to the segregation requirements under the Commission's customer protection rules, and would be subject to a lien by the OCC. An additional acknowledgement form would be required for a cross-margin account. It would contain similar statements as well as statement to the effect that the customer is aware that futures positions are being carried in a securities account, which would make them subject to the Commission's customer protection rules, and Securities Investor Protection Act of 1970 (“SIPA” ) 25 in the event the broker-dealer becomes financially insolvent. The Exchange would prescribe the format of the written disclosure statements and acknowledgements, which would allow a broker-dealer to develop its own format, provided the acknowledgement contains substantially similar information and is approved by the Exchange in advance. 25 15 U.S.C. 78aaa *et seq.* i. Rationale for Portfolio Margin Theoretical options pricing models have become widely utilized since Fischer Black and Myron Scholes first introduced a formula for calculating the value of a European style option in 1973. 26 Other formulas, such as the Cox-Ross-Rubinstein model have since been developed. Option pricing formulas are now used routinely by option market participants to analyze and manage risk. In addition, as noted, a portfolio margin methodology has been used by broker-dealers since 1994 to calculate haircuts on option positions for net capital purposes. 27 26 *See* Securities Exchange Act Release No. 34-38248 (Feb. 6, 1997), 62 FR 6474 (Feb. 12, 1997) (discussing the development of the options pricing approach to capital); *see also* Securities Exchange Act Release No. 33761 (March 15, 1994), 59 FR 13275 (March 21, 1994). 27 *See* letter from Brandon Becker, Director, Division, Commission, to Mary Bender, First Vice President, Division of Regulatory Services, CBOE, and Timothy Hinkes, Vice President, OCC, dated March 15, 1994; *see also* “Net Capital Rule,” Securities Exchange Act Release No. 38248 (February 6, 1997), 61 FR 6474 (February 12, 1997). The Board of Governors of the Federal Reserve System (the “Federal Reserve Board” or “FRB”) in its amendments to Regulation T in 1998 permitted SROs to implement portfolio margin rules, provided they are approved by the Commission. 28 28 *See* Federal Reserve System, “Securities Credit Transactions; Borrowing by Brokers and Dealers”; Regulations G, T, U and X; Docket Nos. R-0905, R-0923 and R-0944, 63 FR 2806 (January 16, 1998). More recently, the FRB encouraged the development of a portfolio margin approach in a letter to the Commission and the CFTC delegating authority to the agencies to jointly prescribe margin regulations for security futures products. *See* letter from the FRB to James E. Newsome, Acting Chairman, CFTC, and Laura S. Unger, Acting Chairman, Commission, dated March 6, 2001. Portfolio margining brings a more risk sensitive approach to establishing margin requirements. For example, in a diverse portfolio some positions may appreciate and others depreciate in response to a given change in market prices. The portfolio margin methodology recognizes offsetting potential changes among the full portfolio of related instruments. This links the margin required to the risk of the entire portfolio as opposed to the individual positions on a position-by-position basis. Professional investors frequently hedge listed index options with futures positions. Cross-margining would better align their margin requirements with the actual risks of these hedged positions. This could reduce the risk of forced liquidations. Currently, an option (securities) account and futures account of the same customer are viewed as separate and unrelated. Moreover, an option account currently must be liquidated if the risk in the positions has increased dramatically or margin calls cannot be met, even if gains in the customer's futures account offset the losses in the options account. If the accounts are combined ( *i.e.* cross-margined), unnecessary liquidation may be avoided. This could lessen the severity of a period of high volatility in the market by reducing the number of liquidations. III. Summary of Comments Received and NYSE Response The Commission received a total of 15 comment letters to the proposed rule change. 29 The comments, in general, were supportive. One commenter stated that “the NYSE's efforts to expand the use of portfolio margining systems—as opposed to strategy-based systems— as an enlightened and decidedly forward looking policy.” 30 Some commenters, however, recommended changes to specific provisions of the proposed rule change. 29 *See supra* notes 5, 8 and 11. 30 *See* Gill CME Letter. Seven of the comment letters received specifically objected to the $5.0 million equity requirement. 31 Three commenters noted that the requirement blocks certain large institutions from participating in portfolio margining because these institutions hold assets as a custodian bank and would generally not hold $5.0 million in an account with a broker-dealer. 32 One commenter recommended reducing the equity requirement to $2.0 million. 33 Four commenters raised the issue that securities index options will be at a disadvantage compared with economically similar CFTC regulated index futures and options, because futures accounts have no minimum equity requirement. 34 31 *See* Ianni Letter; Weingart Letter; Wiermanski Letter; Hansen Letter; Greiner Letter; Martin Letter; and Melvin Letter. 32 *See* Weingart Letter; Wiermanski Letter; and Melvin Letter. 33 *See* Martin Letter. 34 *See* Weingart Letter; Wiermanski Letter; Hansen Letter; and Sheehan Letter. The Exchange believes that the comments directed at the $5.0 million have validity, especially with respect to certain types of accounts that must hold assets at a custodial bank. The Exchange intends to further consider this issue, through the Rule 431 Committee, and seek alternative methods for meeting the minimum equity requirement. 35 35 *See* NYSE Response. Two commenters stated that other products should be eligible for portfolio margining. 36 Two commenters stated that other risk-based algorithms, such as SPAN, that are recognized by other clearing organizations should be permitted for calculating the portfolio margin requirement, in addition to the OCC's TIMS. 37 The Exchange noted that it is working (through the Rule 431 Committee) with an SIA subcommittee to explore the expansion of portfolio margining to additional products and participants. Finally, the NYSE stated that the comments received should not delay implementation of the proposed rule change. 36 *See* Wiermanski Letter and Donohue Letter. 37 *See* Donohue Letter and Gill CME Letter. IV. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. 38 In particular, the Commission believes that the proposed rule change is consistent with Section 6(b)(5) of the Act 39 in particular, in that it is designed to perfect the mechanism of a free and open market and to protect investors and the public interest. The Commission notes that the proposed portfolio margin rule change is intend to promote greater reasonableness, accuracy and efficiency with respect to Exchange margin requirements for complex listed securities index option strategies. The Commission further notes that the cross-margining capability with related index futures positions in eligible accounts may alleviate excessive margin calls, improve cash flows and liquidity, and reduce volatility. Moreover, the Commission notes that approving the proposed rule change would be consistent with the FRB's 1998 amendments to Regulation T, which sought to advance the use of portfolio margining. 38 In approving this proposed rule change, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 39 15 U.S.C. 78f(b)(5). Under the proposed rule changes, the Commission notes that a broker-dealer choosing to offer portfolio margining to its customers must employ a methodology that has been approved by the Commission for use in calculating haircuts under Rule 15c3-1a. As stated above, currently, TIMS is the only approved methodology. While some commenters recommended expanding the choice of models, the Commission believes that requiring a broker-dealer to use a model that qualifies for calculating haircuts under Commission Rule 15c3-1a maintains a consistency with the Commission's net capital rule and across potential portfolio margin pricing models. As a result, portfolio margin requirements would vary less from firm to firm. The Commission notes, however, that like Rule 15c3-1a, the proposed rule permits the use of another theoretical pricing model, should one be developed in the future. 40 40 *See also* Securities Exchange Act Release No. 34-38248 (February 6, 1997), 62 FR 6474 (February 12, 1997) (discussing in Part II.A. the use of TIMS versus other pricing models). The Commission notes the objections of certain commenters to the $5 million minimum equity requirement. The Commission believes that the requirement circumscribes the number of accounts able to participate and adds safety in that such accounts are more likely to be of significant financial means and investment sophistication. Finally, the Commission notes that several commenters recommended expanding the products eligible for portfolio margining. The Exchange's proposed rule limits the instruments eligible for portfolio margining to listed products base on broad-based US securities indices, which tend to be less volatile than narrow-based indices and non-index equities. The Commission believes this limitation is appropriate for the pilot program, which should serve as a first step toward the possible expansion of portfolio margining to other classes of securities. V. Conclusion *It is therefore ordered* , pursuant to seciton 19(b)(2) of the Act, 41 that the proposed rule change (File No. SR-NYSE-2002-19), as amended, is approved on a pilot basis to expire on July 31, 2007. 41 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 42 42 17 CFR 200.30-3(a)(12). J. Lynn Taylor, Assistant Secretary. [FR Doc. 05-14316 Filed 7-20-05; 8:45 am]
Connectionstraces to 8
6 references not yet in our index
  • 17 CFR 240.19
  • 17 CFR 240.15
  • 17 CFR 240.8
  • 5 USC 78aaa
  • 17 CFR 240
  • 17 CFR 250.15
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Notices
SECURITIES AND EXCHANGE COMMISSION
U.S.C.§ 78s
U.S.C.§ 78c
U.S.C.§ 78f
C.F.R.§ 200.30-3
U.S.C.§ 78q–1
U.S.C.§ 552
C.F.R.§ 201.102
U.S.C.§ 78aaa
Cite17 CFR 240.19
Cite17 CFR 240.15
Cite17 CFR 240.8
Cite5 USC 78aaa
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