26858 Federal Register / Vol. 72, No. 91 / Friday, May 11, 2007 / Notices 

Morris, Secretary, Commission, dated September 

23, 2005. 

14 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(7). 

2 17 CFR 240.19b–7. 

3 15 U.S.C. 78o–3(k). 

4 15 U.S.C. 78o(b)(11). 

5The Interpretive Notice currently provides that 

Member firms triggering the enhanced supervisory 

procedures must record all telephone conversations 

between the Member’s APs and both existing and 

potential customers, submit all promotional 

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 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 rulecomments@sec.gov. Please include File 

Number SR–NASD–2007–029 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–NASD–2007–029. 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. 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–2007–029 and 

should be submitted on or before June 

1, 2007. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.14

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–9069 Filed 5–10–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55710; File No. SR–NFA–

2007–03] 

Self-Regulatory Organization; National 

Futures Association; Notice of Filing 

and Immediate Effectiveness of 

Proposed Amendments to Compliance 

Rule 2–9 (Supervision) and the 

Interpretive Notice Regarding 

Compliance Rule 2–9 (Enhanced 

Supervisory Requirements) 

May 4, 2007. 

Pursuant to Section 19(b)(7) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–7 thereunder,2

notice is hereby given that on February 

28, 2007, National Futures Association 

(‘‘NFA’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’) 

the proposed rule change described in 

Items I, II, and III below, which Items 

have been substantially prepared by 

NFA. The Commission is publishing 

this notice to solicit comments on the 

proposed rule change from interested 

persons. NFA, on February 27, 2007, 

submitted the proposed rule change to 

the Commodity Futures Trading 

Commission (‘‘CFTC’’) for approval. The 

CFTC approved the proposed rule 

change on March 28, 2007. 

I. Self-Regulatory Organization’s 

Description of the Proposed Rules 

Section 15A(k) of the Act 3 makes 

NFA a national securities association for 

the limited purpose of regulating the 

activities of NFA members (‘‘Members’’) 

who are registered as brokers or dealers 

in security futures products under 

Section 15(b)(11) of the Exchange Act.4

NFA’s Interpretive Notice entitled 

‘‘Compliance Rule 2–9: Enhanced 

Supervisory Requirements’’

(‘‘Interpretive Notice’’) applies to all 

Members who meet the criteria in the 

Interpretive Notice and could apply to 

Members registered under Section 

15(b)(11). 

The amendments to the Interpretive 

Notice: 

• Expand the definition of a 

Disciplined Firm to include firms that 

have been sanctioned by the CFTC or 

NFA during the preceding five years for 

using deceptive telemarketing practices 

or promotional material, even if the firm 

was not barred from the industry; and 

• Impose the enhanced supervisory 

requirements on firms that charge 50% 

or more of their customers round-turn 

commissions, fees, and other charges 

that total $100 or more per futures, 

forex, or option contract. 

The amendment to Compliance Rule 

2–9(b) adds language specifically 

authorizing NFA’s Board to establish 

criteria related to the employment 

history of a Member’s principals and/or 

to the amount of commissions, fees, and 

other charges assessed by a Member 

when imposing the enhanced 

supervisory requirements on a Member. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rules 

NFA has prepared statements 

concerning the purpose of, and basis for, 

the proposed rule change, burdens on 

competition, and comments received 

from members, participants, and others. 

The text of these statements may be 

examined at the places specified in Item 

IV below. These statements are set forth 

in Sections A, B, and C below. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rules 

1. Purpose 

NFA’s Board of Directors adopted the 

original Interpretive Notice in January 

1993. The Interpretive Notice requires a 

Member to undertake specific enhanced 

supervisory requirements if its sales 

force includes a specified number of 

individuals who have worked at 

Disciplined Firms or, in certain 

situations, when a Member becomes 

subject to a disciplinary action.5 The 


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Federal Register / Vol. 72, No. 91 / Friday, May 11, 2007 / Notices 26859 

material at least ten days prior to first use, adopt 

written supervisory procedures, and either operate 

under a guarantee agreement or maintain at least 

$250,000 in adjusted net capital (‘‘ANC’’). 

6The increase in 2006 is largely attributable to the 

impact of revisions made to the Interpretive Notice 

in early 2006 and to adding a number of Members 

to the list of Disciplined Firms when charges 

against them were resolved with permanent bars. 

7Six large firms that charge commissions that are 

in line with industry norms are among the twelve 

Members that have been subject to the most 

arbitration claims made over the past three years. 

This is not surprising based on their size. 

Interpretive Notice and an enabling 

provision of NFA Compliance Rule 2–

9(b) provide that affected Members may 

petition the Telemarketing Procedures 

Waiver Committee for relief from these 

obligations. 

NFA’s Board has amended the 

Interpretive Notice on eleven different 

occasions since it was first issued. The 

amendments have been based on 

various changes affecting the 

membership and on practical lessons 

learned from administering the 

Interpretive Notice over the years. The 

various amendments have at times 

expanded the scope of the Interpretive 

Notice and, at other times, have granted 

relief to the membership in situations 

when conditions indicated that it was 

warranted. For example, amendments 

were made due to the emergence of 

security futures products; in response to 

Members that reorganize their business 

to avoid the enhanced supervisory 

requirements; and in recognition that 

some associated persons (‘‘APs’’) who 

worked at Disciplined Firms long ago 

and/or for a short time who do not 

appear to pose an extraordinary risk to 

the public. 

a. Expansion of the Definition of 

Disciplined Firm 

Members currently qualify for the 

enhanced supervisory requirements if 

they hire a prescribed percentage of APs 

and principals who previously worked 

at Disciplined Firms. Disciplined Firms 

are defined in the Interpretive Notice as 

firms that have been formally charged 

by either the CFTC or NFA with using 

deceptive telemarketing practices or 

promotional material and have been 

permanently barred from the industry as 

a result of those charges. Disciplined 

Firms also include firms that have been 

barred by the NASD or the SEC for 

fraud-related sales practices involving 

security futures products. 

The amendments to the Interpretive 

Notice expand the definition of a 

Disciplined Firm beyond firms that have 

been permanently barred from the 

industry for sales practice or 

promotional material violations by 

adding firms that have been sanctioned 

in any way for those types of violations 

during the preceding five years. These 

amendments are consistent with the 

considerations cited by NFA’s Board 

when it originally issued the 

Interpretive Notice in 1993 and are 

supported by information NFA gleaned 

in reviewing the firms that would be 

affected by the change. 

When NFA’s Board first established 

the enhanced supervisory requirements, 

it noted in the Interpretive Notice that 

when a firm is closed for fraudulent 

sales tactics, it is reasonable to believe 

that the training and supervision that it 

gave its APs was ‘‘wholly inadequate or 

inappropriate.’’ The Board stated further 

that: 

It is also reasonable to conclude that an AP 

who received inadequate or inappropriate 

training and supervision may have learned 

improper sales tactics, which he will carry 

with him to his next job. Therefore, the Board 

believes that a Member firm employing such 

a sales force must have stringent supervision 

procedures in place in order to ensure that 

the improper training its APs have previously 

received does not taint their sales efforts on 

behalf of the Member. 

More than 140 former NFA Members 

are currently classified as Disciplined 

Firms. The amendments to the 

Interpretive Notice would add 

approximately 180 firms to the list of 

Disciplined Firms because they have 

received sanctions short of a permanent 

bar from the CFTC or NFA for sales 

practice and/or promotional material 

violations during the last five years. 

Members that would be added as 

Disciplined Firms would not themselves 

become subject to the enhanced 

supervisory requirements merely 

because they are now categorized as 

Disciplined Firms. Rather, the effect of 

the proposal would be that their APs 

and principals would have to be 

counted by present and future sponsors 

as having worked at a Disciplined Firm 

for purposes of determining whether the 

sponsor’s employee mix triggered an 

obligation to adopt the enhanced 

supervisory requirements. The overall 

effect of the reclassification of the 

individuals who worked for the firms 

that would be added to the Disciplined 

Firm list under the proposal would be 

to obligate approximately forty-five 

additional active Members to adopt the 

enhanced supervisory requirements. By 

comparison, ten Members became 

subject to the enhanced supervisory 

requirements during 2005 and thirtynine Members became subject to the 

requirements in 2006.6

NFA’s review of the disciplinary 

histories of the additional Members that 

would become subject to the enhanced 

supervisory requirements indicates that 

they have an incidence of disciplinary 

actions that far outstrips the industry 

average for sales practice and 

promotional material violations. In fact, 

eleven of these firms have already been 

subject to NFA or the CFTC actions 

alleging abusive sales practices and/or 

misleading promotional material. Based 

on the disciplinary history of these 

firms and the employment histories of 

their principals and APs, it is reasonable 

to conclude that they would benefit 

from the enhanced supervisory 

requirements ‘‘to ensure that the 

improper training [the firm’s] APs have 

previously received does not taint their 

sales efforts on behalf of the Member.’’

b. Imposition of Enhanced Supervisory 

Requirements Based on Commissions 

and Fees 

NFA has also recently reviewed 

whether it is appropriate to impose the 

enhanced supervisory requirements on 

the few Members that charge 

commissions and fees that are 

substantially in excess of the normal 

range assessed by the general 

membership. NFA staff has reviewed 

the commission and fee structures of a 

number of Member firms which have 

been subject to disciplinary action and 

arbitration claims during recent years 

and has found that a significant 

correlation exists between firms that are 

cited as respondents in actions for 

misleading sales practices and firms that 

charge abnormally high commissions 

and fees. 

NFA reviewed the commission rates 

charged by Member firms that have been 

cited by the Business Conduct 

Committee for misleading sales 

practices over the last three years. All 

but one of the approximately twenty 

firms included in the group charged 

total round-turn commissions, markups, fees, and other charges of between 

$95 and $250 per futures, forex, or 

option contract—with the strong 

majority of the firms skewing toward the 

high end of that range. 

In addition, NFA reviewed arbitration 

claims to determine if there was any 

correlation between claims and high 

commission rates. Five of the twelve 

firms that have been subject to the 

highest number of claims are small-tomedium-sized firms that charge 

commissions that compare to the high 

rates described above. Many of the 

claims against those firms included 

allegations of misleading sales 

practices.7

The correlation between charging 

abnormally high commissions and fees 


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26860 Federal Register / Vol. 72, No. 91 / Friday, May 11, 2007 / Notices 

8The term ‘‘active customers’’ means any 

customers who are entitled to a monthly statement 

under the provisions of CFTC Regulations § 1.33(a). 9 15 U.S.C. 78s(b)(7). 

and allegations of sales practice fraud 

suggests that firms that charge 

commissions that are significantly in 

excess of industry norms would benefit 

from the enhanced supervisory 

requirements. In particular, recording 

conversations with the public would 

give affected Members the opportunity 

to ensure that misrepresentations and 

failure to disclose costs would be 

detected and, hopefully, corrected. 

Based on this information, the Board 

amended the Interpretive Notice to 

impose the enhanced supervisory 

requirements on any Member firm that 

charges 50% or more of its active 

customers round-turn commissions, 

fees, and other charges that total $100 or 

more per futures, forex, or option 

contract.8 In setting the amount of 

commissions at this level, NFA relied 

upon feedback from NFA’s Advisory 

Committees and Joint Audit Committee 

representatives, and used data obtained 

in NFA’s examinations of Member 

firms. This feedback suggests that 

Members that charge commissions and 

fees below this level are less likely to 

engage in fraudulent sales practices. 

The amended Interpretive Notice 

imposes a duty on Members to notify 

NFA if they charge round-turn 

commissions, fees, and other charges 

that reach the triggering levels specified 

in the Interpretive Notice. In addition, 

upon inquiry by NFA, Members have 

the burden of demonstrating that they 

do not meet the triggering levels. The 

amendments to the Interpretive Notice 

add the reasonableness of commissions 

and the effectiveness of any disclosure 

to customers regarding them to the list 

of factors that the Telemarketing 

Procedures Waiver Committee may 

consider in evaluating a waiver request. 

c. Exemptions for Certain Associated 

Persons 

The Interpretive Notice exempts two 

groups of APs who have previously 

worked at Disciplined Firms from being 

counted for purposes of calculating 

whether their current employer’s sales 

force triggers the enhanced supervisory 

requirements. NFA’s analysis shows 

that, in general, the APs covered by the 

exemptions do not pose a greater threat 

to the public than the overall population 

of APs. 

The first exempt group was created in 

2003 and includes APs who worked for 

Disciplined Firms for less than 60 days 

and who have not been employed by 

any Disciplined Firm during the 

preceding five years. The second 

exempt group was created in April of 

2006 and includes APs who worked at 

a single Disciplined Firm more than ten 

years ago and who have not worked for 

a Member that has been subject to any 

sales practice action by NFA or the 

CFTC since leaving the Disciplined 

Firm. The Interpretive Notice provides 

that those APs must not have been 

personally subject to disciplinary action 

by NFA or the CFTC. The amendments 

to the Interpretive Notice require APs 

who fall into the first exempt group to 

be treated consistently with those in the 

second group by also requiring them to 

be free from personal disciplinary action 

by NFA or the CFTC. 

d. Enhanced Adjusted Net Capital 

Requirement 

The Interpretive Notice currently 

requires all Members that are subject to 

the enhanced supervisory requirements 

to either operate pursuant to a guarantee 

agreement or to maintain ANC of at least 

$250,000, which has historically been 

the benchmark amount for FCMs 

required under NFA Financial 

Requirements. Revisions to NFA’s 

Financial Requirements that raised the 

ANC requirements for Forex Dealer 

Members (‘‘FDMs’’) to $1,000,000 and 

for other FCMs to $500,000 became 

effective on July 31, 2006—thus 

rendering the current Interpretive 

Notice outdated as it applies to the ANC 

requirements for those Members. The 

ANC requirement for IBs was raised 

from $30,000 to $45,000 at the same 

time, but the new IB levels are still 

much less than the $250,000 required 

under the Interpretive Notice. 

The revised Interpretive Notice 

imposes an ANC requirement of 

$2,000,000 on FDMs and $1,000,000 on 

other FCMs that are subject to the 

enhanced supervisory requirements. 

The Interpretive Notice also makes it 

clear that the $250,000 increased ANC 

requirement applies to CTAs and CPOs 

as well as IBs. 

e. Miscellaneous Amendments 

In giving the option to Members that 

qualify for the enhanced supervisory 

procedures to either operate under a 

guarantee agreement or maintain at least 

$250,000 in ANC, the current language 

of the Interpretive Notice limits the pool 

of potential guarantors to FCMs that 

meet the eligibility requirements for 

executing a Supplemental Guarantor 

Certification Statement (‘‘SGCS’’) 

pursuant to NFA Registration Rule 

504(a)(2)(B). Changes have been made to 

NFA’s Registration Rules since the 

inclusion of the reference to NFA 

Registration Rule 504(a)(2)(B) in the 

Interpretive Notice and, in fact, the 

Registration Rule provision cited in the 

Interpretive Notice no longer exists. A 

technical amendment to the Interpretive 

Notice deletes the reference to defunct 

NFA Registration Rule 504(a)(2)(B) and 

replaces it with a reference to NFA 

Registration Rule 509(b)(5), which 

contains comparable provisions for 

eligibility to execute an SGCS. 

Most Members that are required to 

record conversations with customers 

use standard format audio cassette 

recordings or commonly used digital 

recording programs. However, there 

have been several instances in which 

Members have provided recordings to 

NFA that are in outdated or exotic 

media formats. NFA has occasionally 

had to go to extraordinary lengths in 

order to hear and understand the 

contents of some of those recordings. In 

one case, NFA Compliance staff auditors 

had to travel to the FBI facility at 

Quantico, Virginia to listen to tapes 

because the FBI had one of the few 

machines capable of playing back 

recordings produced by a Member and 

the firm had represented that its 

outdated machinery was irreparably 

damaged. The amended Interpretive 

Notice requires Members subject to 

enhanced supervisory requirements to 

promptly provide NFA or the CFTC 

with the appropriate resources for 

listening to the recording upon request. 

Obviously, such a request would be rare 

but the addition would be of great 

benefit in certain circumstances and 

would likely encourage affected 

Members to use standard media formats 

in the first place. 

NFA Compliance Rule 2–9(b) 

authorizes NFA’s Board to establish 

criteria for becoming subject to the 

enhanced supervisory requirements. 

The existing rule explicitly authorizes 

the Board to establish those criteria 

based on the employment history of a 

firm’s APs but does not mention either 

the employment history of a Member’s 

principals or the amount of 

commissions, fees and other charges 

assessed by a Member. The amendments 

to the rule add this language. 

2. Statutory Basis 

NFA has filed these proposed 

regulations pursuant to Section 19(b)(7) 

of the Act.9 The rule change is 

authorized by, and consistent with, 

Section 15A(k) of the Act. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The rule change will not impose any 

burden on competition that is not 

necessary or appropriate in furtherance 


ycherry on PROD1PC64 with NOTICES
Federal Register / Vol. 72, No. 91 / Friday, May 11, 2007 / Notices 26861 

10 15 U.S.C. 78s(b)(1). 

11 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2Securities Exchange Act Release No. 55504 

(March 21, 2007), 72 FR 14844. 

3Securities Exchange Act Release No. 39104 

(September 22, 1997), 62 FR 50647 (September 29, 

1997) (File No. SR–OCC–97–01). 

4Securities Exchange Act Release No. 40132 

(June 25, 1998), 63 FR 36467 (July 6, 1998) (File No. 

SR–OCC–97–02). 

5 15 U.S.C. 78q–1(b)(3)(F). 

6Securities Exchange Act Release No. 39104 

(September 22, 1997), 62 FR 50647 (September 29, 

1997) (File No. SR–OCC–97–01). 

of the purposes of the Act and the 

Commodity Exchange Act. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rules Received From 

Members, Participants, or Others 

NFA did not publish the rule change 

to the membership for comment but did 

discuss it with NFA’s FCM, IB and CPO/ 

CTA Advisory Committees. NFA did not 

receive comment letters concerning the 

rule change. 

III. Date of Effectiveness of the 

Proposed Rules and Timing for 

Commission Action 

On February 27, 2007, NFA submitted 

the proposed amendments to NFA’s 

Compliance Rule 2–9 and the 

Interpretive Notice to the CFTC for 

approval. The proposed rule change has 

become effective on March 28, 2007, the 

date of approval of the proposed rule 

change by the CFTC. 

Within 60 days of the date of 

effectiveness of the proposed rule 

change, the Commission, after 

consultation with the CFTC, may 

summarily abrogate the proposed rule 

change and require that the proposed 

rule change be refiled in accordance 

with the provisions of Section 19(b)(1) 

of the Exchange Act.10

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change 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 rulecomments@sec.gov. Please include File 

Number SR–NFA–2007–03 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–NFA–2007–03. 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. Copies of the filing also will be 

available for inspection and copying at 

the principal office of the Exchange. 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–NFA–2007–03 and should 

be submitted on or before June 1, 2007. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.11

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–9071 Filed 5–10–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55716; File No. SR–OCC–

2006–15] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Order 

Granting Approval of a Proposed Rule 

Change Relating to the Approval of 

Fund Shares Deposited as Margin 

May 7, 2007. 

I. Introduction 

On August 31, 2006, The Options 

Clearing Corporation (‘‘OCC’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) proposed 

rule change SR–OCC–2006–15 pursuant 

to Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’).1 Notice 

of the proposal was published in the 

Federal Register on March 29, 2007.2

No comment letters were received. For 

the reasons discussed below, the 

Commission is granting approval of the 

proposed rule change. 

II. Description 

The proposed rule change eliminates 

the requirement that OCC’s 

Membership/Risk Committee approve 

classes of fund shares (e.g., ETFs) for 

deposit as margin. It deletes 

Interpretation and Policy .11 to Rule 

604, Forms of Margin, which requires 

that OCC’s Membership/Risk Committee 

approve classes of fund shares for 

deposit as margin. Committee approval 

was deemed to be a prudent safeguard 

when OCC began accepting fund shares 

for deposit in 1997 because fund shares 

had only been trading since 1993, and 

OCC was not as familiar with them as 

it is today.3 In 1998, OCC began clearing 

options on fund shares.4 Since then, 

fund shares have become a widely used 

investment tool, and OCC has 

developed a broad understanding of the 

fund share marketplace. In light of these 

developments, OCC believes that fund 

shares should be accepted as margin 

under the same conditions that apply to 

the deposit of other equity securities 

without the need for Committee 

approval. 

III. Discussion 

Section 17A(b)(3)(F) of the Act 

requires, among other things, that the 

rules of a clearing agency be designed to 

assure the safeguarding of securities and 

funds which are in its custody or 

control or for which it is responsible.5

OCC’s Rule 604 provides that OCC may 

accept cash, letters of credit, and certain 

types of liquid securities. In our 

approval order of the 1997 proposed 

rule change to allow OCC to accept fund 

shares as margin, we noted that fund 

shares are typically traded and cleared 

like common stock and are typically 

held in book-entry form at a securities 

depository in which OCC can readily 

perfect a security interest.6 Given the 

liquid nature of fund shares and OCC’s 

increased experience with evaluating 

the risks associated with fund shares, 

we are satisfied with OCC’s 

determination that it is no longer 

necessary for its Membership/Risk 

Committee to approve classes of fund 

shares before the fund shares can be 

deposited as margin. Accordingly, the 

proposed rule should not affect OCC’s 

obligation to assure the safeguarding of 

securities and funds which are in its 


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