II

106TH CONGRESS

2D SESSION S. 2765

To amend the securities laws to provide for regulatory parity for single

stock futures, and for other purposes.

IN THE SENATE OF THE UNITED STATES

JUNE 21, 2000

Mr. SCHUMER introduced the following bill; which was read twice and referred

to the Committee on Banking, Housing, and Urban Affairs

A BILL

To amend the securities laws to provide for regulatory parity

for single stock futures, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SEC. 101. DEFINITIONS UNDER THE SECURITIES EX4 CHANGE ACT OF 1934.

5 Section 3(a) of the Securities Exchange Act of 1934

6 (15 U.S.C. 78c(a)) is amended—

7 (1) in paragraph (10), by inserting ‘‘security

8 future,’’ between ‘‘treasury stock,’’ and ‘‘bond’’;

9 (2) by striking paragraph (11) and inserting

10 the following:
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1 ‘‘(11) The term ‘equity security’ means any

2 stock or similar security; or any security future; or

3 any security convertible, with or without consider4 ation, into such a security, or carrying any warrant

5 or right to subscribe to or purchase such a security;

6 or any such warrant or right; or any put, call, strad7 dle, option, or privilege on any such security; or any

8 other security which the Commission shall deem to

9 be of similar nature and consider necessary or ap10 propriate, by such rules and regulations as it may

11 prescribe in the public interest or for the protection

12 of investors, to treat as an equity security.’’;

13 (3) in paragraph (13), by adding at the end the

14 following: ‘‘For security future products, this in15 cludes any contract, agreement, or transaction for

16 future delivery.’’;

17 (4) in paragraph (14), by adding at the end the

18 following: ‘‘For security future products, this in19 cludes any contract, agreement, or transaction for

20 future delivery.’’; and

21 (5) by adding at the end the following:

22 ‘‘(55)(A) The term ‘security future’ means a

23 contract of sale for future delivery of a single secu24 rity or of a narrow-based security index, including

25 any interest therein or based on the value thereof.
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1 ‘‘(B) A ‘narrow-based security index’ is an

2 index—

3 ‘‘(i) that has 10 or fewer component secu4 rities;

5 ‘‘(ii) in which the securities of a single

6 issuer account on average, over the six-month

7 period ending on the date equity options expire

8 in June of each year and over the six-month pe9 riod ending on the date equity options expire in

10 December of each year, for more than 10% of

11 the market capitalization of that index;

12 ‘‘(iii) in which the securities of a single

13 issuer in a price-weighted (or other non-capital14 ization weighted) index account on average,

15 over the six-month period ending on the date

16 equity options expire in June of each year and

17 over the six-month period ending on the date

18 equity options expire in December of each year,

19 for more than three times their weight in the

20 index if calculated on a market-capitalization

21 basis;

22 ‘‘(iv) in which any component security has

23 an average daily trading volume value of less

24 than $1 million or an aggregate market value
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1 of the voting and non-voting common equity

2 held by non-affiliates of less than $150 million;

3 ‘‘(v) in which the average correlation of the

4 securities in the index to the index itself is

5 greater than 0.6 over the six-month period end6 ing on the date equity options expire in June of

7 each year and over the six-month period ending

8 on the date equity options expire in December

9 of each year; or

10 ‘‘(vi) in which the correlation of any secu11 rity in the index to the index itself is greater

12 than 0.9 over the six-month period ending on

13 the date equity options expire in June of each

14 year and over the six-month period ending on

15 the date equity options expire in December of

16 each year.

17 ‘‘(C) The term ‘security future product’ means

18 a security future or any put, call, straddle, option,

19 or privilege on any security future.

20 ‘‘(56)(A) The term ‘margin’, when used with

21 respect to a security future product, means the

22 amount, type, and form of collateral required to se23 cure any extension, maintenance, or arrangement of

24 the extension or maintenance of credit, or the

25 amount of collateral required as a performance bond
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1 related to the purchase, sale, or carrying of a secu2 rity future product, and all other uses of collateral

3 related to the purchasing, selling, or carrying of a

4 security future product.

5 ‘‘(B) The terms ‘margin level’ and ‘level of mar6 gin’, when used with respect to a security future

7 product, mean the amount of collateral required to

8 secure any extension, maintenance, or arrangement

9 of the extension or maintenance of credit, or the

10 amount of collateral required as a performance

11 bond, related to the purchase, sale, or carrying of a

12 security future product.

13 ‘‘(C) The terms ‘higher margin level’ and ‘high14 er level of margin’, when used with respect to a se15 curity future product, mean a margin level estab16 lished by a national securities exchange or a national

17 securities association that is higher than the min18 imum amount established jointly by the Commission

19 and the Commodity Futures Trading Commission

20 pursuant to section 7(c)(1)(C)(ii).’’.

21 SEC. 102. REGULATORY RELIEF FOR MARKETS TRADING

22 SECURITY FUTURE PRODUCTS.

23 (a) EXPEDITED REGISTRATION AND EXEMPTION.—

24 Section 6 of the Securities Exchange Act of 1934 (15

25 U.S.C. 78f) is amended by adding at the end the following:
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1 ‘‘(g)(1) An exchange that lists or trades security fu2 ture products may be registered as a national securities

3 exchange solely for the purposes of trading security future

4 products if (A) it is a board of trade, as that term is de5 fined by the Commodity Exchange Act (7 U.S.C. 1a(1)),

6 that has been designated a contract market by the Com7 modity Futures Trading Commission and is not subject

8 to a suspension order by the Commodity Futures Commis9 sion, and (B) such exchange does not serve as a market

10 place for securities other than security future products,

11 or futures on exempted securities or groups or indexes of

12 securities that have been authorized by Commodity Fu13 tures Trading Commission order or options thereon.

14 ‘‘(2)(A) An exchange required to register only be15 cause it lists or trades security future products may reg16 ister for purposes of this section by filing with the Com17 mission a written notice in such form as the Commission,

18 by rule, may prescribe containing the rules of the exchange

19 and such other information and documents concerning

20 such exchange as the Commission, by rule, may prescribe

21 as necessary or appropriate in the public interest or for

22 the protection of investors.

23 ‘‘(B) Such registration shall be effective immediately

24 upon filing of the written notice with the Commission.

25 Such registration shall not be effective if the exchange
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1 were so registered, its registration would be subject to sus2 pension or revocation.

3 ‘‘(C) Such registration shall be terminated imme4 diately if any of the conditions for registration set forth

5 in this subsection are no longer satisfied.

6 ‘‘(3) The Commission shall make available to the

7 public all notices it receives under this subsection.

8 ‘‘(4)(A) An exchange that is registered under para9 graph (1) of this subsection shall be exempt from and shall

10 not be required to enforce compliance by its members with,

11 and its members shall not, solely with respect to those

12 transactions effected on such exchange in security future

13 products, be required to comply with, the following provi14 sions of this title and the rules thereunder:

15 ‘‘(i) subsections (b)(2), (b)(3), (b)(4), (b)(7),

16 (b)(9), (c), (d), and (e) of section 6;

17 ‘‘(ii) section 11;

18 ‘‘(iii) subsection (d) and (f) of section 17; and

19 ‘‘(iv) subsection (a), (f), and (h) of section 19.

20 ‘‘(B) An exchange that is subject to the registration

21 requirement of paragraph (1) of this subsection shall also

22 be exempt from submitting proposed rule changes pursu23 ant to section 19(b) of this title, except that:

24 ‘‘(i) it shall file proposed rule changes related to

25 higher margin levels, fraud or manipulation, record-
8

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1 keeping, reporting, listing standards of security fu2 ture products, or sales practices for persons who ef3 fect transactions in security future products or rules

4 primarily related to its obligation to enforce the se5 curities laws pursuant to section 19(b)(7);

6 ‘‘(ii) it shall file pursuant to sections 19(b)(1)

7 and 19(b)(2) proposed rule changes related to mar8 gin, except for changes to higher margin levels; and

9 ‘‘(iii) it shall file pursuant to section 19(b)(1)

10 proposed rule changes that have been abrogated by

11 the Commission pursuant to section 19(b)(7)(C).

12 ‘‘(5) No exchange that is registered under paragraph

13 (1) of this subsection shall trade any security future prod14 uct until the National Futures Association has met the

15 requirements set forth in section 15A(k)(2) of this title.’’.

16 (b) COMMISSION REVIEW OF PROPOSED RULE

17 CHANGES.—

18 (1) EXPEDITED REVIEW.—Section 19(b) of the

19 Securities Exchange Act of 1934 (15 U.S.C. 78s(b))

20 is amended by adding at the end the following:

21 ‘‘(7)(A) A self-regulatory organization that is

22 an exchange registered with the Commission pursu23 ant to section 6(g) of this title or that is the Na24 tional Futures Association shall file with the Com25 mission, in accordance with such rules as the Com-
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1 mission may prescribe, copies of any proposed rule

2 change or any proposed change in, addition to, or

3 deletion from the rules of such self-regulatory orga4 nization (hereinafter in this subsection collectively

5 referred to as a ‘proposed rule change’) that relates

6 to higher margin levels, fraud or manipulation, rec7 ordkeeping, reporting, listing standards of security

8 future products, or sales practices for persons who

9 effect transactions in security future products or

10 rules primarily related to its obligation to enforce

11 the securities laws. Such proposed rule change shall

12 be accompanied by a concise general statement of

13 the basis and purpose of such proposed rule change.

14 The Commission shall, upon the filing of any pro15 posed rule change, publish notice thereof together

16 with the terms of substance of the proposed rule

17 change or a description of the subjects and issues in18 volved. The Commission shall give interested persons

19 an opportunity to submit written data, views, and

20 arguments concerning such proposed rule change.

21 ‘‘(B) A proposed rule change filed with the

22 Commission pursuant to subparagraph (A) must be

23 filed concurrently with the Commodity Futures

24 Trading Commission. Such proposed rule change

25 may take effect upon a determination by the Com-
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1 modity Futures Trading Commission that review of

2 the proposed rule change is not necessary or upon

3 approval of the proposed rule change by the Com4 modity Futures Trading Commission.

5 ‘‘(C) Any proposed rule change of a self-regu6 latory organization that has taken effect pursuant to

7 subparagraph (B) may be enforced by such self-reg8 ulatory organization to the extent it is not incon9 sistent with the provisions of this title, the rules and

10 regulations thereunder, and applicable Federal and

11 State law. At any time within sixty days of the date

12 the Commodity Futures Trading Commission deter13 mines that review of such proposed rule change is

14 not necessary or the date the Commodity Futures

15 Trading Commission approves such proposed rule

16 change, the Commission summarily may abrogate

17 the proposed rule change and require that the pro18 posed rule change be refiled in accordance with the

19 provisions of section 19(b)(1), if it appears to the

20 Commission that such proposed rule change unduly

21 burdens competition, conflicts with the securities

22 laws, or does not promote efficiency. Commission ac23 tion pursuant to the preceding sentence shall not af24 fect the validity or force of the rule change during

25 the period it was in effect and shall not be review-
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1 able under section 25 nor deemed to be a final agen2 cy action for purposes of section 704 of title 5,

3 United States Code.

4 ‘‘(D) Within thirty-five days of the date of pub5 lication of notice of the filing of a proposed rule

6 change that is abrogated in accordance with sub7 paragraph (C) and refiled in accordance with section

8 19(b)(1), or within such longer period as the Com9 mission may designate up to ninety days after such

10 date if it finds such longer period to be appropriate

11 and publishes its reasons for so finding or as to

12 which the self-regulatory organization consents, the

13 Commission shall—

14 ‘‘(i) by order approve such proposed rule

15 change, or

16 ‘‘(ii) institute proceedings to determine

17 whether the proposed rule change should be dis18 approved. Such proceedings shall include notice

19 of the grounds for disapproval under consider20 ation and opportunity for hearing and be con21 cluded within one hundred eighty days of the

22 date of publication of notice of the filing of the

23 proposed rule change. At the conclusion of such

24 proceedings the Commission, by order, shall ap25 prove or disapprove such proposed rule change.
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1 The Commission may extend the time for con2 clusion of such proceedings for up to sixty days

3 if it finds good cause for such extension and

4 publishes its reasons for so finding or for such

5 longer period as to which the self-regulatory or6 ganization consents.

7 The Commission shall approve a proposed rule

8 change of a self-regulatory organization if it finds

9 that such proposed rule change promotes efficiency,

10 does not unduly burden competition, and does not

11 conflict with the securities laws. The Commission

12 shall disapprove a proposed rule change of a self13 regulatory organization if it does not make such

14 finding. The Commission shall not approve any pro15 posed rule change prior to the thirtieth day after the

16 date of publication of notice of the filing thereof, un17 less the Commission finds good cause for so doing

18 and publishes its reasons for so finding.’’.

19 (2) CONSULTATION PROVISIONS.—Section 19(b)

20 of the Securities Exchange Act of 1934 (15 U.S.C.

21 78s(b)) is amended by adding after paragraph (7),

22 as added by this Act, the following:

23 ‘‘(8)(A) The Commission shall consult with and

24 consider the views of the Commodity Futures Trad25 ing Commission prior to approving a proposed rule
13

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1 change filed by a national securities association reg2 istered pursuant to section 15A(a) or a national se3 curities exchange subject to the provisions of section

4 19(a) that primarily concerns conduct related to

5 transactions in security futures products, except

6 where the Commission determines that an emer7 gency exists requiring expeditious or summary action

8 and publishes its reasons therefore. If the Com9 modity Futures Trading Commission comments in

10 writing to the Commission on a proposed rule that

11 has been published for comment, the Commission

12 shall respond in writing to such written comment be13 fore approving the proposed rule. If the Commodity

14 Futures Trading Commission determines, and noti15 fies the Commission, that such rule, if implemented,

16 would, or as applied: (i) adversely affect the liquidity

17 or efficiency of the market for security future prod18 ucts; or (ii) impose any burden on competition not

19 necessary or appropriate in furtherance of the pur20 poses of this section, the Commission shall, prior to

21 adopting the proposed rule, find that such rule is

22 necessary and appropriate in furtherance of the pur23 poses of this section notwithstanding the Commodity

24 Futures Trading Commission’s determination.
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1 ‘‘(B) In approving rules described in subpara2 graph (A), the Commission shall consider the suffi3 ciency and appropriateness of then existing laws and

4 rules applicable to security futures products.’’.

5 (c) REVIEW OF DISCIPLINARY PROCEEDINGS.—Sec6 tion 19(d) of the Securities Exchange Act of 1934 (15

7 U.S.C. 78s(d)) is amended by adding at the end the fol8 lowing:

9 ‘‘(3) The provisions of section 19(d) shall apply

10 to an exchange registered pursuant to section 6(g)

11 of this title or the National Futures Association only

12 to the extent that such self-regulatory organization

13 imposes any final disciplinary sanction related to a

14 security future product or the securities laws.’’.

15 SEC. 103. REGULATORY RELIEF FOR INTERMEDIARIES

16 TRADING SECURITY FUTURE PRODUCTS.

17 (a) EXPEDITED REGISTRATION AND EXEMPTIONS.—

18 (1) Section 15(b) of the Securities Exchange

19 Act of 1934 (15 U.S.C. 78o(b)) is amended by add20 ing at the end the following:

21 ‘‘(11)(A)(i) A broker or dealer required to reg22 ister only because it effects transactions in security

23 future products on an exchange registered pursuant

24 to section 6(g) may register for purposes of this sec25 tion by filing with the Commission a written notice
15

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1 in such form and containing such information con2 cerning such broker or dealer and any persons asso3 ciated with such broker or dealer as the Commission,

4 by rule, may prescribe as necessary or appropriate

5 in the public interest or for the protection of inves6 tors, if that broker or dealer is a member of the

7 National Futures Association.

8 ‘‘(ii) Such registration shall be effective imme9 diately upon filing of the written notice with the

10 Commission. Such registration shall not be effective

11 if the applicant were so registered, its registration

12 would be subject to suspension or revocation under

13 paragraph (4).

14 ‘‘(iii) Such registration shall be suspended im15 mediately if the National Futures Association sus16 pends the membership of that broker or dealer.

17 ‘‘(iv) Such registration shall be terminated im18 mediately if any of the above stated conditions for

19 registration set forth in this paragraph are no longer

20 satisfied.

21 ‘‘(B) A broker or dealer registered pursuant to

22 the requirements of subparagraph (A) shall be ex23 empt from the following provisions of this title and

24 the rules thereunder with respect to transactions in

25 security future products:
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1 ‘‘(i) section 8;

2 ‘‘(ii) subsection (a) of section 10;

3 ‘‘(iii) section 11;

4 ‘‘(iv) subsection (c)(3) of section 15;

5 ‘‘(v) section 15B;

6 ‘‘(iv) section 15C; and

7 ‘‘(vii) subsections (d), (e), (f) (g), and (h)

8 of section 17.

9 The Commission, by rule, regulation, or order, also

10 may conditionally or unconditionally exempt any

11 broker or dealer from any other requirement of this

12 title related to security future products, to the ex13 tent that such exemption is necessary or appropriate

14 in the public interest, and is consistent with the pro15 tection of investors.’’; and

16 (2) Section 28(e) of the Securities Exchange

17 Act of 1934 (15 U.S.C. 78bb(e)) is amended by add18 ing at the end the following:

19 ‘‘(4) The provisions of subsection (e) shall not

20 apply with regard to securities that are security fu21 ture products.’’.

22 (b) FLOOR BROKERS.—Section 15(b) of the Securi23 ties Exchange Act of 1934 (15 U.S.C. 78o(b)) is amended

24 by adding after paragraph (11), as added by this Act, the

25 following:
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1 ‘‘(12)(A) A natural person shall be exempt from

2 the registration requirements of this section if such

3 person:

4 ‘‘(i) is a member of a designated contract

5 registered with the Commission as an exchange

6 pursuant to section 6(g);

7 ‘‘(ii) only effects transactions in securities

8 of the exchange of which he is a member; and

9 ‘‘(iii) has no direct contact with public cus10 tomers.

11 ‘‘(B) A natural person exempt from registration

12 pursuant to subparagraph (A) shall also be exempt

13 from the following provisions of this title and the

14 rules thereunder:

15 ‘‘(i) section 8;

16 ‘‘(ii) subsection (a) of section 10;

17 ‘‘(iii) section 11;

18 ‘‘(iv) subsection (c)(3) of section 15;

19 ‘‘(v) section 15B;

20 ‘‘(iv) section 15C; and

21 ‘‘(vii) subsections (d), (e), (f) (g), and (h)

22 of section 17.’’.

23 (c) LIMITED PURPOSE NATIONAL SECURITIES ASSO24 CIATION.—Section 15A of the Securities Exchange Act of
18

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1 1934 (15 U.S.C. 78o–3) is amended by adding at the end

2 the following:

3 ‘‘(k)(1) The National Futures Association shall be a

4 registered national securities association for the limited

5 purpose of regulating the activities of members who are

6 registered as brokers or dealers in security future products

7 pursuant to section 15(b)(11).

8 ‘‘(2) The National Futures Association shall—

9 ‘‘(A) be so organized and have the capacity to

10 carry out the purposes of the securities laws applica11 ble to security future products and to comply, and

12 (subject to any rule or order of the Commission pur13 suant to section 19(g)(2)) to enforce compliance by

14 its members and persons associated with members,

15 with the provisions of the securities laws applicable

16 to security future products, the rules and regulations

17 thereunder, and the rules of the National Futures

18 Association;

19 ‘‘(B) have rules that are designed to prevent

20 fraudulent and manipulative acts and practices, to

21 promote just and equitable principles of trade, and,

22 in general, to protect investors and the public inter23 est; and are not designed to regulate by virtue of

24 any authority conferred by this title matters not re-
19

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1 lated to the purposes of this title or the administra2 tion of the association;

3 ‘‘(C) have rules that provide that (subject to

4 any rule or order of the Commission pursuant to

5 section 19(g)(2)) its members and persons associ6 ated with its members shall be appropriately dis7 ciplined for violation of any provision of the securi8 ties laws applicable to security future products, the

9 rules or regulations thereunder, or the rules of the

10 association, by expulsion, suspension, limitation of

11 activities, functions, and operations, fine, censure,

12 being suspended or barred from being associated

13 with a member, or any other fitting sanction;

14 ‘‘(D) have rules that ensure that members and

15 natural persons associated with members meet such

16 standards of training, experience, and competence

17 necessary to effect transactions in security future

18 products and are tested for their knowledge of secu19 rities and security future products; and

20 ‘‘(E) have rules governing sales practices and

21 the advertising of security future products com22 parable to those of other national securities associa23 tions registered pursuant to section 15A(a).
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1 ‘‘(3) The National Futures Association shall be ex2 empt from submitting proposed rule changes pursuant to

3 section 19(b) of this title, except that:

4 ‘‘(A) it shall file proposed rule changes related

5 to higher margin levels, fraud or manipulation, rec6 ordkeeping, reporting, listing standards of security

7 future products, or sales practices or standards of

8 training, experience, competence, or other qualifica9 tions for persons who effect transactions in security

10 future products or rules primarily related to its obli11 gation to enforce the securities laws pursuant to sec12 tion 19(b)(7);

13 ‘‘(B) it shall file pursuant to sections 19(b)(1)

14 and 19(b)(2) proposed rule changes related to mar15 gin, except for changes to higher margin levels; and

16 ‘‘(C) it shall file pursuant to section 19(b)(1)

17 proposed rule changes that have been abrogated by

18 the Commission pursuant to section 19(b)(7)(C).

19 ‘‘(4) The National Futures Association shall be ex20 empt from and shall not be required to enforce compliance

21 by its members, and its members shall not, solely with re22 spect to their transactions effected in security future prod23 ucts, be required to comply, with the following provisions

24 of this title and the rules thereunder:
21

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1 ‘‘(A) subsections (b)(1), (b)(3), (b)(4), (b)(5),

2 (b)(8), (b)(10), (b)(11), (b)(12), (b)(13), (c), (d),

3 (e), (f), (g), (h), and (i) of section 15A;

4 ‘‘(B) subsections (d) and (f) of section 17; and

5 ‘‘(C) subsections (a), (f), and (h) of section

6 19.’’.

7 ‘‘(d) EXEMPTION UNDER THE SECURITIES INVESTOR

8 PROTECTION ACT OF 1970.—

9 (1) Section 16(14) of the Securities Investor

10 Protection Act of 1970 (15 U.S.C. 78lll(14)) is

11 amended by inserting ‘‘or any security future as that

12 term is defined in Section 3(a)(55)(A) of the Securi13 ties Exchange Act of 1934,’’ between ‘‘certificate of

14 deposit for a security,’’ and ‘‘any investment con15 tract or certificate of interest or participation’’; and

16 (2) Section 3(a)(2) of the Securities Investor

17 Protection Act of 1970 (15 U.S.C. 78ccc(a)(2)) is

18 amended—

19 (A) in subparagraph (A)(i), by striking

20 ‘‘and’’ after the semicolon;

21 (B) in subparagraph (A)(ii), by striking

22 the period and inserting ‘‘; and’’;

23 (C) by adding at the end the following:

24 ‘‘(iii) persons who are registered as a

25 broker or dealer pursuant to section
22

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1 15(b)(11)(A) of the Securities Exchange

2 Act of 1934.’’.

3 (e) OTHER PROVISION.—Section 15(i)(6)(A) of the

4 Securities Exchange Act of 1934 (15 U.S.C. 78o(i)(6)(A))

5 is amended—

6 (1) in subparagraph (A)(ii), by striking

7 ‘‘and’’;

8 (2) in subparagraph (A)(iii), by striking

9 the period and inserting ‘‘; and’’;

10 (3) by adding at the end the following:

11 ‘‘(iv) is not a security future prod12 uct.’’.

13 SEC. 104. SPECIAL PROVISIONS FOR INTERAGENCY CO14 OPERATION.

15 Section 17 of the Securities Exchange Act of 1934

16 (15 U.S.C. 78q) is amended by striking subsection (b) and

17 inserting the following:

18 ‘‘(b)(1) All records of persons described in subsection

19 (a) are subject at any time, or from time to time, to such

20 reasonable periodic, special, or other examinations by rep21 resentatives of the Commission and the appropriate regu22 latory agency for such persons as the Commission or the

23 appropriate regulatory agency for such persons deems nec24 essary or appropriate in the public interest, for the protec25 tion of investors, or otherwise in furtherance of the pur-
23

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1 poses of this title if the Commission, prior to conducting

2 any such examination of a—

3 ‘‘(A) registered clearing agency, registered

4 transfer agent, or registered municipal securities

5 dealer for which it is not the appropriate regulatory

6 agency, gives notice to the appropriate regulatory

7 agency for such clearing agency, transfer agent, or

8 municipal securities dealer, of such proposed exam9 ination and consults with the appropriate regulatory

10 agency concerning the feasibility and desirability of

11 coordinating such examinations conducted by the ap12 propriate regulatory agency with a view to avoiding

13 unnecessary regulatory duplication or undue regu14 latory burdens for such clearing agency, transfer

15 agent, or municipal securities dealer; or

16 ‘‘(B) broker or dealer registered pursuant to

17 section 15(b)(11) or exchange registered pursuant to

18 section 6(g), gives notice to the Commodity Futures

19 Trading Commission of such proposed examination

20 and consults with the Commodity Futures Trading

21 Commission concerning the feasibility and desir22 ability of coordinating such examination with exami23 nations conducted by the Commodity Futures Trad24 ing Commission with a view to avoiding unnecessary
24

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1 regulatory duplication or undue regulatory burdens

2 for such broker or dealer or exchange.

3 ‘‘(2) The Commission shall notify the Commodity Fu4 tures Trading Commission of any examination conducted

5 of any broker or dealer registered pursuant to section

6 15(b)(11) or exchange registered pursuant to section 6(g),

7 and, upon request, furnish to the Commodity Futures

8 Trading Commission any examination report and data

9 supplied to the Commission in connection with such exam10 ination.

11 ‘‘(3) The Commission shall, to the fullest extent pos12 sible, use the reports of examinations of any broker or

13 dealer registered pursuant to section 15(b)(11) or ex14 change registered pursuant to section 6(g) made by the

15 Commodity Futures Trading Commission, the National

16 Futures Association, or an exchange registered pursuant

17 to section 6(g).

18 ‘‘(4) Nothing in this subsection shall be construed to

19 impair or limit (other than by the requirement of prior

20 consultation) the power of the Commission under this sub21 section to examine any clearing agency, transfer agent, or

22 municipal securities dealer, broker or dealer registered

23 pursuant to section 15(b)(11), or exchange registered pur24 suant to section 6(g), or to affect in any way the power

25 of the Commission under any other provision of this title
25

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1 or otherwise to inspect, examine, or investigate any clear2 ing agency, transfer agent, or municipal securities dealer,

3 broker or dealer registered pursuant to section 15(b)(11),

4 or exchange registered pursuant to section 6(g).’’.

5 SEC. 105. MAINTENANCE OF MARKET INTEGRITY FOR SE6 CURITY FUTURE PRODUCTS.

7 (a) ADDITION OF SECURITY FUTURE PRODUCTS TO

8 OPTION-SPECIFIC ENFORCEMENT PROVISIONS.—

9 (1) PROHIBITION AGAINST MANIPULATION.—

10 Section 9(b) of the Securities Exchange Act of 1934

11 (15 U.S.C. 78i) is amended—

12 (A) in paragraph (1), by inserting ‘‘(A)’’

13 between ‘‘acquires’’ and ‘‘any’’ and by striking

14 ‘‘; or’’ and inserting ‘‘, or (B) any contract of

15 sale of the security for future delivery; or’’;

16 (B) in paragraph (2), by inserting ‘‘(A)’’

17 between ‘‘any’’ and ‘‘such’’ and by striking

18 ‘‘; or’’ and inserting ‘‘or (B) such contract of

19 sale for future delivery; or’’; and

20 (C) in paragraph (3), by inserting ‘‘(A)’’

21 between ‘‘any’’ and ‘‘such’’ and inserting ‘‘or

22 (B) contract of sale for future delivery’’ be23 tween ‘‘security’’ and ‘‘with’’.

24 (2) LIABILITY OF CONTROLLING PERSONS AND

25 PERSONS WHO AID AND ABET VIOLATIONS.—Section
26

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1 20(d) of the Securities Exchange Act of 1934 (15

2 U.S.C. 78t) is amended by striking ‘‘or privilege’’

3 and inserting ‘‘privilege, or security future product’’.

4 (3) LIABILITY TO CONTEMPORANEOUS TRADERS

5 FOR INSIDER TRADING.—Section 21A(a)(1) of the

6 Securities Exchange Act of 1934 (15 U.S.C. 78u–

7 1(a)(1)) is amended by striking ‘‘standardized op8 tions, the Commission—’’ and inserting ‘‘standard9 ized options or security future products, the Com10 mission—’’.

11 (4) ENFORCEMENT CONSULTATION.—Section

12 21 of the Securities Exchange Act of 1934 (15

13 U.S.C. 78u) is amended by adding at the end the

14 following:

15 ‘‘(i) The Commission shall file with

16 the Commodity Futures Trading Commis17 sion notice of the commencement of any

18 proceeding and a copy of any order entered

19 by the Commission against any broker or

20 dealer registered pursuant to section

21 15(b)(11) or any exchange registered pur22 suant to section 6(g).’’.
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1 SEC. 106. SPECIAL PROVISIONS FOR THE TRADING OF SE2 CURITY FUTURE PRODUCTS.

3 (a) LISTING STANDARDS.—Section 6 of the Securi4 ties Exchange Act of 1934 (15 U.S.C. 78f) is amended

5 by inserting after subsection (g), as added by this Act,

6 the following:

7 ‘‘(h)(1) It shall be unlawful for any person to effect

8 transactions in security future products otherwise than on

9 a national securities exchange or a national securities as10 sociation registered pursuant to section 15A(a).

11 ‘‘(2) A national securities exchange or a national se12 curities association registered pursuant to section 15A(a)

13 may trade only security future products that conform with

14 listing standards that such exchanges file with the Com15 mission under section 19(b)(7) and the Commodity Fu16 tures Trading Commission under section ll of the Com17 modity Exchange Act (7 U.S.C. ll).

18 ‘‘(3) Such listing standards must:

19 ‘‘(A) require that any security underlying the

20 security future, including each component security of

21 a narrow-based security index, be registered pursu22 ant to section 12 of this title;

23 ‘‘(B) require that the security future product be

24 cash settled;

25 ‘‘(C) be no less restrictive than comparable list26 ing standards for options;
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1 ‘‘(D) require that the security future be based

2 upon common stock and such other equity securities

3 as the Commission determines appropriate;

4 ‘‘(E) require that the security future product is

5 guaranteed by a clearing agency that has in place

6 provisions for linked and coordinated clearing with

7 other clearing agencies that guarantee security fu8 ture products, which permits the security future

9 product to be purchased on a national securities ex10 change or national securities association registered

11 pursuant to section 15A(a) and offset on another

12 national securities exchange or national securities

13 association registered pursuant to section 15A(a);

14 ‘‘(F) require that only a broker or dealer sub15 ject to suitability rules comparable to those of a na16 tional securities association registered pursuant to

17 section 15A(a) effect transactions in the security fu18 ture product;

19 ‘‘(G) require that the security future product be

20 subject to the prohibition against dual trading in

21 section 4(j) of the Commodity Exchange Act (7

22 U.S.C. 6j) or the provisions of section 11(a) of this

23 title and the rules and regulations thereunder, ex24 cept to the extent otherwise permitted under this

25 title and the rules and regulations thereunder;
29

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1 ‘‘(H) require that trading in the security future

2 product and any security that underlies the security

3 future product not be readily susceptible to manipu4 lation;

5 ‘‘(I) require that procedures be in place for co6 ordinated surveillance to detect manipulation and in7 sider trading between the market trading the secu8 rity future product, the market trading the securities

9 underlying the security future product, and other

10 markets trading related securities;

11 ‘‘(J) require that the market trading the secu12 rity future product has in place audit trails nec13 essary or appropriate to facilitate the coordinated

14 surveillance required in subparagraph (I);

15 ‘‘(K) require that the market trading the secu16 rity future product has in place procedures to co17 ordinate trading halts between that market and mar18 kets trading the securities underlying the security

19 future product and other markets trading related se20 curities; and

21 ‘‘(L) require that initial and maintenance mar22 gin levels for a security future product shall not be

23 lower than the levels of margin required on a com24 parable option traded on an exchange registered pur25 suant to section 6(a) of this title.
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1 ‘‘(4) No person shall offer to enter into, enter into,

2 or confirm the execution of any option on a securities fu3 ture: Provided, however, That after 3 years from the date

4 of enactment of this Act the Commission and the Com5 modity Futures Trading Commission may by order deter6 mine to permit trading of options on any security future

7 authorized to be traded under the provisions of this Act.

8 Before any such determination, the Commission and the

9 Commodity Futures Trading Commission shall conduct a

10 study of the effect of the trading of security futures on

11 the markets for futures contracts, securities, and options

12 and the adequacy of protections for investors and other

13 market participants.’’.

14 (b) MARGIN.—Section 7(c)(1) of the Securities Ex15 change Act of 1934 (15 U.S.C. 78g) is amended—

16 (1) in subparagraph (A), by inserting ‘‘except

17 as provided in subparagraph (C),’’ between ‘‘secu18 rity),’’ and ‘‘in contravention’’ and by striking ‘‘and’’

19 after the semicolon;

20 (2) in subparagraph (B), by striking the period

21 and inserting ‘‘; and’’; and

22 (3) by adding at the end the following:

23 ‘‘(C) JOINT REGULATIONS.—

24 ‘‘(i) It shall be unlawful for any

25 broker, dealer, or member of a national se-
31

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1 curities exchange to, directly or indirectly,

2 extend or maintain credit to or for, ar3 range for the extension or maintenance of

4 credit for, or collect margin from any cus5 tomer on any security future product in

6 contravention of the rules and regulations

7 which the Commission and the Commodity

8 Futures Trading Commission shall pre9 scribe pursuant to subparagraph (C)(ii).

10 ‘‘(ii) The Commission and the Com11 modity Futures Trading Commission shall

12 issue jointly such regulations to establish

13 margin requirements, including the estab14 lishment of levels of margin (initial and

15 maintenance) and use of collateral for se16 curity future products under such terms,

17 and at such levels as the Commission and

18 the Commodity Futures Trading Commis19 sion jointly deem: (I) appropriate to pre20 serve the financial integrity of markets

21 trading security future products; (II) to

22 prevent systemic risk; (III) to make equiv23 alent the margin levels (initial and mainte24 nance) and other margin requirements be25 tween security future products and com-
32

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1 parable options traded on a national secu2 rities exchange; and (IV) to ensure that

3 the margin requirements, other than levels

4 of margin, including the type, form, and

5 use of collateral for security future prod6 ucts, are and remain consistent with the

7 requirements for options traded on a na8 tional securities exchange established by

9 the Federal Reserve Board, pursuant to

10 subparagraphs (A) and (B).’’.

11 (c) INCORPORATION OF SECURITY FUTURE PROD12 UCTS INTO THE NATIONAL MARKET SYSTEM.—Section

13 11A of the Securities Exchange Act of 1934 (15 U.S.C.

14 78k–1) is amended by adding at the end the following:

15 ‘‘(e)(1) With respect to security future products, the

16 Commission and the Commodity Futures Trading Com17 mission shall consult and cooperate so that, to the max18 imum extent practicable, their respective regulatory re19 sponsibilities may be fulfilled and the rules and regulations

20 applicable to security future products may foster a na21 tional market system for security future products if the

22 Commission and the Commodity Futures Trading Com23 mission determine that such a system would be consistent

24 with the Congressional findings in subsection (a)(1). In

25 accordance with this objective, the Commission shall, at
33

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1 least fifteen days prior to the issuance for public comment

2 of any proposed rule or regulation under this section con3 cerning security future products, consult and request the

4 views of the Commodity Futures Trading Commission.

5 ‘‘(2) No rule adopted pursuant to this section shall

6 be applied to any person with respect to security future

7 products traded on an exchange that is registered under

8 section 6(g) unless the Commodity Futures Trading Com9 mission has issued an order directing that such rule is ap10 plicable to such persons.’’.

11 (d) INCORPORATION OF SECURITY FUTURE PROD12 UCTS INTO THE NATIONAL SYSTEM FOR CLEARANCE AND

13 SETTLEMENT.—Section 17A(b) of the Securities Ex14 change Act of 1934 (15 U.S.C. 78q–1(b)) is amended by

15 adding at the end the following:

16 ‘‘(7) A clearing agency that is regulated directly

17 or indirectly by the Commodity Futures Trading

18 Commission through its association with a des19 ignated contract market for security future products,

20 and that only performs the functions of a clearing

21 agency with respect to security future products and

22 transactions in securities effected pursuant to the

23 rules of the designated contract market with which

24 it is associated, is exempted from the provisions of

25 this section and the rules and regulations there-
34

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1 under, except that any clearing agency that performs

2 the functions of a clearing agency with respect to se3 curity future products must coordinate with and de4 velop fair and reasonable links with any and all

5 other clearing agencies that perform the functions of

6 a clearing agency with respect to security future

7 products, which will permit security future product

8 to be purchased on a national securities exchange or

9 national securities association registered pursuant to

10 section 15A(a)and offset on another national securi11 ties exchange or national securities association reg12 istered pursuant to section 15A(a).’’.

13 (e) MARKET EMERGENCY POWERS AND CIRCUIT

14 BREAKERS.—Section 12(k) of the Securities Exchange

15 Act of 1934 (15 U.S.C. 78l(k)) is amended—

16 (1) in paragraph (1), by adding at the end the

17 following: ‘‘If the actions described in subparagraph

18 (A) or (B) involve a security future product, the

19 Commission shall consult with and consider the

20 views of the Commodity Futures Trading Commis21 sion.’’; and

22 (2) in paragraph (2)(A), by inserting between

23 ‘‘extensions.’’ and ‘‘In exercising’’ the following: ‘‘If

24 the actions described in subparagraph (A) involve a

25 security future product, the Commission shall con-
35

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1 sult with and consider the views of the Commodity

2 Futures Trading Commission.’’.

3 SEC. 107. AMENDMENTS RELATING TO REGISTRATION AND

4 DISCLOSURE ISSUES UNDER THE SECURI5 TIES ACT OF 1933 AND THE SECURITIES EX6 CHANGE ACT OF 1934.

7 (a) AMENDMENTS TO THE SECURITIES ACT OF

8 1933.—

9 (1) Section 2(a) of the Securities Act of 1933

10 (15 U.S.C. 77b(a)) is amended—

11 (A) in paragraph (1), by inserting ‘‘secu12 rity future,’’ between ‘‘treasury stock,’’ and

13 ‘‘bond’’;

14 (B) in paragraph (3), by adding at the end

15 the following: ‘‘Any offer or sale of a security

16 future product by or on behalf of the issuer of

17 the securities underlying the security future

18 product, an affiliate of the issuer, or an under19 writer, will constitute a contract for sale of, sale

20 of, offer for sale, or offer to sell the issuer’s un21 derlying securities.’’;

22 (C) in paragraph (10), by adding at the

23 end of the following: ‘‘Any materials meeting

24 the requirements of section ll of the Securi25 ties Exchange Act of 1934 or section ll of
36

S 2765 IS

1 the Commodity Exchange Act (7 U.S.C. ll )

2 shall not be deemed to constitute a prospectus

3 for the offer or sale of a security future prod4 uct.’’; and

5 (D) by adding at the end the following:

6 ‘‘(16)(A) The term ‘security future’ means

7 a contract of sale for future delivery of a single

8 security or of a narrow-based security index, in9 cluding any interest therein or based on the

10 value thereof.

11 ‘‘(B) A ‘narrow-based security index’ is an

12 index—

13 ‘‘(i) that has 10 or fewer component

14 securities;

15 ‘‘(ii) in which the securities of a single

16 issuer account on average, over the six17 month period ending on the date equity op18 tions expire in June of each year and over

19 the six-month period ending on the date

20 equity options expire in December of each

21 year, for more than 10% of the market

22 capitalization of that index;

23 ‘‘(iii) in which the securities of a sin24 gle issuer in a price-weighted (or other

25 non-capitalization weighted) index account
37

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1 on average, over the six-month period end2 ing on the date equity options expire in

3 June of each year and over the six-month

4 period ending on the date equity options

5 expire in December of each year, for more

6 than three times their weight in the index

7 if calculated on a market-capitalization

8 basis;

9 ‘‘(iv) in which any component security

10 has an average daily trading volume value

11 of less than $1 million or an aggregate

12 market value of the voting and non-voting

13 common equity held by non-affiliates of

14 less than $150 million;

15 ‘‘(v) in which the average correlation

16 of the securities in the index to the index

17 itself is greater than 0.6 over the six18 month period ending on the date equity op19 tions expire in June of each year and over

20 the six-month period ending on the date

21 equity options expire in December of each

22 year; or

23 ‘‘(vi) in which the correlation of any

24 security in the index to the index itself is

25 greater than 0.9 over the six-month period
38

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1 ending on the date equity options expire in

2 June of each year and over the six-month

3 period ending on the date equity options

4 expire in December of each year.

5 ‘‘(17) The term ‘security future product’

6 means a security future or any put, call, strad7 dle, option, or privilege on any security fu8 ture.’’.

9 (2) Section 3(a) of the Securities Act of 1933

10 (15 U.S.C. 77c) is amended by adding at the end

11 the following:

12 ‘‘(14) Any security future product that is (A)

13 guaranteed by a clearing agency registered under

14 section 17A of the Securities Exchange Act of 1934

15 or exempt from registration under paragraph (b)(4)

16 of section 17A of the Securities Exchange Act of

17 1934; and (B) traded on a national securities ex18 change or a national securities association registered

19 pursuant to section 15A(a) of the Securities Ex20 change Act of 1934.’’.

21 (3) Section 12(a)(2) of the Securities Act of

22 1933 (15 U.S.C. 77l(a)(2)) is amended by striking

23 ‘‘paragraph 2’’ and inserting ‘‘paragraphs (2) and

24 (14)’’.
39

S 2765 IS

1 (b) AMENDMENTS TO THE SECURITIES EXCHANGE

2 ACT OF 1934.—

3 (1) Section 12(a) of the Securities Exchange

4 Act of 1934 (15 U.S.C. 78l(a)) is amended by add5 ing at the end the following:

6 ‘‘(1) The provisions of this subsection shall not

7 apply in respect of a security future product listed

8 on a national securities exchange.’’.

9 (2) Section 12(g)(5) of the Securities Exchange

10 Act of 1934 (15 U.S.C. 78l(g)) is amended by add11 ing at the end the following: ‘‘For purposes of this

12 subsection, a security future product shall not be

13 considered a class of equity security of the issuer of

14 the securities underlying the security future prod15 uct.’’; and

16 (3) Section 16 of the Securities Exchange Act

17 of 1934 (15 U.S.C. 78p) is amended by adding at

18 the end the following:

19 ‘‘(f) The provisions of this section shall apply to own20 ership of and transactions in security future products as

21 if they were ownership of and transactions in the under22 lying equity security. The Commission may adopt such

23 rules and regulations as it deems necessary or appropriate

24 in the public interest to carry out the purposes of this sec25 tion.’’.
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1 SEC. 108. AMENDMENTS TO THE INVESTMENT COMPANY

2 ACT OF 1940 AND THE INVESTMENT ADVIS3 ERS ACT OF 1940.

4 (a) DEFINITIONS UNDER THE INVESTMENT COM5 PANY ACT OF 1940 AND THE INVESTMENT ADVISERS ACT

6 OF 1940.—

7 (1) Section 2(a)(36) of the Investment Com8 pany Act of 1940 (15 U.S.C. 80a–2(a)(36)) is

9 amended by inserting ‘‘security future,’’ between

10 ‘‘treasury stock,’’ and ‘‘bond’’;

11 (2) Section 202(a)(18) of the Investment Advis12 ers Act of 1940 (15 U.S.C. 80b–2(a)(18)) is amend13 ed by inserting ‘‘security future,’’ between ‘‘treasury

14 stock,’’ and ‘‘bond’’;

15 (3) Section 2(a) of the Investment Company

16 Act of 1940 (15 U.S.C. 801–2(a)) is amended by

17 adding at the end the following:

18 ‘‘(52)(A) ‘Security future’ means a contract of

19 sale for future delivery of a single security other

20 than an exempted security under section 3 of the Se21 curities Act of 1933 or of a narrow-based security

22 index, including any interest therein or based on the

23 value thereof.

24 ‘‘(B) A ‘narrow-based security index’ is an

25 index—
41

S 2765 IS

1 ‘‘(i) that has 10 or fewer component secu2 rities;

3 ‘‘(ii) in which the securities of a single

4 issuer account on average, over the six-month

5 period ending on the date equity options expire

6 in June of each year and over the six-month pe7 riod ending on the date equity options expire in

8 December of each year, for more than 10% of

9 the market capitalization of that index;

10 ‘‘(iii) in which the securities of a single

11 issuer in a price-weighted (or other non-capital12 ization weighted) index account on average,

13 over the six-month period ending on the date

14 equity options expire in June of each year and

15 over the six-month period ending on the date

16 equity options expire in December of each year,

17 for more than three times their weight in the

18 index if calculated on a market-capitalization

19 basis;

20 ‘‘(iv) in which any component security has

21 an average daily trading volume value of less

22 than $1 million or an aggregate market value

23 of the voting and non-voting common equity

24 held by non-affiliates of less than $150 million;
42

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1 ‘‘(v) in which the average correlation of the

2 securities in the index to the index itself is

3 greater than 0.6 over the six-month period end4 ing on the date equity options expire in June of

5 each year and over the six-month period ending

6 on the date equity options expire in December

7 of each year; or

8 ‘‘(vi) in which the correlation of any secu9 rity in the index to the index itself is greater

10 than 0.9 over the six-month period ending on

11 the date equity options expire in June of each

12 year and over the six-month period ending on

13 the date equity options expire in December of

14 each year.’’; and

15 (4) Section 202(a) of the Investment Advisers

16 Act of 1940 (15 U.S.C. 80b–2(a)) is amended by

17 adding at the end the following:

18 ‘‘(25)(A) ‘Security future’ means a contract of

19 sale for future delivery of a single security or of a

20 narrow-based security index, including any interest

21 therein or based on the value thereof.

22 ‘‘(B) A ‘narrow-based security index’ is an

23 index—

24 ‘‘(i) that has 10 or fewer component secu25 rities;
43

S 2765 IS

1 ‘‘(ii) in which the securities of a single

2 issuer account on average, over the six-month

3 period ending on the date equity options expire

4 in June of each year and over the six-month pe5 riod ending on the date equity options expire in

6 December of each year, for more than 10% of

7 the market capitalization of that index;

8 ‘‘(iii) in which the securities of a single

9 issuer in a price-weighted (or other non-capital10 ization weighted) index account on average,

11 over the six-month period ending on the date

12 equity options expire in June of each year and

13 over the six-month period ending on the date

14 equity options expire in December of each year,

15 for more than three times their weight in the

16 index if calculated on a market-capitalization

17 basis;

18 ‘‘(iv) in which any component security has

19 an average daily trading volume value of less

20 than $1 billion or an aggregate market value of

21 the voting and non-voting common equity held

22 by non-affiliates of less than $150 million;

23 ‘‘(v) in which the average correlation of the

24 securities in the index to the index itself is

25 greater than 0.6 over the six-month period end-
44

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1 ing on the date equity options expire in June of

2 each year and over the six-month period ending

3 on the date equity options expire in December

4 of each year; or

5 ‘‘(vi) in which the correlation of any secu6 rity in the index to the index itself is greater

7 than 0.9 over the six-month period ending on

8 the date equity options expire in June of each

9 year and over the six-month period ending on

10 the date equity options expire in December of

11 each year.’’.

12 (b) OTHER PROVISION.—Section 203(b) of the In13 vestment Advisers Act of 1940 (15 U.S.C. 80b–3(b)) is

14 amended by adding at the end the following:

15 ‘‘(6) any investment adviser that is registered,

16 or required to be registered, with the Commodity

17 Futures Trading Commission as a commodity trad18 ing advisor and whose business does not consist pri19 marily of acting as a investment adviser, as defined

20 in section 202(a)(11) of this title.’’.

21 SEC. 109. EFFECTIVE DATE.

22 The amendments made by this title shall become ef23 fective one year after the date of enactment of this Act.

Æ