Federal Register / Vol. 73, No. 196 / Wednesday, October 8, 2008 / Notices 59011 

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

2 17 CFR 240.19b–7. 

3NFA filed a letter from the CFTC notifying the 

NFA that it had determined not to review the 

proposed rule change. See note 4. 

4See letter from William Penner, Deputy Director, 

CFTC, to Thomas W. Sexton, III, Esq., General 

Counsel, NFA, dated September 18, 2008. 

5 15 U.S.C. 78o–3(k). 

6 15 U.S.C. 78o(b)(11). 

7There are more than 13,000 individuals who 

have ever worked as an AP at a Disciplined Firm. 

Approximately 2,100 of those individuals are 

Continued 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–58709; File No. SR–NFA– 

2008–02] 

Self-Regulatory Organizations; 

National Futures Association; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change Relating to 

Technical Amendments to the 

Interpretive Notice Regarding 

Compliance Rule 2–9: Enhanced 

Supervisory Requirements 

October 1, 2008. 

Pursuant to Section 19b(7) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–7 under the 

Act,2 notice is hereby given that on 

September 5, 2008, the National Futures 

Association (‘‘NFA’’) filed with the 

Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’) the proposed 

rule change described in Items I, II, and 

III below, which Items have been 

prepared by the NFA.3 The Commission 

is publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. NFA also has 

filed this proposed rule change 

concurrently with the Commodity 

Futures Trading Commission (‘‘CFTC’’). 

On September 5, 2008, the NFA 

requested that the CFTC make a 

determination that review of the 

proposed rule change is not necessary. 

On September 18, 2008, the CFTC 

notified the NFA that the CFTC has 

determined not to review the proposed 

rule change.4

I. Self-Regulatory Organization’s 

Description and Text of the Proposed 

Rule Change 

The NFA’s Board of Directors 

(‘‘Board’’) adopted two revisions to NFA 

Compliance Rule 2–9’s Interpretive 

Notice entitled ‘‘Enhanced Supervisory 

Requirements’’ (‘‘Notice’’). The changes 

include a limited expansion of an 

existing exemption for some associated 

persons (‘‘APs’’) who worked at a 

Disciplined Firm more than ten years 

ago from being counted for purposes of 

calculating whether a Member that hires 

such an individual is required to adopt 

the enhanced supervisory procedures. 

The second change is to the language in 

the Notice describing the enhanced 

capital component to change the 

requirement for Forex Dealer Members 

(‘‘FDMs’’) from a fixed amount to 150 

percent of their capital requirement to 

cover recent changes to capital 

requirements and to make the provision 

more flexible in addressing future 

changes to capital requirements. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for the Proposed Rule 

Change 

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 Rule 

Change 

1. Purpose 

Section 15A(k) of the Act 5 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 

under Section 15(b)(11) of the Act.6

NFA’s Interpretive Notice entitled 

‘‘Compliance Rule 2–9: Enhanced 

Supervisory Requirements’’ applies to 

all Members who meet the criteria in the 

Interpretive Notice and could apply to 

Members registered under Section 

15(b)(11). 

NFA’s Board of Directors first adopted 

the Notice in January 1993. It requires 

a Member to undertake enhanced 

supervisory requirements if its sales 

force includes a specified number of 

individuals who have worked at 

Disciplined Firms, or if a principal of 

the firm has been a principal of another 

firm that has been subject to the 

enhanced supervisory requirements, or, 

under certain circumstances, when a 

Member becomes subject to a 

disciplinary action. 

The Board has amended the Notice 

from time to time based on various 

changes affecting the membership and 

on practical lessons learned from 

administering the Notice. Over the past 

several years, the Board has recognized 

that some APs who were counted as 

having worked at a Disciplined Firm 

under the original version of the Notice 

had personal employment histories that 

indicated that they posed no more risk 

to the public than the AP population at 

large. The Board recognized that 

employers may be wary of hiring such 

individuals despite years of Associate 

membership without disciplinary 

problems. This is particularly true with 

small firms, where hiring one of these 

individuals might trigger the enhanced 

supervisory procedures and require the 

firm to apply for a waiver. In addition, 

some firms are simply loath to hire any 

individual who would be counted as 

having come from a Disciplined Firm, 

even if doing so would not trigger the 

enhanced supervisory procedures. 

Currently, the Notice provides for two 

types of exemptions, which focus on an 

AP’s length of employment at a 

Disciplined Firm (i.e., less than sixty 

days) and the time since an AP has been 

employed at a Disciplined Firm (i.e., 

more than ten years). The Board decided 

to grant relief to these defined groups 

because staff’s analysis showed that 

given their background they pose 

minimal risk. With regard to the second 

type of exemption, the Notice currently 

provides that APs are exempt from 

being counted as having worked at a 

Disciplined Firm if: (1) They worked at 

only one Disciplined Firm; (2) that 

employment terminated more than ten 

years ago; (3) they have not personally 

been subject to a disciplinary action by 

NFA or the CFTC; (4) they have been 

registered as APs and Associate 

Members of NFA for eight of the last ten 

years; and (5) since working for the 

Disciplined Firm they have not worked 

for any other firm that has been subject 

to a sales practice action. 

In practice, this latter condition acts 

as a de facto perpetual bar to receiving 

the exemption even if the AP’s 

employment at the second firm subject 

to a sales practice action also occurred 

many years in the past. 

The NFA performed an analysis of the 

effect of applying a ten-year time limit 

not only to the length of time since an 

AP was employed at a Disciplined Firm 

but also to the condition that the AP not 

work at a firm that had a sales practice 

action since being employed at the 

Disciplined Firm. This analysis showed 

that the current exemption could 

prudently be revised to include APs 

who met the other existing criteria, and 

who had worked more than ten years 

ago at a firm that was subject to a sales 

practice action. This change would 

afford this exemption to approximately 

85 additional individuals who, based 

upon their employment histories, do not 

appear to pose any greater risk of using 

fraudulent sales tactics than the general 

population of APs.7


jlentini on PROD1PC65 with NOTICES
59012 Federal Register / Vol. 73, No. 196 / Wednesday, October 8, 2008 / Notices 

exempted from having to be included in a firm’s 

calculation of whether it has triggered enhanced 

supervision under the current exemptions provided 

for in the Notice. 8 15 U.S.C. 78o–3(k)(2)(B). 9See note 4. 

Excluding these APs from the 

calculation that triggers a firm’s 

obligation to comply with the enhanced 

supervisory procedures is consistent 

with the reasoning behind the existing 

exemptions. Ultimately, the proposed 

expanded exemption would have the 

effect of removing some nonproblematic individuals and Member 

firms from the waiver process. 

The Notice also provides that one of 

the enhanced supervisory requirements 

is an increased adjusted net capital 

(‘‘ANC’’) level. The Notice currently 

provides that FDMs that are required to 

undertake the enhanced supervisory 

requirements are obligated to maintain 

ANC of at least $2,000,000. When the 

Board adopted that provision, FDMs 

that were not subject to the enhanced 

supervisory requirements had a 

minimum ANC of $1,000,000. However, 

revisions to NFA Financial 

Requirements Section 11 in December 

2007 raised the required minimum level 

of ANC for all FDMs to $5,000,000, thus 

rendering the $2,000,000 requirement 

irrelevant. Furthermore, the CFTC 

Reauthorization Act of 2008 further 

increases the ANC for FDMs, phasing in 

the increase to an eventual $20 million. 

The proposed revisions to the 

enhanced supervisory requirements 

would reinstate an increased ANC level 

for FDMs and make the provision more 

flexible in addressing future changes. 

These revisions tie the enhanced ANC 

level for FDMs to the early warning 

requirement under CFTC rules, which is 

currently 150 percent of the required 

ANC. 

Under the proposal (and assuming the 

CFTC’s early warning percentage 

remains unchanged), a triggering FDM 

would currently have to maintain an 

enhanced ANC of $7,500,000, increasing 

to $30,000,000 as the minimum ANC for 

FDMs increases from $5,000,000 to 

$20,000,000 over the next year. This 

revision would not only have the effect 

of bringing the current enhanced ANC 

obligation into harmony with the 

revisions made to NFA Financial 

Requirements Section 11 in December 

2007, it would also keep the obligation 

in harmony with any future changes to 

the level of ANC required of FDMs 

without requiring further amendments 

to the Notice. 

Amendments to the Notice were 

previously filed in SR–NFA–2001–01, 

SR–NFA–2002–07, SR–NFA–2003–01, 

SR–NFA–2005–01, SR–NFA–2006–01, 

SR–NFA–2007–03, and SR–NFA–2007– 

07. 

2. Statutory Basis 

The rule change is authorized by, and 

consistent with, Section 15A(k)(2)(B) of 

the Act.8 That Section requires NFA to 

have rules that are 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, 

including rules governing sales 

practices and advertising of security 

futures products. The proposed rule 

change accomplishes this by imposing 

enhanced supervisory requirements on 

firms at risk for sales practice fraud, and 

the proposed rule change makes 

technical amendments to conform the 

Notice to NFA’s experience with the 

rule and to upcoming changes to the 

capital requirements. 

This proposed rule change is not 

designed to regulate, by virtue of any 

authority conferred by the Act, matters 

not related to the purposes of the Act or 

the administration of the association. To 

the extent that this proposal regulates 

activities and transactions other than 

security futures, the authority for 

regulating those activities and 

transactions comes from the Commodity 

Exchange Act rather than the securities 

laws. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The changes to the events that trigger 

application of the rule will lessen the 

burden on competition by exempting 

additional firms and individuals from 

the enhanced supervision requirements, 

which are imposed on NFA Member 

firms that hire a significant amount of 

their sales force from firms that have 

been barred from the industry for sales 

practice fraud. This part of the rule 

change should decrease the number of 

firms who are subject to the 

requirements. 

The changes to the capital 

requirement will impose additional 

burdens on firms subject to the rule. 

However, the primary impetus for this 

change is Congressional legislation 

raising the capital requirement for firms 

that act as counterparties to retail offexchange foreign currency transactions 

to an amount far in excess of the 

requirement currently set by the rule. 

While a small number of those firms 

may be registered as brokers or dealers 

under Section 15(b)(11) of the Act, the 

capital requirement is based on 

activities unrelated to that registration. 

Furthermore, the Board has considered 

the burden on competition and has 

determined a larger capital requirement 

is necessary and appropriate to protect 

customers from unethical practices by 

firms subject to the rule. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

NFA did not publish the rule changes 

to the membership for comment. NFA 

did not receive comment letters 

concerning the rule changes. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

On September 18, 2008, the CFTC 

notified the NFA that it had determined 

not to review the proposed rule change 

and, therefore, NFA was permitted to 

make the amendments effective as of 

this date.9 At any time 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 Act. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change conflicts with the Exchange 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–2008–02 on the 

subject line. 

Paper Comments 

• Send paper copies in triplicate to 

Secretary, Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR-NFA–2008–02. 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 


jlentini on PROD1PC65 with NOTICES
Federal Register / Vol. 73, No. 196 / Wednesday, October 8, 2008 / Notices 59013 

10 17 CFR 200.30–3(a)(73). 

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

2Securities Exchange Act Release No. 58314 

(Aug. 5, 2008), 73 FR 46958 (Aug. 12, 2008) [File 

No. SR–NSCC–2008–07]. 

3NSCC’s current processing functions are set 

forth in Procedure II, Section H of NSCC’s Rules. 

4The balancing amount is designed to 

compensate for any difference between the net asset 

value of the Index Receipt and the value of the 

underlying index. Among other reasons, a 

difference in value could result from the fact that 

an Index Receipt cannot contain fractional shares of 

a security. 

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 

Section, 100 F Street, NE., Washington, 

DC 20549, on official business days 

between the hours of 10 am and 3 pm. 

Copies of such filing also will be 

available for inspection and copying at 

the principal office of the NFA. 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–2008–02 and should 

be submitted on or before October 29, 

2008. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.10

Florence E. Harmon, 

Acting Secretary. 

[FR Doc. E8–23840 Filed 10–7–08; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–58694; File No. SR–NSCC– 

2008–07] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Order Approving 

Proposed Rule Change To Enhance 

Processing of Exchange-Traded Funds 

September 30, 2008. 

I. Introduction 

On July 22, 2008, the National 

Securities Clearing Corporation 

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

Exchange Commission (‘‘Commission’’), 

proposed rule change SR–NSCC–2008– 

07 pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’).1 The proposed rule change was 

published for comment in the Federal 

Register on August 12, 2008.2 No 

comment letters were received on the 

proposal. This order approves the 

proposal. 

II. Description 

The proposed rule change expands 

processing of shares in exchange-traded 

funds (‘‘Index Receipts’’) to allow for 

cash as a sole component of creations 

and redemptions and provides for an 

optional shortened processing cycle for 

creates and redeems of Index Receipts 

and their underlying components. 

A. Current Process 

Currently, on the day before trade 

date (‘‘T–1’’), an Index Receipt agent 

transmits files to NSCC that contain 

information regarding the underlying 

composition of Index Receipts for 

creates and redeems occurring the next 

business day.3 NSCC compiles the 

information that evening and provides 

members with a portfolio composition 

report listing the composition of Index 

Receipts eligible for processing. The 

report displays the proportionate 

amount of underlying stocks that 

compose each Index Receipt and 

contains a cash component, which is an 

estimation of accrued dividends and 

any necessary balancing amount.4 The 

portfolio information contained in this 

report is used for creation and 

redemption processing the next day, 

which is the Trade Date. On Trade Date, 

by such time as established by NSCC, 

the Index Receipt agent, acting on behalf 

of each member placing an Index 

Receipt order, will report to NSCC the 

number of Index Receipts created and 

redeemed that day. Transactions listed 

on the report are locked-in transactions 

between the Index Receipt agent and the 

member. The Index Receipt agent also 

will report the final cash amount and a 

transaction amount that represents the 

Index Receipt agent’s transaction fee. 

On the night of Trade Date, NSCC 

transmits an Index Receipt instruction 

detail report to members that had 

activity on Trade Date. The report serves 

as the contract for the creation and 

redemption activity and lists the 

number of component shares that the 

member, depending upon the 

underlying shares’ CNS eligibility, will 

deliver to or receive on settlement date 

(‘‘T+3’’) from CNS or as an item allotted 

through the Balance Order Accounting 

Operation. On the night of Trade Date, 

each Index Receipt instruction is 

separated into its underlying stock 

components, and these components are 

processed through CNS or the Balance 

Order Accounting Operation and are 

incorporated into the normal equity 

clearance and settlement process. 

Unsettled positions in Index Receipts 

and their component securities are 

currently risk managed as ordinary 

activity and are guaranteed pursuant to 

the provisions of Addendum K of 

NSCC’s rules. 

B. Enhancements 

For the past two years, demand for 

NSCC’s create and redeem service has 

increased significantly each year with 

activity for Index Receipts with nonU.S. equity components increasing the 

most. As more fully described below, 

the proposed enhancements will allow 

members to create Index Receipts that 

(i) have underlying securities other than 

domestic equity securities for cash as 

consideration and (ii) will allow an 

optional shortened settlement cycle for 

creates and redeems and their 

underlying components. 

1. Expand the Index Receipt Process to 

Allow for Cash as Sole Component for 

Creations and Redemptions 

Currently all component securities 

must be CNS eligible to qualify for 

NSCC’s Index Receipt processing. Cash 

is used as a component only for accrued 

dividends and any balancing amount 

but is not used as a separate underlying 

component. 

NSCC is expanding its Index Receipt 

processing to allow for creates and 

redeems using cash as the sole 

underlying component. This 

enhancement will allow members and 

their agent banks to create and redeem 

Index Receipts whose underlying 

components are not currently eligible 

for processing at NSCC (for example, 

commodity Index Receipts). The Index 

Receipt agent would use the cash to 

purchase the components, the 

settlement of which would occur 

outside of NSCC. 

2. T+1 and T+2 Settlement of Creations 

and Redemptions 

NSCC currently supports the creation 

and redemption of Index Receipts with 

underlying components scheduled to 

settle on a T+3 basis. NSCC is 

expanding its Index Receipt processing 

to allow a member to create and redeem 

Index Receipts with a shortened 

settlement cycle. Currently, shortened 

settlement for standard equity CNS 

trades (e.g., next day settlement) is 

reported in the Consolidated Trade 

Summary and guaranteed on the night 


jlentini on PROD1PC65 with NOTICES