Document ID: SEC-2009-1659-0001
Agency: sec
Document Type: Notice
Title: Joint Order Modifying the Listing Standards Requirements Under Section 6(h) of the Securities Exchange Act of 1934 and the Criteria Under Section 2(a)(1) of the Commodity Exchange Act
Posted Date: 2009-11-24T05:00Z

[Federal Register: November 24, 2009 (Volume 74, Number 225)]
[Notices]               
[Page 61380-61383]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24no09-82]                         

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COMMODITY FUTURES TRADING COMMISSION

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61027]

 
Joint Order Modifying the Listing Standards Requirements Under 
Section 6(h) of the Securities Exchange Act of 1934 and the Criteria 
Under Section 2(a)(1) of the Commodity Exchange Act

    The Securities Exchange Act of 1934 (``Exchange Act'') and the 
Commodity Exchange Act (``CEA'') set forth the types of securities on 
which security futures \1\ can be based. The Exchange Act provides that 
it is unlawful for any person to effect transactions in security 
futures that are not listed on a national securities exchange or a 
national securities association registered pursuant to Section 15A of 
the Exchange Act.\2\ The Exchange Act further provides that such 
exchange or association is permitted to trade only security futures 
that conform with listing standards filed with the Securities and 
Exchange Commission (``SEC'') and that meet the criteria specified in 
Section 2(a)(1)(D)(i) of the CEA.\3\ Section 2(a)(1)(D)(i) of the CEA 
permits the Commodity Futures Trading Commission (``CFTC'') to 
designate a board of trade as a contract market with respect to, or to 
register as a derivatives transaction execution facility to list or 
execute, transactions in security futures if the board of trade and the 
applicable contract meet the criteria specified in that section. 
Similarly, the Exchange Act requires that the listing standards filed 
with the SEC by an exchange or

[[Page 61381]]

association meet specified requirements.\4\
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    \1\ Security futures are futures contracts on single securities 
and narrow-based security indexes. See Section 3(a)(55)(A) of the 
Exchange Act, 15 U.S.C. 3(a)(55)(A), and Section 1a(31) of the CEA, 
7 U.S.C. 1a(31).
    \2\ Section 6(h)(1) of the Exchange Act, 15 U.S.C. 78f(h)(1).
    \3\ Section 6(h)(2) of the Exchange Act, 15 U.S.C. 78f(h)(2). 
See also 7 U.S.C. 2(a)(1)(D)(i).
    \4\ Section 6(h)(3) of the Exchange Act, 15 U.S.C. 78f(h)(3).
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    Among other things, the Exchange Act and the CEA require that any 
security underlying a security future, including each component 
security of a narrow-based security index, except as otherwise provided 
in a rule, regulation, or order, be registered pursuant to Section 12 
of the Exchange Act.\5\ In 2006, the SEC and CFTC (together, the 
``Commissions'') adopted SEC Rule 6h-2 \6\ and an amendment to CEA Rule 
41.21,\7\ respectively, to permit security futures to be based on 
individual debt securities or narrow-based indexes composed of such 
securities.\8\ However, because most debt securities are not registered 
under Section 12 of the Exchange Act,\9\ few security futures based on 
debt securities can be listed.
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    \5\ Section 6(h)(3)(A) of the Exchange Act, 15 U.S.C. 
78f(h)(3)(A), and Section 2(a)(1)(D)(i)(I) of the CEA, 7 U.S.C. 
2(a)(1)(D)(i)(I).
    \6\ 17 CFR 240.6h-2.
    \7\ 17 CFR 41.21.
    \8\ See Securities Exchange Act Release No. 54106 (July 6, 2006) 
71 FR 39534 (July 13, 2006) (``2006 Rulemaking'').
    \9\ In this regard, the Commissions note that, in a 2005 request 
for exemptive relief to permit its members, brokers, and dealers to 
trade certain unregistered debt securities, the New York Stock 
Exchange (``NYSE'') estimated that, out of over 22,000 publicly 
offered corporate bond issues having a par value in excess of $3 
trillion, only 8% of the $3 trillion par value of these debt 
securities was registered under the Exchange Act. See Securities 
Exchange Act Release No. 51998 (July 8, 2005), 70 FR 40748 (July 14, 
2005). The SEC granted the NYSE's request for exemptive relief, 
subject to certain conditions. See Securities Exchange Act Release 
No. 54766 (November 16, 2006), 71 FR 67657 (November 22, 2006) (File 
No. S7-06-05) (``NYSE Exemption'').
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    In addition, the Exchange Act \10\ and the CEA \11\ require that 
security futures be based upon common stock and such other equity 
securities as the Commissions may jointly determine to be appropriate. 
Pursuant to this authority, the Commissions previously issued joint 
orders to permit depository shares \12\ and shares of Exchange-Traded 
Funds, Trust Issued Receipts, and shares of registered closed-end 
management investment companies \13\ to underlie security futures 
(together, the ``Prior Joint Orders''). There are, however, other types 
of securities that underlie listed options that are neither common 
stock nor covered by the Prior Joint Orders.
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    \10\ 15 U.S.C. 78f(h)(3)(D).
    \11\ 7 U.S.C. 2(a)(1)(D)(i)(III).
    \12\ See Securities Exchange Act Release No. 44725 (August 20, 
2001).
    \13\ See Securities Exchange Act Release No. 46090 (June 19, 
2002), 67 FR 42760 (June 25, 2002).
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    Section 6(h)(4)(A) of the Exchange Act \14\ and Section 
2(a)(1)(D)(v)(I) of the CEA \15\ provide that the Commissions, by rule, 
regulation, or order, may jointly modify the listing standard 
requirements specified in Sections 6(h)(3)(A) and (D) of the Exchange 
Act \16\ and the criteria specified in Sections 2(a)(1)(D)(i)(I) and 
(III) of the CEA \17\ to the extent that such modification fosters the 
development of fair and orderly markets in security futures products, 
is necessary or appropriate in the public interest, and is consistent 
with the protection of investors. For the reasons and subject to the 
conditions discussed below, the Commissions believe that jointly 
modifying these requirements to permit any security that is eligible to 
underlie options traded on a national securities exchange to also 
underlie security futures, and to permit debt securities that are not 
registered under Section 12 of the Exchange Act (``unregistered debt 
securities'') to underlie security futures, will foster the development 
of fair and orderly markets, is necessary or appropriate in the public 
interest, and is consistent with the protection of investors.
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    \14\ 15 U.S.C. 78f(h)(4)(A).
    \15\ 7 U.S.C. 2(a)(1)(D)(v)(I).
    \16\ 15 U.S.C. 78f(h)(3)(A) and (D).
    \17\ 7 U.S.C. 2(a)(1)(D)(i)(I) and (III).
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I. Discussion

A. Security Futures Based on Securities Eligible To Underlie Options 
Traded on a National Securities Exchange

    Section 6(h)(3)(D) of the Exchange Act \18\ and Section 
2(a)(1)(D)(i)(III) of the CEA \19\ require that security futures be 
based upon common stock and such other equity securities as the 
Commissions jointly determine appropriate. Section 6(h)(4)(A) of the 
Exchange Act \20\ and Section 2(a)(1)(D)(v)(I) of the CEA \21\ provide 
that the Commissions, by rule, regulation, or order, may jointly modify 
this requirement to the extent that such modification fosters the 
development of fair and orderly markets in security futures products, 
is necessary or appropriate in the public interest, and is consistent 
with the protection of investors.
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    \18\ 15 U.S.C. 78f(h)(3)(D).
    \19\ 7 U.S.C. 2(a)(1)(D)(i)(III).
    \20\ 15 U.S.C. 78f(h)(4)(A).
    \21\ 7 U.S.C. 2(a)(1)(D)(v)(I).
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    The Commissions now believe that modifying the requirement in 
Section 6(h)(3)(D) of the Exchange Act and Section 2(a)(1)(D)(i)(III) 
of the CEA to permit any security that is eligible to underlie options 
traded on a national securities exchange to also underlie security 
futures will foster the development of fair and orderly markets in 
security futures products, is appropriate in the public interest, and 
is consistent with the protection of investors.
    To be eligible to underlie options traded on a national securities 
exchange, and, pursuant to this order, eligible to underlie security 
futures, a security must meet securities options listing standards of a 
national securities exchange. Options listing standards of a national 
securities exchange are rules of an exchange, and, as such, must be 
filed with the SEC pursuant to Section 19(b) of the Exchange Act,\22\ 
and comply with Section 6(b) of the Exchange Act.\23\ Section 6(b)(5) 
of the Exchange Act,\24\ in particular, requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system and, 
in general, to protect investors and the public interest. The SEC may 
not approve an options exchange's proposed rule, including a proposed 
options listing standard, unless the SEC finds that it is consistent 
with the requirements of the Exchange Act, including Section 6(b),\25\ 
and the rules and regulations under the Exchange Act. Accordingly, the 
Commissions believe that it is appropriate in the public interest and 
consistent with the protection of investors to modify the listing 
standard requirements in Section 6(h)(3)(D) of the Exchange Act and 
Section 2(a)(1)(D)(i)(III) of the CEA to permit any security that is 
eligible to underlie options traded on a national securities exchange 
to also underlie security futures. In addition, the Commissions believe 
that this modification of the listing standard requirements in the 
Exchange Act and the CEA will reduce impediments to the listing of 
security futures by allowing the creation of potentially useful new 
financial instruments, thereby fostering the development of fair and 
orderly markets in security futures. The Commissions believe, further, 
that it is appropriate, in the public interest, and consistent with the 
protection of investors to permit the listing and trading of security 
futures based on any security that is eligible to underlie an exchange-
listed option because such security futures may facilitate price 
discovery in, and be a useful hedge for, the underlying securities, 
including

[[Page 61382]]

certain unregistered debt securities.\26\ Finally, the Commissions note 
that all security futures will continue to be required to meet the 
requirements of Sections 6(h)(3)(B), (C), and (E)-(L) of the Exchange 
Act \27\ and Sections 2(a)(1)(D)(i)(II) and (IV)-(XI) of the CEA.\28\
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    \22\ 15 U.S.C. 78s(b).
    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ 15 U.S.C. 78s(b).
    \26\ The listing standards applicable to options generally 
require, among other things, that the underlying security be 
registered under Section 12 of the Exchange Act, be an NMS Stock, as 
defined in Regulation NMS under the Exchange Act, 17 CFR 
242.600(b)(47), and have a substantial number of outstanding shares 
that are widely held and actively traded. See, e.g., CBOE Rule 5.3 
(Criteria for Underlying Securities). To date, the only securities 
not registered under Section 12 of the Exchange Act (other than U.S. 
government securities) that the SEC has approved to underlie 
exchange-listed options are certain corporate debt securities. See 
Securities Exchange Act Release No. 55976 (June 28, 2007), 72 FR 
37551 (July 10, 2007) (order approving a proposal by the CBOE to 
list options on certain unregistered corporate debt securities). 
Among other things, these corporate debt securities must have 
substantial trading volume, initial principal amount, and 
outstanding float; the issuer of the corporate debt security must 
have at least one class of equity security registered under Section 
12(b) of the Exchange Act; and the issuer's equity securities must 
satisfy the exchange's criteria to underlie options. See CBOE Rule 
5.3.12.
    \27\ 15 U.S.C. 78f(h)(3)(B), (C) and (E)-(L).
    \28\ 7 U.S.C. 2(a)(1)(D)(i)(II) and (IV)-(XI).
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    Unless the Commissions jointly determine otherwise, some securities 
eligible to underlie options traded on a national securities exchange 
currently may not be eligible to underlie security futures because such 
securities may not be common stock or covered by the Prior Joint 
Orders. By permitting any security eligible to underlie options to also 
underlie security futures, the Commissions are modifying the listing 
standard requirements in the Exchange Act and the criteria in the CEA 
to eliminate the requirement that any security underlying security 
futures, including each component security of a narrow-based security 
index, be common stock or such other equity securities as the 
Commissions may jointly determine. Instead, as long as a security may 
underlie options traded on a national securities exchange and the 
listing standards and the criteria for futures on such security meet 
the requirements of Sections 6(h)(3)(B), (C), and (E)-(L) of the 
Exchange Act and Sections 2(a)(1)(D)(i)(II) and (IV)-(XI) of the CEA, 
such security may underlie security futures.\29\
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    \29\ The Commissions note that Section 6(h)(3)(C) of the 
Exchange Act, 15 U.S.C. 78f(h)(3)(C), which will continue to apply, 
requires that listing standards for security futures be no less 
restrictive than comparable listing standards for options traded on 
a national securities exchange or national securities association.
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    Further, Section 6(h)(2) of the Exchange Act \30\ provides that a 
national securities exchange or a national securities association is 
permitted to trade only security futures that (A) conform with listing 
standards that the exchange or association files with the SEC under 
Section 19(b) of the Exchange Act, and (B) meet the criteria specified 
in Section 2(a)(1)(D)(i) of the CEA.\31\ Such security futures listing 
standards must also meet the requirements specified in Section 6(h)(3) 
of the Exchange Act,\32\ including the requirement that the listing 
standards for security futures be no less restrictive than comparable 
listing standards for options traded on a national securities exchange 
or a national securities association.\33\ Before listing and trading 
security futures on any security eligible to underlie options traded on 
a national securities exchange, a national securities exchange or a 
national securities association must file with the SEC, pursuant to 
Section 19(b)(7) of the Exchange Act \34\ and Rule 19b-7 
thereunder,\35\ a proposed rule change relating to its listing 
standards. An exchange or an association also must concurrently file 
its proposed listing standards with the CFTC pursuant to Section 
19(b)(7)(B) of the Exchange Act.\36\
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    \30\ 15 U.S.C. 78f(h)(2).
    \31\ 7 U.S.C. 2(a)(1)(D)(i).
    \32\ 15 U.S.C. 78f(h)(3).
    \33\ See Section 6(h)(3)(C) of the Exchange Act, 15 U.S.C. 
78f(h)(3)(C).
    \34\ 15 U.S.C. 78s(b)(7).
    \35\ 17 CFR 240.19b-7.
    \36\ 15 U.S.C. 78s(b)(7)(B).
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B. Security Futures Based on Unregistered Debt Securities

    Section 6(h)(3)(A) of the Exchange Act \37\ and Section 
2(a)(1)(D)(i)(I) of the CEA \38\ require that any security underlying 
security futures, including each component security of a narrow-based 
security index, be registered pursuant to Section 12 of the Exchange 
Act. Thus, although options are permitted to be listed on unregistered 
debt securities under exchange listing standards,\39\ such securities 
would not be permitted to underlie security futures without modifying 
this requirement. As stated above, Section 6(h)(4)(A) of the Exchange 
Act and Section 2(a)(1)(D)(v)(I) of the CEA provide that the 
Commissions by rule, regulation, or order, may jointly modify this 
requirement to the extent that the modification fosters the development 
of fair and orderly markets in security futures products, is necessary 
or appropriate in the public interest, and is consistent with the 
protection of investors.
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    \37\ 15 U.S.C. 78f(h)(3)(A).
    \38\ 7 U.S.C. 2(a)(1)(D)(i)(I).
    \39\ See supra note 26.
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    Pursuant to this authority, the Commissions previously adopted SEC 
Rule 6h-2 \40\ and amended CEA Rule 41.21 \41\ to modify the statutory 
listing standards for security futures to permit the trading of 
security futures based on debt securities and indexes composed of 
certain debt securities.\42\ These rules permit the listing and trading 
of new and potentially useful financial products. The Commissions 
similarly believe that modifying the statutory listing standards for 
security futures to permit, under certain conditions, the trading of 
security futures based on certain unregistered debt securities, and 
narrow-based indexes composed of such securities, will reduce 
impediments to the listing of security futures based on debt securities 
and serve the public interest by allowing the creation of potentially 
useful new financial instruments, thereby fostering the development of 
fair and orderly markets in security futures. The Commissions also 
believe it is appropriate, in the public interest, and consistent with 
the protection of investors to permit, subject to the conditions 
discussed below, the listing of such security futures because they may 
facilitate price discovery in, and be a useful hedge for, debt 
securities.
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    \40\ 17 CFR 240.6h-2.
    \41\ 17 CFR 41.21.
    \42\ See 2006 Rulemaking, supra note 8.
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    An issuer of debt securities that are registered under Section 12 
of the Exchange Act must provide comprehensive public information. This 
joint order may permit the listing and trading of security futures on 
debt securities that are not registered under Section 12 of the 
Exchange Act. However, because the Commissions believe that the public 
interest and the protection of investors is served by having 
information about the underlying debt securities and their issuers 
available, the Commissions are placing certain conditions on this 
order. In particular, as discussed below, this order is conditioned on 
an issuer of unregistered debt securities that underlie security 
futures being subject to the periodic reporting requirements of the 
Exchange Act. This condition is designed to ensure that information 
about the issuers and their securities is available to investors and 
futures traders.
    More specifically, the listing and trading of security futures on 
unregistered debt would be permissible so long as the following four 
conditions

[[Page 61383]]

are satisfied.\43\ First, the offer and sale of the underlying debt 
securities must have been registered under the Securities Act of 1933 
(``Securities Act'').\44\ This condition is designed so that 
participants in the security futures market have access to the detailed 
disclosure in the Securities Act registration statement for the debt 
securities underlying these security futures.
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    \43\ These four conditions are consistent with the conditions in 
the NYSE Exemption, supra note 9.
    \44\ 15 U.S.C. 77a et seq.
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    Second, the issuer of such securities must have at least one class 
of equity securities registered under Section 12(b) of the Exchange 
Act.\45\ The debt securities of a wholly-owned subsidiary of a parent 
company with at least one class of equity securities registered under 
Section 12(b) of the Exchange Act may also underlie a security 
future.\46\ This condition is designed so that there is public 
availability of information about the issuer and the securities, even 
though the particular debt securities underlying the security future 
are not registered under Section 12 of the Exchange Act. Because any 
security registered under Section 12(b) is listed on a national 
securities exchange, this condition assures that a national securities 
exchange is responsible for monitoring the listed securities of the 
issuer of the debt securities underlying a security future and 
enforcing compliance by that issuer with comprehensive listing 
standards of the applicable national securities exchange.
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    \45\ 15 U.S.C. 78l(b).
    \46\ The terms ``parent'' and ``wholly-owned'' have the same 
meanings as in Rule 1-02 of SEC Regulation S-X, 17 CFR 210.1-02.
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    Third, the transfer agent for the debt securities underlying the 
security future must be registered under Section 17A of the Exchange 
Act.\47\ This condition is designed so that the transfer agents 
providing services to issuers of debt securities underlying security 
futures are subject to SEC oversight and the requirements of the 
Exchange Act, including Section 17A, and the rules thereunder. Fourth, 
the indenture for the unregistered debt securities underlying the 
security future must be qualified under the Trust Indenture Act of 1939 
(``Trust Indenture Act'').\48\ This condition is designed so that the 
specific protections afforded to debt holders under the Trust Indenture 
Act apply to debt securities that underlie security futures. The trust 
indenture for underlying debt securities registered under the 
Securities Act is qualified under the Trust Indenture Act at the time 
of registration of those underlying debt securities.
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    \47\ 15 U.S.C. 78q-1.
    \48\ 15 U.S.C. 77aaa-77bbbb.
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    As a result, by modifying the listing standard requirements such 
that the debt securities need not be registered under Section 12 of the 
Exchange Act, provided that the conditions set forth above are 
satisfied, the Commissions are increasing the types of debt securities 
on which security futures may be based while preserving the requirement 
that information important in making investment and trading decisions 
is available.

II. Conclusion

    For the reasons discussed above, the Commissions by order are 
jointly modifying the requirement in Section 6(h)(3)(D) of the Exchange 
Act \49\ and the criteria specified in Section 2(a)(1)(D)(i)(III) of 
the CEA \50\ to permit any security to underlie a security future, 
provided such security is eligible to underlie options traded on a 
national securities exchange.
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    \49\ 15 U.S.C. 78f(h)(3)(D).
    \50\ 7 U.S.C. 2(a)(1)(D)(i)(III).
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    In addition, for the reasons discussed above, the Commissions by 
order are jointly modifying the requirement specified in Section 
6(h)(3)(A) of the Exchange Act \51\ and the criterion specified in 
Section 2(a)(1)(D)(i)(I) of the CEA \52\ to permit an unregistered debt 
security, or a narrow-based index composed of unregistered debt 
securities, to underlie a security future if the following conditions 
are met:
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    \51\ 15 U.S.C. 78f(h)(3)(A).
    \52\ 7 U.S.C. 2(a)(1)(D)(i)(I).
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    (1) Each such security is a note, bond, debenture, or evidence of 
indebtedness that is not an equity security as defined in Section 
3(a)(11) of the Exchange Act; \53\
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    \53\ 15 U.S.C. 78c(a)(11).
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    (2) The issuer of each such security has registered the offer and 
sale of the security under the Securities Act;
    (3) The issuer of each such security, or the issuer's parent if the 
issuer is a wholly-owned subsidiary (as such terms are defined in Rule 
1-02 of SEC Regulation S-X),\54\ has at least one class of common or 
preferred equity security registered under Section 12(b) of the 
Exchange Act \55\ and listed on a national securities exchange;
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    \54\ 17 CFR 210.1-02.
    \55\ 15 U.S.C. 78l(b).
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    (4) The transfer agent of each such security is registered under 
Section 17A of the Exchange Act; \56\ and
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    \56\ 15 U.S.C. 78q-1.
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    (5) The trust indenture for each such security has been qualified 
under the Trust Indenture Act of 1939.\57\
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    \57\ 15 U.S.C. 77aaa-77bbbb.
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    Accordingly,
    It is ordered, pursuant to Section 6(h)(4) of the Exchange Act and 
Section 2(a)(1)(D)(v)(I) of the CEA, that the requirements in Sections 
6(h)(3)(A) and 6(h)(3)(D) of the Exchange Act and the criteria in 
Sections 2(a)(1)(D)(i)(I) and 2(a)(1)(D)(i)(III) of the CEA are 
modified, subject to the conditions set forth above, provided however, 
this order does not affect the CFTC's exclusive jurisdiction under 
Section 2(a)(1)(C) of the CEA over any futures contract based on an 
index that is not a ``narrow-based security index,'' as defined in 
section 3(a)(55) of the Exchange Act and Section 1a(25) of the CEA. 
Accordingly, nothing in this order shall affect or limit the exclusive 
authority and jurisdiction of the CFTC with respect to any futures 
contract, now or in the future, including the CFTC's authority to 
approve any futures contract that is based upon an index that is not a 
``narrow-based security index.''

    Dated: November 19, 2009.

    By the Commodity Futures Trading Commission.\58\
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    \58\ Because the Commissions are jointly modifying the listing 
requirements to permit security futures on any security that is 
eligible to underlie options contracts traded on a national 
securities exchange, this order supersedes and replaces the Prior 
Joint Orders. See supra notes 12 and 13.

David A. Stawick,
Secretary.
    By the Securities and Exchange Commission.

Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-28164 Filed 11-23-09; 8:45 am]

BILLING CODE 6351-01-P