Document ID: SEC-2012-1142-0001
Agency: sec
Document Type: Rule
Title: Extension of Interim Final Temporary Rule on Retail Foreign Exchange Transactions
Posted Date: 2012-07-16T04:00Z

[Federal Register Volume 77, Number 136 (Monday, July 16, 2012)]
[Rules and Regulations]
[Pages 41671-41678]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-17261]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-67405; File No. S7-30-11]
RIN 3235-AL19

Extension of Interim Final Temporary Rule on Retail Foreign 
Exchange Transactions

AGENCY: Securities and Exchange Commission.

ACTION: Interim final temporary rule; extension.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
amending interim final temporary Rule 15b12-1T under the Securities 
Exchange Act of 1934 (``Exchange Act'') to extend the date on which the 
rule will expire from July 16, 2012 to July 16, 2013.

DATES: Effective Date: July 16, 2012. The expiration date of interim 
final temporary Rule 15b12-1T (17 CFR 240.15b12-1T) is extended to July 
16, 2013.

FOR FURTHER INFORMATION CONTACT: Joanne Rutkowski, Branch Chief, Bonnie 
Gauch, Senior Special Counsel, and Leila Bham, Special Counsel, 
Division of Trading and Markets, at (202) 551-5550, Securities and 
Exchange Commission, 100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is extending the expiration 
date for Rule 15b12-1T under the Exchange Act.

I. Discussion

    Section 742 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act'') \1\ amended the Commodity Exchange 
Act (``CEA'') to provide that a person for which there is a Federal 
regulatory agency,\2\ including a broker or dealer (``broker-dealer'') 
registered under section 15(b) (except pursuant to paragraph (11) 
thereof) or 15C of the Exchange Act,\3\ shall not enter into, or offer 
to enter into, a foreign exchange (``forex'') transaction \4\ with a 
person who is not an ``eligible contract participant'' \5\ (``ECP'') 
except pursuant to a rule or regulation of a Federal regulatory agency 
allowing the transaction under such terms and conditions as the Federal 
regulatory agency shall prescribe (``retail forex rule'').\6\ A Federal 
regulatory agency's

[[Page 41672]]

retail forex rule must treat all forex agreements, contracts, and 
transactions and their functional or economic equivalents, 
similarly.\7\ Any retail forex rule also must prescribe appropriate 
requirements with respect to disclosure, recordkeeping, capital and 
margin, reporting, business conduct, and documentation, and may include 
such other standards or requirements as the Federal regulatory agency 
determines to be necessary.\8\
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ 7 U.S.C. 2(c)(2)(E)(i), as amended by Sec.  742(c) of the 
Dodd-Frank Act, defines a ``Federal regulatory agency'' to mean the 
Commodity Futures Trading Commission (``CFTC''), the Securities and 
Exchange Commission, an appropriate Federal banking agency, the 
National Credit Union Association, and the Farm Credit 
Administration.
    \3\ 7 U.S.C. 2(c)(2)(B)(i)(II).
    \4\ 7 U.S.C. 2(c)(2)(B)(i)(I). Transactions described in CEA 
section 2(c)(2)(B)(i)(I) include ``an agreement, contract, or 
transaction in foreign currency that * * * is a contract of sale of 
a commodity for future delivery (or an option on such a contract) or 
an option (other than an option executed or traded on a national 
securities exchange registered pursuant to section 6(a) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78f(a)).''
    \5\ Section 1a(18) of the CEA defines ``eligible contract 
participant'' generally to mean certain regulated persons; entities 
that meet a specified total asset test (e.g., a corporation, 
partnership, proprietorship, organization, trust, or other entity 
with total assets exceeding $10 million) or an alternative monetary 
test coupled with a non-monetary component (e.g., an entity with a 
net worth in excess of $1 million and engaging in business-related 
hedging; or certain employee benefit plans, the investment decisions 
of which are made by one of four enumerated types of regulated 
entities); and certain governmental entities and individuals that 
meet defined thresholds. 7 U.S.C. 2(c)(2)(E)(i). The CFTC has 
adopted rules further clarifying the definition of ``eligible 
contract participant'' in the CEA. See 17 CFR 1.3(m). See also 
Further Definition of ``Swap Dealer,'' ``Security-Based Swap 
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap 
Participant'' and ``Eligible Contract Participant,'' Exchange Act 
Release No. 66868 (April 27, 2012), 77 FR 30596 (May 23, 2012). 
Because transactions that are the subject of this release are 
commonly referred to as ``retail forex transactions,'' this release 
uses the term ``retail customer'' to describe persons who are not 
ECPs.
    \6\ See 7 U.S.C. 2(c)(2)(B)(i)(II) and 7 U.S.C. 
2(c)(2)(E)(ii)(I). On September 10, 2010, the CFTC adopted a retail 
forex rule for persons subject to its jurisdiction. See Regulation 
of Off-Exchange Retail Foreign Exchange Transactions and 
Intermediaries, 75 FR 55410 (September 10, 2010). The CFTC had 
proposed its rules regarding retail forex transactions prior to the 
enactment of the Dodd-Frank Act. See Regulation of Off-Exchange 
Retail Foreign Exchange Transactions and Intermediaries, 75 FR 3282 
(January 20, 2010). The Federal Deposit Insurance Corporation 
(``FDIC'') and the Office of the Comptroller of the Currency 
(``OCC'') have adopted similar rules. See Retail Foreign Exchange 
Transactions, 76 FR 40779 (July 12, 2011); Retail Foreign Exchange 
Transactions, 76 FR 41375 (July 14, 2011). The Board of Governors of 
the Federal Reserve System (the ``Board'') has proposed rules for 
bank holding companies. See Retail Foreign Exchange Transactions, 76 
FR 46652 (August 3, 2011). 
    \7\ 7 U.S.C. 2(c)(2)(E)(iii)(II).
    \8\ 7 U.S.C. 2(c)(2)(E)(iii)(I).
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    The prohibition in CEA section 2(c)(2)(B) took effect on July 16, 
2011. Beginning on that date, broker-dealers, including broker-dealers 
also registered with the CFTC as futures commission merchants (``BD-
FCMs''), for which the Commission is the ``Federal regulatory agency,'' 
were no longer able to engage in off-exchange retail forex futures and 
options transactions with a customer except pursuant to a retail forex 
rule issued by the Commission.\9\ On July 13, 2011, the Commission 
adopted interim final temporary Rule 15b12-1T, which temporarily 
permits a broker-dealer to engage in a ``retail forex business,'' as 
defined in the rule, in compliance with the Exchange Act, the rules and 
regulations thereunder, and the rules of the self-regulatory 
organizations of which the broker-dealer is a member, insofar as they 
are applicable to retail forex transactions.\10\ We explained at the 
time that our action was intended to preserve potentially beneficial 
market practices that, for example, may serve to minimize a retail 
customer's exposure to the risk of changes in foreign currency rates in 
connection with the customer's purchase or sale of a security. We also 
discussed in the Interim Release that there may be potentially abusive 
practices such as lack of disclosure about fees and forex pricing, and 
insufficient capital or margin requirements occurring in the retail 
forex market, and sought comment on these practices and steps we should 
take to seek to prevent them.\11\ Rule 15b12-1T, by its terms and 
without further Commission action, would have expired on July 16, 2012.
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    \9\ See 7 U.S.C. 2(c)(2)(B)(i)(II)(cc) (giving the CFTC 
jurisdiction over retail forex transactions with FCMs that, among 
other things, are not registered broker-dealers) and 7 U.S.C. 
2(c)(2)(C)(i)(I)(aa). In addition, a commenter noted that the CFTC 
``does not have jurisdiction over retail foreign exchange activities 
conducted by broker-dealers, including entities that are dually 
registered as broker-dealers with the SEC and as futures commission 
merchants (`FCMs') with the CFTC.'' SIFMA/ISDA Letter at 1.
    \10\ See Retail Foreign Exchange Transactions, Exchange Act 
Release No. 64874 (July 13, 2011), 76 FR 41676 (July 15, 2011) 
(adopting 17 CFR 240.15b12-1T) (``Interim Release'').
    \11\ Our Office of Investor Education Advocacy has published an 
Investor Bulletin providing information about retail forex 
investing, including information about the risks involved in that 
trading. See Investor Bulletin: Foreign Currency Exchange (Forex) 
Trading for Individual Investors (July 2011), available at http://www.sec.gov/investor/alerts/forextrading.pdf. The CFTC and the North 
American Securities Administrators Association also have published 
an alert regarding risks of fraud in forex markets. See Foreign 
Exchange Currency Fraud: CFTC/NASAA Investor Alert, available at 
http://www.cftc.gov/ConsumerProtection/FraudAwarenessPrevention/ForeignCurrencyTrading/cftcnasaaforexalert. We recently brought an 
enforcement action against the CEO of a purported foreign currency 
trading firm alleging fraud by that person. See SEC v. Jeffery A. 
Lowrance, et al., Case No. CV-11-3451, press release, complaint and 
litigation release, available at http://www.sec.gov/news/press/2011/2011-147.htm.
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    The Commission received comments on the Interim Release, which are 
summarized below.\12\
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    \12\ The comments are available at http://www.sec.gov/comments/s7-30-11/s73011.shtml. In addition to other specific requests for 
comment, the Commission requested comment in the Interim Release as 
to whether Rule 15b12-1T should be extended, and if so for how long.
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     Nine commenters asked the Commission to preserve their 
ability to engage in retail forex transactions.\13\
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    \13\ See email comments from Raul Gonzalez, dated July 17, 2011, 
James Peck, dated July 17, 2011, Bob Flowers, dated July 17, 2011, 
James M. Beatty, dated July 17, 2011, Angela Li, dated July 17, 
2011, Mark A. McDonnell, dated July 21, 2011, Mark Smith, dated July 
23, 2011, John Baur, dated July 27, 2011, and Ronald Covington, 
dated October 23, 2011.
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     One commenter stated that the Commission should rescind 
the rule and allow the ban to take effect or, in the alternative, to 
limit the scope of the rule to a narrowly defined class of forex 
transactions, specifically hedging and the facilitation of settlement 
of foreign securities.\14\ The commenter further stated that in 
adopting Rule 15b12-1T, the Commission did not provide notice of and 
opportunity for comment on the rule, and did not include a ``concrete 
assessment or quantification of the need'' for the relief granted by 
this rule.
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    \14\ See Letter from Dennis M. Kelleher, President and CEO, and 
Stephen W. Hall, Securities Specialist, Better Markets, Inc. to Ms. 
Elizabeth Murphy, Secretary, Commission, dated September 12, 2011 
(``Better Markets Letter''). We understand the commenter's reference 
to transactions entered into to facilitate the settlement of foreign 
securities to mean the conversion trades discussed infra, in the 
text accompanying notes 19 and 20.
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     Another commenter provided data on the returns of retail 
forex accounts at futures commission merchants and retail foreign 
exchange dealers, and offered recommendations that the commenter 
believed would improve retail forex transactions and identified areas 
of retail forex that the commenter believed warrants further study.\15\ 
This commenter also suggested that currency exchange-traded funds 
(``currency ETFs'') would provide an alternative means for effectively 
hedging against currency risk.\16\
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    \15\ Letter from Justin Hughes, CFA and Managing Member, 
Philadelphia Financial Management of San Francisco to Ms. Elizabeth 
Murphy, Secretary, Commission, dated August 2, 2011 (``Philadelphia 
Financial Letter''). See also letter from P. Georgia Bullitt, 
Michael A. Piracci and F. Mindy Lo, Morgan Lewis to Joseph Furey, 
Bonnie L. Gauch and Adam Yonce, Commission, dated July 28, 2011 
(``Morgan Lewis Letter'').
    \16\ See Philadelphia Financial Letter. See also Better Markets 
Letter. While certain forex transactions, in particular portfolio 
hedges or currency transactions that are part of a diversified 
investment strategy, may have close substitutes in currency ETFs, 
currency conversions that facilitate securities transactions 
(discussed in more detail below) may not have such close 
substitutes.
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     One commenter provided data from five large broker-dealers 
showing that the notional amount of foreign exchange conversion trades 
at those broker-dealers accounts for approximately 90% of those firms' 
foreign exchange transactions. The firms' data further indicated that 
99% of customer accounts have entered into a conversion trade, though 
not all trades within an account may be conversion trades.\17\
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    \17\ See Morgan Lewis Letter.
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     One group of commenters urged the Commission to adopt a 
final rule based on the approach followed in the interim final 
temporary rule, with certain modifications.\18\ These commenters 
maintained that it is in the best interests of retail customers to have 
the opportunity to conduct forex activity as part of their broader 
investing activity, through their broker-dealers, with the assistance 
of personnel who have expertise in forex.
    More recently, in April 2012, a group of commenters asked the CFTC, 
as well as other Federal regulatory agencies (including the 
Commission), to take the view that forex transactions that are solely 
incidental to, and that are initiated for the sole purpose of, 
permitting a customer to complete a transaction in a foreign security, 
so-called ``conversion trades,'' are not prohibited retail forex 
transactions for purposes of section 2 of the CEA.\19\

[[Page 41673]]

These commenters maintain that Congress did not intend to include 
within the scope of the CEA section 2 prohibition currency transactions 
effected in connection with securities transactions, stating that 
``[s]uch transactions do not involve speculation in the underlying 
currencies and, to the contrary, will result in an exchange of 
currencies to be used to settle the relevant securities transactions.'' 
\20\ We anticipate that the interpretation will be addressed in the 
context of the CFTC's and SEC's joint rulemaking to further define 
terms such as ``swap'' and ``security-based swap'' under Title VII of 
the Dodd-Frank Act (``Products Definition Release'').\21\ We further 
anticipate that the rulemaking will be finalized in the near future and 
the CFTC will provide at that time its views of whether conversion 
trades are excluded from the prohibition under CEA section 2.
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    \18\ See Letter from Kenneth E. Bentsen, Jr., Executive Vice 
President Public Policy and Advocacy, SIFMA and Robert Pickel, 
Executive Vice Chairman, ISDA, to Ms. Elizabeth Murphy, Secretary, 
Commission, dated October 17, 2011 (``SIFMA/ISDA Letter''). See also 
Memorandum from SIFMA and ISDA to Marc Menchel, Gary Goldsholle, 
Matthew Vitek, Rudy Verra, Glen Garofalo, FINRA, dated February 23, 
2012.
    \19\ See Letter from Phoebe A. Papageorgiou, Senior Counsel, 
American Bankers Association, and James Kemp, Managing Director, 
Global Foreign Exchange Division, to Thomas J. Curry, Comptroller, 
OCC, Robert E. Feldman, Executive Secretary, FDIC, Jennifer J. 
Johnson, Secretary, the Board, David Stanwick, Secretary, CFTC, and 
Elizabeth Murphy, Secretary, Commission, dated April 18, 2012 
(``ABA/GFMA Letter'').
    \20\ Id. at 2.
    \21\ See also Further Definition of ``Swap,'' ``Security-Based 
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping, Securities Act Release 
No. 9204 (April 29, 2011), 76 FR 29818 (May 23, 2011) (proposing 
release).
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    The ABA/GFMA Letter and the CFTC response affect the scope, 
substance, and timing of our consideration of further rulemaking for 
retail forex transactions. If the CFTC were to adopt the interpretation 
put forth by the ABA/GFMA, conversion trades, which commenters have 
asserted comprise the overwhelming majority of retail forex 
transactions conducted through broker-dealers,\22\ would not fall 
within the scope of the prohibition. The potential for such 
interpretation means that further rulemaking could well confront a very 
different set of transactions than contemplated in April 2012, one 
focused not on conversion trades, but rather on apparently less common 
and more diverse retail forex transactions identified by commenters, 
such as hedging transactions and direct investments.\23\ It also means 
that further rulemaking would need to consider whether there are 
classes of conversion trades not excluded under any final 
interpretation that may be adopted by the CFTC that must be addressed 
separately. We expect to consider these types of transactions and an 
appropriate regulatory approach to them in considering whether and what 
permanent rules we should adopt in this area.
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    \22\ See Morgan Lewis Letter.
    \23\ See SIFMA/ISDA Letter (Annex A, Part I).
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    Extending the expiration of Rule 15b12-1T to July 16, 2013 will 
provide the Commission additional time to consider carefully these 
issues. The extension will help to ensure that we have sufficient time 
to take such action as we may determine appropriate in this area, 
particularly in light of the diverse classes of transactions--beyond 
the conversion trades that have been the focus of comments to date--
that any further rulemaking may need to consider.\24\ We recognize that 
commenters' views differed as to whether and to what extent we should 
permit broker-dealers to continue to engage in some or all retail forex 
transactions. As discussed above, some commenters urged us to permit 
the statutory prohibition simply to take effect, thereby preventing 
potential abuses of retail customers by broker-dealers and BD-FCMs. A 
number of retail customers asked us to permit them to have continued 
access to retail forex transactions through broker-dealers. Some 
commenters stated that we should make certain revisions to Rule 15b12-
1T, while others favored the rule as written, stating that existing 
broker-dealer regulations adequately address retail forex activities.
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    \24\ If the Commission adopts permanent rules for retail forex 
transactions by broker-dealers before July 16, 2013, the Commission 
will consider whether it is appropriate to terminate the 
effectiveness of Rule 15b12-1T as part of that rulemaking.
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    In considering commenters' views, we believe, on balance, that we 
should extend the expiration date of the rule to permit further 
assessment by the Commission in this area, which would be informed by 
any potential CFTC interpretation regarding conversion trades. Our view 
is influenced by investors' views that we should permit them to conduct 
retail forex transactions with broker-dealers. We also are mindful that 
while futures commission merchants that are not also broker-dealers 
could continue to engage in retail forex transactions in compliance 
with CFTC rules, a futures commission merchant that is also a broker-
dealer would be prohibited from engaging in retail forex transactions 
if we do not extend Rule 15b12-1T. For these reasons, we are extending 
the expiration date of Rule 15b12-1T to July 16, 2013 to prevent retail 
customers who transact retail forex transactions through a broker-
dealer from being potentially disadvantaged by the prohibition for 
retail forex transactions taking effect.\25\ Given the limited nature 
of this extension, the pending request for a CFTC interpretation 
regarding conversion trades, the need to further understand the 
implications of the CFTC's interpretation, and the scope of comments we 
are seeking before any further action is taken, we are not modifying 
the interim final temporary rule other than to extend the expiration 
date of Rule 15b12-1T to July 16, 2013. Absent further action by the 
Commission, Rule 15b12-1T as amended will expire on July 16, 2013 at 
11:59 p.m. Eastern Time.
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    \25\ While retail customers could of course open an account with 
a futures commission merchant (that is not also registered as a 
broker-dealer) to engage in retail forex transactions, as explained 
below, this could create certain inefficiencies and additional 
costs. See discussion in the Economic Analysis section below.
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II. Request for Comment

    The Commission requests comment regarding all aspects of the 
interim final temporary rule and the current market practices involving 
retail forex transactions, as well as any investor protection or other 
concerns that commenters believe should be addressed by Commission 
rulemaking. The Commission particularly requests comment from broker-
dealers, including BD-FCMs, that are currently engaged or plan to 
engage in a retail forex business, retail customers that engage in 
forex transactions, and ECPs. The Commission welcomes information from 
all affected parties about the current scope and nature of retail forex 
transactions. This information, together with input from market 
participants and other regulators, as well as comments received on the 
Interim Release, will help inform the Commission's consideration of the 
appropriate regulatory framework, if any, for retail forex transactions 
before or beyond the expiration of the interim final temporary rule.
    The Commission seeks comment on the need for further Commission 
rulemaking, should the CFTC determine that certain conversion trades 
are not subject to the CEA prohibition with respect to retail forex 
transactions.\26\ We specifically seek to better understand the other 
types of retail forex transactions in which broker-dealers may engage, 
such as forex transactions to hedge portfolio currency risk or to 
diversify a portfolio, that would not be excluded from the prohibition 
under section 2 of the CEA by the requested interpretation. We also 
request information about what mechanisms broker-dealers use currently 
to comply with existing disclosure, recordkeeping, capital and margin, 
reporting, business conduct and documentation rules with respect to 
each type of retail forex transaction in which they engage. What 
policies and procedures and supervisory controls, for example, have 
broker-

[[Page 41674]]

dealers implemented to address those transactions? We also seek comment 
on what mechanisms broker-dealers use currently to comply with other 
existing regulatory requirements with respect to retail forex 
transactions.
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    \26\ See 7 U.S.C. 2(c)(2)(E)(ii)(I).
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    If commenters believe further rulemaking is needed, please explain 
why, and provide us with a discussion of the types of transactions for 
which rules are needed and the circumstances under which such 
transactions are entered into. If commenters believe further rulemaking 
is not needed, please explain why not. The Commission seeks comment on 
the extent to which broker-dealers' retail forex activities may be 
affected, and any impact on retail customers of broker-dealers, in the 
event the Commission does not adopt any further rules in this area.
    The Commission also seeks comment on the retail forex activities of 
BD-FCMs, and whether the Commission should adopt tailored rules for 
these intermediaries. We seek comment on the nature of BD-FCM retail 
forex activities, including the type of transactions in which they 
engage, and which part of the dually registered entity may engage in 
these activities or transactions. We also request comment on the 
mechanisms BD-FCMs use currently to comply with existing disclosure, 
recordkeeping, capital and margin, reporting, business conduct and 
documentation rules with respect to each type of retail forex 
transaction in which they engage. In connection with this specific 
request for comment, please identify whether the relevant requirements 
are Exchange Act Rules, CEA Rules, or rules of a particular self-
regulatory organization (``SRO'') of which the BD-FCM is a member. The 
Commission also seeks comment on the extent to which the retail forex 
activities of BD-FCMs may be affected, and any impact on retail 
customers of BD-FCMs, in the event the Commission does not adopt any 
further rules in this area.
    Some commenters have suggested that if broker-dealers were 
prohibited from engaging in retail forex activities, currency ETFs 
would be a reasonable substitute for broker-dealer customers seeking to 
hedge their currency exposures.\27\ The Commission requests comment on 
whether and how currency ETFs could meet the needs of retail customers 
in this regard. The Commission also requests information about how 
currency ETFs (and any other financial product or service that 
commenters believe could serve as a substitute for forex) could be used 
more generally to meet the risk mitigation and any other needs of 
retail customers that currently are addressed using retail forex 
transactions. Would currency ETFs (or other financial products) hedge 
currency risks in connection with foreign securities transactions in 
the same manner or differently than retail forex transactions? How 
would the transaction and other costs associated with currency ETFs and 
retail forex transactions compare? We further seek comment on what the 
associated benefits and costs would be of retail customers using 
currency ETFs or some other product or service, as a substitute for 
retail forex. We also seek comment on the liquidity of such alternative 
products or services, the ease or difficulty of accessing and using 
those products or services, and any additional risks involved in using 
those products or services.
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    \27\ See Philadelphia Financial Letter at 8, and Better Markets 
Letter at 3.
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    The Commission also seeks comment on whether Rule 15b12-1T should 
be extended beyond July 16, 2013, and if so, why and for how long, or 
whether it should be adopted as a final rule.

III. Economic Analysis

A. Introduction

    Section 3(f) of the Exchange Act requires the Commission, whenever 
it engages in rulemaking under the Exchange Act and is required to 
consider or determine whether an action is necessary or appropriate in 
the public interest, to consider, in addition to the protection of 
investors, whether the action would promote efficiency, competition and 
capital formation.\28\ In addition, Section 23(a)(2) of the Exchange 
Act requires the Commission, when making rules under the Exchange Act, 
to consider the impact such rules would have on competition.\29\ 
Section 23(a)(2) of the Exchange Act prohibits the Commission from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.\30\
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    \28\ See 15 U.S.C. 78c(f).
    \29\ See 15 U.S.C. 78w(a)(2).
    \30\ See id.
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    We understand that under the current regulatory regime, retail 
customers typically enter into foreign exchange transactions with 
broker-dealers for a number of reasons. Industry participants have told 
us that the most common transaction is a foreign exchange conversion 
trade, in which a currency trade is made in connection with a foreign 
securities transaction.\31\ Commenters have also told us that retail 
customers enter into forex transactions with broker-dealers as part of 
a hedging strategy. For instance, retail customers may engage in forex 
transactions through broker-dealers in order to hedge currency risk in 
securities or in a portfolio generally held in the customer's brokerage 
account; they may also engage in these transactions in order to obtain 
exposure to foreign markets as part of their investment strategy.\32\
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    \31\ Morgan Lewis Letter. As explained above, the ABA/GFMA 
Letter requests an interpretation that would exclude conversion 
trades from the prohibition under CEA section 2.
    \32\ SIFMA/ISDA Letter at 4, Annex A at 1-2.
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    Congress prohibited the retail forex transactions described in CEA 
section 2 except pursuant to rules adopted by the relevant Federal 
regulatory agencies allowing the transactions. As we noted in the 
Interim Release, some of these transactions, in particular hedging 
transactions and securities conversion trades, may be beneficial to 
investors.\33\ At the same time, as discussed in the Interim Release, 
the Commission is aware of potentially abusive practices that may be 
occurring in the retail forex market. Such practices may include, for 
example, lack of disclosure about fees and forex pricing, and 
insufficient capital or margin requirements.\34\
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    \33\ See Interim Release at 41684.
    \34\ See id.
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    As discussed above, on April 18, 2012, a group of commenters asked 
the CFTC, as well as other Federal regulatory agencies (including the 
Commission), to take the view that forex transactions that are solely 
incidental to, and are initiated for the sole purpose of, permitting a 
client to complete a transaction in a foreign security, through 
``conversion trades,'' would not be subject to the retail forex 
prohibition under section 2 of the CEA.\35\ An interpretation by the 
CFTC that conversion trades are not subject to the statutory 
prohibition could significantly affect the costs and benefits of any 
action by the Commission with regard to retail forex transactions going 
forward. Commenters have stated that conversion trades comprise the 
vast majority of retail forex transactions engaged in by broker-
dealers,\36\ but also note that there are other types of forex 
transactions in which broker-dealers engage with retail customers.\37\ 
Because the request for the interpretation is still pending, however, 
the Commission will continue to consider conversion trades as retail 
forex transactions that would be

[[Page 41675]]

prohibited but for Rule 15b12-1T, for purposes of our economic 
analysis.
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    \35\ See ABA/GFMA Letter.
    \36\ See Morgan Lewis Letter.
    \37\ See SIFMA/ISDA Letter, Annex A.
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    Extending Rule 15b12-1T maintains the regulatory framework that 
currently exists for broker-dealers, and does not create any new 
regulatory obligations. Furthermore, the rule preserves the ability of 
broker-dealers to provide, among other services, hedging and conversion 
trades to retail customers while the Commission considers what further 
appropriate steps to take, if any.\38\
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    \38\ To the extent that conversion trades are not excluded from 
the prohibition in CEA section 2, extension of the Rule 15b12-1T 
would also have the benefit of allowing customers to continue to 
engage in those transactions as part of their brokerage activities 
while the Commission considers any further action.
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    The Commission has previously considered and discussed in the 
Interim Release its economic analysis of Rule 15b12-1T.\39\ The 
Commission solicited comment on its economic analysis in the Interim 
Release, and received one comment that addressed but did not support 
its economic analysis.\40\ As stated in the Interim Release, we adopted 
Rule 15b12-1T as an interim final temporary rule to allow the existing 
regulatory framework for retail forex transactions to continue for a 
defined period, to avoid potentially unintended consequences from 
broker-dealers immediately discontinuing their retail forex business, 
and to provide the Commission sufficient time to determine the 
appropriate regulatory framework regarding retail forex 
transactions.\41\ Furthermore, investors who commented on the rule 
asked the Commission to preserve their ability to engage in retail 
forex transaction through their broker-dealers. In addition, we 
included an economic analysis of the rule in the Interim Release.\42\
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    \39\ For a detailed description of the costs and benefits of 
Rule 15b12-1T, see also Interim Release at 41684.
    \40\ Better Markets Letter. But see SIFMA/ISDA Letter.
    \41\ See Interim Release at 48683.
    \42\ See id. at 41684.
---------------------------------------------------------------------------

    As mentioned above, based on data a commenter provided of five 
broker-dealers, in terms of notional amount, foreign exchange 
conversion trades would account for approximately 90% of foreign 
exchange transactions done through broker-dealers, and 99% of all 
broker-dealer customer accounts are involved in conversion trades, 
though not all trades within an account may be conversions.\43\ 
Commenters have told us that certain forex transactions, particularly 
certain portfolio hedges, may have close substitutes in currency 
ETFs.\44\ It does not appear that currency ETFs would necessarily 
function as effectively in mitigating the currency risk of particular 
securities transactions, because the precise timing and amount of a 
securities transaction may not be readily matched to a currency ETF, as 
conversion trades are customer-specific and typically designed to 
facilitate particular securities transactions, whereas currency ETFs 
generally are designed to provide broad exposure to exchange rate 
movements. The contracts used to complete forex conversions do have 
close substitutes in exchange-traded currency futures, as both involve 
the exchange of currency at a future date. However, as with currency 
ETFs, the precise timing and amount of a securities transaction may not 
be easily matched to exchange-traded futures contracts, which have 
standardized maturity dates and notional amounts. Off-exchange 
forwards, on the other hand, can be easily customized to match a 
particular transaction. Additionally, exchange-traded futures are not 
as effective at mitigating risks between the trade and settlement 
dates, since mark-to-market margin requirements expose the investor to 
additional cash flow risk.
---------------------------------------------------------------------------

    \43\ Morgan Lewis Letter.
    \44\ See Philadelphia Financial Letter. See also Better Markets 
Letter.
---------------------------------------------------------------------------

    The Commission understands that conversion trades can be replicated 
at futures commission merchants. However, as a practical matter, this 
would require the customer to maintain multiple accounts, which could 
increase transaction costs and reduce efficiency relative to conversion 
trades performed within a broker-dealer.

B. Alternatives Considered

    The Commission considered certain alternatives to extending Rule 
15b12-1T. One alternative would be to let Rule 15b12-1T expire on its 
original expiration date, and so preclude broker-dealers from engaging 
in certain types of retail forex business other than, potentially, 
conversion trades, at least until such time as the Commission were to 
adopt final rules in this area. The benefit of this alternative would 
be that the abuses Congress sought to address through Dodd-Frank Act 
Section 724 would be addressed through this complete prohibition. The 
cost of this alternative would be that an outright prohibition on 
retail forex activity would interfere with certain business activities 
engaged in by broker-dealers that are potentially beneficial for their 
customers, in particular the potential benefit to customers relating to 
conversion trades. We note in this alternative approach, retail 
customers of broker-dealers would be required to open an account with a 
futures commission merchant or other financial service provider merely 
to engage in currency transactions intended to mitigate risks in 
connection with brokerage transactions in foreign securities. While 
this shifting to services to another intermediary would impose 
additional costs, retail customers may, however, benefit from the 
protection of rules to which those intermediaries are subject.\45\
---------------------------------------------------------------------------

    \45\ See supra note 6.
---------------------------------------------------------------------------

    The Commission has not adopted this alternative at this time for 
the reasons discussed above, and in particular because of concerns that 
we not disrupt potentially beneficial market practices, such as 
conversion trades that may serve to minimize a retail customer's 
exposure to the risk of changes in foreign currency rates in connection 
with the customer's purchase or sale of a security. In addition, we 
have not adopted this alternative because the CFTC's interpretation 
regarding conversion trades is not yet settled.
    The Commission also considered adopting Rule 15b12-1T as a final, 
permanent rule. While the direct costs and benefits of this alternative 
would be minimal (as it would simply continue the existing regulatory 
requirements for broker-dealers engaging in retail forex transactions), 
it nevertheless could have broader impacts on the markets given that 
other regulators have now adopted or proposed final rules with various 
specific requirements relating to retail forex that impose different 
requirements on market intermediaries than those the Commission imposes 
on broker-dealers under Rule 15b12-1T.\46\ The lack of comparable rules 
across the various intermediaries engaging in a retail forex business 
could lead to regulatory arbitrage or regulatory gaps. The Commission 
is considering alternatives, including proposing rules pertaining to 
retail forex that are more tailored than Rule 15b12-1T and that would 
be more closely aligned with those of the other regulators but has 
deferred a determination pending the resolution by the CFTC of the 
pending request in the ABA/GFMA Letter concerning the treatment of 
conversion trades.
---------------------------------------------------------------------------

    \46\ Id.
---------------------------------------------------------------------------

C. Benefits

    Rule 15b12-1T was designed to preserve retail customers' access to 
the forex markets through broker-dealers and so promote efficiency by, 
for example, permitting retail customers to continue to enter into 
forex transactions in connection with trades in foreign

[[Page 41676]]

securities, as part of their brokerage activities until such time as 
the Commission allows Rule 15b12-1T to expire or adopts final, 
permanent rules in this area. Without the Commission acting to extend 
Rule 15b12-1T, broker-dealers would be required to exit certain types 
of retail forex business, which could require retail customers to 
engage in forex transactions through a futures commission merchant or 
other service provider. This could be economically inefficient. In 
particular, to the extent that access to the foreign exchange markets 
through broker-dealers provides hedging and conversion opportunities 
for foreign investments, economic benefits may accrue to retail 
customers.\47\ To the extent that the CFTC takes the view that some or 
all conversion trades remain subject to the retail forex prohibition, 
and as noted in the Interim Release, the benefits of these trades may 
not be as easily or efficiently replicated outside of the broker-
dealer.\48\ Furthermore, by continuing to preserve a channel for 
broker-dealers' retail customers to access forex transactions through 
broker-dealers, the extension of the interim final temporary rule will 
continue to prevent any loss of competition in the retail forex market 
that could result if broker-dealers were required to exit the business. 
Moreover, extending the term of the rule will likely, for the period of 
the extended term, maintain the status quo for broker-dealers with 
respect to other regulated intermediaries offering retail forex 
services, whose regulators have adopted (or have proposed to adopt) 
rules targeted to retail forex with which those intermediaries must 
comply.\49\ Extending the term of the rule would not necessarily 
promote competition between broker-dealers and the other regulated 
intermediaries, as broker-dealers would continue to offer retail forex 
services under Rule 15b12-1T which, in general, imposes requirements 
that arguably could be viewed as less burdensome than those that have 
become (or are proposed to become) applicable to other regulated 
intermediaries. Competition among broker-dealers would most likely not 
be affected by extending the term of the rule.
---------------------------------------------------------------------------

    \47\ See Interim Release at 41684.
    \48\ See id.
    \49\ See supra note 6.
---------------------------------------------------------------------------

    Because the regulatory requirements for broker-dealers operating in 
the retail forex market will remain unchanged, extending the expiration 
date of Rule 15b12-1T will impose no new burden on competition. 
Similarly, since the rule preserves an existing regulatory structure, 
the Commission does not expect that extending the term of the rule 
would result in any potential impairment of the capital formation 
process.

D. Costs

    Because Rule 15b12-1T preserves the regulatory regime that had been 
in place prior to the effective date of Section 742(c) of the Dodd-
Frank Act, the extension of the rule imposes no new regulatory burdens 
beyond those that already existed for broker-dealers engaged in a 
retail forex business. The Commission recognizes that broker-dealers 
will face regulatory costs and requirements associated with operating 
in the retail forex market, but these costs and requirements are those 
they already shouldered from engaging in the business.\50\ As discussed 
above and in the Interim Release, the Commission is aware of 
potentially abusive practices that may be occurring in the retail forex 
market. To the extent that such practices continue, customers may bear 
the costs associated with these abuses. We are monitoring potential 
fraud involved in forex within our jurisdiction,\52\ and our staff has 
also alerted investors to the risks of retail forex trading.\53\ The 
Commission believes, on balance, that the cost of market disruption 
that may occur if the Commission does not extend Rule 15b12-1T, 
particularly with respect to conversion transactions that may not be 
easily replicated outside of the broker-dealer,\54\ justifies the cost 
of maintaining the current regulatory regime while the Commission 
considers proposing rules in light of additional developments, 
including the recent request for the CFTC's interpretation regarding 
conversion trades.\55\
---------------------------------------------------------------------------

    \50\ As described in the Interim Release, these costs include 
costs related to disclosure, recordkeeping and documentation, 
capital and margin, reporting, and business conduct. A broker-dealer 
that currently engages in forex transactions with retail customers, 
for example, incurs costs associated with establishing, maintaining, 
and implementing policies and procedures to comply with regulatory 
requirements; preparing disclosure documents; establishing and 
maintaining forex-related business records; and preparing filings 
with the Commission, which may include legal and accounting fees. 
Interim Release at 41684.
    \52\ For instance, we recently brought an enforcement action 
against the CEO of a purported foreign currency trading firm, 
alleging fraud by that person. See SEC v. Jeffery A. Lowrance, et 
al., Case No. CV-11-3451, press release, complaint and litigation 
release, available at http://www.sec.gov/news/press/2011/2011-147.htm.
    \53\ See Investor Bulletin: Foreign Currency Exchange (Forex) 
Trading for Individual Investors (July 2011), available at http://www.sec.gov/investor/alerts/forextrading.pdf.
    \54\ See Interim Release at 41684.
    \55\ Id.
---------------------------------------------------------------------------

E. Conclusion

    Because the extension of Rule 15b12-1T will not affect the 
regulatory requirements for broker-dealers operating in the retail 
forex market, this extension will impose no new burden on competition. 
Similarly, because the rule's extension does not alter the existing 
regulatory structure, the Commission does not expect any potential 
impairment of the capital formation process. To the extent that 
potentially abusive practices continue in the retail forex market, the 
market will continue to bear the costs associated with any such abuses 
and the resultant inefficient provision of services across the market. 
Because extending Rule 15b12-1T does not alter the existing regulatory 
structure or regime, the Commission does not expect any potential 
impairment of the capital formation process, especially as the rule's 
extension allows retail customers to continue to have access through 
broker-dealers to hedging transactions, conversion trades, and other 
forex transactions, without the need to shift business and open new 
accounts at other market intermediaries.

IV. Paperwork Reduction Act

    Rule 15b12-1T does not impose any new ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA''),\56\ or create any new filing, reporting, recordkeeping, or 
disclosure reporting requirements for broker-dealers that are or plan 
to be engaged in a retail forex business. In the Interim Release, the 
Commission requested comment on its conclusion that there are no 
collections of information.\57\ The Commission received no comments 
relating to the PRA analysis. Accordingly, the Commission maintains its 
PRA analysis set forth in the Interim Release for purposes of this 
extension.
---------------------------------------------------------------------------

    \56\ 44 U.S.C. 3501 et seq.
    \57\ See Interim Release at 41683-84.
---------------------------------------------------------------------------

V. Other Matters

A. Administrative Procedure Act

    The Administrative Procedure Act generally requires an agency to 
publish notice of a proposed rulemaking in the Federal Register.\58\ 
This requirement does not apply, however, if the agency ``for good 
cause finds * * * that notice and public procedure are impracticable, 
unnecessary, or contrary to the public interest.'' \59\ The 
Administrative Procedure Act also generally requires that an agency 
publish an adopted rule

[[Page 41677]]

in the Federal Register 30 days before it becomes effective.\60\ This 
requirement, however, does not apply if the agency finds good cause for 
making the rule effective sooner.\61\ The Commission finds that there 
is good cause to extend the expiration date of Rule 15b12-1T to July 
16, 2013, without notice and comment and not to delay the effective 
date of the extension. The Commission further finds that notice and 
solicitation of comment on the extension is impracticable, unnecessary, 
or contrary to the public interest.\62\
---------------------------------------------------------------------------

    \58\ See 5 U.S.C. 553(b).
    \59\ Id.
    \60\ See 5 U.S.C. 553(d).
    \61\ Id.
    \62\ See 5 U.S.C. 553(b) and (d).
---------------------------------------------------------------------------

    As discussed above, on April 18, 2012, a group of commenters asked 
the CFTC, as well as other Federal regulatory agencies (including the 
Commission), to find that forex transactions that are solely incidental 
to, and are initiated for the sole purpose of, permitting a client to 
complete a transaction in a foreign security, so-called ``conversion 
trades,'' would not be subject to the retail forex prohibition under 
section 2 of the CEA.\63\ We anticipate that the CFTC will address this 
request in the context of the Products Definition Release. An 
interpretation by the CFTC that conversion trades are not subject to 
the statutory prohibition could affect the need for, or the extent and 
reach of, any Commission rulemaking for retail forex transactions 
generally. Commenters have stated that conversion trades comprise the 
vast majority of retail forex transactions engaged in by broker-
dealers,\64\ and permitting conversion trades by broker-dealers was one 
of the reasons we adopted Rule 15b12-1T.\65\ As we previously have 
noted, there are other types of forex transactions broker-dealers 
engage in which may be potentially beneficial for retail customers, 
such as using forex to hedge portfolio currency risk or to provide 
portfolio diversification.\66\ The potential CFTC interpretation means 
that further rulemaking could well confront a very different set of 
transactions than contemplated in April 2012, one focused not on 
conversion trades, but rather on these other types of forex 
transactions. It also means that further rulemaking would need to 
consider whether there are classes of conversion trades not excluded 
under any final interpretation that may be adopted by the CFTC that 
must be addressed separately. Accordingly, if the CEA is interpreted so 
that certain conversion trades would not be prohibited, we would want 
to consider what, if anything, we believe is appropriate with respect 
to proposing and adopting a permanent rule in this area in light of the 
diverse classes of transactions--beyond the conversion trades that have 
been the focus of comments to date--that any such rule may need to 
consider. Accordingly, in view of these very recent developments, the 
Commission has determined that it would be impracticable to publish 
notice of the proposed extension.
---------------------------------------------------------------------------

    \63\ See ABA/GFMA Letter.
    \64\ See Morgan Lewis Letter.
    \65\ See Interim Release at 41684.
    \66\ See id. See also SIFMA/ISDA Letter (Annex A, Part I).
---------------------------------------------------------------------------

    In making this finding of good cause,\67\ the Commission has 
decided to maintain the current regulatory regime in order to avoid 
disruption for investors engaging in retail forex transactions through 
broker-delaers, until such time as the Commission makes any final 
decision with regard to permanent rulemaking in this area, in light of 
any potential interpretation by the CFTC. In particular, the Commission 
considered that not extending the expiration date, or allowing the 
extension to be delayed, would cause disruption to the markets and 
potentially harm investors, as retail forex transactions, including 
conversion trades, would, as of July 16, 2012, the original expiration 
date of Rule 15b12-1T, be prohibited. For the same reasons, the 
Commission finds good cause not to delay the effective date of this 
extension for 30 days.
---------------------------------------------------------------------------

    \67\ This finding also satisfies the requirements of 5 U.S.C. 
808(2), allowing the rules to become effective notwithstanding the 
requirement of 5 U.S.C. 801 (if a federal agency finds that notice 
and public comment are ``impractical, unnecessary or contrary to the 
public interest,'' a rule ``shall take effect at such time as the 
federal agency promulgating the rule determines'').
---------------------------------------------------------------------------

    In the event that the Commission determines to propose a permanent 
rule to replace Rule 15b12-1T, the Commission will provide notice and 
solicit comment on that proposal.

B. Regulatory Flexibility Act Certification

    In the Interim Release, the Commission certified that pursuant to 5 
U.S.C. 605(b), Rule 15b12-1T would not have a significant economic 
impact on a substantial number of small entities. As explained in the 
Interim Release, although Rule 15b12-1T applies to broker-dealers that 
may engage in retail forex transactions, which may include small 
businesses, any costs or regulatory burdens incurred as a result of the 
rule are the same as those incurred by small broker-dealers prior to 
the effective date of Section 742 of the Dodd-Frank Act.\68\ We also 
noted that the rule would impose no new regulatory obligations, costs, 
or burdens on such broker-dealers. Thus, there would not be a 
significant economic impact on a substantial number of small entities. 
In the Interim Release, we requested comment on our conclusion that 
Rule 15b12-1T should not have a significant economic impact on a 
substantial number of small entities. The Commission received no 
comments addressing this issue. In light of this, as well as the fact 
that we are making no change to Rule 15b12-1T apart from extending its 
expiration date, we hereby certify pursuant to 5 U.S.C. 605(b) that 
extending Rule 15b12-1T will not have a significant economic impact on 
a substantial number of small entities.
---------------------------------------------------------------------------

    \68\ See id. at 41684-85.
---------------------------------------------------------------------------

VI. Statutory Authority and Text of Rule and Amendment

    Pursuant to section 2(c)(2) of the Commodity Exchange Act, as well 
as the Exchange Act as amended, the Commission is amending Exchange Act 
Rule 15b12-1T.

List of Subjects in 17 CFR Part 240

    Brokers, Consumer protection, Currency, Reporting and recordkeeping 
requirements.

    In accordance with the foregoing, the Securities and Exchange 
Commission is amending Title 17, chapter II, of the Code of Federal 
Regulations as follows:

Text of the Rule and Amendment

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The general authority citation for Part 240 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 78p, 78q, 
78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 
80b-3, 80b-4, 80b-11, and 7201 et. seq.; 18 U.S.C. 1350; 12 U.S.C. 
5221(e)(3); and 7 U.S.C. 2(c)(2)(E), unless otherwise noted.
* * * * *

Sec.  240.15b12-1T  [Amended]

0
2. Revise paragraph (d) of Sec.  240.15b12-1T to read as follows:

Sec.  240.15b12-1T  Brokers or dealers engaged in a retail forex 
business.

* * * * *
    (d) This section will expire and no longer be effective on July 16, 
2013.

    Dated: July 11, 2012.

[[Page 41678]]

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-17261 Filed 7-13-12; 8:45 am]
BILLING CODE 8011-01-P