Document ID: SEC-2007-0686-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Futures Association
Posted Date: 2007-05-16T04:00Z

[Federal Register: May 16, 2007 (Volume 72, Number 94)]
[Notices]               
[Page 27608-27610]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16my07-119]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55732; File No. SR-NFA-2007-02]

 
Self-Regulatory Organization; National Futures Association; 
Notice of Filing and Immediate Effectiveness of a Proposed Interpretive 
Notice to Compliance Rule 2-4 Regarding Disclosure Guidelines for FCMs 
Offering Sweep Accounts

May 9, 2007.
    Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-7 under the Act,\2\ notice is hereby given 
that on February 27, 2007, National Futures Association (``NFA'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change described in Items I, II, and III below, which 
Items have been substantially prepared by NFA. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons. NFA, on February 26, 2007, submitted the 
proposed rule change to the Commodity Futures Trading Commission 
(``CFTC'') for approval. The CFTC approved the proposed rule change on 
March 12, 2007.
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    \1\ 15 U.S.C. 78s(b)(7).
    \2\ 17 CFR 240.19b-7.
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I. Self-Regulatory Organization's Description of the Proposed Rules

    Section 15A(k) of the Act \3\ makes NFA a national securities 
association for the limited purpose of regulating the activities of NFA 
members (``Members'') who are registered as brokers or dealers in 
security futures products under Section 15(b)(11) of the Exchange 
Act.\4\ The new Interpretive Notice to NFA Compliance Rule 2-4 entitled 
``Disclosure Guidelines for FCMs Offering Sweep Accounts'' 
(``Interpretive Notice'') will apply to all futures commission merchant 
(``FCM'') Members, including those who are registered as security 
futures brokers or dealers under Section 15(b)(11). The Interpretive 
Notice applies certain disclosure guidelines to FCM-offered sweep 
account programs that manage cash balances.
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    \3\ 15 U.S.C. 78o-3(k).
    \4\ 15 U.S.C. 78o(b)(11).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rules

    NFA has prepared statements concerning the purpose of, and basis 
for, the proposed rule change, burdens on

[[Page 27609]]

competition, and comments received from members, participants, and 
others. The text of these statements may be examined at the places 
specified in Item IV below. These statements are set forth in Sections 
A, B, and C below.

 A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rules

1. Purpose
    As noted above, the Interpretive Notice applies certain disclosure 
guidelines to FCM-offered sweep account programs that manage cash 
balances. Specifically, these sweep account programs transfer a 
customer's excess funds from a regulated commodity account (whether a 
customer segregated or secured account) to a non-regulated account for 
the customer at the FCM, an affiliate of the FCM, or another entity so 
that the customer can obtain a higher investment return than 
maintaining the funds in the FCM's customer regulated commodity 
accounts.
    The Interpretive Notice makes clear that the disclosure guidelines 
apply only to sweep account programs offered or regularly recommended 
by an FCM. If a customer elects on its own to transfer funds to a 
particular sweep account program that is not offered by the FCM, then 
the FCM does not have any disclosure obligations pursuant to the 
Interpretive Notice. Additionally, the disclosure guidelines are 
inapplicable to transfers made pursuant to an FCM's customer 
agreement's provisions whereby a customer authorizes the transfer of 
funds from a regulated commodity account to any other account 
maintained by the customer at the FCM or one of its affiliates when 
necessary to avoid a margin call or to reduce the debit balance in the 
other account, or to satisfy any other obligation to the FCM or its 
affiliates.
    Initially, FCMs should identify the entity maintaining the sweep 
account and whether that entity is subject to regulation and should 
disclose any material terms and conditions, risks and features of their 
offered programs. In addition, FCMs should advise customers of any 
conflicts of interest in connection with the offered programs, 
including whether the FCM receives compensation or other benefits for 
customer balances maintained in the sweep account, and the FCM should 
advise the customer which entity to contact to gain access to any swept 
funds. An FCM should make these disclosures at the time a sweep program 
is offered to a customer and, of course, these disclosures should be 
updated for participants if any material changes are made to an 
existing sweep program. The Interpretive Notice also provides that if a 
customer elects to participate in a sweep program offered by the FCM, 
then the FCM must obtain the customer's written consent prior to any 
funds being transferred pursuant to the program.
    The Interpretive Notice also requires FCMs to advise customers of 
the consequences of transferring monies from the FCM's customer 
regulated accounts. Specifically, the FCM should disclose that by 
transferring excess funds from an FCM's customer regulated commodity 
accounts, the customer will not receive the preferential treatment 
afforded funds held in a customer regulated commodity account pursuant 
to CFTC Regulation Part 190 and the U.S. Bankruptcy Code. The 
Interpretive Notice recognizes, however, that an FCM may offer programs 
that transfer monies to an account whereby customers receive certain 
other protections (e.g., SIPC or FDIC) in the event of a bankruptcy. In 
this case, the FCM should disclose the nature and extent of the 
protection available, including any applicable SIPC or FDIC coverage. 
If the FCM's programs transfer funds to a non-regulated account that 
does not offer protections comparable to those afforded funds held in a 
customer regulated commodity account, then the FCM must clearly 
disclose this fact and describe the impact upon customer funds in the 
unlikely event that the entity maintaining the sweep account files for 
bankruptcy.
    Failure to follow the prescribed guidelines may be deemed conduct 
inconsistent with a Member's obligation under NFA Compliance Rule 2-4 
to observe high standards of commercial honor and just and equitable 
principles of trade in the conduct of its commodity futures business. 
The Interpretive Notice recognizes, however, that FCMs offering these 
sweep programs may have to modify these guidelines to address their 
particular programs.
2. Statutory Basis
    NFA has filed these proposed regulations pursuant to Section 
19(b)(7) of the Act.\5\ The rule change is authorized by, and 
consistent with, Section 15A(k) of the Act.
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    \5\ 15 U.S.C. 78s(b)(7).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The rule change will not impose any burden on competition that is 
not necessary or appropriate in furtherance of the purposes of the Act 
and the Commodity Exchange Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rules Received From Members, Participants, or Others

    NFA did not publish the rule change to the membership for comment 
but did discuss it with NFA's FCM Advisory Committee. NFA did not 
receive comment letters concerning the rule change.

III. Date of Effectiveness of the Proposed Rules and Timing for 
Commission Action

    On February 26, 2007, NFA submitted the proposed Interpretive 
Notice to the CFTC for approval. The proposed rule change has become 
effective on March 12, 2007, the date of approval of the proposed rule 
change by the CFTC.
    Within 60 days of the date of effectiveness of the proposed rule 
change, the Commission, after consultation with the CFTC, may summarily 
abrogate the proposed rule change and require that the proposed rule 
change be refiled in accordance with the provisions of Section 19(b)(1) 
of the Exchange Act.\6 \
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    \6\ 15 U.S.C. 78s(b)(1).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NFA-2007-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NFA-2007-02. 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/

[[Page 27610]]

rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room. Copies of the 
filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NFA-2007-02 and should be submitted on or before June 6, 
2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-9371 Filed 5-15-07; 8:45 am]

BILLING CODE 8010-01-P