Document ID: SEC-2007-1468-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Futures Association
Posted Date: 2007-10-22T04:00Z

[Federal Register: October 22, 2007 (Volume 72, Number 203)]
[Notices]               
[Page 59577-59579]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22oc07-117]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56667; File No. SR-NFA-2007-04]

 
Self-Regulatory Organizations; National Futures Association; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Regarding Compliance Rule 2-4: Misuse of Trade Secrets and Proprietary 
Information

October 17, 2007.
    Pursuant to section 19(b)(7) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-7 under the Exchange Act,\2\ notice 
is hereby given that on August 20, 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 also has filed the 
proposed rule change with the Commodity Futures Trading Commission 
(``CFTC'').
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    \1\ 15 U.S.C. 78s(b)(7).
    \2\ 17 CFR 240.19b-7.
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    NFA, on August 17, 2007, submitted the proposed rule change to the 
CFTC for approval and invoked the ``ten-day'' provision of section 
17(j) of the Commodity Exchange Act (``CEA'').\3\ By letter dated 
September 5, 2007, the CFTC notified NFA of its determination not to 
review the proposed rule change.\4\
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    \3\ 7 U.S.C. 21(j).
    \4\ See letter from Lawrence B. Patent, Deputy Director, CFTC, 
to Thomas W. Sexton, III, General Counsel, NFA (``Letter'').
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I. Self-Regulatory Organization's Description of the Proposed Rule 
Change

Text of Proposed Rule Changes Interpretive Notice NFA Compliance Rule 
2-4: Misuse of Trade Secrets And Proprietary Information

    National Futures Association (``NFA'') Compliance Rule 2-4 provides 
that Members and Associates shall observe high standards of commercial 
honor and just and equitable principles of trade in the conduct of 
their commodity futures business. Over the years, NFA's Board of 
Directors (``Board'') has provided guidance on certain issues to ensure 
that Members and Associates understand their responsibilities to 
observe just and equitable principles of trade and to act honestly, 
fairly, and in the best interests of customers.
    Compliance Rule 2-4 prohibits Members and Associates from knowingly 
obtaining or seeking to obtain another Member's or Associate's 
confidential information or trade secrets without that person's 
permission. It also prohibits Members and Associates from knowingly or 
recklessly misusing confidential information or trade secrets in their 
possession. Although that rule does not seek to regulate business 
disputes between Members or to extend beyond commodity futures 
activities, it does reach conduct that could potentially harm 
customers.
    Conduct that may violate Compliance Rule 2-4 includes:
     Misusing customer information, such as misappropriating 
social security numbers or purposefully violating the firm's privacy 
statement;
     Disclosing customer orders prior to execution (except as 
permitted by exchange rules); or
     Obtaining or attempting to obtain information disclosing a 
CTA's historical trading positions without the CTA's permission.
    These are merely examples of conduct that could potentially harm 
customers. Any Member or Associate that knowingly obtains or seeks to 
obtain

[[Page 59578]]

confidential information or trade secrets of another Member or 
Associate without that person's permission or that knowingly or 
recklessly misuses trade secrets and/or proprietary information in the 
conduct of its commodity futures business violates Compliance Rule 2-4.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NFA has prepared statements 
concerning the purpose of, and basis for, the proposed rule change, 
burdens on competition, and comments received from members, 
participants, and others. The text of these statements may be examined 
at the places specified in Item IV below. NFA has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

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

1. Purpose
    Section 15A(k) of the Exchange Act \5\ makes NFA a national 
securities association for the limited purpose of regulating the 
activities of NFA members (``Members'') who are registered as brokers 
or dealers in security futures products under section 15(b)(11) of the 
Exchange Act.\6\ The new interpretive notice applies to all Members, 
including those who are registered as security futures brokers or 
dealers under section 15(b)(11).
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    \5\ 15 U.S.C. 78o-3(k).
    \6\ 15 U.S.C. 78o(b)(11).
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    NFA Compliance Rule 2-4 requires Members and Associates to observe 
high standards of commercial honor and just and equitable principles of 
trade in the conduct of their commodity futures business. The proposed 
notice makes clear that Members and Associates violate NFA Compliance 
Rule 2-4 if they knowingly obtain or seek to obtain another Member's or 
Associate's confidential information or trade secrets without that 
person's permission or knowingly or recklessly misuse confidential 
information or trade secrets in their possession when these activities 
may harm futures customers. It also clarifies that this prohibition is 
limited to a Member's commodity futures business and does not reach 
into areas beyond NFA's normal jurisdiction.
    The notice is narrowly drawn, focusing on behaviors that could harm 
customers. It gives three examples of behavior that violates the rule: 
(1) Misusing customer information, (2) disclosing customer orders, and 
(3) obtaining or attempting to obtain confidential information 
disclosing a CTA's historical trading positions.
2. Statutory Basis
    The rule change is authorized by, and consistent with, Section 
15A(k) of the Exchange Act.\7\ This Section requires NFA to have rules 
that are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and, in 
general, to protect investors and the public interest in connection 
with security futures products. The proposed rule change accomplishes 
this by prohibiting the misuse of nonpublic information.
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    \7\ 15 U.S.C. 78o-3(k).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The rule change will not impose any burden on legitimate 
competition. It should, however, prevent Members from using 
illegitimate means to gain a competitive advantage when those means 
could harm customers.

C. Self-Regulatory Organization's Statement of Comments on the Proposed 
Rule Change 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, IB, and CPO/CTA Advisory Committees, 
which generally supported it. NFA did not receive comment letters 
concerning the rule change.

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

    NFA, on August 17, 2007, submitted the proposed Interpretive Notice 
entitled ``NFA Compliance Rule 2-4: Misuse of Trade Secrets and 
Proprietary Information'' to the CFTC for approval and invoked the 
``ten-day'' provision of section 17(j) of the CEA.\8\ The CFTC notified 
NFA of its determination not to review the proposed rule change.\9\ The 
proposed rule change has become effective on September 5, 2007.
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    \8\ 7 U.S.C. 21(j).
    \9\ See Letter, supra note 4.
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    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.\10\
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    \10\ 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 Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

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

File Number SR-NFA-2007-04 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-2007-04. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of NFA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NFA-2007-04 and should be 
submitted on or before November 13, 2007.

[[Page 59579]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(75).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-20784 Filed 10-19-07; 8:45 am]

BILLING CODE 8011-01-P