I
103D CONGRESS
2D SESSION
H. R. 4745
To provide a framework for Securities and Exchange Commission supervision
and regulation of derivatives activities, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
JULY 13, 1994
Mr. MARKEY (for himself and Mr. SYNAR) introduced the following bill; which
was referred to the Committee on Energy and Commerce
A BILL
To provide a framework for Securities and Exchange Com-
mission supervision and regulation of derivatives activi-
ties, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Derivatives Dealers
Act of 1994’’.
SEC. 2. DEFINITIONS.
Section 3(a) of the Securities Exchange Act of 1934
(15 U.S.C. 78c(a)) is amended by adding at the end the
following new paragraphs:
‘‘(53) The term ‘derivative’ means any financial
contract or other instrument that derives its value
from the value or performance of any security, cur-
rency exchange rate, or interest rate (or group or
index thereof), but does not include—
‘‘(A) any security that is traded on a na-
tional securities exchange or on an automated
interdealer quotation system sponsored by a se-
curities association registered under section
15A of this title;
‘‘(B) any forward contract which has a
maturity at the time of issuance not exceeding
270 days;
‘‘(C) any contract of sale of a commodity
for future delivery, or any option on such a con-
tract, traded or executed on a designated con-
tract market and subject to regulation under
the Commodity Exchange Act; or
‘‘(D) any deposit held by a financial insti-
tution.
‘‘(54) The term ‘derivatives dealer’ means any
person engaged in the business of buying, selling, or
entering into derivatives for his own account, but
does not include—
‘‘(A) any person insofar as such person
buys, sells, or enters into derivatives for his own
account, either individually or in a fiduciary ca-
pacity, but not as part of a regular business; or
‘‘(B) any financial institution.
‘‘(55) The term ‘material associated person’
means any associated person of a broker, dealer,
government securities broker, government securities
dealer, municipal securities dealer, or derivatives
dealer (other than a natural person) whose business
activities are reasonably likely to have a material im-
pact on the financial or operational condition of any
such broker, dealer, government securities broker,
government securities dealer, municipal securities
dealer, or derivatives dealer, including on its net
capital, its liquidity, or its ability to conduct or fi-
nance its operations.
‘‘(56) The term ‘person associated with a de-
rivatives dealer’ or ‘associated person of a deriva-
tives dealer’ means any partner, officer, director, or
branch manager of such derivatives dealer (or any
person occupying a similar status or performing
similar functions), and any other employee of such
derivatives dealer who is engaged in the manage-
ment, direction, supervision, or performance of any
activities relating to derivatives, and any person di-
rectly or indirectly controlling, controlled by, or
under common control with such derivatives dealer.
‘‘(57) The term ‘designated examining author-
ity’ means the national securities exchange or reg-
istered securities association of which a registered
broker or dealer is a member, and if such broker or
dealer is a member of more than 1 such self-regu-
latory organization, the organization designated by
the Commission as the principal examining authority
for such broker or dealer.’’.
TITLE I—DERIVATIVES DEALERS
SEC. 101. DERIVATIVES DEALER REGISTRATION.
The Securities Exchange Act of 1934 is hereby
amended by inserting after section 15C (15 U.S.C. 78o–
5) the following new section:
‘‘SEC. 15D. DERIVATIVES DEALERS.
‘‘(a) REGISTRATION REQUIRED.—
‘‘(1) REGISTRATION
OF
DERIVATIVES
DEAL-
ERS.—
‘‘(A) REGISTRATION
REQUIREMENT.—It
shall be unlawful for any derivatives dealer
(other than a registered broker or dealer, or a
material associated person of a registered
broker or dealer that has filed notice in accord-
ance with subparagraph (B) of this paragraph)
to make use of the mails or any means or in-
strumentality of interstate commerce to effect
any transaction in, or to induce or attempt to
induce the purchase or sale of, any derivative
unless such derivatives dealer is registered in
accordance with paragraph (2) of this sub-
section.
‘‘(B) MATERIAL ASSOCIATED PERSONS OF
BROKERS AND DEALERS.—
‘‘(i) NOTICE REQUIREMENT.—It shall
be unlawful for any derivatives dealer that
is a material associated person of a reg-
istered broker or dealer (other than a ma-
terial associated person of a registered
broker or dealer that is itself a registered
broker or dealer, or a derivatives dealer
that is registered in accordance with para-
graph (2) of this subsection) to make use
of the mails or any means or instrumental-
ity of interstate commerce to effect any
transaction in, or to induce or attempt to
induce the purchase or sale of, any deriva-
tive unless such derivatives dealer has filed
with the Commission written notice that it
is a derivatives dealer. When such a de-
rivatives dealer ceases to act as such it
shall file with the Commission a written
notice that it is no longer acting as a de-
rivatives dealer.
‘‘(ii) FORM OF NOTICE.—Such notices
shall be in such form and contain such in-
formation concerning a derivatives dealer
and any persons associated with such de-
rivatives dealer as the Commission shall,
by rule, prescribe as necessary or appro-
priate in the public interest or for the pro-
tection of investors.
‘‘(2) REGISTRATION
PROCEDURE.—A deriva-
tives dealer subject to the registration requirement
of paragraph (1)(A) of this subsection may be reg-
istered by filing with the Commission an application
for registration in such form and containing such in-
formation and documents concerning such deriva-
tives dealer and any of its associated persons as the
Commission, by rule, may prescribe as necessary or
appropriate in the public interest or for the protec-
tion of investors. Within 45 days of the date of filing
of such application (or within such longer period as
to which the applicant consents), the Commission
shall—
‘‘(A) by order grant registration, or
‘‘(B) institute proceedings to determine
whether registration should be denied. Such
proceedings shall include notice of the grounds
for denial under consideration and opportunity
for hearing and shall be concluded within 120
days of the date of the filing of the application
for registration. At the conclusion of such pro-
ceedings, the Commission, by order, shall grant
or deny such registration. The order granting
registration shall not be effective until such de-
rivatives dealer has become a member of a secu-
rities association registered under section 15A
of this title, unless the Commission has exempt-
ed such derivatives dealer, by rule or order,
from such membership. The Commission may
extend the time for the conclusion of such pro-
ceedings for up to 90 days if it finds good cause
for such extension and publishes its reasons for
so finding or for such longer period as to which
the applicant consents.
The Commission shall grant the registration of a de-
rivatives dealer if the Commission finds that the re-
quirements of this section are satisfied. The Com-
mission shall deny such registration if it does not
make such a finding or if it finds that if the appli-
cant were so registered, its registration would be
subject to suspension or revocation under subsection
(c) of this section.
‘‘(3) PROHIBITED CONDUCT.—Any provision of
this title (other than section 5 or paragraph (1) of
this subsection) which prohibits any act, practice, or
course of business if the mails or any means or in-
strumentality of interstate commerce is used in con-
nection therewith shall also prohibit any such act,
practice, or course of business by any derivatives
dealer registered or having filed notice under para-
graph (1) of this subsection or any person acting on
behalf of such derivatives dealer, irrespective of any
use of the mails or any means or instrumentality of
interstate commerce in connection therewith.
‘‘(4) EXEMPTIONS.—The Commission, by rule
or order, upon the Commission’s own motion or
upon application, may conditionally or uncondition-
ally exempt any derivatives dealer, or class of deriva-
tives dealers, from any provision of this section, or
the rules thereunder, if the Commission finds that
such exemption is consistent with the public interest,
the protection of investors, and the purposes of this
title.
‘‘(b) RULES.—
‘‘(1) AUTHORITY.—The Commission shall pro-
pose and adopt rules to effect the purposes of this
title with respect to transactions in derivatives ef-
fected by derivatives dealers registered or required to
register under subsection (a)(1)(A) of this section as
follows:
‘‘(A) FINANCIAL
RESPONSIBILITY.—Such
rules shall provide safeguards with respect to
the financial responsibility and related practices
of such derivatives dealers including, but not
limited to, capital adequacy standards and the
carrying and use of customers’ deposits or cred-
it balances.
‘‘(B) REPORTS.—Such rules shall require
every such derivatives dealer to make reports to
and furnish copies of records to the Commis-
sion, and to file with the Commission, annually
or more frequently, a balance sheet and income
statement certified by an independent public ac-
countant, prepared on a calendar or fiscal year
basis, and such other financial statements
(which shall, as the Commission specifies, be
certified) and information concerning its finan-
cial condition as required by such rules.
‘‘(C) RECORDKEEPING.—Such rules shall
require records to be made and kept by such
derivatives dealers and shall specify the periods
for which such records shall be preserved.
‘‘(2) AUTHORITY TO LIMIT DISCLOSURE OF IN-
FORMATION.—Notwithstanding any other provision
of law, the Commission shall not be compelled to
disclose any information required to be kept or re-
ported under rules adopted under paragraph (1) of
this subsection. Nothing in this paragraph shall au-
thorize the Commission to withhold information
from Congress, or prevent the Commission from
complying with a request for information from any
other Federal department or agency requesting the
information for purposes within the scope of its ju-
risdiction, or complying with an order of a court of
the United States in an action brought by the
United States or the Commission. For purposes of
section 552 of title 5, United States Code, this para-
graph shall be considered a statute described in sub-
section (b)(3)(B) of such section 552.
‘‘(3) FRAUDULENT
ACTS
AND
PRACTICES.—
With respect to any derivatives dealer, the Commis-
sion may, by rule or regulation define, and prescribe
means reasonably designed to prevent, such acts and
practices as are fraudulent, deceptive, or manipula-
tive.
‘‘(4) COMPLIANCE
WITH
RULES
UNDER
THIS
SECTION.—No derivatives dealer shall make use of
the mails or any means or instrumentality of inter-
state commerce to effect any transaction in, or to in-
duce or attempt to induce the purchase or sale of,
any derivative in contravention of any rule under
this section.
‘‘(c) ENFORCEMENT BY THE COMMISSION.—
‘‘(1) ADMINISTRATIVE
POWERS
TO
IMPOSE
SANCTIONS.—With respect to any derivatives dealer
registered or required to register under subsection
(a)(1)(A) of this section—
‘‘(A) DERIVATIVES DEALERS.—The Com-
mission, by order, shall censure, place limita-
tions on the activities, functions, or operations
of, suspend for a period not exceeding 12
months, or revoke the registration of such de-
rivatives dealer, if it finds, on the record after
notice and opportunity for hearing, that such
censure, placing of limitations, suspension, or
revocation is in the public interest and that
such derivatives dealer, or any person associ-
ated with such derivatives dealer (whether prior
or subsequent to becoming so associated), has
committed or omitted any act or omission enu-
merated in subparagraph (A), (D), (E), or (G)
of paragraph (4) of section 15(b) of this title,
has been convicted of any offense specified in
subparagraph (B) of such paragraph (4) within
10 years of the commencement of the proceed-
ings under this paragraph, or is enjoined from
any action, conduct, or practice specified in
subparagraph (C) of such paragraph (4).
‘‘(B) SUSPENSION OR WITHDRAWAL PEND-
ING FINAL DETERMINATION.—Pending final de-
termination whether registration of any deriva-
tives dealer shall be revoked, the Commission,
by order, may suspend such registration, if such
suspension appears to the Commission, after
notice and opportunity for hearing, to be nec-
essary or appropriate in the public interest or
for the protection of investors. Any registered
derivatives dealer may, upon such terms and
conditions as the Commission may deem nec-
essary in the public interest or for the protec-
tion of investors, withdraw from registration by
filing a written notice of withdrawal with the
Commission. If the Commission finds that any
registered derivatives dealer is no longer in ex-
istence or has ceased to do business as a deriva-
tives dealer, the Commission, by order, shall
cancel the registration of such derivatives deal-
er.
‘‘(C) ASSOCIATED
PERSONS.—The Com-
mission, by order, shall censure or place limita-
tions on the activities or functions of any per-
son associated, or seeking to become associated,
with a derivatives dealer registered or required
to register under subsection (a)(1)(A) of this
section or suspend for a period not exceeding
12 months or bar any such person from being
associated with such a derivatives dealer, if the
Commission finds, on the record after notice
and opportunity for hearing, that such censure,
placing of limitations, suspension, or bar is in
the public interest and that such person has
committed or omitted any act or omission enu-
merated in subparagraph (A), (D), (E), or (G)
of paragraph (4) of section 15(b) of this title,
has been convicted of any offense specified in
subparagraph (B) of such paragraph (4) within
10 years of the commencement of the proceed-
ings under this paragraph, or is enjoined from
any action, conduct, or practice specified in
subparagraph (C) of such paragraph (4).
‘‘(2) PERSONS SUSPENDED OR BARRED FROM
ASSOCIATION.—It shall be unlawful for any person
as to whom an order entered pursuant to paragraph
(1) of this subsection suspending or barring him
from being associated with a derivatives dealer is in
effect willfully to become, or to be, associated with
a derivatives dealer without the consent of the Com-
mission, and it shall be unlawful for any derivatives
dealer to permit such a person to become, or remain,
a person associated with it without the consent of
the Commission, if such derivatives dealer knew, or,
in the exercise of reasonable care should have
known, of such order.
‘‘(d) EXAMINATION OF RECORDS.—All records of a
derivatives dealer registered or required to register under
subsection (a)(1)(A) of this section, or that has filed notice
or is required to file notice under subsection (a)(1)(B) of
this section, are subject at any time, or from time to time,
to such reasonable periodic, special, or other examinations
by representatives of the Commission as the Commission
deems necessary or appropriate in the public interest, for
the protection of investors, or otherwise in furtherance of
the purposes of this title.
‘‘(e) SECURITIES ASSOCIATION MEMBERSHIP.—
‘‘(1) MEMBERSHIP REQUIREMENT.—It shall be
unlawful for any derivatives dealer registered or re-
quired to register with the Commission under sub-
section (a)(1)(A) of this section to effect any trans-
action in, or induce or attempt to induce the pur-
chase or sale of, any derivative, unless such deriva-
tives dealer is a member of a securities association
registered under section 15A of this title.
‘‘(2) EXEMPTION.—The Commission, by rule or
order, as it deems consistent with the public interest
and the protection of investors, may conditionally or
unconditionally exempt from paragraph (1) of this
subsection any derivatives dealer or class of deriva-
tives dealers specified in such rule or order.’’.
TITLE II—BROKER-DEALER
OVERSIGHT REFORMS
SEC. 201. DERIVATIVES ON SECURITIES.
Section 3(a)(10) of the Securities Exchange Act of
1934 (15 U.S.C. 78c(a)(10)) is amended by inserting ‘‘de-
rivative,’’ after ‘‘any put, call, straddle, option,’’ the first
place it appears.
SEC. 202. NATIONAL SECURITIES EXCHANGES.
Section 6 of the Securities Exchange Act of 1934 (15
U.S.C. 78f) is amended by adding at the end the following
new subsection:
‘‘(g) A national securities exchange may adopt and
implement rules applicable to members of such exchange,
and material associated persons that have filed notice or
are required to file notice under section 15D(a)(1)(B) of
this title and that are associated with members for which
the exchange is the designated examining authority, who
engage in transactions in derivatives—
‘‘(1) to enforce compliance with applicable pro-
visions of this title and the rules and regulations
thereunder;
‘‘(2) to provide that any such person shall be
appropriately disciplined for violations of applicable
provisions of this title and the rules and regulations
thereunder;
‘‘(3) to provide for reasonable inspection and
examination of the books and records of any such
person;
‘‘(4) to prevent fraudulent and manipulative
acts and practices;
‘‘(5) to promote just and equitable principles of
trade; and
‘‘(6) to require the establishment of, and adher-
ence to, appropriate internal controls structures.’’.
SEC. 203. FINANCIAL RESPONSIBILITY.
Section 15(c)(3) of the Securities Exchange Act of
1934 (15 U.S.C. 78o(c)(3)) is amended—
(1) by striking ‘‘and’’ at the end of clause (A);
and
(2) by inserting after ‘‘requirements for all bro-
kers and dealers’’ the following: ‘‘, and (C) require
the maintenance of sufficient capital levels taking
into account the financial activities conducted by,
the customary sources of capital and funding of, and
the credit risk and aggregate leverage of, any deriva-
tives dealer that is a material associated person of
the broker or dealer and that has filed notice or is
required to file notice under section 15D(a)(1)(B) of
this title’’.
SEC. 204. REGISTERED SECURITIES ASSOCIATION.
Section 15A of the Securities Exchange Act of 1934
(15 U.S.C. 78o–3) is hereby amended by adding at the
end the following new subsection:
‘‘(j) A registered securities association may adopt and
implement rules applicable to members of such associa-
tion, and material associated persons that have filed notice
or are required to file notice under section 15D(a)(1)(B)
of this title and that are associated with members for
which the association is the designated examining author-
ity, who engage in transactions in derivatives—
‘‘(1) to enforce compliance with applicable pro-
visions of this title and the rules and regulations
thereunder;
‘‘(2) to provide that any such person shall be
appropriately disciplined, in accordance with sub-
sections (b)(7), (b)(8), and (h) of this section, for
violations of applicable provisions of this title and
the rules and regulations thereunder;
‘‘(3) to provide for reasonable inspection and
examination of the books and records of any such
person;
‘‘(4) to prevent fraudulent and manipulative
acts and practices;
‘‘(5) to promote just and equitable principles of
trade; and
‘‘(6) to require the establishment of, and adher-
ence to, appropriate internal controls structures.’’.
SEC. 205. RISK ASSESSMENT FOR GOVERNMENT SECURI-
TIES BROKERS AND DEALERS.
Section 15C(b)(2) of the Securities Exchange Act of
1934 (15 U.S.C. 78o–5(b)(2)) is amended by striking sub-
paragraphs (A) and (B) and inserting the following:
‘‘(A) OBLIGATIONS TO OBTAIN, MAINTAIN, AND
REPORT INFORMATION.—Every person who is reg-
istered as a government securities broker or govern-
ment securities dealer under this section shall obtain
such information and make and keep such records
as the Secretary by rule prescribes concerning (i) the
registered person’s policies, procedures, or systems
for monitoring and controlling financial and oper-
ational risks to it resulting from the activities of any
of its associated persons, other than a natural per-
son, and (ii) with respect to any of its material asso-
ciated persons, such material associated person’s fi-
nancial activities, including trading activity in any
financial, securities, or derivatives market. Such
records shall be in such form as the Secretary shall
prescribe and shall include such information as may
be necessary to evaluate any effect that such mate-
rial associated person’s activities may have on any
financial, securities, or derivatives market, or any
participant in such market. The Secretary, by rule
or order, may require reports of such information to
be filed with the registered person’s appropriate reg-
ulatory agency at such intervals as the Secretary
prescribes as necessary or appropriate in the public
interest, for the protection of investors, or otherwise
in furtherance of the purposes of this title.
‘‘(B) AUTHORITY TO REQUIRE ADDITIONAL IN-
FORMATION.—If the appropriate regulatory agency
concludes that it has concerns regarding the finan-
cial or operational condition of any government secu-
rities broker or government securities dealer reg-
istered under this section or concerns regarding ac-
tivities affecting the stability or integrity of the secu-
rities or derivatives markets, such agency may re-
quire the registered person to make reports concern-
ing the financial, securities, and derivatives activities
of any of such person’s material associated persons.
The appropriate regulatory agency, in requiring re-
ports pursuant to this subparagraph, shall specify
the information required, the period for which it is
required, the time and date on which the informa-
tion must be furnished, and whether the information
is to be furnished directly to the appropriate regu-
latory agency or to the designated examining author-
ity for such person.’’.
SEC. 206. RISK ASSESSMENT FOR BROKERS AND DEALERS.
Section 17(h) of the Securities Exchange Act of 1934
(15 U.S.C. 78q(h)) is amended by striking paragraphs (1)
and (2) and inserting the following:
‘‘(1) OBLIGATION TO OBTAIN, MAINTAIN, AND
REPORT INFORMATION.—Every person who is (A) a
registered broker or dealer, or (B) a registered mu-
nicipal securities dealer for which the Commission is
the appropriate regulatory agency, shall obtain such
information and make and keep such records as the
Commission by rule prescribes concerning (i) the
registered person’s policies, procedures, or systems
for monitoring and controlling financial and oper-
ational risks to it resulting from the activities of any
of its associated persons, other than a natural per-
son, and (ii) with respect to any of its material asso-
ciated persons, such material associated person’s fi-
nancial activities, including trading activity in any
financial, securities, or derivatives market. Such
records shall be in such form as the Commission
shall prescribe and shall include such information as
may be necessary to evaluate any effect that such
material associated person’s activities may have on
any financial, securities, or derivatives market, or
any participant in such market. The Commission, by
rule or order, may require reports of such informa-
tion to be filed with the Commission at such inter-
vals as the Commission prescribes as necessary or
appropriate in the public interest, for the protection
of investors, or otherwise in furtherance of the pur-
poses of this title.
‘‘(2) AUTHORITY TO REQUIRE ADDITIONAL IN-
FORMATION.—If the Commission concludes that it
has concerns regarding the financial or operational
condition of (A) any registered broker or dealer, or
(B) any registered municipal securities dealer, gov-
ernment securities broker, or government securities
dealer for which the Commission is the appropriate
regulatory agency, or concerns regarding activities
affecting the stability or integrity of the securities or
derivatives markets, the Commission may require
the registered person to make reports concerning the
financial, securities, and derivatives activities of any
of such person’s material associated persons. The
Commission, in requiring reports pursuant to this
paragraph, shall specify the information required,
the period for which it is required, the time and date
on which the information must be furnished, and
whether the information is to be furnished directly
to the Commission or to the designated examining
authority for such person.’’.
SEC. 207. RULES, REGULATIONS, AND ORDERS; ANNUAL RE-
PORTS.
Section 23(a)(1) of the Securities Exchange Act of
1934 (15 U.S.C. 78w(a)(1)) is amended by inserting ‘‘de-
rivatives,’’ after ‘‘and may for such purposes classify per-
sons, securities,’’.
SEC. 208. CONFORMING AMENDMENTS.
Section 3(a)(48) of the Securities Exchange Act of
1934 (15 U.S.C. 78c(a)(48)) is amended to read as fol-
lows:
‘‘(48) The term ‘registered broker or dealer’
means a broker or dealer registered or required to
register pursuant to section 15 or 15B of this title,
except that—
‘‘(A) in paragraph (3)(A) of this sub-
section and in section 6, the term means such
a broker or dealer or a government securities
broker or government securities dealer reg-
istered or required to register pursuant to sec-
tion 15C(a)(1)(A) of this title; and
‘‘(B) in paragraph (3)(B) of this sub-
section and in section 15A, the term means
such a broker or dealer, a government securities
broker or government securities dealer reg-
istered or required to register pursuant to sec-
tion 15C(a)(1)(A) of this title, or a derivatives
dealer registered or required to register pursu-
ant to section 15D(a)(1)(A) of this title.’’.
Æ
HR 4745 IH——2