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Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-19-02; Confirmation Requirements for Transactions of Security Futures Products Effected in Futures Accounts
Dear Mr. Katz:
National Futures Association (NFA) is a limited purpose national securities association under the Securities Exchange Act of 1934 (Exchange Act) and a registered futures association under the Commodity Exchange Act. NFA appreciates this opportunity to comment on the Securities and Exchange Commission's (SEC) proposed amendments to Exchange Act Rule 10b-10.
Commodity Futures Trading Commission (CFTC) Rule 1.33(b) requires futures commission merchants to send customers a written confirmation no later than the next business day after the transaction, and experience shows that the information given on these confirmations is sufficient. Therefore, NFA believes that customers would be adequately protected even if the SEC were to grant a complete exemption from the requirements of Rule 10b-10 for transactions in futures accounts. Nonetheless, the SEC's proposed amendments to Rule 10b-10 rule are a reasonable response to the tension between the current provisions of Rule 10b-10 and futures industry practices, and we support those amendments. We also believe that the same confirmation requirements should apply to security futures product (SFP) transactions in futures accounts regardless of whether the account is carried by a notice-registered broker-dealer (Notice BD) or a fully registered broker-dealer/futures commission merchant (jointly referred to as FCMs).
NFA agrees that the confirmation should include the date executed; the identity of the contract, including the delivery month; the number of shares or contracts (units); whether bought or sold; and the transaction price. Although Commodity Futures Trading Commission (CFTC) Rule 1.33(b) does not specify the information to be included in a confirmation, this information is routinely provided to futures customers. Furthermore, we believe all of this information is necessary to put a customer on notice of the transaction and enable the customer to determine whether the order was executed according to the customer's instructions. Therefore, we fully support proposed Rule 10b-10(e)(1)(i).
Proposed subsection (e)(1)(ii) states that the confirmation must include "the source and amount of any remuneration received or to be received by the broker or dealer in connection with the transaction" (emphasis added). While NFA supports this provision in general, we believe that the language in the rule should be clarified. As noted in the discussion section of the release, FCMs commonly charge commissions and fees for futures transactions when the position is liquidated rather than charging a portion when the transaction is initiated, and the confirmation includes these charges only when they are due. The proposed language, which requires disclosure of the amount of remuneration "to be received" by the FCM, could be read to require disclosure in the confirmation for the initiating transaction even if the charges are not payable until the liquidating transaction. We respectfully ask the SEC to revise the language to clarify that remuneration does not have to appear on the confirmation statement until it is payable.
NFA supports proposed subsection (e)(1)(iii) as a reasonable compromise between the requirements of Rule 10b-10(a)(2) and futures industry practices. The information required is already available upon request. Furthermore, as the release notes, the CEA and CFTC rules limit the circumstances in which an FCM can act as a principal and require the customer's consent before those transactions occur. Therefore, as we noted in our December 5, 2001 comment letter regarding the proposed customer protection and recordkeeping rules, applying the transaction-by-transaction requirements of Rule 10b-10(a)(2) to futures accounts would create operational and programming burdens for FCMs without providing corresponding benefits. Although the current proposal would require some programming changes, it is significantly less burdensome and expensive to program changes that print standard legends on confirmation statements than it is to program changes that electronically collect and print specific information relating to each transaction.
As the release notes, payment for order flow does not exist in the futures industry. We do, however, recognize the SEC's concern that it could develop in connection with security futures, and we generally support the requirement that the confirmation statement should notify the customer if the FCM receives payment for order flow for effecting security futures transactions. We suggest, however, that the SEC revise proposed subsection (e)(1)(iv) to require disclosure only if the FCM engages in this practice.
The release also asks for comment on any potential competitive burdens that could exist if there are different confirmation requirements for futures and securities accounts. NFA believes that the proposed rule actually creates a more level playing field by alleviating the competitive burden that would exist if FCMs were required to modify their futures systems to include the transaction-by-transaction information currently required by Rule 10b-10(a)(2). Since systems used by BDs for transactions in securities accounts already capture this information, Rule 10b-10(a)(2) does not create the same burden for those transactions. On the other hand, the SEC's discussion of why transaction-by-transaction disclosure is not necessary for SFP transactions in futures accounts applies equally to SFP transactions in securities accounts. Therefore, if the SEC were to determine that the requirement creates an unlevel playing field, the logical solution is to apply proposed Rule 10b-10(e) to securities accounts rather than to apply Rule 10b-10(a) to futures accounts.
Finally, the release asks for comments on whether the requirement in Rule 10b-10(a)(9) should be applied to Notice BDs. That subsection requires broker-dealers that are not members of the Securities Investor Protection Corporation (SIPC) to disclose that fact on their confirmation statements. For the reasons discussed below, we believe that applying this requirement to Notice BDs would be both unnecessary and inconsistent with current practices and requirements for futures accounts. Therefore, we support the current proposal, which does not require that disclosure.
First, customers will have adequate notice that transactions in futures accounts will not be covered by SIPC. The joint SEC/CFTC rules regarding customer protection require all firms carrying SFPs to provide disclosure regarding the effect of carrying them in a futures account as opposed to a securities account, and NFA rules will require Notice BDs to provide customers with a specific disclosure statement that includes a plain English description of these differences. It is one thing to require firms to disclose the customer protection scheme when a customer is deciding to open an account, but it is overkill to remind them of that scheme every time they enter into or liquidate a transaction, especially since futures accounts receive similar protections.
Second, FCMs are not currently required to disclose that transactions in futures accounts are not covered by SIPC. This is true even where the futures transaction may resemble a security (e.g., futures on broad-based stock indices and government securities) and regardless of whether the FCM is also a broker-dealer member of SIPC. We are not aware of any instance where this has caused customer confusion or administrative problems in insolvency proceedings.
Thomas W. Sexton
Vice President and General Counsel