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July 18, 2002

Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: File No. S7-23-02; Commission Guidance on the Application of Certain Provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and Rules thereunder to Trading in Security Futures Products

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 (CEA). NFA appreciates this opportunity to comment on the Securities and Exchange Commission's (SEC) interpretive guidance on the application of certain provisions of the Securities Act of 1933 (Securities Act), the Exchange Act, and SEC rules to security futures products.

NFA commends the SEC for issuing the interpretation and providing much needed guidance on a number of issues under the securities laws. We do, however, request clarification on a couple of items included in the interpretation.

The third bullet under II.A.1.a. in the release states that "a transaction in a security futures product on a security of an issuer by such persons also is a transaction in the issuer's underlying security that must be registered unless an exemption from registration is available." 67 Fed. Reg. 43234, 43236 (June 27, 2002). Although the previous bullet recognizes that the Securities Act exempts exchange-traded security futures products from registration, we are concerned that the third bullet could be read to imply that an issuer of the underlying securities may not hedge its own holdings on an exchange unless the security futures product is registered under the Securities Act. While there may be other provisions of the securities laws that affect the ability to hedge these holdings, we do not believe that requiring a registration statement would be appropriate where the issuer (or an underwriter) is trading security futures products on an exchange in the same manner as any other market participant, and we request that the SEC clarify this issue.

NFA also requests clarification on the applicability of Regulation M to security futures products. Q&A 33 states that Regulation M would apply to the purchase of security futures during a distribution of the securities underlying the security future because it would be an indirect purchase of a covered security. We believe this is inconsistent with the Regulation M adopting release, which states that derivative securities are not subject to the trading prohibition of Rule 101. 62 Fed. Reg. 520, 524 (Jan. 3, 1997). Although the adopting release does not specifically address how Rules 102-105 apply to derivatives, we see nothing in the language of those rules that would distinguish them from Rule 101 in this regard. Security futures are clearly derivative securities, as the SEC recognizes in Q&A 8. To the extent that the interpretation treats security futures differently than security options, it is inconsistent with the spirit of the Commodity Futures Modernization Act of 2000, which goes to great lengths to put the two types of derivative instruments on a level regulatory playing field.

If you have any questions concerning this letter, please contact me (312-781-1413, or Kathryn Camp (312-781-1393,

Respectfully submitted,
Thomas W. Sexton
Vice President and General Counsel

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