SEC/CFTC AGREEMENT

SECTION BY SECTION ANALYSIS

TITLE II – SECURITIES ACTS AMENDMENTS

SUBTITLE A – AMENDMENTS

Section 201. Definitions under the Securities Exchange Act of 1934.

Section 201 would amend Section 3 of the Securities Exchange Act of 1934 ("Exchange Act") to add definitions of the terms "security future," "security futures product," and "narrow-based security index." An objective test based on the number and weighting of the securities in the index determines whether an index falls within the definition of "narrow-based security index." Section 3 also would be amended to add definitions of the terms "margin," "margin level," "level of margin," "higher margin level," and "higher level of margin." In addition, Section 3 would be amended to include the term "security future" in the definitions of the terms "security" and "equity security". The definitions of "buy" and "sell" would also be amended to include transactions for future delivery for security futures products.

Section 202. Regulatory Relief for Markets Trading Security Futures Products.

Section 202 would amend Section 6 of the Exchange Act to provide for expedited SEC registration of CFTC designated contract markets that would fall within the statutory definition of the term "exchange" by trading security futures products. These "notice registrant" exchanges would become registered by filing a notice with the SEC. Because notice registrant exchanges would continue to be subject to the Commodity Exchange Act ("CEA"), they would be exempt from all but the core provisions of the federal securities laws applicable to exchanges. Amended Section 6 would include a list of specific Exchange Act provisions from which notice registrants are exempt, but no inference should be drawn that any other Exchange Act section not included on this list applies to a notice registrant with respect to the trading of security futures products if such section does not apply by its terms.

Section 202 would also amend Section 6 of the Exchange Act to permit notice registrant exchanges to increase margin levels above minimum levels established jointly by the SEC and the CFTC by submitting proposed rule changes through the expedited filing process described below. In addition, amended Section 6 would provide that notice registrant exchanges would be required to submit any other proposed rule changes relating to margin (except for changes resulting in higher margin levels) for SEC approval under Section 19(b)(2) of the Exchange Act.

Section 202 would further amend Section 6 of the Exchange Act to provide a waiting period before security futures products could be traded. Specifically, amended Section 6 would prohibit the trading of security futures products until the later of (1) one year after the statute is enacted, (2) the date on which the Secretary of the Treasury, in consultation with the SEC and the CFTC, certifies that federal income tax treatment is equivalent for security futures products and equity options, or (3) the date on which a futures association has met the requirements to become a limited purpose national securities association under amended Section 15A of the Exchange Act. However, security futures products will be able to begin trading on January 2, 2003 even without certification of equivalent federal income tax treatment, subject to a sunset provision. Specifically, trading in security futures products would have to stop after another two years (plus a wind down period) in the absence of certification of equivalent tax treatment. Additionally, Section 6 would prohibit trading in security futures products unless margin requirements are set at the higher of those required by the exchange’s risk-based margining system or those required for comparable options traded on securities exchanges (exclusive of options premiums).

Section 202 would amend Section 19 of the Exchange Act to limit the types of proposed rule changes that notice registrant exchanges have to file and to provide for expedited treatment of such proposed rule changes. In particular, amended Section 19 would require notice registrant exchanges to file with the SEC under new Section 19(b)(7) only proposed rule changes that relate to higher margin levels, fraud or manipulation, recordkeeping, reporting, listing standards, decimal pricing, sales practices for persons who effect transactions in security futures products, and rules effectuating their obligations to enforce the federal securities laws. Notice registrant exchanges would be required to comply with the CFTC’s procedures for proposed rule changes simultaneously. The SEC would be permitted to abrogate a proposed rule change filed by a notice registrant exchange after it took effect, but only if the SEC determined that the rule change unduly burdened competition or efficiency, conflicted with the federal securities laws, or was inconsistent with the public interest and the protection of investors.

Section 202 provides for SEC consultation with the CFTC, except for emergencies, for proposed rules changes that primarily concern conduct related to security futures product transactions submitted by national securities exchanges and national securities associations that are not notice registrants.

Section 202 also would amend Section 19 of the Exchange Act to provide that the SEC does not have the authority to review final disciplinary proceedings by notice registrant exchanges except to the extent that they relate to a violation of the federal securities laws or to violation of the exchange’s rules with respect to a security futures product. Finally, Section 202 would amend Section 19 to require exchanges on which security futures products are traded to file proposed rule changes necessary to implement decimal pricing of security futures products nine months after the commencement of trading of security futures products.

Section 203. Regulatory Relief for Intermediaries Trading Security Futures Products.

Section 203 would amend Section 15 of the Exchange Act to provide for expedited SEC registration of CFTC registered futures commission merchants and introducing brokers that would fall within the statutory definition of the term "broker" or "dealer" solely by effecting transactions in security futures products. These "notice registrant" broker-dealers would become registered by filing a notice with the SEC. Because notice registrant broker-dealers would continue to be subject to the CEA, they would be exempt from all but the core provisions of the federal securities laws applicable to broker-dealers. Amended Section 15 would include a list of specific Exchange Act provisions from which notice registrants are exempt, but no inference should be drawn that any other Exchange Act section not included on this list applies to a notice registrant with respect to the trading of security futures products if such section does not apply by its terms.

Section 203 also would amend Section 15 of the Exchange Act to provide an exemption from all broker-dealer registration and non-core requirements for floor brokers and floor traders on CFTC designated contract markets.

Section 203 would amend Section 15A of the Exchange Act to allow futures associations to become national securities associations for the limited purpose of regulating the activities of notice registrant broker-dealers. Amended Section 15A would also exempt futures associations from all but the core requirements of the federal securities laws applicable to national securities associations and would provide for limited review by the SEC of futures association rules relating to security futures products. A futures association, such as the National Futures Association ("NFA"), would become a national securities association automatically as long as it met certain conditions. The NFA (and other limited purpose national securities associations) would be expected to enforce securities laws applicable to security futures products. As a result, notice registrant broker-dealers that belong to the NFA would not have to join the National Association of Securities Dealers.

Section 203 would amend the Securities Investor Protection Act of 1970 to exempt notice registrant broker-dealers from the requirement to join the Securities Investor Protection Corporation ("SIPC"). In addition, Section 203 would extend the protections of SIPC to customer positions in security futures products that are held by registered broker-dealers (other than notice registrant broker-dealers).

Finally, Section 203 would make a technical amendment to Section 15(i)(6)(A) of the Exchange Act to avoid extending the definition of "new hybrid product" to security futures products.

Section 204. Special Provisions for Interagency Cooperation.

Section 204 would amend Section 17 of the Exchange Act to permit the SEC to examine limited purpose national securities associations as well as notice registrant broker-dealers and exchanges. Amended Section 17 would require the SEC to notify the CFTC of such examinations and to use the CFTC’s examination reports to the fullest extent possible. In addition, limited purpose national securities associations and notice registrant broker-dealers and exchanges would not be subject to routine periodic examinations by the SEC and the SEC would only be permitted to apply recordkeeping rules to those entities with respect to security futures products.

Section 205. Maintenance of Market Integrity for Security Futures Products.

Section 205 is intended to ensure effective enforcement against unlawful practices with respect to the trading of security futures products. Specifically, Section 205 would amend Sections 9(b), 9(g), 20(d), and 21A(a)(1) of the Exchange Act, which relate to the trading of options and their underlying securities, so that they expressly apply to security futures products. In addition, Section 205 would amend Section 21 of the Exchange Act to require the SEC to provide the CFTC with notice of the commencement of any proceeding, and a copy of any order issued, against a notice registrant broker-dealer, exchange, or limited purpose national securities association.

Section 206. Special Provisions for the Trading of Security Futures Products.

Section 206 would amend Section 6 of the Exchange Act to provide minimum requirements for the listing of security futures products, including requirements that trading in the security futures product not be readily susceptible to manipulation, that transactions in security futures products be effected only by broker-dealers subject to suitability requirements comparable to those of a registered national securities association, and that procedures for coordinated surveillance be in place to detect manipulation and insider trading between the market trading the security futures product and markets trading the underlying securities and other related securities. Physical settlement would be permitted if the exchange on which the security futures product is traded has arrangements for the payment or delivery of the underlying securities with a registered clearing agency.

Section 206 would allow the SEC and CFTC jointly to permit options on security futures after a period of three years.

Section 206 would require linked and coordinated clearing of security futures products that would permit a security futures product to be purchased in one market and offset in another. However, Section 206 also would provide that linked and coordinated clearing would not have to be in place until the later of two years after trading in security futures products has commenced or at such point as the volume of trading in security futures products reaches a specific threshold that is designed to indicate that the market is viable. In addition, amended section 6 would permit the SEC and the CFTC to jointly exempt any person from the linked and coordinated clearing requirement if the exemption fosters the development of fair and orderly markets in security futures products, is necessary or appropriate in the public interest, and is consistent with the protection of investors.

Section 206 would amend Section 31 of the Exchange Act to exempt security futures products from transaction fees.

Section 206 would amend Section 7 of the Exchange Act to permit the SEC to establish margin requirements for security futures products jointly with the CFTC.

Section 206 would amend Section 11A of the Exchange Act to require the SEC to consult with the CFTC on national market system rulemaking relating to security futures products. In addition, amended Section 11A would provide that any national market system rules adopted by the SEC would not apply to trading on notice registrant exchanges unless the CFTC specifically orders that they should apply.

Section 206 would amend Section 17A of the Exchange Act to provide that clearing agencies that are regulated by the CFTC do not have to register with the SEC in order to clear and settle transactions in security futures products. In addition, amended Section 17A would provide that payments and deliveries of underlying securities in connection with security futures products that are not cash settled would have to be carried out by a registered clearing agency. Amended Section 17A would also provide that all clearing agencies that clear security futures products (whether registered or exempted from registration) must coordinate with and develop links with each other, subject to the delayed start date described above.

Section 206 would amend Section 12 of the Exchange Act to require the SEC to consult with the CFTC before suspending trading in a security futures product or taking emergency action with respect to a security futures product.

Section 206 would amend Section 10(a) of the Exchange Act to exclude security futures products from that provision.

Section 206 would direct the SEC and CFTC to determine within three years whether a trading system operated by a broker-dealer should be permitted to trade security futures products and, if so, would permit the SEC to require such an entity to comply with those provisions of the Exchange Act applicable to national securities exchanges and associations trading security futures products (other than the registration provisions).

Section 206 would direct the SEC, after consultation with the CFTC, to issue regulations to avoid duplicative or conflicting regulation of dual registered broker-dealers with respect to the financial responsibility provisions (other than margin rules) of the Exchange Act, the CEA, and the rules of both Commissions.

Section 206 would amend Sections 6 and 15A of the Exchange Act to require national securities exchanges and national securities associations to issue rules to avoid duplicative or conflicting rules related to financial responsibility with those of registered futures associations with respect to dual-registered broker-dealers.

Section 207. Amendments Relating to the Clearance and Settlement of Over-the-Counter Derivatives

Section 207 would amend Section 17A of the Exchange Act to provide registered clearing agencies with the express authority to clear and settle over-the-counter derivatives.

Section 208. Amendments Relating to Registration and Disclosure Issues under the Securities Act of 1933 and the Securities Exchange Act of 1934.

Section 208 would amend Section 2 of the Securities Act of 1933 ("Securities Act") to incorporate definitions of the terms "security future," "security futures product," and "narrow-based security index." In addition, Section 2 would be amended to include the term "security future" in the definition of the term "security."

Section 208 also would amend Section 2 of the Securities Act to provide that any offer or sale of a security futures product by or on behalf of an issuer of underlying securities, any affiliate of an issuer, or an underwriter would constitute a contract for sale of, sale of, offer for sale of, or offer to sell the underlying securities. This would ensure that issuers of the securities underlying security futures products, their affiliates, and underwriters could not use security futures products to avoid the registration requirements of the Securities Act. The amendment to Section 2 of the Securities Act is not intended to imply or create any presumption regarding whether the offer or sale of any contract, other than a security futures product, involving an exchange of payments based on the value of one or more securities is or is not a contract for sale of, sale or, offer for sale, or offer to sell any securities underlying the contract. In other words, this amendment does not change the present state of the law for over-the-counter derivative instruments.

Section 208 would amend Section 3 of the Securities Act to exempt from the registration requirements of Section 5 of the Securities Act any security futures product that is (1) cleared by a clearing agency registered under Section 17A of the Exchange Act or exempt from registration under Section 17A(b)(7) of the Exchange Act; and (2) traded on a registered exchange or a national securities association registered pursuant to Section 15A(a) of the Exchange Act.

Further, Section 208 would amend Section 12(a)(2) of the Securities Act to exempt offers or sales of security futures products that are exempt from Section 5 by reason of Section 3(a) from the liability provisions of Section 12(a)(2) of the Securities Act.

Section 208 would amend Section 12(a) of the Exchange Act to exempt security futures products listed on a national securities exchange from the registration requirements of that section. Because the security futures product would not be registered under Section 12, the provisions of Sections 13, 14 and 16 of the Exchange Act would not apply to the security futures product as a class of equity security registered under Section 12. Sections 13(e), 14(d) and 14(e) of the Exchange Act would still apply to the securities underlying security futures products. Section 14(e), the tender offer anti-fraud section, applies to any security and would apply to security futures products. Sections 13(d) and 13(g) of the Exchange Act would apply with respect to beneficial ownership only of the security underlying the security futures product. Further, the anti-fraud and anti-manipulation provisions of the Exchange Act would apply if security futures products were used to manipulate the underlying security.

Section 208 also would amend Section 12(g)(5) of the Exchange Act to clarify that, for purposes of Section 12(g), a security futures product would not be considered a separate class of equity security of the issuer of the securities underlying the security futures product.

Section 208 would amend Section 16 of the Exchange Act to provide that, for purposes of Section 16 of the Exchange Act, ownership of and transactions in security futures products would be considered ownership of and transactions in the underlying equity securities.

Section 209. Amendments to the Investment Company Act of 1940 and the Investment Advisers Act of 1940.

Section 209 would amend Section 2 of the Investment Company Act of 1940 ("Investment Company Act") to incorporate definitions of the terms "security future" and "narrow-based security index." In addition, Section 2 of the Investment Company Act would be amended to include the term "security future" in the definition of the term "security."

Section 209 also would amend Section 202 of the Investment Advisers Act of 1940 ("Advisers Act") to add definitions of the terms "security future" and "narrow-based security index" and to include the term "security future" in the definition of the term "security." Section 209 also would add new Section 203(b)(6) to the Advisers Act, which would exempt from the registration provisions of the Advisers Act any investment adviser that is registered with the CFTC as a commodity trading advisor and whose business does not consist primarily of acting as an investment adviser and that does not act as an investment adviser to an investment company registered under the Investment Company Act or a business development company that has elected to be regulated under the Investment Company Act and has not withdrawn such election. The SEC and the CFTC would promulgate complementary rules or regulations to give effect to these provisions.

Section 210. Preemption

Section 210 amends Section 28 of the Exchange Act to clarify the preemption of state laws related to gaming and bucket shops.

SUBTITLE B – CONFORMING AMENDMENTS TO THE COMMODITY EXCHANGE ACT

Section 221. Amendments Relating to the Jurisdiction of the Securities and Exchange Commission

Section 221 would amend Section 2 of the CEA to clarify that security futures products would be jointly regulated by the CFTC and the SEC, and that security futures products would not be subject to the exclusive jurisdiction of the CFTC.

Section 221 also would amend Section 2 of the CEA to provide criteria that security futures products would have to meet before they could be traded on a designated contract market. These criteria would include requirements that trading in the security futures product not be readily susceptible to manipulation, that transactions in the security futures product be effected only by futures commission merchants, introducing brokers, commodity trading advisers, commodity pool operators, or associated persons subject to suitability requirements comparable to those of a registered national securities association, and that procedures for coordinated surveillance be in place to detect manipulation and insider trading between the market trading the security futures product and markets trading the underlying securities and other related securities. Physical settlement would be permitted if the market on which the security futures product is traded has arrangements for the payment or delivery of the underlying securities with a registered clearing agency.

Section 221 would amend Section 2 of the CEA to permit the CFTC to examine contract markets, futures commission merchants, introducing brokers, commodity trading advisers, commodity pool operators, and associated persons that are designated or registered with the CFTC under the expedited processes described below. The CFTC would only be permitted to apply recordkeeping rules to those entities with respect to security futures products. Amended Section 2 would require the CFTC to notify the SEC of such examinations. In addition, amended Section 2 would require the CFTC to use the SEC’s examination reports to the fullest extent possible.

Section 221 would allow the SEC and CFTC jointly to permit options on security futures after a period of three years.

Section 221 also would amend Section 2 of the CEA to permit the CFTC and the SEC to establish margin requirements for security futures products by joint regulation.

Section 221 would amend Section 4m of the CEA to exempt from regulation as a commodity trading advisor any investment adviser registered with the SEC whose business does not consist primarily of acting as a commodity trading advisor and that do not act as a commodity trading advisor to any investment trust, syndicate, or similar form of enterprise that is engaged primarily in trading in any commodity for future delivery on or subject to the rules of any contract market.

Section 221 amends Section 16 of the CEA to clarify that it does not apply to investigations involving any security underlying a security futures product.

Section 221 would require linked and coordinated clearing of security futures products that would permit a security futures product to be purchased in one market and offset in another. However, Section 221 also would provide that linked and coordinated clearing would not have to be in place until the later of two years after trading in security futures products has commenced or at such point as the volume of trading in security futures products reaches a specific threshold that is designed to indicate that the market is viable. In addition, Section 221 would permit the SEC and the CFTC to jointly exempt any person from the linked and coordinated clearing requirement if the exemption fosters the development of fair and orderly markets in security futures products, is necessary or appropriate in the public interest, and is consistent with the protection of investors.

Section 221 would amend redesignated section 2(a)(1)(C) (current section 2(a)(1)(B)) of the CEA by amending the standards under which the CFTC can designate a contract market in contracts of sale for future delivery of certain broad-based securities indexes. An objective test contained in the new definition of "narrow-based security index" replaces the old requirement that the CFTC evaluate factors such as the index’s reflection of a substantial segment of the market for all publicly traded equity or debt securities. Moreover, the SEC would no longer have veto authority over the decision to designate a contract market in contracts of sale for future delivery of certain broad-based securities indexes. Finally, the CFTC would be given authority to require that contracts of sale for future delivery (and options thereon) of certain broad-based securities indexes be treated as security futures products under the CEA and the federal securities laws.

Section 221 would amend Section 4j of the CEA to direct the CFTC to issue regulations to prohibit the privilege of dual trading only for security futures products.

Section 221 directs the SEC and CFTC, within three years of the commencement of trading in security futures products, to determine whether trading systems operated by broker-dealers should be permitted to trade security futures products. If so, Section 221 would provide that any such entity shall be deemed a national securities exchange for purposes of Section 5f of the CEA, and would permit the CFTC to exempt such entity from any provision of the CEA or the rules thereunder.

Section 221 amends Section 4d of the CEA to direct the CFTC, after consultation with the SEC, to issue regulations to avoid duplicative or conflicting regulation of dual-registered futures commission merchants with respect to the financial responsibility provisions (other than margin rules) of the Exchange Act, the CEA, and the rules of both Commissions.

Section 221 would also amend Section 17 of the CEA to require national futures associations to issue rules to avoid duplicative or conflicting rules related to financial responsibility applicable to dual-registered futures commission merchants with those of national securities exchanges and associations.

Section 222. Regulatory Relief under the Commodity Exchange Act for Markets and Intermediaries Trading Security Futures Products.

Section 222 would add Section 5f to the CEA to provide for expedited CFTC designation as contract markets of national securities exchanges and national securities associations that are registered with the SEC that would fall within the statutory definition of the term "board of trade" by trading security futures products. A "notice designated" contract market would be designated as a contract market with respect to a security futures product by providing to the CFTC a written certification that the specific contract with respect to which the application has been made, or the board of trade, meets the specified criteria. Because notice designated contract markets would continue to be subject to the federal securities laws, they would be exempt from all but the core provisions of the CEA applicable to designated contract markets.

Section 222 also would amend Section 4f of the CEA to provide for expedited CFTC registration of SEC registered broker-dealers that would fall within the statutory definition of the term "futures commission merchant" or "introducing broker" by effecting transactions in security futures products. These "notice registrants" would become registered by filing a notice with the CFTC. In addition, amended Section 4f would provide that SEC registered broker-dealers that fall within the definition of "floor broker" or "floor trader" by effecting transactions in security futures products are exempt from CFTC registration. Because these entities would continue to be subject to the federal securities laws, they would be exempt from all but the core provisions of the CEA that otherwise would apply to them.

In addition, Section 222 would amend Section 4k of the CEA to provide exemptions from relevant provisions of the CEA for associated persons of SEC registered broker-dealers.

Section 223. Amendments Relating to the Notification of Investigations and Enforcement Actions.

Section 223 would amend Sections 6, 6c, and 8 of the CEA to require the CFTC to furnish the SEC with notice of the commencement of any proceeding, and a copy of any order issued, against a notice designated contract market, notice registered futures commission merchant or introducing broker, or exempt floor broker or floor trader.

SUBTITLE C – EFFECTIVE DATE

Section 231. Effective Date.

This section provides that the provisions of the Act shall become effective on the date of the enactment of the Act.