Retail Foreign Exchange Transactions, 41676-41685 [2011-18009]
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Federal Register / Vol. 76, No. 136 / Friday, July 15, 2011 / Rules and Regulations
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[FR Doc. 2011–17401 Filed 7–14–11; 8:45 am]
BILLING CODE 4910–13–P
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 240
[Release No. 34–64874; File No. S7–30–11]
RIN 3235–AL19
Retail Foreign Exchange Transactions
Securities and Exchange
Commission.
ACTION: Interim final temporary rule;
request for comments.
AGENCY:
Under section 742(c) of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act (‘‘Dodd-Frank
Act’’), certain foreign exchange
transactions with persons who are not
‘‘eligible contract participants’’
(commonly referred to as ‘‘retail forex
transactions,’’ and as further defined
below) with a registered broker or dealer
(‘‘broker-dealer’’) will be prohibited as
of July 16, 2011, in the absence of the
Commission adopting a rule to allow
such transactions under terms and
conditions prescribed by the
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SUMMARY:
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Commission. The Commission is
adopting interim final temporary Rule
15b12–1T to allow a registered brokerdealer to engage in a retail forex
business until July 16, 2012, provided
that the broker-dealer complies with the
Securities Exchange Act of 1934
(‘‘Exchange Act’’), the rules and
regulations thereunder, and the rules of
the self-regulatory organization(s) of
which the broker-dealer is a member
(‘‘SRO rules’’), insofar as they are
applicable to retail forex transactions.
DATES: Effective Date: Rule 15b12–1T is
effective on July 15, 2011 and will
remain in effect until July 16, 2012.
Comment Date: Comments on the
interim final temporary rule should be
received on or before September 13,
2011.
ADDRESSES: Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/interim-final-temp.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–30–11 on the subject line;
or
• Use the Federal eRulemaking Portal
(https://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate
to Elizabeth Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549.
All submissions should refer to File
Number S7–30–11. This file number
should be included on the subject line
if e-mail is used. To help the
Commission to process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on its Web site:
(https://www.sec.gov/rules/interim-finaltemp.shtml). Comments are also
available for Web site viewing and
printing 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. 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.
FOR FURTHER INFORMATION CONTACT: Jo
Anne Swindler, Assistant Director;
Richard Vorosmarti, Special Counsel; or
Angie Le, Special Counsel, at (202) 551–
PO 00000
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5777, Division of Trading and Markets,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549.
SUPPLEMENTARY INFORMATION: The
Commission is adopting new Rule
15b12–1T under the Exchange Act as an
interim final temporary rule. The rule
will expire and no longer be effective on
July 16, 2012. The Commission is
soliciting comments on all aspects of
this interim final temporary rule. The
Commission will carefully consider any
comments received and intends to take
further action if it determines that
further action is necessary or
appropriate, either prior to or following
the expiration of the rule. In making this
determination, the Commission may
consider a number of alternative
approaches with respect to retail forex
transactions, including proposing new
rules for public comment; issuing a final
rule amending the interim final
temporary rule; issuing a final rule
adopting the interim final temporary
rule as final; or allowing the interim
final temporary rule to expire without
further action, which would allow the
statutory prohibition to take effect.
I. Background
On July 21, 2010, President Obama
signed into law the Dodd-Frank Act.1 As
amended by the Dodd-Frank Act,2 the
Commodity Exchange Act (‘‘CEA’’)
provides that a person for which there
is a Federal regulatory agency,3
including a broker-dealer registered
under section 15(b) (except pursuant to
paragraph (11) thereof) or 15C of the
Exchange Act,4 shall not enter into, or
offer to enter into, a transaction
described in section 2(c)(2)(B)(i)(I) of the
CEA with a person who is not an
‘‘eligible contract participant’’ 5 except
1 Public
Law 111–203, 124 Stat. 1376.
Law 111–203, § 742(c)(2) (to be codified
at 7 U.S.C. 2(c)(2)(E)).
3 7 U.S.C. 2(c)(2)(E)(i), as amended by § 742(c) of
the Dodd-Frank Act, defines a ‘‘Federal regulatory
agency’’ to mean the Commodity Futures Trading
Commission (‘‘CFTC’’), the Securities and Exchange
Commission, an appropriate Federal banking
agency, the National Credit Union Association, and
the Farm Credit Administration.
4 7 U.S.C. 2(c)(2)(B)(i)(II).
5 ‘‘Eligible contract participant’’ (‘‘ECP’’) is
defined in CEA section 1a(18), as re-designated and
amended by section 721 of the Dodd-Frank Act. See
Public Law 111–203, § 721 (amending CEA section
1a). The CEA’s definition of ECP generally is
comprised of regulated persons; entities that meet
a specified total asset test (e.g., a corporation,
partnership, proprietorship, organization, trust, or
other entity with total assets exceeding $10 million)
or an alternative monetary test coupled with a nonmonetary component (e.g., an entity with a net
worth in excess of $1 million and engaging in
business-related hedging; or certain employee
benefit plans, the investment decisions of which are
made by one of four enumerated types of regulated
2 Public
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Federal Register / Vol. 76, No. 136 / Friday, July 15, 2011 / Rules and Regulations
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pursuant to a rule or regulation of a
Federal regulatory agency allowing the
transaction under such terms and
conditions as the Federal regulatory
agency shall prescribe 6 (‘‘retail forex
rule’’).7 Transactions described in CEA
section 2(c)(2)(B)(i)(I) include ‘‘an
agreement, contract, or transaction in
foreign currency that * * * is a contract
of sale of a commodity for future
delivery (or an option on such a
contract) or an option (other than an
option executed or traded on a national
securities exchange registered pursuant
to section 6(a) of the Securities
Exchange Act of 1934 (15 U.S.C.
78f(a)).’’ 8 A Federal regulatory agency’s
retail forex rule must treat all
agreements, contracts, and transactions
in foreign currency described in CEA
section 2(c)(2)(B)(i)(I) and all
agreements, contracts, and transactions
in foreign currency that are functionally
or economically similar to agreements,
contracts, or transactions described in
CEA section 2(c)(2)(B)(i)(I), similarly.9
Any retail forex rule also must prescribe
appropriate requirements with respect
to disclosure, recordkeeping, capital and
margin, reporting, business conduct,
and documentation, and may include
such other standards or requirements as
the Federal regulatory agency
determines to be necessary.10
This amendment to the CEA takes
effect on July 16, 2011, which is 360
days from the date of enactment of the
Dodd-Frank Act.11 After that date, for
purposes of CEA section 2(c)(2)(B),
broker-dealers for which the
Commission is the ‘‘Federal regulatory
agency’’ may not engage in off-exchange
retail forex futures and options with a
customer except pursuant to a retail
forex rule issued by the Commission.12
entities); and certain governmental entities and
individuals that meet defined thresholds. The
Commission and the CFTC recently have proposed
rules under the CEA that further define ‘‘eligible
contract participant’’ with respect to transactions
with major swap participants, swap dealers, major
security-based swap participants, security-based
swap dealers, and commodity pools. See Exchange
Act Release No. 63452 (Dec. 7, 2010), 75 FR 80174
(Dec. 21, 2010). Because transactions that are the
subject of this release are commonly referred to as
‘‘retail forex transactions,’’ this release uses the
term ‘‘retail customer’’ to describe persons who are
not ECPs.
6 7 U.S.C. 2(c)(2)(E)(ii)(I).
7 As used in this release, ‘‘retail forex rule’’ refers
to any rule proposed or adopted by a Federal
regulatory agency pursuant to section 742(c)(2) of
the Dodd-Frank Act.
8 7 U.S.C. 2(c)(2)(B)(i)(I).
9 7 U.S.C. 2(c)(2)(E)(iii)(II).
10 7 U.S.C. 2(c)(2)(E)(iii)(I).
11 See Public Law 111–203, § 754.
12 See 7 U.S.C. 2(c)(2)(B)(i)(II) and 7 U.S.C.
2(c)(2)(E)(ii)(I). On September 10, 2010, the CFTC
adopted a retail forex rule for persons subject to its
jurisdiction. See Regulation of Off-Exchange Retail
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This prohibition will not apply to (1)
forex transactions with a customer who
qualifies as an ECP, or (2) transactions
that are spot forex contracts or forward
forex contracts irrespective of whether
the customer is an ECP.13 However,
consistent with other Federal regulatory
agencies’ retail forex rules, Rule 15b12–
1T applies to ‘‘rolling spot’’ transactions
in foreign currency by broker-dealers.14
The discussion of the definition of
‘‘retail forex transaction’’ below
addresses the distinctions between
rolling spot forex transactions and spot
and forward forex contracts.
Prior to June 2011, the Commission
had not been made aware of industry
concerns with respect to the operation
of section 742 of the Dodd-Frank Act in
the absence of Commission rulemaking.
In mid-June 2011, however, market
participants for the first time brought to
the attention of Commission staff the
possibility that section 742 of the DoddFrank Act may have serious adverse
consequences for certain securities
markets in the absence of rulemaking by
the Commission before the impending
effective date of the provision (i.e., July
16, 2011).15 Although this
correspondence from market
Foreign Exchange Transactions and Intermediaries,
75 FR 55410 (Sept. 10, 2010) (‘‘Final CFTC Retail
Forex Rule’’). The CFTC had proposed its rules
regarding retail forex transactions prior to the
enactment of the Dodd-Frank Act. See Regulation
of Off-Exchange Retail Foreign Exchange
Transactions and Intermediaries, 75 FR 3282 (Jan.
20, 2010) (‘‘Proposed CFTC Retail Forex Rule’’). The
Federal Deposit Insurance Corporation (‘‘FDIC’’)
and the Office of the Comptroller of the Currency
(‘‘OCC’’) subsequently proposed similar rules. See
Retail Foreign Exchange Transactions, 76 FR 28358
(May 17, 2011); Retail Foreign Exchange
Transactions, 76 FR 22633 (Apr. 22, 2011)
(‘‘Proposed OCC Retail Forex Rule’’). On July 6,
2011, the FDIC adopted final retail forex rules. See
Retail Foreign Exchange Transactions, 76 FR 40779
(July 12, 2011) (‘‘Final FDIC Retail Forex Rule’’).
13 See 7 U.S.C. 2(c)(2)(C)(i)(I) and 7 U.S.C.
2(c)(2)(C)(i)(II); see also Final FDIC Retail Forex
Rule, supra note 12; Proposed OCC Retail Forex
Rule, supra note 12.
14 See Final FDIC Retail Forex Rule, supra note
12 (explaining that its retail forex rule applies to
rolling spot forex transactions); Proposed OCC
Retail Forex Rule, supra note 12 (stating that rolling
spot forex transactions should be regulated as retail
forex transactions); Final CFTC Retail Forex Rule,
supra note 12 (stating that the CFTC has the
authority to fully regulate ‘‘look-alike,’’ leveraged
forex contacts, also called off-exchange Zelener
contracts; as discussed below, Zelener contracts are
also called rolling spot transactions); Proposed
CFTC Retail Forex Rule, supra note 12 (‘‘The [CFTC
Reauthorization Act of 2008] amends the [CEA] to
require that certain intermediaries for forex futures
and options and for look-alike contracts (i.e., those
at issue in Zelener) register in such capacity as the
Commission shall determine. * * * ’’).
15 See Memorandum from P. Georgia Bullitt,
Morgan Lewis, on Pershing LLC—Proposed Relief
regarding transactions in Retail Foreign Exchange to
James Brigagliano et al. (June 17, 2011) (available
at https://www.sec.gov/comments/other/otherinitiatives/otherinitiatives-56.pdf) (‘‘Morgan Lewis
Memo’’).
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41677
participants brought this issue to the
attention of Commission staff, the
Commission understands that this is in
fact a wider concern shared by several
other market participants. One potential
consequence concerns the ability of
broker-dealers to facilitate the
settlement of foreign securities
transactions for retail customers. For
example, a broker-dealer may purchase
a foreign currency or exchange a foreign
currency for U.S. dollars on behalf of a
retail customer in connection with the
customer’s purchase or sale of a security
listed on a foreign exchange and
denominated in the foreign currency. In
particular, a representative of certain
market participants informed the staff
that section 742 could operate to
preclude broker-dealers from continuing
to engage in certain foreign exchange
transactions that are inherent in certain
of their customers’ securities
transactions, and that serve to minimize
their customers’ risk exposure to
changes in foreign currency rates.16
The Commission further understands
that there may be other situations in
which broker-dealers engage in foreign
exchange transactions in connection
with facilitating the ordinary execution,
clearance, or settlement of customers’
securities transactions and that may
warrant rulemaking by the Commission
in order to avoid market disruption due
to the potential application of section
742 of the Dodd-Frank Act. At the same
time, the Commission notes that media
coverage over the past few years has
highlighted potentially abusive
practices by some intermediaries in
connection with retail forex
transactions.17 The Commission also
notes that other regulators have
expressed concerns with regard to the
retail forex practices of the entities that
they regulate.18
In order to provide the Commission
with the opportunity to receive
comments regarding practices in this
area and to consider prescribing
additional rules to address investor
protection concerns (e.g., abusive sales
practices, volatility and riskiness of the
16 See
id.
Gregory Zuckerman, Carrick Mollenkamp &
Lingling Wei, Suspicion of Forex Gouging Spreads,
The Wall Street Journal (Feb. 10, 2011) at A1
(describing allegations of overcharging of customers
by custody banks in currency trades).
18 See, e.g., Press Release, CFTC, CFTC Releases
Final Rules Regarding Retail Forex Transactions
(Aug. 30, 2010) (available at https://www.cftc.gov/
PressRoom/PressReleases/pr5883-10.html?dbk)
(noting that retail forex is the largest area of retail
fraud that the CFTC oversees); see also the
Financial Industry Regulatory Authority’s
(‘‘FINRA’’) Regulatory Notice 08–66, (Retail Foreign
Currency Exchange) (November 2008) (‘‘FINRA
Forex Notice’’) (describing the retail forex market as
opaque, volatile, and risky).
17 See
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Federal Register / Vol. 76, No. 136 / Friday, July 15, 2011 / Rules and Regulations
forex market) 19 as they affect the
regulatory treatment of retail forex
transactions by broker-dealers—while
also preserving potentially beneficial
market practices identified to the
Commission only weeks before the July
16, 2011 effective date for section 742 of
the Dodd-Frank Act—the Commission
today is adopting interim final
temporary Rule 15b12–1T under the
Exchange Act to enable broker-dealers
to engage in a retail forex business
under the existing regulatory regime for
one year. By receiving comments
regarding practices in this area, the
Commission will be better positioned to
determine, for example, the scope of
retail forex business conducted by
broker-dealers that may be beneficial
and poses limited risk to customers and
any aspects of the business that may
pose substantial undue risks to
customers. The Commission will
carefully consider comments on what
additional rulemaking may be
necessary, if any.
II. Discussion
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The Commission is adopting interim
final temporary Rule 15b12–1T to
maintain the ability of broker-dealers to
engage in a retail forex business during
a one-year period under the existing
regulatory framework that now applies
to broker-dealers providing these
services. The Commission solicits
comment on each aspect of the rule and
the nature and circumstances
surrounding retail forex business
conducted by broker-dealers. The
Commission intends to carefully
consider comments received to
determine what further regulatory
action, if any, would be appropriate. In
making this determination, the
Commission may consider a number of
alternatives with respect to retail forex
transactions, including proposing new
rules for public comment; issuing a final
rule amending the interim final
temporary rule; issuing a final rule
adopting the interim final temporary
rule as final; or allowing the interim
final temporary rule to expire without
further action, which would allow the
statutory prohibition to take effect.
19 In one of its notices to members, FINRA
identified several investor protection concerns,
including, among other things, the following: ‘‘[t]he
retail customer typically does not having pricing
information and cannot determine whether the
price quoted by the dealer is fair’’; ‘‘the dealer acts
as counterparty and establishes the price, which
means that the dealer has a conflict of interest in
the transaction’’; ‘‘[p]rice comparisons are also
complicated by different compensation structures’’;
and ‘‘[t]he currency market is extremely volatile
and retail forex customers are exposed to
substantial currency risk.’’ See FINRA Forex Notice,
supra note 18.
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A. Rule 15b12–1T(a): Definitions
Rule 15b12–1T(a) sets forth the
definitions of terms specific to the
interim final temporary rule. Many of
the terms (i.e., broker, dealer, person,
registered broker or dealer, and selfregulatory organization) have the same
meanings as in the Exchange Act. The
term ‘‘Act,’’ as used in the rule, refers
to the Exchange Act.20 The Commission
chose these terms and definitions
because their meanings are readily
understood in the industry.
The term ‘‘retail forex business’’ is
defined as ‘‘engaging in one or more
retail forex transactions with the intent
to derive income from those
transactions, either directly or
indirectly.’’ 21 This definition mirrors
the definition contained in the FDIC’s
final retail forex rules and the OCC’s
proposed rules.22 This term is intended
to include retail forex transactions that
may not generate income to the brokerdealer or a retail forex business that is
ultimately not profitable. The
Commission chose this definition
because it focuses on the intent to
engage in a series of forex transactions
with a business purpose, whether or not
the transactions result in income or
profits.
The term ‘‘retail forex transaction’’ is
defined as ‘‘any account, agreement,
contract or transaction in foreign
currency that is offered or entered into
by a broker or dealer with a person that
is not an eligible contract participant as
defined in section 1a(18) of the
Commodity Exchange Act (7 U.S.C.
1a(18)) and that is: (i) A contract of sale
of a commodity for future delivery or an
option on such a contract; (ii) an option,
other than an option executed or traded
on a national securities exchange
registered pursuant to section 6(a) of the
Act (15 U.S.C. 78(f)(a)); or (iii) offered,
or entered into, on a leveraged or
margined basis, or financed by a broker
or dealer or any person acting in concert
with the broker or dealer on a similar
basis, other than: (A) a security that is
not a security futures product as defined
in section 1a(47) of the Commodity
Exchange Act (7 U.S.C. 1a(47)); or (B) a
contract of sale that: (1) Results in actual
delivery within two days; or (2) creates
an enforceable, obligation to deliver
between a seller and buyer that have the
ability to deliver and accept delivery,
respectively, in connection with their
line of business.’’ 23 This definition is
Act Rule 15b12–1T(a)(1).
Act Rule 15b12–1T(a)(2).
22 See Final FDIC Retail Forex Rule, supra note
12; Proposed OCC Retail Forex Rule, supra note 12
(each defining ‘‘retail forex business’’).
23 Exchange Act Rule 15b12–1T(a)(3).
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20 Exchange
21 Exchange
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based on the CEA, incorporates the
terms described in CEA sections
2(c)(2)(B) and 2(c)(2)(C),24 and is
substantially the same as the definition
in the FDIC’s final section 349.2 25 and
the OCC’s proposed section 48.2.26 This
definition has at least two important
features.
First, certain transactions in foreign
currency are excluded from the
definition of the term ‘‘retail forex
transaction.’’ For example, the CEA
expressly excludes ‘‘a contract of sale
[in foreign currency] that * * * results
in actual delivery within 2 days.’’ 27 As
defined by court decisions as well as the
retail forex rules of other Federal
regulatory agencies, this term refers to a
‘‘spot’’ forex transaction, in which one
currency is purchased for another, the
transaction is settled within two days,
and actual delivery occurs as soon as
practicable.28 Similarly, based upon the
language in the CEA,29 a ‘‘retail forex
transaction’’ does not include a contract
of sale that creates an enforceable
obligation to deliver between a buyer
and seller that have the ability to deliver
and accept delivery, respectively, in
connection with their line of business.30
This statutory language refers to a retail
forex forward contract with a
commercial entity that creates an
enforceable obligation to make or take
delivery, provided the commercial
counterparty has the ability to make
delivery and accept delivery in
connection with its line of business.31 In
24 7
U.S.C. 2(c)(2)(B) and 7 U.S.C. 2(c)(2)(C).
Final FDIC Retail Forex Rule, supra note
12 (defining ‘‘retail forex transaction’’).
26 See Proposed OCC Retail Forex Rule, supra
note 12 (defining ‘‘retail forex transaction’’).
27 See 7 U.S.C. 2(c)(2)(C)(i)(II).
28 See generally CFTC v. Int’l Fin. Servs. (New
York), Inc., 323 F. Supp. 2d 482, 495 (S.D.N.Y.
2004) (distinguishing between foreign exchange
futures contracts and spot contracts in foreign
exchange, and noting that spot transactions—unlike
futures contracts—ordinarily call for settlement
within two days); see also Bank Brussels Lambert
v. Intermetals Corp., 779 F. Supp. 741, 748
(S.D.N.Y. 1991) (noting that the spot market is
essentially the current market rather than the
market for future delivery); Final FDIC Retail Forex
Rule, supra note 12 (explaining that its retail forex
rule does not apply to spot forex contracts);
Proposed OCC Retail Forex Rule, supra note 12
(explaining that its retail forex rule does not apply
to spot forex contracts); Final CFTC Retail Forex
Rule, supra note 12 (defining ‘‘retail forex
transaction’’ as any account, agreement, contract or
transaction described in section 2(c)(2)(B) or
2(c)(2)(C) of the CEA; as discussed above, by its
terms, CEA section 2(c)(2)(C)(i)(II) excludes what
are referred to as spot forex transactions).
29 See 7 U.S.C. 2(c)(2)(C)(i)(II).
30 Exchange Act Rule 15b12–1T(a)(3)(iii)(B)(2).
31 See generally CFTC v. Int’l Fin. Servs. (New
York), Inc., 323 F. Supp. 2d at 495 (distinguishing
between forward contracts in foreign exchange and
foreign exchange futures contracts); see also
William L. Stein, The Exchange-Trading
Requirement of the Commodity Exchange Act, 41
25 See
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addition, consistent with the approach
of other Federal regulatory agencies’
retail forex rules, the definition does not
include forex transactions executed or
traded on an exchange or designated
contract market.32
Second, a ‘‘rolling spot’’ forex
transaction (also known as a Zelener
contract),33 including without limitation
such a transaction traded on the
Internet, through a mobile phone, or on
an electronic platform, falls within the
definition of ‘‘retail forex
transaction,’’ 34 and thus is not excluded
from the definition as a ‘‘spot’’
transaction. This interpretation is
consistent with the approach of other
Federal regulatory agencies acting
Vand. L. Rev. 473, 491 (1988). In contrast to forward
contracts, futures contracts generally include
several or all of the following characteristics: (i)
Standardized nonnegotiable terms (other than price
and quantity); (ii) parties are required to deposit
initial margin to secure their obligations under the
contract; (iii) parties are obligated and entitled to
pay or receive variation margin in the amount of
gain or loss on the position periodically over the
period the contract is outstanding; (iv) purchasers
and sellers are permitted to close out their positions
by selling or purchasing offsetting contracts; and (v)
settlement may be provided for by either (a) cash
payment through a clearing entity that acts as the
counterparty to both sides of the contract without
delivery of the underlying commodity; or (b)
physical delivery of the underlying commodity. See
Edward F. Greene et al., U.S. Regulation of
International Securities and Derivatives Markets
§ 14.08[2] (8th ed. 2006). See also Final FDIC Retail
Forex Rule, supra note 12; Proposed OCC Retail
Forex Rule, supra note 12 (each explaining that
their retail forex rule would not apply to forex
forward contracts).
32 See Final CFTC Retail Forex Rule, supra note
12; Final FDIC Retail Forex Rule, supra note 12;
Proposed OCC Retail Forex Rule, supra note 12.
33 See CFTC v. Zelener, 373 F.3d 861 (7th Cir.
2004); see also CFTC v. Erskine, 512 F.3d 309 (6th
Cir. 2008) (discussing Zelener contracts).
34 CEA section 2(c)(2)(E)(ii) refers to agreements,
contracts, or transactions described in CEA section
2(c)(2)(B)(i)(I) (which is incorporated into subparts
(i) and (ii) of the Commission’s definition of ‘‘retail
forex transaction’’). In addition, CEA section
2(c)(2)(E)(iii)(II) requires the Commission to treat
similarly all agreements, contracts, and transactions
in foreign currency described in CEA section
2(c)(2)(B)(i)(I) and all agreements, contracts, and
transactions that are functionally or economically
similar to agreements, contracts, or transactions
described in CEA section 2(c)(2)(B)(i)(I). The
Commission preliminarily believes that agreements,
contracts, and transactions described in CEA
section 2(c)(2)(C)(i) (including rolling spot forex
transactions) are functionally or economically
similar to agreements, contracts, or transactions
described in CEA section 2(c)(2)(B)(i)(I). Therefore,
the Commission is defining ‘‘retail forex
transaction’’ to encompass the types of agreements,
contracts, and transactions described in CEA
section 2(c)(2)(C)(i), such as rolling spot forex
transactions, and is reflected in subpart (iii) of the
Commission’s definition. See also Final FDIC Retail
Forex Rule, supra note 12; Proposed OCC Retail
Forex Rule, supra note 12 (both concluding that
rolling spot forex transactions are more like futures
than spot contracts). Some courts have held these
contracts to be spot contracts in form. See, e.g.,
CFTC v. Erskine, 512 F.3d 309, 326 (6th Cir. 2008);
CFTC v. Zelener, 373 F.3d 861, 869 (7th Cir. 2004).
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pursuant to section 742 of the DoddFrank Act to treat all agreements,
contracts, and transactions in foreign
currency described in CEA section
2(c)(2)(B)(i)(I) and all agreements,
contracts, and transactions in foreign
currency that are functionally or
economically similar to agreements,
contracts, or transactions described in
CEA section 2(c)(2)(B)(i)(I), similarly.35
Like a spot forex transaction, a rolling
spot forex transaction with a retail
customer may initially require delivery
of currency within two days. In practice,
however, contracts with a retail
customer for a rolling spot forex
transaction may be indefinitely renewed
every other day, and no currency is
actually delivered until one party
affirmatively closes out the position.36
The Commission preliminarily believes
that a contract with a retail customer for
a rolling spot forex transaction is
economically more similar to a retail
forex future, as described in CEA
section 2(c)(2)(B)(i)(I), than a spot forex
contract.
B. Rule 15b12–1T(b): Broker-Dealers
Engaged in a Retail Forex Business
Rule 15b12–1T(b) allows any
registered broker or dealer to engage in
a retail forex business provided that
such broker or dealer complies with the
Exchange Act, the rules and regulations
thereunder, and the SRO rules,
including, but not limited to, the
disclosure, recordkeeping (or
documentation), capital and margin,
reporting, and business conduct
requirements, insofar as they are
applicable to retail forex transactions. In
order for broker-dealers to engage in
retail forex transactions after July 16,
2011, the Commission must adopt rules
prescribing appropriate requirements
with respect to disclosure,
recordkeeping, capital and margin,
reporting, business conduct,
documentation,37 and such other
standards or requirements that the
Commission determines to be
necessary.38 Because broker-dealers
engaging in a retail forex business are
35 7 U.S.C. 2(c)(2)(E)(iii)(II); see also Final FDIC
Retail Forex Rule, supra note 12; Proposed OCC
Retail Forex Rule, supra note 12.
36 For example, in Zelener, the retail forex dealer
retained the right, at the date of delivery of the
currency, to deliver the currency, roll the
transaction over, or offset all or a portion of the
transaction with another open position held by its
customer. See CFTC v. Zelener, 373 F.3d 861, 868
(7th Cir. 2004).
37 The Commission considers the documentation
requirements as a subset of recordkeeping
requirements. To avoid confusion, the Commission
will refer to these requirements collectively as
recordkeeping requirements.
38 See Public Law 111–203, § 742(c)(2) (amending
CEA section 2(c)(2)).
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41679
already subject to numerous regulatory
requirements with respect to this
business under the Exchange Act, the
rules and regulations thereunder, and
SRO rules, the Commission does not
intend to create any new obligations
under this interim final temporary rule
for broker-dealers that are engaged in a
retail forex business. The Commission
provides below illustrative examples of
obligations, including certain SRO
requirements, applicable to brokerdealers’ retail forex transactions.39
Disclosure Requirements
Broker-dealers that engage in a retail
forex business must comply with the
disclosure requirements in NASD Rule
2210.40 NASD Rule 2210 requires all
communications with the public by
members of FINRA—including forexrelated communications—to be based on
principles of fair dealing and good faith,
to be fair and balanced, and to provide
a sound basis for evaluating the facts
regarding the market generally and a
customer’s specific transaction.41 NASD
Rule 2210 further prohibits brokerdealers from making ‘‘any false,
exaggerated, unwarranted or misleading
statement or claim in any
communication with the public.’’ As
stated in the FINRA Forex Notice, a
broker-dealer’s communications with
the public ‘‘must adequately disclose
the risks associated with forex trading,
including the risks of highly leveraged
trading,’’ and a broker-dealer ‘‘must also
make sure that [its] communications
with the public are not misleading
regarding, among other things: [t]he
likelihood of profits or the risks of forex
trading, including leveraged trading;
[t]he firm’s role in or compensation
from the trade; [t]he firm’s or the
customer’s access to the interbank
currency market; or [t]he performance or
accuracy of electronic trading platforms
or software sold or licensed by or
through the firm to customers in
connection with forex trading, including
falsely advertising claims regarding
slippage rates.’’ 42
Further, FINRA stated in its
regulatory notice to members that
FINRA Rule 2010 (formerly NASD Rule
2110), which requires broker-dealers, in
the conduct of their business, to observe
high standards of commercial honor and
just and equitable principles of trade,
applies to all of a broker-dealer’s
39 In this connection, the Commission notes that
in the FINRA Forex Notice, FINRA described
specific FINRA rules that apply to retail forex
activities of broker-dealers, which are referenced
below. See FINRA Forex Notice, supra note 18.
40 See id.
41 See id.
42 Id.
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business, including its retail forex
business.43 FINRA stated, for example,
that to comply with FINRA Rule 2010,
a member firm must adequately disclose
to its retail customers that the firm is
acting as a counterparty to a transaction,
the risks associated with forex trading,
and the risks and terms of leveraged
trading.44
Recordkeeping Requirements
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Exchange Act Rules 17a–3 and 17a–4
require a broker-dealer to make, keep
current, and preserve records regarding
its business. For example, Exchange Act
Rules 17a–3(a)(2) and 17a–3(a)(11)
require a broker-dealer to make and
keep current a general ledger, which
provides details relating to all assets,
liabilities, and nominal accounts.
A broker-dealer is also required to
preserve, for a period of not less than
three years, originals of all
communications received and copies of
all communications (and any approvals
thereof) sent by the broker-dealer
relating to its business as such,
including all communications that are
subject to SRO rules regarding
communications with the public.45 As
discussed above, communications with
the public regarding retail forex are
subject to NASD Rule 2210.46 In
addition, Exchange Act Rule 17a–4(b)(7)
requires a broker-dealer to preserve, for
a period of not less than three years, all
written agreements (or copies thereof)
entered into by the broker-dealer
relating to its business as such,
including agreements with respect to
any account. Accordingly, brokerdealers must preserve, for a period of
not less than three years, originals of all
communications received and copies of
all communications (and any approvals
thereof) sent by the broker-dealer and
any written agreements with respect to
retail forex transactions.
Another example of recordkeeping
requirements applicable to retail forex
transactions derives from the Bank
Secrecy Act (‘‘BSA’’), as amended by the
USA PATRIOT Act and implemented
under rules promulgated by the U.S.
Treasury Department’s Financial Crimes
Enforcement Network (‘‘FinCEN’’),
which requires broker-dealers to make,
keep, retain, and report certain records
that have a high degree of usefulness for
the purposes of criminal, tax, or
43 Id.
44 Id.
45 Exchange Act Rule 17a–4(b)(4). See Exchange
Act Release No. 44992 (Oct. 26, 2001), 66 FR 55818
(Nov. 23, 2001).
46 See supra note 40 and accompanying text
regarding NASD Rule 2210 (communications with
the public).
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regulatory matters.47 Exchange Act Rule
17a–8 requires broker-dealers to comply
with the reporting, recordkeeping, and
record retention requirements of the
BSA’s implementing regulations.48
Net Capital and Margin Requirements
Each broker-dealer must comply with
Exchange Act Rule 15c3–1, which
prescribes minimum regulatory net
capital requirements for broker-dealers
and is applicable to all business
activities of the broker-dealer, including
forex. The Commission notes that,
under Exchange Act Rule 15c3–1, any
uncollateralized current exposure by a
broker-dealer to retail forex transactions
must be deducted when computing the
firm’s net capital. The provisions of the
net capital rule dealing with contractual
commitment charges under Rule 15c3–
1(c)(2)(viii) also apply to commitments
with respect to foreign currency.
Further, pursuant to Exchange Act
section 7, broker-dealer margin
requirements are generally set according
to Regulation T 49 and SRO margin
rules.50
Reporting Requirements
A broker-dealer is required to file
with the Commission periodic financial
47 See 31 CFR Chapter X (formerly 31 CFR Part
103); see also 67 FR 44048 (July 1, 2002)
(amendments to BSA regulations requiring that a
broker-dealer report suspicious transactions).
48 See Exchange Act Release No. 18321 (Dec. 10,
1981); 46 FR 61454 (Dec. 17, 1981); see also FINRA
Rule 3310 (formerly NASD Rule 3011) (requiring
FINRA member firms to establish and implement
policies and procedures that can be reasonably
expected to detect and cause the reporting of
suspicious transactions). As FINRA noted, ‘‘FINRA
member firms engaging in retail forex activities
should ensure their Anti-Money Laundering
Program addresses the risks associated with the
business and includes procedures for monitoring,
detecting, and reporting suspicious transactions
associated with their retail forex activities.’’ FINRA
Forex Notice, supra note 18.
49 12 CFR Part 220.
50 In 2009, FINRA solicited comment on proposed
FINRA Rule 2380 to establish a leverage limitation
for retail forex. Specifically, proposed FINRA Rule
2380, as modified by Amendment No. 2, would
prohibit any member firm from permitting a
customer to: (1) initiate any forex position with a
leverage ratio of greater than 4 to 1; and (2)
withdraw money from an open forex position that
would cause the leverage ratio for such position to
be greater than 4 to 1. In addition, it would exempt
from the proposed leverage limitation any security
as defined in Exchange Act section 3(a)(10). See
FINRA Regulatory Notice 09–06 (Retail Forex)
(January 2009). FINRA filed Amendment No. 1 to
the proposed rule change on August 27, 2009. See
Letter from Gary L. Goldsholle, Vice President and
Associate General Counsel, FINRA, to Elizabeth M.
Murphy, Secretary, Commission (Aug. 27, 2009).
On November 12, 2009, FINRA filed Amendment
No. 2 to the proposed rule. Amendment No. 2
replaced and superseded Amendment No. 1 in its
entirety. The proposed rule change, as modified by
Amendment No. 2, was published for comment in
the Federal Register on December 8, 2009.
Exchange Act Release No. 61090 (Dec. 1, 2009), 74
FR 64776 (Dec. 8, 2009).
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and operational reports (i.e., FOCUS
Reports), as prescribed in Exchange Act
Rule 17a–5, that include relevant
information regarding the broker-dealer,
including information regarding its
retail forex business, if any. In addition,
FINRA has advised its member firms
that a broker-dealer’s expansion of its
business to include retail forex
transactions constitutes a material
change in business operations pursuant
to NASD Rule 1017(a), and brokerdealers must first apply for and receive
approval from FINRA to conduct this
activity.51 Additionally, as discussed
above, Exchange Act Rule 17a–8
requires broker-dealers to report to
FinCEN certain enumerated types of
transactions, including suspicious
transactions in foreign currencies and
foreign currency futures and options.52
Business Conduct Requirements
In the course of complying with
certain Exchange Act requirements,
rules and regulations thereunder, and
SRO rules relating to business conduct,
broker-dealers must address their retail
forex business. For example, as
discussed above, FINRA Rule 2010
(formerly NASD Rule 2110), which
requires broker-dealers, in the conduct
of their business, to observe high
standards of commercial honor and just
and equitable principles of trade,
applies to all of a broker-dealer’s
business, including its retail forex
business.53 FINRA has noted that the
following examples of conduct in
relation to a retail forex business are
prohibited under FINRA Rule 2010,
including: Misappropriating or
mishandling customer funds; using,
selling, or leasing electronic trading
platforms that allow ‘‘slippage’’ of trade
executions in a manner that
disproportionately or unfairly affects the
customer; manipulating or displaying
false quotes; offering mock, or
‘‘demonstration,’’ accounts that do not
accurately reflect the risks of forex
trading; making post-execution price
adjustments that are inappropriate and
unfavorable to the customer; soliciting
business for and introducing customers
to a forex dealer without conducting
adequate due diligence on the forex
dealer, or in a way that misleads the
customer about the forex dealer or forex
trading, including how customer funds
will be held; failing to conduct due
diligence on any solicitors that
introduce forex customers to the broker51 See FINRA Forex Notice, supra note 18
(emphasizing that a broker-dealer’s expansion of
business into retail forex constitutes a material
change in business operations under NASD rules).
52 See supra note 48 and accompanying text.
53 See FINRA Forex Notice, supra note 18.
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dealer; and accepting forex-related
trades from an entity or individual that
solicits retail forex business on behalf of
the firm in a misleading or deceptive
way.54
Broker-dealers also need to address
retail forex transactions in connection
with the customer reserve bank account
requirements under Exchange Act Rule
15c3–3. In calculating what amount, if
any, a broker-dealer must deposit on
behalf of its customers in a reserve bank
account pursuant to Exchange Act Rule
15c3–3(e), the broker-dealer must use
the formula set forth in Exchange Act
Rule 15c3–3a. Specifically, the
Commission staff has interpreted
Exchange Act Rule 15c3–3 to require
that the broker-dealer must include the
net balance due to customers in nonregulated commodity accounts, reduced
by any deposits of cash or securities
with any clearing organization or
clearing broker in connection with the
open contracts in such accounts.55
Furthermore, Exchange Act section
15(b)(4)(E) authorizes the Commission
to impose sanctions against a brokerdealer for failing reasonably to supervise
another person subject to the firm’s
supervision who committed a violation
of specified laws, including the CEA,
unless the broker-dealer established
procedures, and a system for applying
such procedures, that would reasonably
be expected to prevent and detect,
insofar as practicable, the violation of
law.56 Thus, broker-dealers engaged in a
retail forex business should include in
their policies and procedures
mechanisms to prevent and detect
potential violations of applicable laws
and regulations in connection with that
business.
The examples provided above are not
inclusive of all regulatory requirements
administered by the Commission that
are implicated by retail forex business
conducted by broker-dealers. By
providing these examples, the
Commission does not intend to suggest
that other provisions, rules and
regulations, including antifraud
provisions and SRO rules, may not
apply to retail forex business. At the
same time, this interim final temporary
rule is not intended to impose new
regulatory obligations for broker-dealers,
in connection with such business.
54 See
id.
Division of Market Regulation’s
Interpretations of Rule 15c3–3 under the Securities
Exchange Act of 1934, Exchange Act Release No.
9922 (Jan. 2, 1973); see also FINRA Forex Notice,
supra note 18 (stating that the requirement in
Exchange Act Rule 15c3–3 applies to forex
transactions).
56 See 15 U.S.C. 78o(b)(4)(E).
55 See
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C. Rule 15b12–1T(c): Broker-Dealers
Deemed To Be Acting Pursuant to a
Commission Rule
Rule 15b12–1T(c) provides that any
registered broker or dealer that engages
in a retail forex business in compliance
with paragraph (b) of this rule on or
after the effective date of this rule will
be deemed, until July 16, 2012, to be
acting pursuant to rule or regulation
described in CEA section 2(c)(2)(E)(ii)(I),
as amended by section 742 of the DoddFrank Act. This rule will allow brokerdealers that engage in a retail forex
business to do so until July 16, 2012,
subject to compliance with existing
applicable requirements.
Rule 15b12–1T(c) applies to brokerdealers that prior to the effective date of
the rule had entered into retail forex
transactions that continue after the
effective date. The rule also applies to
broker-dealers that begin after the rule’s
effective date to engage in retail forex
transactions. As the Commission
explained above, FINRA has advised its
member firms that a broker-dealer that
expands into a retail forex business
must first apply for and receive
approval to conduct this activity, as a
change in business operations pursuant
to NASD Rule 1017(a).57
D. Rule 15b12–1T(d): Expiration
Rule 15b12–1T(d) provides that the
rule will expire and no longer be
effective on July 16, 2012. The
Commission believes that the sunset
date is appropriate because it will allow
the existing regulatory framework for a
retail forex business to continue for a
defined period and thereby give the
Commission sufficient time to
determine what further appropriate
steps, if any, to take with respect to a
retail forex business.
III. Request for Comment
The Commission is requesting
comments from all members of the
public regarding all aspects of the
interim final temporary rule and the
current market practices involving retail
forex transactions, as well as any
investor protection or other concerns
that should be addressed by
Commission rulemaking. The
Commission particularly requests
comments from the point of view of
broker-dealers that are presently
engaged in a retail forex business,
broker-dealers that plan to engage in
such a business, customers that use
retail forex transactions, and ECPs.
Together with continued discussions
with market participants and other
regulators, the Commission considers
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57 See
FINRA Forex Notice, supra note 18.
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41681
this rulemaking to be an important
avenue for gathering more information
from affected parties about the current
scope and nature of retail forex
transactions. Such information will
inform the Commission’s thoughtful
review of the appropriate regulatory
framework for retail forex transactions
before or beyond the expiration of the
interim final rule. The Commission also
seeks comment on the particular
questions below, which have been
designed to elicit a robust discussion of
the uses and reasons for such
transactions as they occur today, as well
as the potential need for additional
regulation. The Commission will
carefully consider all comments
received, and will benefit especially
from detailed comments and comments
responding to other commentary in the
public file for this rulemaking.
Interim Final Temporary Rule
1. Should the Commission clarify or
modify any of the definitions included
in Rule 15b12–1T? If so, which
definitions and what specific
modifications are appropriate or
necessary?
2. Are the requirements in Rule
15b12–1T sufficiently clear? Is
additional guidance from the
Commission necessary?
3. Rule 15b12–1T is an interim final
temporary rule that is set to expire on
July 16, 2012. Should the Commission
extend the expiration date of the rule
and if so, for how long?
Possible Permanent Rule Regulating a
Retail Forex Business
4. Should the Commission propose
new rules relating to the retail forex
business operated by broker-dealers for
public comment, issue a final rule
amending the interim final temporary
rule, issue a final rule adopting the
interim final temporary rule as final, or
allow the interim final temporary rule to
expire without further action, which
would allow the statutory prohibition to
take effect? If further rulemaking is
appropriate, what should those rules
provide?
5. Should the Commission prohibit a
broker-dealer from engaging in retail
forex transactions altogether?
Alternatively, should the Commission
prohibit a broker-dealer from engaging
in retail forex transactions other than
forex transactions engaged in solely (1)
to effect the purchase or sale of a foreign
security or in order to clear or settle
such purchase or sale, or (2) to facilitate
distribution to customers of monies or
securities received through corporate
actions (e.g., coupons, dividends, class
action settlements, and rights offerings)
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with respect to foreign securities?
Should the Commission permit other
retail forex transactions that otherwise
facilitate customers’ securities
transactions and minimize risk exposure
to customers from changes in foreign
currency rates? Do investors have
adequate recourse against broker-dealers
for any misconduct related to retail
forex transactions? Would retail forex
customers be harmed if broker-dealers
were unable to provide them with
certain forex-related services? Which
services? What benefits might retail
forex customers receive in connection
with forex-related services offered by
broker-dealers, as compared to other
intermediaries? Would the benefits
outweigh potential harm?
6. Should the Commission adopt rules
modeled on the Final CFTC Retail Forex
Rule, the Final FDIC Retail Forex Rule,
or the Proposed OCC Retail Forex Rule?
If so, which aspects of those rules
should the Commission consider
adopting? What would be the associated
costs and benefits?
7. Should the Commission adopt final
permanent rules governing retail forex
transactions? If so, what should those
rules address?
8. Are there any requirements or
prohibitions not covered in the Final
CFTC Retail Forex Rule, the Final FDIC
Retail Forex Rule, or the Proposed OCC
Retail Forex Rule that the Commission
should address? Do existing Exchange
Act provisions, rules and regulations
thereunder, and SRO rules governing
broker-dealers appropriately protect
retail forex customers of broker-dealers?
Should the Commission consider
rulemaking to address any concerns that
are not adequately addressed under the
current regulatory framework?
9. What distinctive characteristics of
retail forex transactions should the
Commission take into consideration if it
were to engage in further rulemaking
relating to such transactions? Are there
certain types of retail forex transactions
(e.g., rolling spot transactions) that
warrant Commission rulemaking to
address specific disclosure and other
investor protection concerns? 58
Business Practices of Broker-Dealers
Engaged in Retail Forex Transactions
10. What is the extent of the retail
forex business currently conducted by
broker-dealers? Does the retail forex
business currently conducted by brokerdealers consist solely or primarily of
forex transactions to facilitate
58 See, e.g., Gregory Zuckerman, Carrick
Mollenkamp & Lingling Wei, Suspicion of Forex
Gouging Spreads, The Wall Street Journal (Feb. 10,
2011) at A1 (describing allegations of overcharging
of customers by custody banks in currency trades).
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customers’ securities transactions and
minimize risk exposure to customers
from changes in foreign currency rates?
In general, what proportion of the retail
forex business currently conducted by
broker-dealers do such transactions
account for? Please provide as
comprehensive of a description as
possible of the retail forex activities of
broker-dealers.
11. For what other reasons do brokerdealers engage in retail forex
transactions and what proportion of the
retail forex business currently
conducted by broker-dealers do such
transactions account for? What benefits
do these transactions provide to
customers? What risks do customers
face by engaging in such transactions?
12. Provide estimates of the absolute
size of the retail forex business (in both
dollar amounts and numbers of
transactions) conducted by the brokerdealer. What does this business
represent as an estimated percent of the
broker-dealer’s total business? As an
estimated percent of its total forex
business?
13. What is the estimated absolute
size of the retail forex business (in both
dollar amounts and numbers of
transactions) conducted by brokerdealers overall? What does this business
represent as a percent of their total
business? As a percent of their total
forex business?
14. What types of customers engage in
retail forex transactions, including
rolling spot forex transactions?
15. Is the existing regulatory
framework for retail forex business as
currently conducted by broker-dealers
consistent with the protection of
investors, the maintenance of fair,
orderly, and efficient markets, and the
facilitation of capital formation?
16. What disclosures do brokerdealers provide to their customers
regarding forex transactions that are
conducted to facilitate settlement of
securities transactions? What
disclosures do broker-dealers provide to
customers regarding forex transactions
that are conducted for other purposes
(e.g., at the customer’s request to hedge
against currency exchange risk exposure
associated with securities transactions,
or to engage in speculative activity)? Do
broker-dealers adequately and fully
disclose the risks associated with forex
trading? Do broker-dealers provide
information to customers regarding
pricing of forex transactions (e.g.,
pricing methodology, exchange rates for
foreign currencies, how the price was
calculated)? If so, is this information
provided in advance of or following the
forex transactions?
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17. On what basis do broker-dealers
price retail forex transactions? For
example, do broker-dealers use the endof-day currency exchange rate or some
other benchmark? Do broker-dealers
maintain policies and procedures that
govern how forex transactions are
handled and priced for retail forex
customers? If broker-dealers do not
provide pricing information to retail
customers, what documentation does
the broker-dealer maintain to
demonstrate the price provided in retail
forex transactions?
18. Are transaction-time records for
retail forex transactions currently
created and provided to retail
customers? If not, what would be the
cost to create transaction-time records
for retail forex transactions? What
would be the cost to report to customers
the transaction time and/or the source
or basis for the currency exchange rate
provided on retail forex transactions?
19. For broker-dealers that provide
custody services to retail customers,
please describe any retail forex business
conducted with respect to these custody
services. What disclosures are provided
to retail customers in connection with
custody services? What pricing
information is provided to retail
customers in connection with forex
transactions conducted in relation to
custody services (e.g., pricing
methodology, exchange rates for foreign
currencies, how the price was
calculated)? If pricing information is
provided, is this information provided
in advance of or following the forex
transactions? On what basis do brokerdealers price retail forex transactions
conducted in connection with custody
services? Do broker-dealers maintain
policies and procedures that govern
how forex transactions are handled and
priced in connection with custody
services for retail forex customers? If
broker-dealers do not provide pricing
information to retail customers in
connection with their custody business,
what documentation do broker-dealers
maintain to demonstrate to examiners
the price provided in retail forex
transactions?
20. Do broker-dealers provide retail
customers alternatives for obtaining
prevailing prices on retail forex
transactions? For example, do brokerdealers inform customers that the
customer can choose whether the
broker-dealers will handle retail forex
transactions at rates set under a
‘‘standing instruction’’ (i.e., nonnegotiated trades, where a customer
provides the broker-dealer discretion
with respect to handling the forex
transaction) or as a negotiated trade?
Where a broker-dealer provides a
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‘‘standing instruction’’ process for
customers, what methods are used to
determine the appropriate exchange
rate? Do retail customers receive the
interbank rate or some other rate?
21. What conflicts of interest exist in
connection with broker-dealers
handling and pricing of retail forex
transactions? How do broker-dealers
manage these conflicts of interest? Do
broker-dealers disclose when they are
acting as a counterparty to a forex
transaction with a retail customer?
22. What compensation structures do
broker-dealers apply to retail forex
transactions (e.g., per trade
commissions, spreads, both)? Do brokerdealers charge retail forex customers
rolling fees or additional transaction
fees, such as maintenance charges,
software licensing fees, commissions
paid to introducing brokers or other
third-party service providers? Are there
breakpoints offered to retail customers
based on, for example, volume or
number of trades? If so, are the
breakpoints available to all retail
customers?
23. What fees are charged by brokerdealers for each type of retail forex
trade? What is the prevailing market rate
for retail forex transactions? How does
this differ from the prevailing market
rate for forex transactions with ECPs?
Does the prevailing market rate differ for
standing instruction fees and negotiated
trade fees?
24. Do broker-dealers disclose all
compensation charged to retail
customers? At what point during the
customer relationship are compensation
disclosures made (e.g., prior to any forex
transactions, following a forex
transaction)? What is the scope and
breadth of those disclosures? Should the
Commission consider rules that would
expand broker-dealers’ disclosure
obligations?
25. In light of the authority provided
under section 742 of the Dodd-Frank
Act for the Commission to consider any
other standards or requirements in
connection with retail forex transactions
that it determines to be necessary, when
a broker-dealer solicits business for and
introduces customers to a forex dealer,
what due diligence does the brokerdealer conduct about the forex dealer?
What policies and procedures do
broker-dealers have in place, if any,
regarding supervision of unregistered
solicitors that introduce forex customers
to the broker-dealer and that are
employees or agents of the brokerdealer?
26. What policies and procedures do
broker-dealers have in place regarding
advertisements and marketing materials
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related to forex services offered to retail
customers?
27. Do broker-dealers provide
information to customers regarding
access to the interbank currency market?
28. What disclosures do brokerdealers make to retail customers
regarding the performance and accuracy
(including slippage rates) of electronic
trading platforms or software sold or
licensed by or through the firm to
customers in connection with forex
trading?
29. What information do retail
customers believe is important for them
to receive from broker-dealers regarding
their forex transactions?
30. What business conduct concerns
do retail customers have regarding the
manner in which their broker-dealers
handle and price forex transactions?
31. Do broker-dealers provide
structured products to retail customers
that require forex transactions at
maturity? In connection with these
types of products, how are the foreign
exchange conversion fees calculated and
disclosed? Is the cost of the conversion
embedded in the transaction itself, or
must investors pay additional fees for
conversion?
32. What alternatives for handling
forex transactions outside of brokerdealers are available to retail investors?
Would a transition of retail forex
business out of broker-dealers be
efficient or costly from the standpoint of
customers?
IV. Other Matters
The Administrative Procedure Act
generally requires an agency to publish
notice of a proposed rulemaking in the
Federal Register.59 This requirement
does not apply, however, if the agency
‘‘for good cause finds * * * that notice
and public procedure are impracticable,
unnecessary, or contrary to the public
interest.’’ 60 Further, the Administrative
Procedure Act also generally requires
that an agency publish an adopted rule
in the Federal Register 30 days before it
becomes effective.61 This requirement,
however, does not apply if the agency
finds good cause for making the rule
effective sooner.62 The Commission, for
the reasons discussed above and below,
finds that notice and solicitation of
comment before the effective date of
Rule 15b12–1T is impracticable,
unnecessary, and contrary to the public
interest.63
59 See
5 U.S.C. 553(b).
60 Id.
61 See
5 U.S.C. 553(d).
62 Id.
63 This finding also satisfies the requirements of
5 U.S.C. 808(2), allowing the rules to become
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41683
It was not until mid-June 2011 that
market participants first informed the
Commission of a possible disruption of
a potentially important forex service
provided by broker-dealers to retail
investors if the Commission did not act
swiftly to adopt a rule allowing retail
forex transactions by July 16, 2011, the
effective date of section 742 of the
Dodd-Frank Act.64 As noted above, one
representative of certain market
participants stated that ‘‘it would
expose both broker-dealers and their
retail customers to needless operational,
price, credit and other risks if the
[Commission did] not allow brokerdealers to engage in foreign exchange
activity that is ancillary to the brokerdealer’s ordinary securities execution,
clearing, settlement and booking
activity.’’ 65 The Commission believes
that Congress, in enacting section 742 of
the Dodd-Frank Act, may not have
intended to prohibit certain types of
foreign exchange activity, which might
be beneficial to retail investors. To
allow the existing regulatory framework
for retail forex transactions to continue
for a defined period, to avoid potentially
unintended consequences from brokerdealers immediately discontinuing their
retail forex business, and to provide the
Commission sufficient time to
determine the appropriate regulatory
framework regarding retail forex
transactions, the Commission is
adopting on an interim final temporary
basis Rule 15b12–1T. The Commission
does not intend to create new regulatory
obligations for broker-dealers in
adopting this interim final temporary
rule. The Commission further
emphasizes that it is requesting
comment on all aspects of the rule. The
Commission will carefully consider the
comments it receives.
V. Paperwork Reduction Act
The Commission notes that interim
final temporary Rule 15b12–1T does not
create new regulatory obligations for
broker-dealers, and therefore does not
impose any new ‘‘collections of
information’’ within the meaning of the
Paperwork Reduction Act of 1995
(‘‘PRA’’),66 nor does it create any new
filing, reporting, recordkeeping, or
disclosure reporting requirements for
broker-dealers that are or plan to be
engaged in a retail forex business.
effective notwithstanding the requirement of 5
U.S.C. 801 (if a federal agency finds that notice and
public comment are ‘‘impractical, unnecessary or
contrary to the public interest,’’ a rule ‘‘shall take
effect at such time as the federal agency
promulgating the rule determines’’).
64 See Morgan Lewis Memo, supra note 15.
65 Id.
66 44 U.S.C. 3501 et seq.
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Accordingly, the Commission did not
submit the interim final temporary rule
to the Office of Management and Budget
for review in accordance with the PRA.
The Commission requests comment on
its conclusion that there are no
collections of information.
VI. Economic Analysis
A. Introduction
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Exchange Act section 23(a)(2) requires
the Commission, when adopting rules
under the Exchange Act, to consider the
impact that any new rule would have on
competition, and prohibits the
Commission from adopting any rule that
would impose a burden on competition
that is not necessary or appropriate in
furtherance of the purposes of the
Exchange Act. Furthermore, section 2(b)
of the Securities Act of 1933 and
Exchange Act section 3(f) require the
Commission, when engaging in
rulemaking where it is required to
consider or determine whether an action
is necessary or appropriate in the public
interest, to also consider, in addition to
the protection of investors, whether the
action will promote efficiency,
competition, and capital formation.
As noted above, section 742(c) of the
Dodd-Frank Act amended the CEA to
prohibit broker-dealers from engaging in
retail forex transactions after July 16,
2011, absent rulemaking by the
Commission to allow such transactions.
If there is no such rulemaking in place,
then certain transactions that may be
considered beneficial to retail investors,
such as hedging transactions and
securities conversion trades that take
more than two days to settle, may no
longer be conducted by broker-dealers.
Retail investors who transact in foreign
securities through a broker-dealer may
find it difficult to minimize their
currency risk exposure if riskminimizing hedging transactions are
moved outside the broker-dealer.
The Commission is adopting interim
final temporary Rule 15b12–1T to allow
broker-dealers to engage in a retail forex
business for one year. This rule keeps in
place the regulatory framework that
currently exists for broker-dealers, and
preserves the ability of broker-dealers to
provide, among other services, hedging
and conversion trades, to retail investors
while the Commission considers what
further appropriate steps to take, if any.
B. Benefits and Impact on Efficiency,
Competition, and Capital Formation
Rule 15b12–1T is intended to
minimize market disruptions that may
occur when section 724(c) of the DoddFrank Act goes into effect. Absent
rulemaking by the Commission, broker-
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dealers would be required to exit the
retail forex business. Consequently,
retail customers who transact with a
broker-dealer for their foreign
investments may need to find another
service provider for their foreign
exchange transactions, which could
interrupt the customers’ ability to trade
in forex, depending on the availability
of retail forex-related services outside of
broker-dealers.
The interim final temporary rule
preserves retail customers’ access to the
forex markets through broker-dealers.
To the extent that this provides hedging
opportunities for foreign investments or
otherwise promotes an efficient
investment opportunity set by, for
example, permitting the continued use
of forex in connection with clearing
trades in foreign securities, economic
benefits accrue to retail investors,
assuming that no close substitutes exist
or that retail access to forex is not easily
available elsewhere.
Furthermore, by preserving a channel
for retail customers to access forex
transactions, the interim final temporary
rule prevents any loss of competition in
the retail forex space that could result
if broker-dealers were required to exit
the business. Potential effects of
reduced competition include, but are
not limited to, higher customer fees for
retail forex transactions charged by
remaining service providers, as well as
reduced availability of forex services to
retail customers if customers no longer
have access to these transactions
through broker-dealers.
C. Costs and Impact on Efficiency,
Competition, and Capital Formation
Because Rule 15b12–1T preserves the
regulatory regime that is in place prior
to the effective date of section 742(c) of
the Dodd-Frank Act, the rule imposes
no new regulatory burdens beyond
those that already exist for brokerdealers engaged in a retail forex
business. The Commission recognizes,
however, that broker-dealers will face
regulatory costs and requirements
associated with operating in the retail
forex market, which are costs and
requirements that they already shoulder
from doing business. These include
costs related to disclosure,
recordkeeping and documentation,
capital and margin, reporting, and
business conduct. For example, a
broker-dealer that presently engages in
forex transactions with retail customers
incurs costs associated with
establishing, maintaining, and
implementing policies and procedures
to comply with regulatory requirements;
preparing disclosure documents;
establishing and maintaining forex-
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related business records; and preparing
filings with the Commission, which may
include legal and accounting fees.
As discussed above, the Commission
is aware of potentially abusive practices
that may be occurring in the retail forex
market. To the extent that such practices
continue, for example, lack of disclosure
about fees and forex pricing, or
insufficient capital or margin
requirements, the retail forex market
may bear costs associated with the
inefficient provision of retail forex
services. The Commission believes,
however, that the cost of market
disruption that may occur if the
Commission does not promulgate the
interim final temporary rule is greater
than the cost of maintaining the current
regulatory regime while the Commission
seeks comment and evaluates whether a
more comprehensive regulatory regime
is necessary.
Because the regulatory requirements
for broker-dealers operating in the retail
forex market will remain unchanged,
Rule 15b12–1T will impose no new
burden on competition. Similarly, since
the rule preserves an existing regulatory
structure, the Commission does not
expect any potential impairment of the
capital formation process. Finally,
because the rule allows hedging
transactions, securities conversions, and
other transactions that allow investors
to continue to have access to these
vehicles, the Commission believes that
the interim temporary final rule will
promote efficiency.
VII. Regulatory Flexibility Certification
The Commission hereby certifies that
pursuant to 5 U.S.C. 605(b) the interim
final temporary rule contained in this
release will not have a significant
economic impact on a substantial
number of small entities. The interim
final temporary rule applies to brokerdealers that may engage in retail forex
transactions. However, the Commission
does not intend for the interim final
temporary rule to impose new
regulatory obligations, costs, or burdens
on such broker-dealers. While the rule
applies to broker-dealers that may be
small businesses, any costs or regulatory
burdens incurred as a result of the rule
are the same as those incurred by small
broker-dealers prior to the effective date
of section 742 of the Dodd-Frank Act.
Broker-dealers have already incurred
those costs and regulatory burdens
through establishing compliance with
the rules adopted by the Commission
under the Exchange Act applicable to
broker-dealers. Further, the interim final
temporary rule does not change the
burdens on small broker-dealers relative
to large broker-dealers. Accordingly, the
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Federal Register / Vol. 76, No. 136 / Friday, July 15, 2011 / Rules and Regulations
(i) A contract of sale of a commodity
for future delivery or an option on such
a contract;
(ii) An option, other than an option
executed or traded on a national
securities exchange registered pursuant
to section 6(a) of the Act (15 U.S.C.
78(f)(a)); or
(iii) Offered, or entered into, on a
VIII. Statutory Basis and Text of
leveraged or margined basis, or financed
Amendments
by a broker or dealer or any person
The Commission is adopting
acting in concert with the broker or
Exchange Act Rule 15b12–1T pursuant
dealer on a similar basis, other than:
(A) A security that is not a security
to section 2(c)(2) of the Commodity
Exchange Act, as well as pursuant to the futures product as defined in section
1a(47) of the Commodity Exchange Act
Exchange Act, as amended.
(7 U.S.C. 1a(47)); or
List of Subjects in 17 CFR Part 240
(B) A contract of sale that:
(1) Results in actual delivery within
Brokers, Consumer protection,
two days; or
Currency, Reporting and recordkeeping
(2) Creates an enforceable obligation
requirements.
to deliver between a seller and buyer
In accordance with the foregoing, the
Securities and Exchange Commission is that have the ability to deliver and
accept delivery, respectively, in
amending Title 17, chapter II of the
connection with their line of business.
Code of Federal Regulations as follows:
(b) Any registered broker or dealer
may engage in a retail forex business
PART 240—GENERAL RULES AND
provided that such broker or dealer
REGULATIONS, SECURITIES
complies with the Act, the rules and
EXCHANGE ACT OF 1934
regulations thereunder, and the rules of
■ 1. The general authority citation for
the self-regulatory organization(s) of
part 240 is revised to read as follows:
which the broker or dealer is a member,
including, but not limited to, the
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
disclosure, recordkeeping, capital and
77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j,
margin, reporting, business conduct,
78j–1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o, and documentation requirements,
78o–4, 78p, 78q, 78s, 78u–5, 78w, 78x, 78ll,
insofar as they are applicable to retail
78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b–
3, 80b–4, 80b–11, and 7201 et. seq.; 18 U.S.C. forex transactions.
(c) Any registered broker or dealer
1350; 12 U.S.C. 5221(e)(3); and 7 U.S.C.
that is engaged in a retail forex business
2(c)(2)(E), unless otherwise noted.
in compliance with paragraph (b) of this
*
*
*
*
*
section on or after the effective date of
■ 2. Add § 240.15b12–1T to read as
this section shall be deemed, until the
follows:
date specified in paragraph (d) of this
section, to be acting pursuant to a rule
§ 240.15b12–1T Brokers or dealers
engaged in a retail forex business.
or regulation described in section
2(c)(2)(E)(ii)(I) of the Commodity
(a) Definitions. In addition to the
definitions in this section, the following Exchange Act (7 U.S.C. 2(c)(2)(E)(ii)(I)).
(d) This section will expire and no
terms have the same meaning as in the
longer be effective on July 16, 2012.
Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.): ‘‘broker,’’ ‘‘dealer,’’
By the Commission.
‘‘person,’’ ‘‘registered broker or dealer,’’
Dated: July 13, 2011.
and ‘‘self-regulatory organization.’’
Cathy H. Ahn,
(1) Act means the Securities Exchange
Deputy Secretary.
Act of 1934 (15 U.S.C. 78a et seq.).
[FR Doc. 2011–18009 Filed 7–13–11; 4:15 pm]
(2) Retail forex business means
BILLING CODE 8011–01–P
engaging in one or more retail forex
transactions with the intent to derive
income from those transactions, either
SOCIAL SECURITY ADMINISTRATION
directly or indirectly.
(3) Retail forex transaction means any
20 CFR Part 416
account, agreement, contract or
transaction in foreign currency that is
[Docket No. SSA–2009–0027]
offered or entered into by a broker or
RIN 0960–AH02
dealer with a person that is not an
eligible contract participant as defined
Electronic Substitutions for Form
in section 1a(18) of the Commodity
SSA–538
Exchange Act (7 U.S.C. 1a(18)) and that
is:
AGENCY: Social Security Administration.
mstockstill on DSK4VPTVN1PROD with RULES
interim final temporary rule should not
have a significant economic impact on
a substantial number of small entities.
The Commission requests comment on
its conclusion that Rule 15b12–1T
should not have a significant economic
impact on a substantial number of small
entities.
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41685
Final rule with request for
comments.
ACTION:
We are revising our
regulations to reflect our use of
electronic case processing at the initial
and reconsideration levels of our
administrative review process. Our prior
rule required adjudicators at these levels
to complete a Form SSA–538,
Childhood Disability Evaluation Form,
in all cases of children alleging
disability or continuing disability under
title XVI of the Social Security Act
(Act). However, we developed and now
use a Web-based tool that assists our
adjudicators in making disability
determinations in several States, and we
plan to expand its use to other States.
We are revising our regulation to reflect
the new tool. We are not changing the
requirement that State agency medical
and psychological consultants must
affirm the accuracy and completeness of
their findings of fact and discussion of
the supporting evidence, only the
manner in which they may provide the
required findings and affirmation. We
expect that this revision will improve
our efficiency by increasing our use of
electronic resources.
DATES: These rules are effective on July
15, 2011. Comment Date: To ensure that
your comments are considered, we must
receive them no later than September
13, 2011.
ADDRESSES: You may submit comments
by any one of three methods—Internet,
fax, mail. Do not submit the same
comments multiple times or by more
than one method. Regardless of which
method you choose, please state that
your comments refer to Docket No.
SSA–2009–0027 so that we may
associate your comments with the
correct regulation.
Caution: You should be careful to
include in your comments only
information that you wish to make
publicly available. We strongly urge you
not to include in your comments any
personal information, such as Social
Security numbers or medical
information.
• Internet: We strongly recommend
that you submit your comments via the
Internet. Please visit the Federal
eRulemaking portal at https://
www.regulations.gov. Use the Search
function to find docket number SSA–
2009–0027. The system will issue a
tracking number to confirm your
submission. You will not be able to
view your comment immediately
because we must post each comment
manually. It may take up to a week for
your comment to be viewable.
• Fax: Fax comments to (410) 966–
2830.
SUMMARY:
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]]>Agencies
[Federal Register Volume 76, Number 136 (Friday, July 15, 2011)]
[Rules and Regulations]
[Pages 41676-41685]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-18009]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-64874; File No. S7-30-11]
RIN 3235-AL19
Retail Foreign Exchange Transactions
AGENCY: Securities and Exchange Commission.
ACTION: Interim final temporary rule; request for comments.
-----------------------------------------------------------------------
SUMMARY: Under section 742(c) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (``Dodd-Frank Act''), certain foreign exchange
transactions with persons who are not ``eligible contract
participants'' (commonly referred to as ``retail forex transactions,''
and as further defined below) with a registered broker or dealer
(``broker-dealer'') will be prohibited as of July 16, 2011, in the
absence of the Commission adopting a rule to allow such transactions
under terms and conditions prescribed by the Commission. The Commission
is adopting interim final temporary Rule 15b12-1T to allow a registered
broker-dealer to engage in a retail forex business until July 16, 2012,
provided that the broker-dealer complies with the Securities Exchange
Act of 1934 (``Exchange Act''), the rules and regulations thereunder,
and the rules of the self-regulatory organization(s) of which the
broker-dealer is a member (``SRO rules''), insofar as they are
applicable to retail forex transactions.
DATES: Effective Date: Rule 15b12-1T is effective on July 15, 2011 and
will remain in effect until July 16, 2012.
Comment Date: Comments on the interim final temporary rule should
be received on or before September 13, 2011.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/interim-final-temp.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-30-11 on the subject line; or
Use the Federal eRulemaking Portal (https://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549.
All submissions should refer to File Number S7-30-11. This file number
should be included on the subject line if e-mail is used. To help the
Commission to process and review your comments more efficiently, please
use only one method. The Commission will post all comments on its Web
site: (https://www.sec.gov/rules/interim-final-temp.shtml). Comments are
also available for Web site viewing and printing 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. 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.
FOR FURTHER INFORMATION CONTACT: Jo Anne Swindler, Assistant Director;
Richard Vorosmarti, Special Counsel; or Angie Le, Special Counsel, at
(202) 551-5777, Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is adopting new Rule 15b12-1T
under the Exchange Act as an interim final temporary rule. The rule
will expire and no longer be effective on July 16, 2012. The Commission
is soliciting comments on all aspects of this interim final temporary
rule. The Commission will carefully consider any comments received and
intends to take further action if it determines that further action is
necessary or appropriate, either prior to or following the expiration
of the rule. In making this determination, the Commission may consider
a number of alternative approaches with respect to retail forex
transactions, including proposing new rules for public comment; issuing
a final rule amending the interim final temporary rule; issuing a final
rule adopting the interim final temporary rule as final; or allowing
the interim final temporary rule to expire without further action,
which would allow the statutory prohibition to take effect.
I. Background
On July 21, 2010, President Obama signed into law the Dodd-Frank
Act.\1\ As amended by the Dodd-Frank Act,\2\ the Commodity Exchange Act
(``CEA'') provides that a person for which there is a Federal
regulatory agency,\3\ including a broker-dealer registered under
section 15(b) (except pursuant to paragraph (11) thereof) or 15C of the
Exchange Act,\4\ shall not enter into, or offer to enter into, a
transaction described in section 2(c)(2)(B)(i)(I) of the CEA with a
person who is not an ``eligible contract participant'' \5\ except
[[Page 41677]]
pursuant to a rule or regulation of a Federal regulatory agency
allowing the transaction under such terms and conditions as the Federal
regulatory agency shall prescribe \6\ (``retail forex rule'').\7\
Transactions described in CEA section 2(c)(2)(B)(i)(I) include ``an
agreement, contract, or transaction in foreign currency that * * * is a
contract of sale of a commodity for future delivery (or an option on
such a contract) or an option (other than an option executed or traded
on a national securities exchange registered pursuant to section 6(a)
of the Securities Exchange Act of 1934 (15 U.S.C. 78f(a)).'' \8\ A
Federal regulatory agency's retail forex rule must treat all
agreements, contracts, and transactions in foreign currency described
in CEA section 2(c)(2)(B)(i)(I) and all agreements, contracts, and
transactions in foreign currency that are functionally or economically
similar to agreements, contracts, or transactions described in CEA
section 2(c)(2)(B)(i)(I), similarly.\9\ Any retail forex rule also must
prescribe appropriate requirements with respect to disclosure,
recordkeeping, capital and margin, reporting, business conduct, and
documentation, and may include such other standards or requirements as
the Federal regulatory agency determines to be necessary.\10\
---------------------------------------------------------------------------
\1\ Public Law 111-203, 124 Stat. 1376.
\2\ Public Law 111-203, Sec. 742(c)(2) (to be codified at 7
U.S.C. 2(c)(2)(E)).
\3\ 7 U.S.C. 2(c)(2)(E)(i), as amended by Sec. 742(c) of the
Dodd-Frank Act, defines a ``Federal regulatory agency'' to mean the
Commodity Futures Trading Commission (``CFTC''), the Securities and
Exchange Commission, an appropriate Federal banking agency, the
National Credit Union Association, and the Farm Credit
Administration.
\4\ 7 U.S.C. 2(c)(2)(B)(i)(II).
\5\ ``Eligible contract participant'' (``ECP'') is defined in
CEA section 1a(18), as re-designated and amended by section 721 of
the Dodd-Frank Act. See Public Law 111-203, Sec. 721 (amending CEA
section 1a). The CEA's definition of ECP generally is comprised of
regulated persons; entities that meet a specified total asset test
(e.g., a corporation, partnership, proprietorship, organization,
trust, or other entity with total assets exceeding $10 million) or
an alternative monetary test coupled with a non-monetary component
(e.g., an entity with a net worth in excess of $1 million and
engaging in business-related hedging; or certain employee benefit
plans, the investment decisions of which are made by one of four
enumerated types of regulated entities); and certain governmental
entities and individuals that meet defined thresholds. The
Commission and the CFTC recently have proposed rules under the CEA
that further define ``eligible contract participant'' with respect
to transactions with major swap participants, swap dealers, major
security-based swap participants, security-based swap dealers, and
commodity pools. See Exchange Act Release No. 63452 (Dec. 7, 2010),
75 FR 80174 (Dec. 21, 2010). Because transactions that are the
subject of this release are commonly referred to as ``retail forex
transactions,'' this release uses the term ``retail customer'' to
describe persons who are not ECPs.
\6\ 7 U.S.C. 2(c)(2)(E)(ii)(I).
\7\ As used in this release, ``retail forex rule'' refers to any
rule proposed or adopted by a Federal regulatory agency pursuant to
section 742(c)(2) of the Dodd-Frank Act.
\8\ 7 U.S.C. 2(c)(2)(B)(i)(I).
\9\ 7 U.S.C. 2(c)(2)(E)(iii)(II).
\10\ 7 U.S.C. 2(c)(2)(E)(iii)(I).
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This amendment to the CEA takes effect on July 16, 2011, which is
360 days from the date of enactment of the Dodd-Frank Act.\11\ After
that date, for purposes of CEA section 2(c)(2)(B), broker-dealers for
which the Commission is the ``Federal regulatory agency'' may not
engage in off-exchange retail forex futures and options with a customer
except pursuant to a retail forex rule issued by the Commission.\12\
This prohibition will not apply to (1) forex transactions with a
customer who qualifies as an ECP, or (2) transactions that are spot
forex contracts or forward forex contracts irrespective of whether the
customer is an ECP.\13\ However, consistent with other Federal
regulatory agencies' retail forex rules, Rule 15b12-1T applies to
``rolling spot'' transactions in foreign currency by broker-
dealers.\14\ The discussion of the definition of ``retail forex
transaction'' below addresses the distinctions between rolling spot
forex transactions and spot and forward forex contracts.
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\11\ See Public Law 111-203, Sec. 754.
\12\ See 7 U.S.C. 2(c)(2)(B)(i)(II) and 7 U.S.C.
2(c)(2)(E)(ii)(I). On September 10, 2010, the CFTC adopted a retail
forex rule for persons subject to its jurisdiction. See Regulation
of Off-Exchange Retail Foreign Exchange Transactions and
Intermediaries, 75 FR 55410 (Sept. 10, 2010) (``Final CFTC Retail
Forex Rule''). The CFTC had proposed its rules regarding retail
forex transactions prior to the enactment of the Dodd-Frank Act. See
Regulation of Off-Exchange Retail Foreign Exchange Transactions and
Intermediaries, 75 FR 3282 (Jan. 20, 2010) (``Proposed CFTC Retail
Forex Rule''). The Federal Deposit Insurance Corporation (``FDIC'')
and the Office of the Comptroller of the Currency (``OCC'')
subsequently proposed similar rules. See Retail Foreign Exchange
Transactions, 76 FR 28358 (May 17, 2011); Retail Foreign Exchange
Transactions, 76 FR 22633 (Apr. 22, 2011) (``Proposed OCC Retail
Forex Rule''). On July 6, 2011, the FDIC adopted final retail forex
rules. See Retail Foreign Exchange Transactions, 76 FR 40779 (July
12, 2011) (``Final FDIC Retail Forex Rule'').
\13\ See 7 U.S.C. 2(c)(2)(C)(i)(I) and 7 U.S.C.
2(c)(2)(C)(i)(II); see also Final FDIC Retail Forex Rule, supra note
12; Proposed OCC Retail Forex Rule, supra note 12.
\14\ See Final FDIC Retail Forex Rule, supra note 12 (explaining
that its retail forex rule applies to rolling spot forex
transactions); Proposed OCC Retail Forex Rule, supra note 12
(stating that rolling spot forex transactions should be regulated as
retail forex transactions); Final CFTC Retail Forex Rule, supra note
12 (stating that the CFTC has the authority to fully regulate
``look-alike,'' leveraged forex contacts, also called off-exchange
Zelener contracts; as discussed below, Zelener contracts are also
called rolling spot transactions); Proposed CFTC Retail Forex Rule,
supra note 12 (``The [CFTC Reauthorization Act of 2008] amends the
[CEA] to require that certain intermediaries for forex futures and
options and for look-alike contracts (i.e., those at issue in
Zelener) register in such capacity as the Commission shall
determine. * * * '').
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Prior to June 2011, the Commission had not been made aware of
industry concerns with respect to the operation of section 742 of the
Dodd-Frank Act in the absence of Commission rulemaking. In mid-June
2011, however, market participants for the first time brought to the
attention of Commission staff the possibility that section 742 of the
Dodd-Frank Act may have serious adverse consequences for certain
securities markets in the absence of rulemaking by the Commission
before the impending effective date of the provision (i.e., July 16,
2011).\15\ Although this correspondence from market participants
brought this issue to the attention of Commission staff, the Commission
understands that this is in fact a wider concern shared by several
other market participants. One potential consequence concerns the
ability of broker-dealers to facilitate the settlement of foreign
securities transactions for retail customers. For example, a broker-
dealer may purchase a foreign currency or exchange a foreign currency
for U.S. dollars on behalf of a retail customer in connection with the
customer's purchase or sale of a security listed on a foreign exchange
and denominated in the foreign currency. In particular, a
representative of certain market participants informed the staff that
section 742 could operate to preclude broker-dealers from continuing to
engage in certain foreign exchange transactions that are inherent in
certain of their customers' securities transactions, and that serve to
minimize their customers' risk exposure to changes in foreign currency
rates.\16\
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\15\ See Memorandum from P. Georgia Bullitt, Morgan Lewis, on
Pershing LLC--Proposed Relief regarding transactions in Retail
Foreign Exchange to James Brigagliano et al. (June 17, 2011)
(available at https://www.sec.gov/comments/other/other-initiatives/otherinitiatives-56.pdf) (``Morgan Lewis Memo'').
\16\ See id.
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The Commission further understands that there may be other
situations in which broker-dealers engage in foreign exchange
transactions in connection with facilitating the ordinary execution,
clearance, or settlement of customers' securities transactions and that
may warrant rulemaking by the Commission in order to avoid market
disruption due to the potential application of section 742 of the Dodd-
Frank Act. At the same time, the Commission notes that media coverage
over the past few years has highlighted potentially abusive practices
by some intermediaries in connection with retail forex
transactions.\17\ The Commission also notes that other regulators have
expressed concerns with regard to the retail forex practices of the
entities that they regulate.\18\
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\17\ See Gregory Zuckerman, Carrick Mollenkamp & Lingling Wei,
Suspicion of Forex Gouging Spreads, The Wall Street Journal (Feb.
10, 2011) at A1 (describing allegations of overcharging of customers
by custody banks in currency trades).
\18\ See, e.g., Press Release, CFTC, CFTC Releases Final Rules
Regarding Retail Forex Transactions (Aug. 30, 2010) (available at
https://www.cftc.gov/PressRoom/PressReleases/pr5883-10.html?dbk)
(noting that retail forex is the largest area of retail fraud that
the CFTC oversees); see also the Financial Industry Regulatory
Authority's (``FINRA'') Regulatory Notice 08-66, (Retail Foreign
Currency Exchange) (November 2008) (``FINRA Forex Notice'')
(describing the retail forex market as opaque, volatile, and risky).
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In order to provide the Commission with the opportunity to receive
comments regarding practices in this area and to consider prescribing
additional rules to address investor protection concerns (e.g., abusive
sales practices, volatility and riskiness of the
[[Page 41678]]
forex market) \19\ as they affect the regulatory treatment of retail
forex transactions by broker-dealers--while also preserving potentially
beneficial market practices identified to the Commission only weeks
before the July 16, 2011 effective date for section 742 of the Dodd-
Frank Act--the Commission today is adopting interim final temporary
Rule 15b12-1T under the Exchange Act to enable broker-dealers to engage
in a retail forex business under the existing regulatory regime for one
year. By receiving comments regarding practices in this area, the
Commission will be better positioned to determine, for example, the
scope of retail forex business conducted by broker-dealers that may be
beneficial and poses limited risk to customers and any aspects of the
business that may pose substantial undue risks to customers. The
Commission will carefully consider comments on what additional
rulemaking may be necessary, if any.
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\19\ In one of its notices to members, FINRA identified several
investor protection concerns, including, among other things, the
following: ``[t]he retail customer typically does not having pricing
information and cannot determine whether the price quoted by the
dealer is fair''; ``the dealer acts as counterparty and establishes
the price, which means that the dealer has a conflict of interest in
the transaction''; ``[p]rice comparisons are also complicated by
different compensation structures''; and ``[t]he currency market is
extremely volatile and retail forex customers are exposed to
substantial currency risk.'' See FINRA Forex Notice, supra note 18.
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II. Discussion
The Commission is adopting interim final temporary Rule 15b12-1T to
maintain the ability of broker-dealers to engage in a retail forex
business during a one-year period under the existing regulatory
framework that now applies to broker-dealers providing these services.
The Commission solicits comment on each aspect of the rule and the
nature and circumstances surrounding retail forex business conducted by
broker-dealers. The Commission intends to carefully consider comments
received to determine what further regulatory action, if any, would be
appropriate. In making this determination, the Commission may consider
a number of alternatives with respect to retail forex transactions,
including proposing new rules for public comment; issuing a final rule
amending the interim final temporary rule; issuing a final rule
adopting the interim final temporary rule as final; or allowing the
interim final temporary rule to expire without further action, which
would allow the statutory prohibition to take effect.
A. Rule 15b12-1T(a): Definitions
Rule 15b12-1T(a) sets forth the definitions of terms specific to
the interim final temporary rule. Many of the terms (i.e., broker,
dealer, person, registered broker or dealer, and self-regulatory
organization) have the same meanings as in the Exchange Act. The term
``Act,'' as used in the rule, refers to the Exchange Act.\20\ The
Commission chose these terms and definitions because their meanings are
readily understood in the industry.
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\20\ Exchange Act Rule 15b12-1T(a)(1).
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The term ``retail forex business'' is defined as ``engaging in one
or more retail forex transactions with the intent to derive income from
those transactions, either directly or indirectly.'' \21\ This
definition mirrors the definition contained in the FDIC's final retail
forex rules and the OCC's proposed rules.\22\ This term is intended to
include retail forex transactions that may not generate income to the
broker-dealer or a retail forex business that is ultimately not
profitable. The Commission chose this definition because it focuses on
the intent to engage in a series of forex transactions with a business
purpose, whether or not the transactions result in income or profits.
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\21\ Exchange Act Rule 15b12-1T(a)(2).
\22\ See Final FDIC Retail Forex Rule, supra note 12; Proposed
OCC Retail Forex Rule, supra note 12 (each defining ``retail forex
business'').
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The term ``retail forex transaction'' is defined as ``any account,
agreement, contract or transaction in foreign currency that is offered
or entered into by a broker or dealer with a person that is not an
eligible contract participant as defined in section 1a(18) of the
Commodity Exchange Act (7 U.S.C. 1a(18)) and that is: (i) A contract of
sale of a commodity for future delivery or an option on such a
contract; (ii) an option, other than an option executed or traded on a
national securities exchange registered pursuant to section 6(a) of the
Act (15 U.S.C. 78(f)(a)); or (iii) offered, or entered into, on a
leveraged or margined basis, or financed by a broker or dealer or any
person acting in concert with the broker or dealer on a similar basis,
other than: (A) a security that is not a security futures product as
defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C.
1a(47)); or (B) a contract of sale that: (1) Results in actual delivery
within two days; or (2) creates an enforceable, obligation to deliver
between a seller and buyer that have the ability to deliver and accept
delivery, respectively, in connection with their line of business.''
\23\ This definition is based on the CEA, incorporates the terms
described in CEA sections 2(c)(2)(B) and 2(c)(2)(C),\24\ and is
substantially the same as the definition in the FDIC's final section
349.2 \25\ and the OCC's proposed section 48.2.\26\ This definition has
at least two important features.
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\23\ Exchange Act Rule 15b12-1T(a)(3).
\24\ 7 U.S.C. 2(c)(2)(B) and 7 U.S.C. 2(c)(2)(C).
\25\ See Final FDIC Retail Forex Rule, supra note 12 (defining
``retail forex transaction'').
\26\ See Proposed OCC Retail Forex Rule, supra note 12 (defining
``retail forex transaction'').
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First, certain transactions in foreign currency are excluded from
the definition of the term ``retail forex transaction.'' For example,
the CEA expressly excludes ``a contract of sale [in foreign currency]
that * * * results in actual delivery within 2 days.'' \27\ As defined
by court decisions as well as the retail forex rules of other Federal
regulatory agencies, this term refers to a ``spot'' forex transaction,
in which one currency is purchased for another, the transaction is
settled within two days, and actual delivery occurs as soon as
practicable.\28\ Similarly, based upon the language in the CEA,\29\ a
``retail forex transaction'' does not include a contract of sale that
creates an enforceable obligation to deliver between a buyer and seller
that have the ability to deliver and accept delivery, respectively, in
connection with their line of business.\30\ This statutory language
refers to a retail forex forward contract with a commercial entity that
creates an enforceable obligation to make or take delivery, provided
the commercial counterparty has the ability to make delivery and accept
delivery in connection with its line of business.\31\ In
[[Page 41679]]
addition, consistent with the approach of other Federal regulatory
agencies' retail forex rules, the definition does not include forex
transactions executed or traded on an exchange or designated contract
market.\32\
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\27\ See 7 U.S.C. 2(c)(2)(C)(i)(II).
\28\ See generally CFTC v. Int'l Fin. Servs. (New York), Inc.,
323 F. Supp. 2d 482, 495 (S.D.N.Y. 2004) (distinguishing between
foreign exchange futures contracts and spot contracts in foreign
exchange, and noting that spot transactions--unlike futures
contracts--ordinarily call for settlement within two days); see also
Bank Brussels Lambert v. Intermetals Corp., 779 F. Supp. 741, 748
(S.D.N.Y. 1991) (noting that the spot market is essentially the
current market rather than the market for future delivery); Final
FDIC Retail Forex Rule, supra note 12 (explaining that its retail
forex rule does not apply to spot forex contracts); Proposed OCC
Retail Forex Rule, supra note 12 (explaining that its retail forex
rule does not apply to spot forex contracts); Final CFTC Retail
Forex Rule, supra note 12 (defining ``retail forex transaction'' as
any account, agreement, contract or transaction described in section
2(c)(2)(B) or 2(c)(2)(C) of the CEA; as discussed above, by its
terms, CEA section 2(c)(2)(C)(i)(II) excludes what are referred to
as spot forex transactions).
\29\ See 7 U.S.C. 2(c)(2)(C)(i)(II).
\30\ Exchange Act Rule 15b12-1T(a)(3)(iii)(B)(2).
\31\ See generally CFTC v. Int'l Fin. Servs. (New York), Inc.,
323 F. Supp. 2d at 495 (distinguishing between forward contracts in
foreign exchange and foreign exchange futures contracts); see also
William L. Stein, The Exchange-Trading Requirement of the Commodity
Exchange Act, 41 Vand. L. Rev. 473, 491 (1988). In contrast to
forward contracts, futures contracts generally include several or
all of the following characteristics: (i) Standardized nonnegotiable
terms (other than price and quantity); (ii) parties are required to
deposit initial margin to secure their obligations under the
contract; (iii) parties are obligated and entitled to pay or receive
variation margin in the amount of gain or loss on the position
periodically over the period the contract is outstanding; (iv)
purchasers and sellers are permitted to close out their positions by
selling or purchasing offsetting contracts; and (v) settlement may
be provided for by either (a) cash payment through a clearing entity
that acts as the counterparty to both sides of the contract without
delivery of the underlying commodity; or (b) physical delivery of
the underlying commodity. See Edward F. Greene et al., U.S.
Regulation of International Securities and Derivatives Markets Sec.
14.08[2] (8th ed. 2006). See also Final FDIC Retail Forex Rule,
supra note 12; Proposed OCC Retail Forex Rule, supra note 12 (each
explaining that their retail forex rule would not apply to forex
forward contracts).
\32\ See Final CFTC Retail Forex Rule, supra note 12; Final FDIC
Retail Forex Rule, supra note 12; Proposed OCC Retail Forex Rule,
supra note 12.
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Second, a ``rolling spot'' forex transaction (also known as a
Zelener contract),\33\ including without limitation such a transaction
traded on the Internet, through a mobile phone, or on an electronic
platform, falls within the definition of ``retail forex transaction,''
\34\ and thus is not excluded from the definition as a ``spot''
transaction. This interpretation is consistent with the approach of
other Federal regulatory agencies acting pursuant to section 742 of the
Dodd-Frank Act to treat all agreements, contracts, and transactions in
foreign currency described in CEA section 2(c)(2)(B)(i)(I) and all
agreements, contracts, and transactions in foreign currency that are
functionally or economically similar to agreements, contracts, or
transactions described in CEA section 2(c)(2)(B)(i)(I), similarly.\35\
Like a spot forex transaction, a rolling spot forex transaction with a
retail customer may initially require delivery of currency within two
days. In practice, however, contracts with a retail customer for a
rolling spot forex transaction may be indefinitely renewed every other
day, and no currency is actually delivered until one party
affirmatively closes out the position.\36\ The Commission preliminarily
believes that a contract with a retail customer for a rolling spot
forex transaction is economically more similar to a retail forex
future, as described in CEA section 2(c)(2)(B)(i)(I), than a spot forex
contract.
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\33\ See CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004); see also
CFTC v. Erskine, 512 F.3d 309 (6th Cir. 2008) (discussing Zelener
contracts).
\34\ CEA section 2(c)(2)(E)(ii) refers to agreements, contracts,
or transactions described in CEA section 2(c)(2)(B)(i)(I) (which is
incorporated into subparts (i) and (ii) of the Commission's
definition of ``retail forex transaction''). In addition, CEA
section 2(c)(2)(E)(iii)(II) requires the Commission to treat
similarly all agreements, contracts, and transactions in foreign
currency described in CEA section 2(c)(2)(B)(i)(I) and all
agreements, contracts, and transactions that are functionally or
economically similar to agreements, contracts, or transactions
described in CEA section 2(c)(2)(B)(i)(I). The Commission
preliminarily believes that agreements, contracts, and transactions
described in CEA section 2(c)(2)(C)(i) (including rolling spot forex
transactions) are functionally or economically similar to
agreements, contracts, or transactions described in CEA section
2(c)(2)(B)(i)(I). Therefore, the Commission is defining ``retail
forex transaction'' to encompass the types of agreements, contracts,
and transactions described in CEA section 2(c)(2)(C)(i), such as
rolling spot forex transactions, and is reflected in subpart (iii)
of the Commission's definition. See also Final FDIC Retail Forex
Rule, supra note 12; Proposed OCC Retail Forex Rule, supra note 12
(both concluding that rolling spot forex transactions are more like
futures than spot contracts). Some courts have held these contracts
to be spot contracts in form. See, e.g., CFTC v. Erskine, 512 F.3d
309, 326 (6th Cir. 2008); CFTC v. Zelener, 373 F.3d 861, 869 (7th
Cir. 2004).
\35\ 7 U.S.C. 2(c)(2)(E)(iii)(II); see also Final FDIC Retail
Forex Rule, supra note 12; Proposed OCC Retail Forex Rule, supra
note 12.
\36\ For example, in Zelener, the retail forex dealer retained
the right, at the date of delivery of the currency, to deliver the
currency, roll the transaction over, or offset all or a portion of
the transaction with another open position held by its customer. See
CFTC v. Zelener, 373 F.3d 861, 868 (7th Cir. 2004).
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B. Rule 15b12-1T(b): Broker-Dealers Engaged in a Retail Forex Business
Rule 15b12-1T(b) allows any registered broker or dealer to engage
in a retail forex business provided that such broker or dealer complies
with the Exchange Act, the rules and regulations thereunder, and the
SRO rules, including, but not limited to, the disclosure, recordkeeping
(or documentation), capital and margin, reporting, and business conduct
requirements, insofar as they are applicable to retail forex
transactions. In order for broker-dealers to engage in retail forex
transactions after July 16, 2011, the Commission must adopt rules
prescribing appropriate requirements with respect to disclosure,
recordkeeping, capital and margin, reporting, business conduct,
documentation,\37\ and such other standards or requirements that the
Commission determines to be necessary.\38\ Because broker-dealers
engaging in a retail forex business are already subject to numerous
regulatory requirements with respect to this business under the
Exchange Act, the rules and regulations thereunder, and SRO rules, the
Commission does not intend to create any new obligations under this
interim final temporary rule for broker-dealers that are engaged in a
retail forex business. The Commission provides below illustrative
examples of obligations, including certain SRO requirements, applicable
to broker-dealers' retail forex transactions.\39\
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\37\ The Commission considers the documentation requirements as
a subset of recordkeeping requirements. To avoid confusion, the
Commission will refer to these requirements collectively as
recordkeeping requirements.
\38\ See Public Law 111-203, Sec. 742(c)(2) (amending CEA
section 2(c)(2)).
\39\ In this connection, the Commission notes that in the FINRA
Forex Notice, FINRA described specific FINRA rules that apply to
retail forex activities of broker-dealers, which are referenced
below. See FINRA Forex Notice, supra note 18.
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Disclosure Requirements
Broker-dealers that engage in a retail forex business must comply
with the disclosure requirements in NASD Rule 2210.\40\ NASD Rule 2210
requires all communications with the public by members of FINRA--
including forex-related communications--to be based on principles of
fair dealing and good faith, to be fair and balanced, and to provide a
sound basis for evaluating the facts regarding the market generally and
a customer's specific transaction.\41\ NASD Rule 2210 further prohibits
broker-dealers from making ``any false, exaggerated, unwarranted or
misleading statement or claim in any communication with the public.''
As stated in the FINRA Forex Notice, a broker-dealer's communications
with the public ``must adequately disclose the risks associated with
forex trading, including the risks of highly leveraged trading,'' and a
broker-dealer ``must also make sure that [its] communications with the
public are not misleading regarding, among other things: [t]he
likelihood of profits or the risks of forex trading, including
leveraged trading; [t]he firm's role in or compensation from the trade;
[t]he firm's or the customer's access to the interbank currency market;
or [t]he performance or accuracy of electronic trading platforms or
software sold or licensed by or through the firm to customers in
connection with forex trading, including falsely advertising claims
regarding slippage rates.'' \42\
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\40\ See id.
\41\ See id.
\42\ Id.
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Further, FINRA stated in its regulatory notice to members that
FINRA Rule 2010 (formerly NASD Rule 2110), which requires broker-
dealers, in the conduct of their business, to observe high standards of
commercial honor and just and equitable principles of trade, applies to
all of a broker-dealer's
[[Page 41680]]
business, including its retail forex business.\43\ FINRA stated, for
example, that to comply with FINRA Rule 2010, a member firm must
adequately disclose to its retail customers that the firm is acting as
a counterparty to a transaction, the risks associated with forex
trading, and the risks and terms of leveraged trading.\44\
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\43\ Id.
\44\ Id.
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Recordkeeping Requirements
Exchange Act Rules 17a-3 and 17a-4 require a broker-dealer to make,
keep current, and preserve records regarding its business. For example,
Exchange Act Rules 17a-3(a)(2) and 17a-3(a)(11) require a broker-dealer
to make and keep current a general ledger, which provides details
relating to all assets, liabilities, and nominal accounts.
A broker-dealer is also required to preserve, for a period of not
less than three years, originals of all communications received and
copies of all communications (and any approvals thereof) sent by the
broker-dealer relating to its business as such, including all
communications that are subject to SRO rules regarding communications
with the public.\45\ As discussed above, communications with the public
regarding retail forex are subject to NASD Rule 2210.\46\ In addition,
Exchange Act Rule 17a-4(b)(7) requires a broker-dealer to preserve, for
a period of not less than three years, all written agreements (or
copies thereof) entered into by the broker-dealer relating to its
business as such, including agreements with respect to any account.
Accordingly, broker-dealers must preserve, for a period of not less
than three years, originals of all communications received and copies
of all communications (and any approvals thereof) sent by the broker-
dealer and any written agreements with respect to retail forex
transactions.
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\45\ Exchange Act Rule 17a-4(b)(4). See Exchange Act Release No.
44992 (Oct. 26, 2001), 66 FR 55818 (Nov. 23, 2001).
\46\ See supra note 40 and accompanying text regarding NASD Rule
2210 (communications with the public).
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Another example of recordkeeping requirements applicable to retail
forex transactions derives from the Bank Secrecy Act (``BSA''), as
amended by the USA PATRIOT Act and implemented under rules promulgated
by the U.S. Treasury Department's Financial Crimes Enforcement Network
(``FinCEN''), which requires broker-dealers to make, keep, retain, and
report certain records that have a high degree of usefulness for the
purposes of criminal, tax, or regulatory matters.\47\ Exchange Act Rule
17a-8 requires broker-dealers to comply with the reporting,
recordkeeping, and record retention requirements of the BSA's
implementing regulations.\48\
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\47\ See 31 CFR Chapter X (formerly 31 CFR Part 103); see also
67 FR 44048 (July 1, 2002) (amendments to BSA regulations requiring
that a broker-dealer report suspicious transactions).
\48\ See Exchange Act Release No. 18321 (Dec. 10, 1981); 46 FR
61454 (Dec. 17, 1981); see also FINRA Rule 3310 (formerly NASD Rule
3011) (requiring FINRA member firms to establish and implement
policies and procedures that can be reasonably expected to detect
and cause the reporting of suspicious transactions). As FINRA noted,
``FINRA member firms engaging in retail forex activities should
ensure their Anti-Money Laundering Program addresses the risks
associated with the business and includes procedures for monitoring,
detecting, and reporting suspicious transactions associated with
their retail forex activities.'' FINRA Forex Notice, supra note 18.
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Net Capital and Margin Requirements
Each broker-dealer must comply with Exchange Act Rule 15c3-1, which
prescribes minimum regulatory net capital requirements for broker-
dealers and is applicable to all business activities of the broker-
dealer, including forex. The Commission notes that, under Exchange Act
Rule 15c3-1, any uncollateralized current exposure by a broker-dealer
to retail forex transactions must be deducted when computing the firm's
net capital. The provisions of the net capital rule dealing with
contractual commitment charges under Rule 15c3-1(c)(2)(viii) also apply
to commitments with respect to foreign currency. Further, pursuant to
Exchange Act section 7, broker-dealer margin requirements are generally
set according to Regulation T \49\ and SRO margin rules.\50\
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\49\ 12 CFR Part 220.
\50\ In 2009, FINRA solicited comment on proposed FINRA Rule
2380 to establish a leverage limitation for retail forex.
Specifically, proposed FINRA Rule 2380, as modified by Amendment No.
2, would prohibit any member firm from permitting a customer to: (1)
initiate any forex position with a leverage ratio of greater than 4
to 1; and (2) withdraw money from an open forex position that would
cause the leverage ratio for such position to be greater than 4 to
1. In addition, it would exempt from the proposed leverage
limitation any security as defined in Exchange Act section 3(a)(10).
See FINRA Regulatory Notice 09-06 (Retail Forex) (January 2009).
FINRA filed Amendment No. 1 to the proposed rule change on August
27, 2009. See Letter from Gary L. Goldsholle, Vice President and
Associate General Counsel, FINRA, to Elizabeth M. Murphy, Secretary,
Commission (Aug. 27, 2009). On November 12, 2009, FINRA filed
Amendment No. 2 to the proposed rule. Amendment No. 2 replaced and
superseded Amendment No. 1 in its entirety. The proposed rule
change, as modified by Amendment No. 2, was published for comment in
the Federal Register on December 8, 2009. Exchange Act Release No.
61090 (Dec. 1, 2009), 74 FR 64776 (Dec. 8, 2009).
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Reporting Requirements
A broker-dealer is required to file with the Commission periodic
financial and operational reports (i.e., FOCUS Reports), as prescribed
in Exchange Act Rule 17a-5, that include relevant information regarding
the broker-dealer, including information regarding its retail forex
business, if any. In addition, FINRA has advised its member firms that
a broker-dealer's expansion of its business to include retail forex
transactions constitutes a material change in business operations
pursuant to NASD Rule 1017(a), and broker-dealers must first apply for
and receive approval from FINRA to conduct this activity.\51\
Additionally, as discussed above, Exchange Act Rule 17a-8 requires
broker-dealers to report to FinCEN certain enumerated types of
transactions, including suspicious transactions in foreign currencies
and foreign currency futures and options.\52\
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\51\ See FINRA Forex Notice, supra note 18 (emphasizing that a
broker-dealer's expansion of business into retail forex constitutes
a material change in business operations under NASD rules).
\52\ See supra note 48 and accompanying text.
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Business Conduct Requirements
In the course of complying with certain Exchange Act requirements,
rules and regulations thereunder, and SRO rules relating to business
conduct, broker-dealers must address their retail forex business. For
example, as discussed above, FINRA Rule 2010 (formerly NASD Rule 2110),
which requires broker-dealers, in the conduct of their business, to
observe high standards of commercial honor and just and equitable
principles of trade, applies to all of a broker-dealer's business,
including its retail forex business.\53\ FINRA has noted that the
following examples of conduct in relation to a retail forex business
are prohibited under FINRA Rule 2010, including: Misappropriating or
mishandling customer funds; using, selling, or leasing electronic
trading platforms that allow ``slippage'' of trade executions in a
manner that disproportionately or unfairly affects the customer;
manipulating or displaying false quotes; offering mock, or
``demonstration,'' accounts that do not accurately reflect the risks of
forex trading; making post-execution price adjustments that are
inappropriate and unfavorable to the customer; soliciting business for
and introducing customers to a forex dealer without conducting adequate
due diligence on the forex dealer, or in a way that misleads the
customer about the forex dealer or forex trading, including how
customer funds will be held; failing to conduct due diligence on any
solicitors that introduce forex customers to the broker-
[[Page 41681]]
dealer; and accepting forex-related trades from an entity or individual
that solicits retail forex business on behalf of the firm in a
misleading or deceptive way.\54\
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\53\ See FINRA Forex Notice, supra note 18.
\54\ See id.
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Broker-dealers also need to address retail forex transactions in
connection with the customer reserve bank account requirements under
Exchange Act Rule 15c3-3. In calculating what amount, if any, a broker-
dealer must deposit on behalf of its customers in a reserve bank
account pursuant to Exchange Act Rule 15c3-3(e), the broker-dealer must
use the formula set forth in Exchange Act Rule 15c3-3a. Specifically,
the Commission staff has interpreted Exchange Act Rule 15c3-3 to
require that the broker-dealer must include the net balance due to
customers in non-regulated commodity accounts, reduced by any deposits
of cash or securities with any clearing organization or clearing broker
in connection with the open contracts in such accounts.\55\
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\55\ See Division of Market Regulation's Interpretations of Rule
15c3-3 under the Securities Exchange Act of 1934, Exchange Act
Release No. 9922 (Jan. 2, 1973); see also FINRA Forex Notice, supra
note 18 (stating that the requirement in Exchange Act Rule 15c3-3
applies to forex transactions).
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Furthermore, Exchange Act section 15(b)(4)(E) authorizes the
Commission to impose sanctions against a broker-dealer for failing
reasonably to supervise another person subject to the firm's
supervision who committed a violation of specified laws, including the
CEA, unless the broker-dealer established procedures, and a system for
applying such procedures, that would reasonably be expected to prevent
and detect, insofar as practicable, the violation of law.\56\ Thus,
broker-dealers engaged in a retail forex business should include in
their policies and procedures mechanisms to prevent and detect
potential violations of applicable laws and regulations in connection
with that business.
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\56\ See 15 U.S.C. 78o(b)(4)(E).
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The examples provided above are not inclusive of all regulatory
requirements administered by the Commission that are implicated by
retail forex business conducted by broker-dealers. By providing these
examples, the Commission does not intend to suggest that other
provisions, rules and regulations, including antifraud provisions and
SRO rules, may not apply to retail forex business. At the same time,
this interim final temporary rule is not intended to impose new
regulatory obligations for broker-dealers, in connection with such
business.
C. Rule 15b12-1T(c): Broker-Dealers Deemed To Be Acting Pursuant to a
Commission Rule
Rule 15b12-1T(c) provides that any registered broker or dealer that
engages in a retail forex business in compliance with paragraph (b) of
this rule on or after the effective date of this rule will be deemed,
until July 16, 2012, to be acting pursuant to rule or regulation
described in CEA section 2(c)(2)(E)(ii)(I), as amended by section 742
of the Dodd-Frank Act. This rule will allow broker-dealers that engage
in a retail forex business to do so until July 16, 2012, subject to
compliance with existing applicable requirements.
Rule 15b12-1T(c) applies to broker-dealers that prior to the
effective date of the rule had entered into retail forex transactions
that continue after the effective date. The rule also applies to
broker-dealers that begin after the rule's effective date to engage in
retail forex transactions. As the Commission explained above, FINRA has
advised its member firms that a broker-dealer that expands into a
retail forex business must first apply for and receive approval to
conduct this activity, as a change in business operations pursuant to
NASD Rule 1017(a).\57\
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\57\ See FINRA Forex Notice, supra note 18.
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D. Rule 15b12-1T(d): Expiration
Rule 15b12-1T(d) provides that the rule will expire and no longer
be effective on July 16, 2012. The Commission believes that the sunset
date is appropriate because it will allow the existing regulatory
framework for a retail forex business to continue for a defined period
and thereby give the Commission sufficient time to determine what
further appropriate steps, if any, to take with respect to a retail
forex business.
III. Request for Comment
The Commission is requesting comments from all members of the
public regarding all aspects of the interim final temporary rule and
the current market practices involving retail forex transactions, as
well as any investor protection or other concerns that should be
addressed by Commission rulemaking. The Commission particularly
requests comments from the point of view of broker-dealers that are
presently engaged in a retail forex business, broker-dealers that plan
to engage in such a business, customers that use retail forex
transactions, and ECPs. Together with continued discussions with market
participants and other regulators, the Commission considers this
rulemaking to be an important avenue for gathering more information
from affected parties about the current scope and nature of retail
forex transactions. Such information will inform the Commission's
thoughtful review of the appropriate regulatory framework for retail
forex transactions before or beyond the expiration of the interim final
rule. The Commission also seeks comment on the particular questions
below, which have been designed to elicit a robust discussion of the
uses and reasons for such transactions as they occur today, as well as
the potential need for additional regulation. The Commission will
carefully consider all comments received, and will benefit especially
from detailed comments and comments responding to other commentary in
the public file for this rulemaking.
Interim Final Temporary Rule
1. Should the Commission clarify or modify any of the definitions
included in Rule 15b12-1T? If so, which definitions and what specific
modifications are appropriate or necessary?
2. Are the requirements in Rule 15b12-1T sufficiently clear? Is
additional guidance from the Commission necessary?
3. Rule 15b12-1T is an interim final temporary rule that is set to
expire on July 16, 2012. Should the Commission extend the expiration
date of the rule and if so, for how long?
Possible Permanent Rule Regulating a Retail Forex Business
4. Should the Commission propose new rules relating to the retail
forex business operated by broker-dealers for public comment, issue a
final rule amending the interim final temporary rule, issue a final
rule adopting the interim final temporary rule as final, or allow the
interim final temporary rule to expire without further action, which
would allow the statutory prohibition to take effect? If further
rulemaking is appropriate, what should those rules provide?
5. Should the Commission prohibit a broker-dealer from engaging in
retail forex transactions altogether? Alternatively, should the
Commission prohibit a broker-dealer from engaging in retail forex
transactions other than forex transactions engaged in solely (1) to
effect the purchase or sale of a foreign security or in order to clear
or settle such purchase or sale, or (2) to facilitate distribution to
customers of monies or securities received through corporate actions
(e.g., coupons, dividends, class action settlements, and rights
offerings)
[[Page 41682]]
with respect to foreign securities? Should the Commission permit other
retail forex transactions that otherwise facilitate customers'
securities transactions and minimize risk exposure to customers from
changes in foreign currency rates? Do investors have adequate recourse
against broker-dealers for any misconduct related to retail forex
transactions? Would retail forex customers be harmed if broker-dealers
were unable to provide them with certain forex-related services? Which
services? What benefits might retail forex customers receive in
connection with forex-related services offered by broker-dealers, as
compared to other intermediaries? Would the benefits outweigh potential
harm?
6. Should the Commission adopt rules modeled on the Final CFTC
Retail Forex Rule, the Final FDIC Retail Forex Rule, or the Proposed
OCC Retail Forex Rule? If so, which aspects of those rules should the
Commission consider adopting? What would be the associated costs and
benefits?
7. Should the Commission adopt final permanent rules governing
retail forex transactions? If so, what should those rules address?
8. Are there any requirements or prohibitions not covered in the
Final CFTC Retail Forex Rule, the Final FDIC Retail Forex Rule, or the
Proposed OCC Retail Forex Rule that the Commission should address? Do
existing Exchange Act provisions, rules and regulations thereunder, and
SRO rules governing broker-dealers appropriately protect retail forex
customers of broker-dealers? Should the Commission consider rulemaking
to address any concerns that are not adequately addressed under the
current regulatory framework?
9. What distinctive characteristics of retail forex transactions
should the Commission take into consideration if it were to engage in
further rulemaking relating to such transactions? Are there certain
types of retail forex transactions (e.g., rolling spot transactions)
that warrant Commission rulemaking to address specific disclosure and
other investor protection concerns? \58\
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\58\ See, e.g., Gregory Zuckerman, Carrick Mollenkamp & Lingling
Wei, Suspicion of Forex Gouging Spreads, The Wall Street Journal
(Feb. 10, 2011) at A1 (describing allegations of overcharging of
customers by custody banks in currency trades).
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Business Practices of Broker-Dealers Engaged in Retail Forex
Transactions
10. What is the extent of the retail forex business currently
conducted by broker-dealers? Does the retail forex business currently
conducted by broker-dealers consist solely or primarily of forex
transactions to facilitate customers' securities transactions and
minimize risk exposure to customers from changes in foreign currency
rates? In general, what proportion of the retail forex business
currently conducted by broker-dealers do such transactions account for?
Please provide as comprehensive of a description as possible of the
retail forex activities of broker-dealers.
11. For what other reasons do broker-dealers engage in retail forex
transactions and what proportion of the retail forex business currently
conducted by broker-dealers do such transactions account for? What
benefits do these transactions provide to customers? What risks do
customers face by engaging in such transactions?
12. Provide estimates of the absolute size of the retail forex
business (in both dollar amounts and numbers of transactions) conducted
by the broker-dealer. What does this business represent as an estimated
percent of the broker-dealer's total business? As an estimated percent
of its total forex business?
13. What is the estimated absolute size of the retail forex
business (in both dollar amounts and numbers of transactions) conducted
by broker-dealers overall? What does this business represent as a
percent of their total business? As a percent of their total forex
business?
14. What types of customers engage in retail forex transactions,
including rolling spot forex transactions?
15. Is the existing regulatory framework for retail forex business
as currently conducted by broker-dealers consistent with the protection
of investors, the maintenance of fair, orderly, and efficient markets,
and the facilitation of capital formation?
16. What disclosures do broker-dealers provide to their customers
regarding forex transactions that are conducted to facilitate
settlement of securities transactions? What disclosures do broker-
dealers provide to customers regarding forex transactions that are
conducted for other purposes (e.g., at the customer's request to hedge
against currency exchange risk exposure associated with securities
transactions, or to engage in speculative activity)? Do broker-dealers
adequately and fully disclose the risks associated with forex trading?
Do broker-dealers provide information to customers regarding pricing of
forex transactions (e.g., pricing methodology, exchange rates for
foreign currencies, how the price was calculated)? If so, is this
information provided in advance of or following the forex transactions?
17. On what basis do broker-dealers price retail forex
transactions? For example, do broker-dealers use the end-of-day
currency exchange rate or some other benchmark? Do broker-dealers
maintain policies and procedures that govern how forex transactions are
handled and priced for retail forex customers? If broker-dealers do not
provide pricing information to retail customers, what documentation
does the broker-dealer maintain to demonstrate the price provided in
retail forex transactions?
18. Are transaction-time records for retail forex transactions
currently created and provided to retail customers? If not, what would
be the cost to create transaction-time records for retail forex
transactions? What would be the cost to report to customers the
transaction time and/or the source or basis for the currency exchange
rate provided on retail forex transactions?
19. For broker-dealers that provide custody services to retail
customers, please describe any retail forex business conducted with
respect to these custody services. What disclosures are provided to
retail customers in connection with custody services? What pricing
information is provided to retail customers in connection with forex
transactions conducted in relation to custody services (e.g., pricing
methodology, exchange rates for foreign currencies, how the price was
calculated)? If pricing information is provided, is this information
provided in advance of or following the forex transactions? On what
basis do broker-dealers price retail forex transactions conducted in
connection with custody services? Do broker-dealers maintain policies
and procedures that govern how forex transactions are handled and
priced in connection with custody services for retail forex customers?
If broker-dealers do not provide pricing information to retail
customers in connection with their custody business, what documentation
do broker-dealers maintain to demonstrate to examiners the price
provided in retail forex transactions?
20. Do broker-dealers provide retail customers alternatives for
obtaining prevailing prices on retail forex transactions? For example,
do broker-dealers inform customers that the customer can choose whether
the broker-dealers will handle retail forex transactions at rates set
under a ``standing instruction'' (i.e., non-negotiated trades, where a
customer provides the broker-dealer discretion with respect to handling
the forex transaction) or as a negotiated trade? Where a broker-dealer
provides a
[[Page 41683]]
``standing instruction'' process for customers, what methods are used
to determine the appropriate exchange rate? Do retail customers receive
the interbank rate or some other rate?
21. What conflicts of interest exist in connection with broker-
dealers handling and pricing of retail forex transactions? How do
broker-dealers manage these conflicts of interest? Do broker-dealers
disclose when they are acting as a counterparty to a forex transaction
with a retail customer?
22. What compensation structures do broker-dealers apply to retail
forex transactions (e.g., per trade commissions, spreads, both)? Do
broker-dealers charge retail forex customers rolling fees or additional
transaction fees, such as maintenance charges, software licensing fees,
commissions paid to introducing brokers or other third-party service
providers? Are there breakpoints offered to retail customers based on,
for example, volume or number of trades? If so, are the breakpoints
available to all retail customers?
23. What fees are charged by broker-dealers for each type of retail
forex trade? What is the prevailing market rate for retail forex
transactions? How does this differ from the prevailing market rate for
forex transactions with ECPs? Does the prevailing market rate differ
for standing instruction fees and negotiated trade fees?
24. Do broker-dealers disclose all compensation charged to retail
customers? At what point during the customer relationship are
compensation disclosures made (e.g., prior to any forex transactions,
following a forex transaction)? What is the scope and breadth of those
disclosures? Should the Commission consider rules that would expand
broker-dealers' disclosure obligations?
25. In light of the authority provided under section 742 of the
Dodd-Frank Act for the Commission to consider any other standards or
requirements in connection with retail forex transactions that it
determines to be necessary, when a broker-dealer solicits business for
and introduces customers to a forex dealer, what due diligence does the
broker-dealer conduct about the forex dealer? What policies and
procedures do broker-dealers have in place, if any, regarding
supervision of unregistered solicitors that introduce forex customers
to the broker-dealer and that are employees or agents of the broker-
dealer?
26. What policies and procedures do broker-dealers have in place
regarding advertisements and marketing materials related to forex
services offered to retail customers?
27. Do broker-dealers provide information to customers regarding
access to the interbank currency market?
28. What disclosures do broker-dealers make to retail customers
regarding the performance and accuracy (including slippage rates) of
electronic trading platforms or software sold or licensed by or through
the firm to customers in connection with forex trading?
29. What information do retail customers believe is important for
them to receive from broker-dealers regarding their forex transactions?
30. What business conduct concerns do retail customers have
regarding the manner in which their broker-dealers handle and price
forex transactions?
31. Do broker-dealers provide structured products to retail
customers that require forex transactions at maturity? In connection
with these types of products, how are the foreign exchange conversion
fees calculated and disclosed? Is the cost of the conversion embedded
in the transaction itself, or must investors pay additional fees for
conversion?
32. What alternatives for handling forex transactions outside of
broker-dealers are available to retail investors? Would a transition of
retail forex business out of broker-dealers be efficient or costly from
the standpoint of customers?
IV. Other Matters
The Administrative Procedure Act generally requires an agency to
publish notice of a proposed rulemaking in the Federal Register.\59\
This requirement does not apply, however, if the agency ``for good
cause finds * * * that notice and public procedure are impracticable,
unnecessary, or contrary to the public interest.'' \60\ Further, the
Administrative Procedure Act also generally requires that an agency
publish an adopted rule in the Federal Register 30 days before it
becomes effective.\61\ This requirement, however, does not apply if the
agency finds good cause for making the rule effective sooner.\62\ The
Commission, for the reasons discussed above and below, finds that
notice and solicitation of comment before the effective date of Rule
15b12-1T is impracticable, unnecessary, and contrary to the public
interest.\63\
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\59\ Se
