15 U.S.C. § 78f — National securities exchanges

submitted 92 years ago by ch. 404 to r/title-15-COMMERCE-AND-TRADE · 6,256 words · no verdicts yet

in plain englishAI-generated · not legal advice

This law sets the rules exchanges must follow to register with the SEC. It covers membership, fees, discipline of members, and trading in security futures products. It also covers security-based swaps.

(a) Registering an exchange An exchange can become a "national securities exchange" by applying to the SEC. It must file the exchange's rules and any other information or documents the SEC requires by rule, whenever the SEC decides that's necessary or appropriate to protect the public or investors. (b) What the SEC must find before registering an exchange The SEC can only register an exchange if it determines nine things are true: (1) The exchange is organized well enough, and has the capacity, to carry out securities law's purposes and to comply with — and enforce compliance by its members with — the securities laws, SEC rules, and its own rules. (2) Subject to subsection (c), the exchange's rules let any registered broker or dealer (or a person associated with one) become a member, and let anyone become associated with a member. (3) The exchange's rules make sure members are fairly represented in picking directors and running the exchange, and require at least one director who represents issuers and investors and isn't tied to a member, broker, or dealer. (4) The exchange's rules divide dues, fees, and charges fairly among members, issuers, and other users. (5) The exchange's rules are designed to stop fraud and manipulation, promote fair trading, encourage cooperation with others who regulate or process securities transactions, remove barriers to a free and open market, and protect investors and the public — without unfairly discriminating between customers, issuers, brokers, or dealers, and without regulating things unrelated to securities law's purposes. (6) The exchange's rules let it discipline members and associated persons — by expulsion, suspension, limits on their activities, fines, censure, or other fitting punishment — for violating securities law, SEC rules, or the exchange's own rules. (7) The exchange's rules follow subsection (d) and, generally, provide fair procedures for disciplining members, denying membership, barring someone from associating with a member, or limiting access to the exchange's services. (8) The exchange's rules don't burden competition more than necessary to achieve securities law's purposes. (9) The exchange's rules ban listing securities issued in a "limited partnership rollup transaction" (a term defined elsewhere in this chapter), unless that transaction followed procedures protecting limited partners' rights. Those required protections include: (i) letting a partner who votes against the rollup (a "dissenting limited partner") choose one of several options — get their interest appraised and paid out, keep a security on close to the same terms as before, require 75% approval from each partnership's outstanding securities, use an independent committee of limited partners with real negotiating authority, or get some other comparable protection the exchange's rules set up; (ii) the right not to have voting power unfairly cut; (iii) the right not to unfairly bear the costs of a rollup that gets voted down; and (iv) limits on turning contingent fees into guaranteed ones, or trading unearned fees for equity. A "dissenting limited partner" is someone who held an interest in the partnership when the vote materials were mailed, voted against the deal, and followed the exchange's objection procedures (or, for a tender offer, filed a written objection while the offer was open). (10) The exchange's rules stop a member who doesn't actually own a registered security from voting a customer's shares on major matters — board elections, executive pay, or other significant issues the SEC identifies by rule — unless the real owner told the member how to vote. This doesn't apply to routine, uncontested board elections at registered investment companies. And nothing here stops an exchange from also barring non-owner voting on other matters. (c) Denying or limiting membership An exchange must refuse membership to anyone who isn't a registered broker or dealer (or, for individuals, isn't associated with one). It may — and must, if the SEC orders it — refuse membership, or bar someone from associating with a member, if that person is legally disqualified; if the exchange knew or should have known someone was disqualified, it must tell the SEC at least 30 days before letting them in, using a form the SEC prescribes. An exchange may also deny or condition membership for a broker or dealer that doesn't meet its financial, operational, or competence standards, or that has engaged (and might again engage) in unfair trading practices; it can check an applicant's qualifications under its own procedures. Similarly, it may bar or condition an individual's membership or association for the same reasons, and may require registration of associated persons. It may also bar someone from associating with a member if that person won't agree to share information about the relationship and let the exchange examine records to check it. An exchange may limit how many members it has, and how many members can trade on the floor without a broker's help — but it can't cut those numbers below what they were on May 1, 1975, or when the exchange registered with the SEC, whichever is later. The SEC can raise or remove such limits (never lower them) if it finds they burden competition more than necessary. (d) Disciplining members Before disciplining a member or associated person (other than through the summary process below), the exchange must bring specific charges, give notice, let the person defend themselves, and keep a record. Any sanction must come with a written statement listing: (A) what the person did or failed to do; (B) which law, rule, or exchange rule that violates; and (C) the punishment and why. Before denying membership, barring someone from associating with a member, or limiting access to services (again, other than through the summary process), the exchange must notify the person of the specific grounds, give them a chance to be heard, keep a record, and support its decision with a written statement of those grounds. An exchange can act immediately, without the usual hearing first, to: (A) suspend a member or associated person who's already been expelled, suspended, or barred by another self-regulatory organization; (B) suspend a member in financial or operational trouble so severe that letting it keep doing business would endanger investors, creditors, other members, or the exchange — after telling the SEC; or (C) limit or block someone's access to services if (A) or (B) applies to them, or — for a non-member — if they don't meet the qualifications needed and letting them continue would be unsafe. Anyone hit with this kind of summary action must promptly get the fuller hearing described above. The SEC can pause any summary action, on its own or on request, if it decides — summarily or after a hearing — that pausing it serves the public interest and investor protection. (e) Commissions and fees Since June 4, 1975, an exchange generally can't set or fix the commissions, fees, or other charges its members charge. There were transition rules: until May 1, 1976, exchanges could still fix rates for members acting as floor brokers or odd-lot dealers, and the SEC could allow fixed-rate schedules through November 1, 1976 if in the public interest, and could allow them after that date only if the SEC found the rates reasonably tied to the cost of the service (with the SEC publishing its standards) and not an unnecessary burden on competition. The SEC can also cancel any exchange rule that fixes rates if it decides the rates are no longer reasonable, needed, or in the public interest. Before approving or rejecting a proposed exchange rule that would fix commissions or fees, the SEC must let interested people present their views orally, and — if there are disputed facts, for rules covering trades after November 1, 1976 — must let them submit rebuttals and cross-examine, in whatever way the SEC finds necessary to fully resolve the facts. The SEC writes procedural rules to avoid wasted time and cost, including reasonable time limits and rules for how cross-examination is conducted, possibly through SEC staff acting on a person's behalf. If a group of people with the same interests can't agree on one representative for cross-examination, the SEC can decide how they'll be represented — but anyone who made a real good-faith effort to reach agreement, and has substantial issues a group representative wouldn't cover, can still cross-examine on those issues personally. A transcript must be kept of all this. On top of the normal grounds for appeal, a reviewing court can strike down an SEC order approving a fee-fixing rule if the court finds that the SEC wrongly denied someone the right to cross-examine or rebut, or wrongly limited it, in a way that blocked full, fair resolution of a necessary factual dispute. (f) Non-members must follow exchange rules too The SEC can require: (1) people who aren't exchange members (or their designated reps) but trade on an exchange without a broker's help, or (2) non-member brokers or dealers who trade on an exchange regularly, to follow specific exchange rules the SEC identifies — whenever needed to protect the public, keep markets fair and orderly, or ensure equal regulation. (g) Registering to trade security futures products only An exchange that only lists or trades "security futures products" can register just for that purpose if: (1) it's a commodity "board of trade" already designated as a contract market by the Commodity Futures Trading Commission (CFTC), with that designation not suspended, and (2) it doesn't offer any other securities market besides security futures products, or futures/options on exempted securities or security indexes authorized under the Commodity Exchange Act. Such an exchange registers by simply filing written notice with its rules and the required information — it can reuse documents already filed with the CFTC if they cover what the SEC needs. Registration takes effect as soon as the notice is filed, unless it would be subject to suspension or revocation. It ends immediately if the exchange stops meeting these conditions. The SEC must promptly publish notice in the Federal Register that it received each filing, and make the filings available to the public. An exchange registered this way, and its members, are excused from certain other listed securities-law provisions for transactions in security futures products only. It's also excused from filing most proposed rule changes with the SEC in advance — except it must still file changes that raise margin levels, involve fraud or manipulation, recordkeeping, reporting, listing standards, decimal pricing, sales practices, or its duty to enforce securities laws; it must use the normal filing process for margin-related changes that aren't increases; and it must use that process for changes the SEC has canceled. It's unlawful to trade a security futures product until the later of one year after December 21, 2000, or the date a registered futures association meets certain readiness requirements. As an exception, a security futures product can be traded earlier on a principal-to-principal basis between "eligible contract participants" (sophisticated parties defined elsewhere in the law), starting the later of eight months after December 21, 2000, or that same readiness date. (h) General trading rules for security futures products It's unlawful to trade a security futures product unless it's listed on a national securities exchange or a registered national securities association. Such an exchange or association can only trade products that meet listing standards it has filed with the SEC and that meet a criterion set out under the Commodity Exchange Act. Those listing standards must require, among other things: (A) the underlying security be registered under the securities laws (with some exceptions the SEC and CFTC can jointly create); (B) if not cash-settled, the market have delivery arrangements with a registered clearing agency; (C) standards be no less strict than for options on comparable exchanges; (D) the product be based on common stock or other equity the SEC and CFTC jointly approve (again, with possible exceptions); (E) clearing be linked and coordinated across clearing agencies so a product bought on one market can be closed out on another; (F) only brokers or dealers under suitability rules like those of a registered securities association can trade it; (G) it be subject to anti-dual-trading rules; (H) trading not be easily manipulated, and not enable manipulating the price of the underlying security or related options; (I) coordinated surveillance be in place across markets to catch manipulation and insider trading; (J) audit trails support that surveillance; (K) trading-halt procedures be coordinated across markets; and (L) margin requirements follow the rules under section 78g(c)(2)(B), though an exchange can still require higher margin if it wants. The SEC and CFTC can jointly modify the requirements in (A) or (D) above, or jointly exempt someone from the linked-clearing requirement in (E), if doing so helps fair markets develop, serves the public interest, and protects investors. It's unlawful for anyone other than a registered exchange or association to run a marketplace for security futures products, or act like a stock exchange for them, unless a registered exchange or association that person belongs to has: (A) coordinated surveillance procedures with the markets trading the underlying and related securities; (B) audit-trail rules supporting that; and (C) rules to coordinate trading halts with those other markets. Options on security futures (puts, calls, straddles, and similar) are banned until the SEC and CFTC jointly decide, after three years from December 21, 2000, to allow them. Until a "compliance date" is reached, an exchange or association can trade a security futures product even if it doesn't meet the linked-clearing listing standard or a related CFTC criterion. The SEC and CFTC must publish that compliance date in the Federal Register at least 165 days ahead of time. The date is whichever comes later: 180 days after the first full month in which security-futures trading volume reaches 10% of comparable options volume, or two years after security futures trading begins under this chapter. (i) Avoiding duplicate rules for dual-registered firms Each exchange registered under (a) must issue rules to prevent duplicate or conflicting requirements for a broker-dealer that's also registered with the CFTC, when it comes to rules about security futures products under this section and under subsection (g) and section 78o–3(k). (j) Deadlines for procedures and rules An exchange registered under (a) must put the procedures from (h)(5)(A) and the rules from (h)(5)(B)-(C) in place within 8 months after an alternative trading system asks it to. (k) Foreign security futures products The SEC and CFTC must jointly issue rules or orders letting security futures products traded on a foreign board of trade be offered and sold to U.S. persons, when doing so serves the public interest, fair competition, market efficiency, and investor protection. Those rules must take into account the size and nature of the markets for the underlying securities. (l) Security-based swaps It's unlawful to enter into a security-based swap with someone who isn't an "eligible contract participant," unless the trade happens on a national securities exchange registered as this section describes.

the actual law source: uscode.house.gov ↗public domain

(a) Registration; application

An exchange may be registered as a national securities exchange under the terms and conditions hereinafter provided in this section and in accordance with the provisions of section 78s(a) of this title, by filing with the Commission an application for registration in such form as the Commission, by rule, may prescribe containing the rules of the exchange and such other information and documents as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors.

(b) Determination by Commission requisite to registration of applicant as a national securities exchange

An exchange shall not be registered as a national securities exchange unless the Commission determines that—

(1)

Such exchange is so organized and has the capacity to be able to carry out the purposes of this chapter and to comply, and (subject to any rule or order of the Commission pursuant to section 78q(d) or 78s(g)(2) of this title) to enforce compliance by its members and persons associated with its members, with the provisions of this chapter, the rules and regulations thereunder, and the rules of the exchange.

(2)

Subject to the provisions of subsection (c) of this section, the rules of the exchange provide that any registered broker or dealer or natural person associated with a registered broker or dealer may become a member of such exchange and any person may become associated with a member thereof.

(3)

The rules of the exchange assure a fair representation of its members in the selection of its directors and administration of its affairs and provide that one or more directors shall be representative of issuers and investors and not be associated with a member of the exchange, broker, or dealer.

(4)

The rules of the exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities.

(5)

The rules of the exchange are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers, or to regulate by virtue of any authority conferred by this chapter matters not related to the purposes of this chapter or the administration of the exchange.

(6)

The rules of the exchange provide that (subject to any rule or order of the Commission pursuant to section 78q(d) or 78s(g)(2) of this title) its members and persons associated with its members shall be appropriately disciplined for violation of the provisions of this chapter, the rules or regulations thereunder, or the rules of the exchange, by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, being suspended or barred from being associated with a member, or any other fitting sanction.

(7)

The rules of the exchange are in accordance with the provisions of subsection (d) of this section, and in general, provide a fair procedure for the disciplining of members and persons associated with members, the denial of membership to any person seeking membership therein, the barring of any person from becoming associated with a member thereof, and the prohibition or limitation by the exchange of any person with respect to access to services offered by the exchange or a member thereof.

(8)

The rules of the exchange do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of this chapter.

(9)

(A)

The rules of the exchange prohibit the listing of any security issued in a limited partnership rollup transaction (as such term is defined in paragraphs (4) and (5) of section 78n(h) of this title), unless such transaction was conducted in accordance with procedures designed to protect the rights of limited partners, including—

(i)

the right of dissenting limited partners to one of the following:

(I)

an appraisal and compensation;

(II)

retention of a security under substantially the same terms and conditions as the original issue;

(III)

approval of the limited partnership rollup transaction by not less than 75 percent of the outstanding securities of each of the participating limited partnerships;

(IV)

the use of a committee of limited partners that is independent, as determined in accordance with rules prescribed by the exchange, of the general partner or sponsor, that has been approved by a majority of the outstanding units of each of the participating limited partnerships, and that has such authority as is necessary to protect the interest of limited partners, including the authority to hire independent advisors, to negotiate with the general partner or sponsor on behalf of the limited partners, and to make a recommendation to the limited partners with respect to the proposed transaction; or

(V)

other comparable rights that are prescribed by rule by the exchange and that are designed to protect dissenting limited partners;

(ii)

the right not to have their voting power unfairly reduced or abridged;

(iii)

the right not to bear an unfair portion of the costs of a proposed limited partnership rollup transaction that is rejected; and

(iv)

restrictions on the conversion of contingent interests or fees into non-contingent interests or fees and restrictions on the receipt of a non-contingent equity interest in exchange for fees for services which have not yet been provided.

(B)

As used in this paragraph, the term “dissenting limited partner” means a person who, on the date on which soliciting material is mailed to investors, is a holder of a beneficial interest in a limited partnership that is the subject of a limited partnership rollup transaction, and who casts a vote against the transaction and complies with procedures established by the exchange, except that for purposes of an exchange or tender offer, such person shall file an objection in writing under the rules of the exchange during the period during which the offer is outstanding.

(10)

(A)

The rules of the exchange prohibit any member that is not the beneficial owner of a security registered under section 78l of this title from granting a proxy to vote the security in connection with a shareholder vote described in subparagraph (B), unless the beneficial owner of the security has instructed the member to vote the proxy in accordance with the voting instructions of the beneficial owner.

(B)

A shareholder vote described in this subparagraph is a shareholder vote with respect to the election of a member of the board of directors of an issuer, executive compensation, or any other significant matter, as determined by the Commission, by rule, and does not include a vote with respect to the uncontested election of a member of the board of directors of any investment company registered under the Investment Company Act of 1940 [15 U.S.C. 80a–1 et seq.].

(C)

Nothing in this paragraph shall be construed to prohibit a national securities exchange from prohibiting a member that is not the beneficial owner of a security registered under section 78l of this title from granting a proxy to vote the security in connection with a shareholder vote not described in subparagraph (A).

(1)

A national securities exchange shall deny membership to (A) any person, other than a natural person, which is not a registered broker or dealer or (B) any natural person who is not, or is not associated with, a registered broker or dealer.

(2)

A national securities exchange may, and in cases in which the Commission, by order, directs as necessary or appropriate in the public interest or for the protection of investors shall, deny membership to any registered broker or dealer or natural person associated with a registered broker or dealer, and bar from becoming associated with a member any person, who is subject to a statutory disqualification. A national securities exchange shall file notice with the Commission not less than thirty days prior to admitting any person to membership or permitting any person to become associated with a member, if the exchange knew, or in the exercise of reasonable care should have known, that such person was subject to a statutory disqualification. The notice shall be in such form and contain such information as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors.

(3)

(A)

A national securities exchange may deny membership to, or condition the membership of, a registered broker or dealer if (i) such broker or dealer does not meet such standards of financial responsibility or operational capability or such broker or dealer or any natural person associated with such broker or dealer does not meet such standards of training, experience, and competence as are prescribed by the rules of the exchange or (ii) such broker or dealer or person associated with such broker or dealer has engaged and there is a reasonable likelihood he may again engage in acts or practices inconsistent with just and equitable principles of trade. A national securities exchange may examine and verify the qualifications of an applicant to become a member and the natural persons associated with such an applicant in accordance with procedures established by the rules of the exchange.

(B)

A national securities exchange may bar a natural person from becoming a member or associated with a member, or condition the membership of a natural person or association of a natural person with a member, if such natural person (i) does not meet such standards of training, experience, and competence as are prescribed by the rules of the exchange or (ii) has engaged and there is a reasonable likelihood he may again engage in acts or practices inconsistent with just and equitable principles of trade. A national securities exchange may examine and verify the qualifications of an applicant to become a person associated with a member in accordance with procedures established by the rules of the exchange and require any person associated with a member, or any class of such persons, to be registered with the exchange in accordance with procedures so established.

(C)

A national securities exchange may bar any person from becoming associated with a member if such person does not agree (i) to supply the exchange with such information with respect to its relationship and dealings with the member as may be specified in the rules of the exchange and (ii) to permit the examination of its books and records to verify the accuracy of any information so supplied.

(4)

A national securities exchange may limit (A) the number of members of the exchange and (B) the number of members and designated representatives of members permitted to effect transactions on the floor of the exchange without the services of another person acting as broker: Provided, however, That no national securities exchange shall have the authority to decrease the number of memberships in such exchange, or the number of members and designated representatives of members permitted to effect transactions on the floor of such exchange without the services of another person acting as broker, below such number in effect on May 1, 1975, or the date such exchange was registered with the Commission, whichever is later: And provided further, That the Commission, in accordance with the provisions of section 78s(c) of this title, may amend the rules of any national securities exchange to increase (but not to decrease) or to remove any limitation on the number of memberships in such exchange or the number of members or designated representatives of members permitted to effect transactions on the floor of the exchange without the services of another person acting as broker, if the Commission finds that such limitation imposes a burden on competition not necessary or appropriate in furtherance of the purposes of this chapter.

(d) Discipline of national securities exchange members and persons associated with members; summary proceedings

(1)

In any proceeding by a national securities exchange to determine whether a member or person associated with a member should be disciplined (other than a summary proceeding pursuant to paragraph (3) of this subsection), the exchange shall bring specific charges, notify such member or person of, and give him an opportunity to defend against, such charges, and keep a record. A determination by the exchange to impose a disciplinary sanction shall be supported by a statement setting forth—

(A)

any act or practice in which such member or person associated with a member has been found to have engaged, or which such member or person has been found to have omitted;

(B)

the specific provision of this chapter, the rules or regulations thereunder, or the rules of the exchange which any such act or practice, or omission to act, is deemed to violate; and

(C)

the sanction imposed and the reasons therefor.

(2)

In any proceeding by a national securities exchange to determine whether a person shall be denied membership, barred from becoming associated with a member, or prohibited or limited with respect to access to services offered by the exchange or a member thereof (other than a summary proceeding pursuant to paragraph (3) of this subsection), the exchange shall notify such person of, and give him an opportunity to be heard upon, the specific grounds for denial, bar, or prohibition or limitation under consideration and keep a record. A determination by the exchange to deny membership, bar a person from becoming associated with a member, or prohibit or limit a person with respect to access to services offered by the exchange or a member thereof shall be supported by a statement setting forth the specific grounds on which the denial, bar, or prohibition or limitation is based.

(3)

A national securities exchange may summarily (A) suspend a member or person associated with a member who has been and is expelled or suspended from any self-regulatory organization or barred or suspended from being associated with a member of any self-regulatory organization, (B) suspend a member who is in such financial or operating difficulty that the exchange determines and so notifies the Commission that the member cannot be permitted to continue to do business as a member with safety to investors, creditors, other members, or the exchange, or (C) limit or prohibit any person with respect to access to services offered by the exchange if subparagraph (A) or (B) of this paragraph is applicable to such person or, in the case of a person who is not a member, if the exchange determines that such person does not meet the qualification requirements or other prerequisites for such access and such person cannot be permitted to continue to have such access with safety to investors, creditors, members, or the exchange. Any person aggrieved by any such summary action shall be promptly afforded an opportunity for a hearing by the exchange in accordance with the provisions of paragraph (1) or (2) of this subsection. The Commission, by order, may stay any such summary action on its own motion or upon application by any person aggrieved thereby, if the Commission determines summarily or after notice and opportunity for hearing (which hearing may consist solely of the submission of affidavits or presentation of oral arguments) that such stay is consistent with the public interest and the protection of investors.

(e) Commissions, allowances, discounts, and other fees

(1)

On and after June 4, 1975, no national securities exchange may impose any schedule or fix rates of commissions, allowances, discounts, or other fees to be charged by its members: Provided, however, That until May 1, 1976, the preceding provisions of this paragraph shall not prohibit any such exchange from imposing or fixing any schedule of commissions, allowances, discounts, or other fees to be charged by its members for acting as broker on the floor of the exchange or as odd-lot dealer: And provided further, That the Commission, in accordance with the provisions of section 78s(b) of this title as modified by the provisions of paragraph (3) of this subsection, may—

(A)

permit a national securities exchange, by rule, to impose a reasonable schedule or fix reasonable rates of commissions, allowances, discounts, or other fees to be charged by its members for effecting transactions on such exchange prior to November 1, 1976, if the Commission finds that such schedule or fixed rates of commissions, allowances, discounts, or other fees are in the public interest; and

(B)

permit a national securities exchange, by rule, to impose a schedule or fix rates of commissions, allowances, discounts, or other fees to be charged by its members for effecting transactions on such exchange after November 1, 1976, if the Commission finds that such schedule or fixed rates of commissions, allowances, discounts, or other fees (i) are reasonable in relation to the costs of providing the service for which such fees are charged (and the Commission publishes the standards employed in adjudging reasonableness) and (ii) do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of this chapter, taking into consideration the competitive effects of permitting such schedule or fixed rates weighed against the competitive effects of other lawful actions which the Commission is authorized to take under this chapter.

(2)

Notwithstanding the provisions of section 78s(c) of this title, the Commission, by rule, may abrogate any exchange rule which imposes a schedule or fixes rates of commissions, allowances, discounts, or other fees, if the Commission determines that such schedule or fixed rates are no longer reasonable, in the public interest, or necessary to accomplish the purposes of this chapter.

(3)

(A)

Before approving or disapproving any proposed rule change submitted by a national securities exchange which would impose a schedule or fix rates of commissions, allowances, discounts, or other fees to be charged by its members for effecting transactions on such exchange, the Commission shall afford interested persons (i) an opportunity for oral presentation of data, views, and arguments and (ii) with respect to any such rule concerning transactions effected after November 1, 1976, if the Commission determines there are disputed issues of material fact, to present such rebuttal submissions and to conduct (or have conducted under subparagraph (B) of this paragraph) such cross-examination as the Commission determines to be appropriate and required for full disclosure and proper resolution of such disputed issues of material fact.

(B)

The Commission shall prescribe rules and make rulings concerning any proceeding in accordance with subparagraph (A) of this paragraph designed to avoid unnecessary costs or delay. Such rules or rulings may (i) impose reasonable time limits on each interested person’s oral presentations, and (ii) require any cross-examination to which a person may be entitled under subparagraph (A) of this paragraph to be conducted by the Commission on behalf of that person in such manner as the Commission determines to be appropriate and required for full disclosure and proper resolution of disputed issues of material fact.

(C)

(i)

If any class of persons, the members of which are entitled to conduct (or have conducted) cross-examination under subparagraphs (A) and (B) of this paragraph and which have, in the view of the Commission, the same or similar interests in the proceeding, cannot agree upon a single representative of such interests for purposes of cross-examination, the Commission may make rules and rulings specifying the manner in which such interests shall be represented and such cross-examination conducted.

(ii)

No member of any class of persons with respect to which the Commission has specified the manner in which its interests shall be represented pursuant to clause (i) of this subparagraph shall be denied, pursuant to such clause (i), the opportunity to conduct (or have conducted) cross-examination as to issues affecting his particular interests if he satisfies the Commission that he has made a reasonable and good faith effort to reach agreement upon group representation and there are substantial and relevant issues which would not be presented adequately by group representation.

(D)

A transcript shall be kept of any oral presentation and cross-examination.

(E)

In addition to the bases specified in section 78y(a) of this title, a reviewing Court may set aside an order of the Commission under section 78s(b) of this title approving an exchange rule imposing a schedule or fixing rates of commissions, allowances, discounts, or other fees, if the Court finds—

(1)

a Commission determination under subparagraph (A) of this paragraph that an interested person is not entitled to conduct cross-examination or make rebuttal submissions, or

(2)

a Commission rule or ruling under subparagraph (B) of this paragraph limiting the petitioner’s cross-examination or rebuttal submissions,

has precluded full disclosure and proper resolution of disputed issues of material fact which were necessary for fair determination by the Commission.

(f) Compliance of non-members with exchange rules

The Commission, by rule or order, as it deems necessary or appropriate in the public interest and for the protection of investors, to maintain fair and orderly markets, or to assure equal regulation, may require—

(1)

any person not a member or a designated representative of a member of a national securities exchange effecting transactions on such exchange without the services of another person acting as a broker, or

(2)

any broker or dealer not a member of a national securities exchange effecting transactions on such exchange on a regular basis,

to comply with such rules of such exchange as the Commission may specify.

(g) Notice registration of security futures product exchanges

(1) Registration required

An exchange that lists or trades security futures products may register as a national securities exchange solely for the purposes of trading security futures products if—

(A)

the exchange is a board of trade, as that term is defined by the Commodity Exchange Act (7 U.S.C. 1a(2)) [7 U.S.C. 1 et seq.], that has been designated a contract market by the Commodity Futures Trading Commission and such designation is not suspended by order of the Commodity Futures Trading Commission; and

(B)

such exchange does not serve as a market place for transactions in securities other than—

(i)

security futures products; or

(ii)

futures on exempted securities or groups or indexes of securities or options thereon that have been authorized under section 2(a)(1)(C) of the Commodity Exchange Act [7 U.S.C. 2(a)(1)(C)].

(2) Registration by notice filing

(A) Form and content

An exchange required to register only because such exchange lists or trades security futures products may register for purposes of this section by filing with the Commission a written notice in such form as the Commission, by rule, may prescribe containing the rules of the exchange and such other information and documents concerning such exchange, comparable to the information and documents required for national securities exchanges under subsection (a), as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors. If such exchange has filed documents with the Commodity Futures Trading Commission, to the extent that such documents contain information satisfying the Commission’s informational requirements, copies of such documents may be filed with the Commission in lieu of the required written notice.

(B) Immediate effectiveness

Such registration shall be effective contemporaneously with the submission of notice, in written or electronic form, to the Commission, except that such registration shall not be effective if such registration would be subject to suspension or revocation.

Such registration shall be terminated immediately if any of the conditions for registration set forth in this subsection are no longer satisfied.

(3) Public availability

The Commission shall promptly publish in the Federal Register an acknowledgment of receipt of all notices the Commission receives under this subsection and shall make all such notices available to the public.

(4) Exemption of exchanges from specified provisions

(A) Transaction exemptions

An exchange that is registered under paragraph (1) of this subsection shall be exempt from, and shall not be required to enforce compliance by its members with, and its members shall not, solely with respect to those transactions effected on such exchange in security futures products, be required to comply with, the following provisions of this chapter and the rules thereunder:

(i)

Subsections (b)(2), (b)(3), (b)(4), (b)(7), (b)(9), (c), (d), and (e) of this section.

(ii)

Section 78h of this title.

(iii)

Section 78k of this title.

(iv)

Subsections (d), (f), and (k) 1 of section 78q of this title.

(v)

Subsections (a), (f), and (h) of section 78s of this title.

(B) Rule change exemptions

An exchange that registered under paragraph (1) of this subsection shall also be exempt from submitting proposed rule changes pursuant to section 78s(b) of this title, except that—

(i)

such exchange shall file proposed rule changes related to higher margin levels, fraud or manipulation, recordkeeping, reporting, listing standards, or decimal pricing for security futures products, sales practices for security futures products for persons who effect transactions in security futures products, or rules effectuating such exchange’s obligation to enforce the securities laws pursuant to section 78s(b)(7) of this title;

(ii)

such exchange shall file pursuant to sections 78s(b)(1) and 78s(b)(2) of this title proposed rule changes related to margin, except for changes resulting in higher margin levels; and

(iii)

such exchange shall file pursuant to section 78s(b)(1) of this title proposed rule changes that have been abrogated by the Commission pursuant to section 78s(b)(7)(C) of this title.

(5) Trading in security futures products

(A) In general

Subject to subparagraph (B), it shall be unlawful for any person to execute or trade a security futures product until the later of—

(i)

1 year after December 21, 2000; or

(ii)

such date that a futures association registered under section 17 of the Commodity Exchange Act [7 U.S.C. 21] has met the requirements set forth in section 78o–3(k)(2) of this title.

(B) Principal-to-principal transactions

Notwithstanding subparagraph (A), a person may execute or trade a security futures product transaction if—

(i)

the transaction is entered into—

(I)

on a principal-to-principal basis between parties trading for their own accounts or as described in section 1a(18)(B)(ii) of the Commodity Exchange Act [7 U.S.C. 1a(18)(B)(ii)]; and

(II)

only between eligible contract participants (as defined in subparagraphs (A), (B)(ii), and (C) of such section 1a(18) [7 U.S.C. 1a(18)(A), (B)(ii), (C)]) at the time at which the persons enter into the agreement, contract, or transaction; and

(ii)

the transaction is entered into on or after the later of—

(I)

8 months after December 21, 2000; or

(II)

such date that a futures association registered under section 17 of the Commodity Exchange Act [7 U.S.C. 21] has met the requirements set forth in section 78o–3(k)(2) of this title.

(h) Trading in security futures products

(1) Trading on exchange or association required

It shall be unlawful for any person to effect transactions in security futures products that are not listed on a national securities exchange or a national securities association registered pursuant to section 78o–3(a) of this title.

(2) Listing standards required

Except as otherwise provided in paragraph (7), a national securities exchange or a national securities association registered pursuant to section 78o–3(a) of this title may trade only security futures products that (A) conform with listing standards that such exchange or association files with the Commission under section 78s(b) of this title and (B) meet the criteria specified in section 2(a)(1)(D)(i) of the Commodity Exchange Act [7 U.S.C. 2(a)(1)(D)(i)].

(3) Requirements for listing standards and conditions for trading

Such listing standards shall—

(A)

except as otherwise provided in a rule, regulation, or order issued pursuant to paragraph (4), require that any security underlying the security future, including each component security of a narrow-based security index, be registered pursuant to section 78l of this title;

(B)

require that if the security futures product is not cash settled, the market on which the security futures product is traded have arrangements in place with a registered clearing agency for the payment and delivery of the securities underlying the security futures product;

(C)

be no less restrictive than comparable listing standards for options traded on a national securities exchange or national securities association registered pursuant to section 78o–3(a) of this title;

(D)

except as otherwise provided in a rule, regulation, or order issued pursuant to paragraph (4), require that the security future be based upon common stock and such other equity securities as the Commission and the Commodity Futures Trading Commission jointly determine appropriate;

(E)

require that the security futures product is cleared by a clearing agency that has in place provisions for linked and coordinated clearing with other clearing agencies that clear security futures products, which permits the security futures product to be purchased on one market and offset on another market that trades such product;

(F)

require that only a broker or dealer subject to suitability rules comparable to those of a national securities association registered pursuant to section 78o–3(a) of this title effect transactions in the security futures product;

(G)

require that the security futures product be subject to the prohibition against dual trading in section 4j of the Commodity Exchange Act (7 U.S.C. 6j) and the rules and regulations thereunder or the provisions of section 78k(a) of this title and the rules and regulations thereunder, except to the extent otherwise permitted under this chapter and the rules and regulations thereunder;

(H)

require that trading in the security futures product not be readily susceptible to manipulation of the price of such security futures product, nor to causing or being used in the manipulation of the price of any underlying security, option on such security, or option on a group or index including such securities;

(I)

require that procedures be in place for coordinated surveillance among the market on which the security futures product is traded, any market on which any security underlying the security futures product is traded, and other markets on which any related security is traded to detect manipulation and insider trading;

(J)

require that the market on which the security futures product is traded has in place audit trails necessary or appropriate to facilitate the coordinated surveillance required in subparagraph (I);

(K)

require that the market on which the security futures product is traded has in place procedures to coordinate trading halts between such market and any market on which any security underlying the security futures product is traded and other markets on which any related security is traded; and

(L)

require that the margin requirements for a security futures product comply with the regulations prescribed pursuant to section 78g(c)(2)(B) of this title, except that nothing in this subparagraph shall be construed to prevent a national securities exchange or national securities association from requiring higher margin levels for a security futures product when it deems such action to be necessary or appropriate.

(4) Authority to modify certain listing standard requirements

(A) Authority to modify

The Commission and the Commodity Futures Trading Commission, by rule, regulation, or order, may jointly modify the listing standard requirements specified in subparagraph (A) or (D) of paragraph (3) to the extent such modification fosters the development of fair and orderly markets in security futures products, is necessary or appropriate in the public interest, and is consistent with the protection of investors.

(B) Authority to grant exemptions

The Commission and the Commodity Futures Trading Commission, by order, may jointly exempt any person from compliance with the listing standard requirement specified in subparagraph (E) of paragraph (3) to the extent such exemption fosters the development of fair and orderly markets in security futures products, is necessary or appropriate in the public interest, and is consistent with the protection of investors.

(5) Requirements for other persons trading security future products

It shall be unlawful for any person (other than a national securities exchange or a national securities association registered pursuant to section 78o–3(a) of this title) to constitute, maintain, or provide a marketplace or facilities for bringing together purchasers and sellers of security future products or to otherwise perform with respect to security future products the functions commonly performed by a stock exchange as that term is generally understood, unless a national securities association registered pursuant to section 78o–3(a) of this title or a national securities exchange of which such person is a member—

(A)

has in place procedures for coordinated surveillance among such person, the market trading the securities underlying the security future products, and other markets trading related securities to detect manipulation and insider trading;

(B)

has rules to require audit trails necessary or appropriate to facilitate the coordinated surveillance required in subparagraph (A); and

(C)

has rules to require such person to coordinate trading halts with markets trading the securities underlying the security future products and other markets trading related securities.

(6) Deferral of options on security futures trading

No person shall offer to enter into, enter into, or confirm the execution of any put, call, straddle, option, or privilege on a security future, except that, after 3 years after December 21, 2000, the Commission and the Commodity Futures Trading Commission may by order jointly determine to permit trading of puts, calls, straddles, options, or privileges on any security future authorized to be traded under the provisions of this chapter and the Commodity Exchange Act [7 U.S.C. 1 et seq.].

(7) Deferral of linked and coordinated clearing

(A)

Notwithstanding paragraph (2), until the compliance date, a national securities exchange or national securities association registered pursuant to section 78o–3(a) of this title may trade a security futures product that does not—

(i)

conform with any listing standard promulgated to meet the requirement specified in subparagraph (E) of paragraph (3); or

(ii)

meet the criterion specified in section 2(a)(1)(D)(i)(IV) of the Commodity Exchange Act [7 U.S.C. 2(a)(1)(D)(i)(IV)].

(B)

The Commission and the Commodity Futures Trading Commission shall jointly publish in the Federal Register a notice of the compliance date no later than 165 days before the compliance date.

(C)

For purposes of this paragraph, the term “compliance date” means the later of—

(i)

180 days after the end of the first full calendar month period in which the average aggregate comparable share volume for all security futures products based on single equity securities traded on all national securities exchanges, any national securities associations registered pursuant to section 78o–3(a) of this title, and all other persons equals or exceeds 10 percent of the average aggregate comparable share volume of options on single equity securities traded on all national securities exchanges and any national securities associations registered pursuant to section 78o–3(a) of this title; or

(ii)

2 years after the date on which trading in any security futures product commences under this chapter.

(i) Rules to avoid duplicative regulation of dual registrants

Consistent with this chapter, each national securities exchange registered pursuant to subsection (a) of this section shall issue such rules as are necessary to avoid duplicative or conflicting rules applicable to any broker or dealer registered with the Commission pursuant to section 78o(b) of this title (except paragraph (11) thereof), that is also registered with the Commodity Futures Trading Commission pursuant to section 4f(a) of the Commodity Exchange Act [7 U.S.C. 6f(a)] (except paragraph (2) thereof), with respect to the application of—

(1)

rules of such national securities exchange of the type specified in section 78o(c)(3)(B) of this title involving security futures products; and

(2)

similar rules of national securities exchanges registered pursuant to subsection (g) and national securities associations registered pursuant to section 78o–3(k) of this title involving security futures products.

(j) Procedures and rules for security future products

A national securities exchange registered pursuant to subsection (a) shall implement the procedures specified in subsection (h)(5)(A) and adopt the rules specified in subparagraphs (B) and (C) of subsection (h)(5) not later than 8 months after the date of receipt of a request from an alternative trading system for such implementation and rules.

(k) Rules relating to security futures products traded on foreign boards of trade

(1)

To the extent necessary or appropriate in the public interest, to promote fair competition, and consistent with the promotion of market efficiency, innovation, and expansion of investment opportunities, the protection of investors, and the maintenance of fair and orderly markets, the Commission and the Commodity Futures Trading Commission shall jointly issue such rules, regulations, or orders as are necessary and appropriate to permit the offer and sale of a security futures product traded on or subject to the rules of a foreign board of trade to United States persons.

(2)

The rules, regulations, or orders adopted under paragraph (1) shall take into account, as appropriate, the nature and size of the markets that the securities underlying the security futures product reflect.

(l) Security-based swaps

It shall be unlawful for any person to effect a transaction in a security-based swap with or for a person that is not an eligible contract participant, unless such transaction is effected on a national securities exchange registered pursuant to subsection (b).

Source credit: (June 6, 1934, ch. 404, title I, § 6, 48 Stat. 885; Pub. L. 94–29, § 4, June 4, 1975, 89 Stat. 104; Pub. L. 100–181, title III, §§ 309–312, Dec. 4, 1987, 101 Stat. 1255; Pub. L. 103–202, title III, § 303(b), Dec. 17, 1993, 107 Stat. 2365; Pub. L. 106–554, § 1(a)(5) [title II, §§ 202(a), 206(a), (i), (k)(2), (l)], Dec. 21, 2000, 114 Stat. 2763, 2763A–416, 2763A–426, 2763A–433, 2763A–434; Pub. L. 111–203, title VII, §§ 721(e)(8), 734(b)(2), 763(e), title IX, § 957, July 21, 2010, 124 Stat. 1671, 1718, 1777, 1906.)

history & why it existsrecord from the source credit

1934Enacted · Act of June 6, 1934, ch. 404 · 48 Stat. 885
1975Amended · Pub. L. 94-29 · 89 Stat. 104
1987Amended · Pub. L. 100-181 · 101 Stat. 1255
1993Amended · Pub. L. 103-202 · 107 Stat. 2365
2000Amended · Pub. L. 106-554 · 114 Stat. 2763, 2763
2010Amended · Pub. L. 111-203 · 124 Stat. 1671, 1718, 1777, 1906

A history note hasn’t been published yet. The record shows enactment by ch. 404 on 1934-06-06.

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