SEC Division of Trading and Markets no-action letter: National Futures Association

April 11, 2005

Thomas W. Sexton, Esq. Vice President and General Counsel National Futures Association 200 West Madison Street, Suite 1600 Chicago, Illinois 60606

Re: Application of Rule 19b-4(m)

Dear Mr. Sexton:

Rule 19b-4(m) under the Securities Exchange Act of 1934 ("Exchange Act") requires each self-regulatory organization to post and maintain a current and complete version of its rules on its Web site. In addition, Rule 19b-4(m) requires self-regulatory organizations to update their Web sites within certain specified time periods to reflect rule changes. In your letter dated April 1, 2005, you request that the Division of Market Regulation ("Division") not recommend that the Securities and Exchange Commission ("Commission") take enforcement action against the National Futures Association ("NFA"), if the NFA reflects on its internet Web site a proposed rule change filed pursuant to Section 19(b)(7) of the Exchange Act within two business days after the Commodity Futures Trading Commission ("CFTC") approves the rule change or CFTC staff notifies the NFA that review is not necessary.

We understand the facts to be as follows:

Sections 15A(k)(3) and 19(b)(7) of the Exchange Act require the NFA, as a limited purpose national securities association under Section 15A(k) of the Exchange Act, to file with the Commission certain proposed changes to its rules governing security futures products and the activities of its members who are registered as brokers or dealers in security futures products pursuant to Section 15(b)(11) of the Exchange Act. Specifically, Section 15A(k)(3) requires the NFA to file with the Commission, pursuant to Section 19(b)(7), rule changes related to higher margin levels, fraud or manipulation, recordkeeping, reporting, listing standards, or decimal pricing for security futures products, sales practices for, advertising of, or standards of training, experience, or competence or other qualifications for security futures products for persons who effect transactions in security futures products, or rules effectuating the NFA's obligation to enforce the securities laws. 1

A proposed rule change filed with the Commission pursuant to Section 19(b)(7) must be filed concurrently with the CFTC, and the proposed rule change may take effect upon filing of a written certification with the CFTC under Section 5c(c) of the Commodity Exchange Act ("CEA"), upon a determination by the CFTC that review of the proposed rule change is not necessary, or upon approval of the proposed rule change by the CFTC.

You state that, under Section 17(j) of the CEA, the NFA, as a registered futures association, may make a rule change effective ten days after filing the rule change with the CFTC, unless, within the ten-day period, the NFA asks the CFTC to review and approve the rule change or CFTC staff notifies the NFA that it has decided not to review the rule change. You represent that, although the NFA could make a rule change effective on the tenth day after filing if the NFA has not requested approval and has not received notice that the CFTC has decided not to review the rule change, in practice the NFA does not make a rule change effective until the NFA receives a letter from CFTC staff stating that it has decided not to review the rule change. Thus, under your current practice, an NFA rule change becomes effective upon the CFTC's approval of the rule change or upon the NFA's receipt of a letter from CFTC staff indicating that it has determined not to review the rule change.

As of May 9, 2005, 2 Rule 19b-4(m) under the Exchange Act will require the NFA to update its Web site to reflect rule changes filed pursuant to Section 19(b)(7) within two business days after the NFA has been notified of the Commission's notice of the proposed rule change. The Commission's notice, however, could occur prior to the CFTC's approval of the rule change or the CFTC's determination not to review the rule change. Thus, a strict reading of Rule 19b 4(m) could require the NFA to reflect a rule change on its Web site before it becomes effective under the Exchange Act. You also note that it is possible for a rule change to become effective under the CEA before the Commission's notice is published. Accordingly, you request the Division to confirm that it will not recommend enforcement action to the Commission if the NFA reflects rule changes filed pursuant to Section 19(b)(7) under the Exchange Act on its Web site within two business days after the CFTC approves the rule change or within two business days after the NFA receives notification from CFTC staff that the CFTC has determined not to review the rule change.

Response:

Based upon the facts and representations set forth above, the Division will not recommend enforcement action to the Commission under Exchange Act Rule 19b 4(m), if the NFA reflects on its Web site rule changes filed with the Commission under Exchange Act Section 19(b)(7) within two business days after the CFTC approves the rule change or within two business days after the NFA receives notification from CFTC staff that review is not necessary. The Division's position is based on the representations you have made. Facts or representations different from those set forth in your letter may require a different response, and the Division's position is subject to modification or revocation if the facts or representations are altered.

Sincerely,

Elizabeth K. King Associate Director

Endnotes

1 An NFA rule change relating to lower margin levels must be filed with the Commission pursuant to Sections 19(b)(1) and 19(b)(2) of the Exchange Act, and an NFA rule change that has been abrogated pursuant to Section 19(b)(7)(C) of the Exchange Act must be filed with the Commission pursuant to Section 19(b)(1) of the Exchange Act. See Section 15A(k)(3).

2

See Exchange Act Release No. 50486 (October 4, 2004), 69 FR 60287 (October 8, 2004).

Incoming Letter:

The Incoming Letter is in Acrobat format.

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NFA NATIONAL FUTURES ASSOCIATION
April 1, 2005
Via Overnight Mail ~ N N REG- M ~
Elizabeth King, Esq.
Division of Market Regulation
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Web Site Rule-Posting Requirements; Request for No-Action Relief Dear Ms. King:
As you know, Sections 15A(k)(3) and 19(b)(7) of the Securities and Exchange Act of 1934 (Exchange Act) require National Futures Association (NFA) to file proposed rule changes relating to notice-registered broker-dealers and security futures products with the Securities Exchange Commission (SEC), and the SEC has codified this process in SEC Rule 19b-7. With limited exceptions, these NFA rule changes become effective as provided in the Commodity Exchange Act (CEA) without any action by the SEC or its staff.' Under Section ?7(j)of the CEA, NFA can make a rule change effective ten days after it is filed with the Commodity Futures Trading Commission (CFTC) unless NFA asks that the CFTC review and approve it or the CFTC notifies NFA that it has decided to review it. Although NFA can technically make the rule change effective on the tenth day if NFA did not ask for approval and did not receive notice that the CFTC has decided to review the rule change, in practice NFA does not make rule changes effective until NFA receives a letter from CFTC staff stating that it has decided not to review the rule change (which normally occurs on the tenth day). This means that NFA rule changes can become effective either ten days after they are filed with the CFTC (based on a letter from CFTC staff stating that review is not necessary) or upon CFTC approval, although NFA may adopi a later effective date to give Members time to comply or for administrative purposes. 1 The exceptions are for rule changes setting lower margin requirements -which NFA is unlikely to adopt since it has traditionally deferred to the exchanges to set margin requirements for exchange-traded products - and rules that the SEC has abrogated. 200 west so^,Stme( SO//^ 1&')0 (,'h/cago, l//rnots 60606 311 181 1300 Xn0.621 3!~/0 .31? 1x1 l*lG/h.r www./lffi 'ulur"F [Iff!

NFA

Elizabeth King, Esq. April ?, 2005
Effective May 9, 2005, SEC Rule 19b-4(m) will require NFA to post and maintain a complete version of its rules on its Web site (electronic rulebook) and to update it within two business days after the Commission's notice of a proposed rule change filed under section 19(b)(7) of the Exchange ~ct.* The SEC1s notice is unlikely to be concurrent with the CFTC's approval or its determination that review is not necessary, however. Since the Exchange Act allows most NFA rule changes to take effect under the CEA provisions, and since NFA cannot make a rule change effective prior to that time without running afoul of the CEA, a strict reading of Rule 19b-4(m) would require NFA to post rules that have not yet been approved or for which the 10- day period has not run.= We do not believe it was the Commission's intent to require NFA to post rules before they have been approved by the CFTC or before the 10-day period has run. Therefore, NFA is asking Commission staff to confirm that it will not recommend enforcement action if NFA posts rule changes filed with the Commission pursuant to
Section 19(b)(7) and Rule 19b-7 thereunder to its electronic rulebook within two
business days after the CFTC approves the rule change or CFTC staff notifies NFA that review is not necessary, whichever is applicable. If we adopt a later effective date we will, of course, state the delayed effective date immediately preceding the rule text. If you have any questions or need any additional information, please contact me (312-781-141 3 or tsexton@nfa.futures.org) or Kathryn Camp (312-781-1 393 or kcamp@nfa.futures.org). ---, .__ Thomas W. Sexton Vice President and General Counsel cc: Lawrence B. Patent. CFTC (kpdSecurily FulureslNo-Act~on Request (Rules)) NFA already posts and maintains a complete version of its rules on its Web site and updates those rules within two business days. There could also be timing issues where a rule change becomes effective under the CEA before the Commission's notice.