By John Filar Atwood, Associate Managing Editor, SEC Today.
The SEC is adopting interim final temporary Rule 15b12-1T to permit a registered broker-dealer to engage in retail foreign exchange transactions with persons who are not eligible contract participants (“retail forex transactions”) until July 16, 2012, provided that the broker-dealer complies with all applicable 1934 Act rules and regulations and SRO rules (Release No. 34-64874, July 13, 2011). Under Dodd-Frank Section 742(c), certain retail forex transactions would have been prohibited as of July 16 in the absence of the interim rule. The rule is effective July 15, 2011 and will remain in effect for one year.
The Dodd-Frank Act amends the Commodity Exchange Act as of July 16, 2011 to provide that a person for which there is a federal regulatory agency cannot enter into, or offer to enter into, a retail forex transaction except pursuant to a rule or regulation that allows the transaction issued by the federal agency. Consequently, broker-dealers for which the SEC is the regulator may not engage in off-exchange retail forex futures and options transactions with a customer except pursuant to a retail forex rule issued by the Commission. The prohibition does not apply to forex transactions with a customer who qualifies as an eligible contract participant, or to transactions that are spot forex contracts or forward forex contracts irrespective of whether the customer is an eligible contract participant. The prohibition does apply to “rolling spot” transactions in foreign currency by broker-dealers.
The Commission noted that prior to June 2011, it was not aware of industry concerns with respect to the operation of Section 742 in the absence of Commission rulemaking. In mid-June, however, market participants notified the staff of the possibility that Section 742 may have serious adverse consequences for certain securities markets in the absence of rulemaking prior to July 16. The SEC acknowledged that while only a few interested parties contacted the Commission, their concerns are shared by many market participants.
One possible consequence relates to 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. According to one industry participant, Section 742 could preclude broker-dealers from continuing to engage in certain forex transactions that are inherent in some of their customers’ securities transactions, and that serve to minimize their customers’ risk exposure to changes in foreign currency rates.
The Commission noted that there may be other situations in which broker-dealers engage in forex transactions in connection with facilitating the ordinary execution, clearance, or settlement of customers’ securities transactions that may warrant rulemaking to avoid market disruption due to the potential application of Section 742. The agency also noted that other regulators have expressed concerns with regard to the retail forex practices of the entities that they regulate.
Adopting the interim final rule gives the Commission the opportunity to receive comments regarding practices in this area and to consider prescribing additional rules to address investor protection concerns while preserving potentially beneficial market practices. The SEC believes that receiving comments will better position it to determine 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 stated that it will carefully consider comments on what additional rulemaking may be necessary. Comments on the interim final temporary rule are due within 60 days of publication of the rule in the Federal Register.