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SEC Approves Rule On Margin Requirements For Security Futures - Proposes Regulation On Analyst Certifications

Date 25/07/2002

On July 24, the Securities and Exchange Commission took the following actions in an open meeting:

1. Customer Margin Requirements for Security Traders

The SEC voted to approve final rules that set forth the customer margin requirements for security futures. These rules will implement provisions of the Commodity Futures Modernization Act of 2000 (CFMA), which lifted the 19-year ban on the trading of futures on single securities and narrow-based security indexes in this country.

The final rules will apply to customer margin collected for security futures transactions by brokers, dealers, and members of national securities exchanges (security futures intermediaries). They will include certain uniform provisions that are designed to satisfy the statutory requirement that the margin rules for security futures be and remain consistent with the margin requirements set by the Board of Governors of the Federal Reserve System under Regulation T. The final rules also will include provisions that establish minimum margin levels for security futures and permit security futures exchanges to set margin levels for customers with strategy-based offset positions involving security futures. These provisions of the final rules are designed to satisfy the statutory requirement that the margin rules for security futures be consistent with those for comparable exchange-traded options. Finally, the final rules will identify the types of collateral acceptable as margin deposits for security futures and set forth procedures applicable to undermargined accounts. The rules will be effective 30 days after publication in the Federal Register.

2. Proposed Regulation AC - Analyst Certification

The Commission voted to propose Regulation AC for comment. Regulation AC would require research analysts to certify the truthfulness of their views in research reports and public appearances and disclose whether they have received any compensation related to the specific recommendation provided in those reports and appearances.

The proposed Regulation would include the following provisions:

  • Research Reports. Under this proposal, research reports must include a statement by the research analyst certifying that the research report accurately reflects his or her personal views. Research reports also must include a statement by the research analyst certifying whether the recommendation is related to the analyst's compensation. If there is any relation between the analyst's compensation and his or her recommendation, that fact must be disclosed along with the amount of the compensation received, its source, and its purpose.
  • Public Appearances. Research analysts must quarterly attest that any recommendations and views provided in public appearances during the prior quarter accurately reflected their personal views and were not related to any compensation they received or will receive. If an analyst is unable to provide those written certifications, he or she must provide his or her firm with an explanation and the firm must promptly provide that information to its designated examining authority. The firm would then have to disclose in all research reports prepared by that analyst for the next 120 days that the research analyst did not provide the certifications and the reasons for the failure to certify.
Proposed Regulation AC is part of an ongoing process by the Commission, NASD, NYSE, and the states to address conflicts of interest faced by research analysts. On April 25, 2002, the Commission announced that it had commenced a formal inquiry with the SROs and the states into market practices concerning research analysts and the conflicts that can arise from the relationship between research and investment banking. This inquiry may indicate the need for further rulemaking by the NASD and NYSE or additional Commission action. In addition, on May 10, 2002, the Commission approved comprehensive rule changes proposed by the NYSE and NASD to manage and increase disclosure of analysts' conflicts of interest in connection with research reports on equity securities and public appearances. Comments on the proposal should be submitted to the Commission within 45 days of the date of publication in the Federal Register.