2013 Form 1-N Justification

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Rule 6a-4 and Form 1-N

A.

Justification
1.

Necessity for Information Collection

The Securities Exchange Act of 1934 (“Exchange Act”) provides a framework for
self-regulation under which various entities involved in the securities business, including
national securities exchanges, have primary responsibility for regulating their members or
participants. The role of the Securities and Exchange Commission (“SEC”) in this
framework is primarily one of oversight: the Exchange Act charges the SEC with
supervising the national securities exchanges and assuring that each complies with and
advances the policies of the Exchange Act.
The Exchange Act was amended by the Commodity Futures Modernization Act
of 2000 (“CFMA”), which allows the trading of futures on individual stocks or on
narrow-based stock indexes (collectively, “security futures products”). Under the
CFMA, markets that wish to trade security futures products are regulated jointly by the
SEC and the Commodity Futures Trading Commission (“CFTC”). The Exchange Act, as
amended by the CFMA, provides that futures exchanges that meet certain criteria and that
wish to trade security futures products must file notice with the SEC to become a
“Security Futures Product Exchange.” 1
Rule 6a-4 sets out procedures for filing such notices with the SEC on Form 1-N.
Form 1-N calls for information regarding: how the futures exchange operates, its rules
and procedures, corporate governance its criteria for membership, its subsidiaries and
affiliates, and the security futures products it intends to trade. Rule 6a-4 also requires
existing Security Futures Product Exchanges to file: (1) amendments to Form 1-N in the
event of material changes to the information provided in the initial Form 1-N; (2) annual
and three-year updates of certain information provided in the initial Form 1-N; (3) certain
information that is provided to the exchange’s members; and (4) a monthly report
summarizing the exchange’s trading of security futures products.
2.

Purpose and Use of the Information Collection

The information obtained under Rule 6a-4 and Form 1-N provides the SEC with
basic information about exchanges that trade security futures products. This information
assists the SEC to ascertain that such exchanges’ activities do not conflict with the Exchange
Act and, thus, assists the SEC’s efforts to protect investors and the public interest. An entity
that is not already registered with the SEC and that does not comply with proposed Rule 6a4 by filing the Form 1-N is not permitted to trade security futures products.
1

See 15 U.S.C. 78f(g).

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3.

Consideration Given to Information Technology

Because much of the information requested by Form 1-N consists of copies of
existing documents, the SEC does not expect information technology to reduce
respondents’ burden in any meaningful way. However, Rule 6a-4 permits respondents to
make certain information available on the Internet and to notify the Commission of its web
location. The Internet has developed the potential to ease compliance burdens for
respondents and increase the speed, accuracy and availability of information, generating
benefits to investors and financial markets.
4.

Duplication

Because the CFTC shares jurisdiction with the SEC to regulate the markets for
security futures products, much of the information collected by the SEC also is collected by
the CFTC. The Exchange Act, as amended by the CFMA, provides that, if a futures
exchange has filed documents with the CFTC, to the extent that such documents contain
information satisfying the SEC’s informational requirements, copies of such documents may
be filed with the SEC in lieu of the SEC’s required written notice.2 In addition, Rule 6a-4
provides that, in lieu of providing hard copies for certain information, a Security Futures
Product Exchange may simply provide the SEC with the location of the website where such
information may be found.
5.

Effect on Small Entities

Not applicable. None of the entities that would file notice to become Security
Futures Product Exchanges and trade security futures products is a small business entity.
6.

Consequences of Not Conducting Collection

To become a Security Futures Product Exchange, an entity must file a single Form
1-N. Therefore, less frequent collection is not feasible. After an entity files the initial Form
1-N and becomes a Security Futures Product Exchange, Rule 6a-4 requires the entity to file:
(1) amendments to Form 1-N in the event of material changes to the information provided
in the initial Form 1-N; (2) periodic updates of certain information provided in the initial
Form 1-N; (3) certain information that is provided to the exchange’s members; and (4) a
monthly report summarizing the exchange’s trading of security futures products. Any
less frequent collection of information would deprive the SEC of up-to-date information
that is necessary to regulate Security Futures Product Exchanges in accordance with the
Exchange Act.
7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

The collection of information is not inconsistent with 5 CFR 1320.5(d)(2).

2

See 15 U.S.C. 78f(g)(2)(A).

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8.

Consultations Outside the Agency

The SEC published in the Federal Register notice of the proposal for Rule 6a-4 and
Form 1-N. The SEC solicited comments regarding, among other things, the proposed
burden of the proposed collection of information.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable. Information provided on Form 1-N is publicly available.
11.

Sensitive Questions

Not applicable. No issues of a sensitive nature are involved.
12.

Burden of Information Collection
a. Initial Filing

Under the CFMA, futures exchanges may become national securities exchanges for
the limited purpose of trading security futures products. In prior Paperwork Reduction Act
submissions, the SEC stated that after the first seven respondents file, the SEC believes that
additional entities would file an initial Form 1-N on an extremely infrequent basis, if ever.
The SEC continues to believe that such filings would be infrequent, if ever. Therefore, the
Commission estimates that the burden is 0 hours. The following discussion is for
informational purposes in the event that a respondent files a Form 1-N.
The SEC has an existing Form 1 that is used to register national securities
exchanges. The Form 1-N, which is based on the Form 1, registers futures exchanges that
become national securities exchanges solely because they would trade security futures
products. As the SEC’s jurisdiction over such Security Futures Product Exchanges is less
comprehensive than over the existing securities exchanges, the SEC believes that less
information should be required on Form 1-N than on the Form 1. Accordingly, the SEC
requires on the Form 1-N approximately one-third fewer items than required for the Form 1.
(The remaining two-thirds of the items are the same for both forms.)
In its most recent Paperwork Reduction Act submission for the Form 1, the SEC
estimated that a respondent would incur an average burden of 47 hours to comply with Rule
6a-1 and file an initial Form 1 with the Commission. Reducing that figure by approximately
one-third, the SEC estimates that a respondent would incur an average burden of 31 hours to
comply with Rule 6a-4 and file an initial Form 1-N. The Commission estimates that the
average cost per initial filing would be approximately $8,372. This figure was derived in
the following manner:

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20 hours of professional work at $379/hr3 =
11 hours of clerical work at $72/hr4 =

$7580
$ 792
$8,372

Initial filings on Form 1-N by futures exchanges would be on a one-time basis. As
stated above, following the enactment of the CFMA, a number of entities registered with the
SEC to become Security Futures Product Exchanges and therefore the above burden would
not apply to such entities on a prospective basis. The SEC believes that additional entities
would file an initial Form 1-N on an extremely infrequent basis, if ever. The SEC estimates
that in the event an entity files an initial Form 1, the total burden for filing the initial Form 1N for would be 31 hours for a total cost of $8,372.
b. Amendment
Rule 6a-4 also requires existing Security Futures Product Exchanges to file an
amendment to Form 1-N whenever material information supplied in the initial Form 1-N
changes and to update certain information on an ad hoc basis. In its most recent Paperwork
Reduction Act submission for the Form 1, the SEC estimates that each exchange would file
one amendment or periodic update per year at an average burden of 25 hours per response.
The Commission believes that Security Futures Product Exchanges would file one
amendment or update per year, but, because Form 1-N would be a less comprehensive filing
than the Form 1, the SEC estimates that the average burden for filing each amendment or
update to the Form 1-N would be 15 hours per response. Therefore, the SEC estimates that
each respondent will incur a burden of 15 hours in association with this requirement. This
figure was derived in the following manner: 10 hours of in-house professional work + 5
hours of in-house clerical work x 1 response = 15 hours. The Commission estimates that the
average cost would be approximately $4,105 ((10 hours x $379) + (5 hours x $72) x 1
response). In the last few years, three Security Futures Product Exchanges have filed
amendments to Form 1-N with the SEC. Therefore, the SEC estimates that these Security
Futures Product Exchanges will continue to file amendments to their Form 1-N for a total
annual burden of 45 hours (15 hours x 1 response x 3 respondents).
Additionally, Rule 6a-4 requires existing Security Futures Product Exchanges to
file an amendment to Form 1-N at certain mandatory intervals. Every year, a Security
Futures Product Exchange shall file, as an amendment to Form 1-N, Exhibits F, H, and I.
Every three years, a Security Futures Product Exchange shall file, as an amendment to
3

$379 per hour figure for an Attorney is from SIFMA’s Management & Professional
Earnings in the Securities Industry 2012, modified by Commission staff to account for an
1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.

4

$72 per hour figure for an Administrative Assistant is from SIFMA’s Office Salaries in
the Securities Industry 2012, modified by Commission staff to account for an 1800-hour
work-year and multiplied by 2.93 to account for bonuses, firm size, employee benefits
and overhead.

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Form 1-N, Exhibits A, B, C, and E. The SEC estimates the average burden for each
annual filing would be 15 hours, and each three-year filing would be 20 hours. The
Commission estimates that the average cost for each annual filing would be approximately
$4,105 ((10 hours x $379) + (5 hours x $72)) and for each three year filing would be $6,045
((15 hours x $379) + (5 hours x $72). The SEC estimates that each exchange will incur an
average annual burden of 21.67 (rounded up to 22) hours associated with this
requirement. This figure was derived in the following manner: 15 hours per annual
amendment + 6.67 (the yearly pro-rated hourly amount for each three-year amendment
calculated by using 20 hours per three-year amendment / 3). The SEC, therefore,
estimates that the total annual burden for submitting mandatory amendments under Rule
6a-4 will be 88 hours (22 hours x 4 exchanges 5).
c. Periodic Reporting
Finally, Rule 6a-4 requires each existing Security Futures Product Exchange to
provide the SEC with copies of certain supplemental materials sent to the exchange’s
members, and to file monthly reports concerning security futures products traded on the
exchange. Existing Rule 6a-3 imposes a similar requirement on securities exchanges
registered under Form 1. The SEC estimates that the preparation and filing of
amendments generally involves photocopying existing documents and would usually take
less than one-half hour per response. The Commission estimates that each active
exchange would make approximately 25 such filings annually. The SEC estimates that
each exchange will incur an annual burden of 12.5 hours, for an estimated cost of $900, with
this requirement. These figures were derived in the following manner: 0.5 hours of inhouse clerical work x 25 filings = 12.5 hours, and 12.5 hours x $72 / hour = $900. The
Commission estimates that these three existing Security Futures Product Exchanges will
provide the SEC with copies of supplementary materials and monthly reports concerning
security futures products traded on the exchange. Accordingly, the total annual burden for
all respondents to provide supplementary materials and reports is 50 hours (12.5 hours x 4
respondents).
d. Total Burden
In sum, the SEC estimates that the total annual burden for all Security Futures
Product Exchanges after filing Form 1-N is: (1) 45 hours for three respondents combined to
prepare and submit amendments to Form 1-N required under Rule 6a-4(b)(1); (2) 88 hours
for four respondents combined to prepare and submit amendments to Form 1-N required
under Rule 6a-4(b)(3) and (4); and (3) 50 hours for four respondents combined to prepare
and submit supplementary materials and monthly reports.

5

The Commission notes that while there are currently five Security Futures Product
Exchanges, one of those exchanges, NQLX, is dormant. Thus, a total of four exchanges
are active and required to submit mandatory amendments pursuant to Rule 6a-4.

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13.

Costs to Respondents

The SEC estimates that the total annual cost burden for all Security Futures Product
Exchanges after filing Form 1-N is: (1) $300 in miscellaneous clerical expenses for three
respondents combined to prepare and submit amendments to Form 1-N required under Rule
6a-4(b)(1); (2) $576 in miscellaneous clerical expenses for four respondents combined to
prepare and submit amendments to Form 1-N required under Rule 6a-4(b)(3) and (4); and
(3) $500 in miscellaneous clerical expenses for four respondents combined to prepare and
submit supplementary materials and monthly reports.
14.

Costs to Federal Government

The costs to the Federal Government in administering Rule 6a-4 result from
appropriate regulatory staff time and related overhead costs devoted to reviewing the
filings submitted by respondents.
As noted above, the SEC believes that additional entities would file an initial Form
1-N on an extremely infrequent basis, if ever. The SEC estimates that in the event an
entity files an initial Form 1-N, the SEC will devote approximately 40 hours of
professional time to review each Form 1-N which, at $251/hour, 6 has a related cost of
$10,040. The SEC also estimates that it will devote approximately 10 hours of
administrative time to review each Form 1-N which, at $64/hour, 7 has a related cost of
$640. The total cost to review each Form 1-N is $10,680. If the SEC receives one Form
1-N, the total estimated cost to review this form is $10,680.
The SEC estimates that it will devote approximately 8 hours of professional time
to review amendments and updates to Form 1-N which, at $251/hour, has a related cost of
$2,088 (($251 x 8 hours + $10 (miscellaneous clerical expenses)) x 8). The SEC also
estimates that it will devote approximately 4 hours of administrative time to review each
Form 1-N which, at $64/hour, has a related cost of $256. The total cost to review
amendments and updates to each Form 1-N is $2,344. If the SEC receives two
amendments to Forms 1-N, one from each respondent as estimated above, the total
estimated cost to review these forms is $4,688.
Thus, the SEC estimates that its aggregate annual costs to review amendments and
updates to Form 1-N filings would be $4,688 (two respondents x one amendment or update
per year per respondent x $2,344/amendment). In addition, the SEC estimates that its total
operational cost to review periodic information updates and monthly reports required by
Rule 6a-4 would be approximately $1,715 per year. This amount was based on our
computation of the value of staff time devoted to reviewing similar filings made under
existing Rule 6a-3 on a regular basis and the related overhead value (at 35 percent of the
value of staff time).
6

Based on an SEC professional, as adjusted for special SEC pay rates, fringe benefits, and
overhead.

7

Based on SEC office salaries.

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15.

Changes in Burden

The original estimates provided that after the first seven respondents file, the SEC
believes that additional entities would file an initial Form 1-N on an extremely infrequent
basis, if ever. This submission provides that the SEC continues to believe that additional
entities would file an initial Form 1-N on an extremely infrequent basis, if ever, based upon
its experience over the last few years with initial Form 1-N filings. In addition, the SEC has
analyzed the number of Security Futures Product Exchanges that have listed and traded
security futures products and, based on that analysis, has determined that three Security
Futures Product Exchanges are likely to continue making amendments and updates to their
Form 1-N and continue providing periodic information and monthly reports. The burden
estimates above associated with amendments and updates to the Form 1-N and the
submission of periodic and monthly reports are applied to the existing Security Futures
Product Exchanges that file such reports currently.
16.

Information Collection Planned for Statistical Purposes

Not applicable. The information collection is not used for statistical purposes.
17.

Approval to Omit OMB Expiration Date

The SEC is not seeking approval not to display the expiration date for OMB
approval.
18.

Exceptions to Certification for Paperwork Reduction Act Submission

This collection complies with the requirements in 5 CFR 1320.9.

B.

Collections of Information Employing Statistical Methods
This collection does not involve statistical methods.