Supporting Statement Rule 6a-4 Form 1-N 2016

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

A.

Justification
1.

Information Collection Necessity

The Securities Exchange Act of 1934 (“Exchange Act”) provides a framework for selfregulation 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 1N 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.

Information Collection Purpose and Use

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 6a-4 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 will 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)

There are no special circumstances. The collection of information is consistent 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 required Federal Register notice with a 60-day comment period soliciting comments
on this collection of information was published. No public comments were received.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

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

Sensitive Questions

No questions of a sensitive nature are asked. The information collection does not collect
any Personally Identifiable Information (“PII”).
12.

Information Collection Burden
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 filed, the SEC believed that
additional entities will file an initial Form 1-N on an extremely infrequent basis, if ever. While only
five respondents filed, the SEC continues to believe that such filings will 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 will 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.
In its most recent Paperwork Reduction Act submission for the Form 1, the SEC estimated
that a respondent will incur an average burden of 880 hours to comply with Rule 6a-1 and file an
initial Form 1 with the Commission. As Form 1-N is a less comprehensive filing than Form 1, the
SEC estimates that a respondent will incur an average burden of 93 hours to comply with Rule 6a-4
and file an initial Form 1-N. The Commission estimates that the average internal cost per initial
filing will be approximately $26,028. This figure was derived in the following manner:

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60 hours of professional work at $392/hr3 =
33 hours of clerical work at $76/hr4 =

$23,520
$ 2,508
$26,028

Initial filings on Form 1-N by futures exchanges will 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 will not apply to such
entities on a prospective basis. The SEC believes that additional entities will file an initial Form 1N 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 1-N for would be 93 hours for a total
internal cost of compliance of $26,028.
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
Form 1, the SEC estimates that each exchange will 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 will file one amendment or update per year, but, because Form 1-N will be a
less comprehensive filing than Form 1, the SEC estimates that the average burden for filing each
amendment or update to Form 1-N will 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 internal cost of
compliance will be approximately $4,300 ((10 hours x $392) + (5 hours x $76) x 1 response).
Therefore, the SEC estimates that the total annual burden for submitting ad hoc amendments to
Form 1-N will be 60 hours (15 hours x 1 response x 4 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 Form 1-N, Exhibits A, B, C,
and E. The SEC estimates the average burden for each annual filing will be 15 hours, and each
three-year filing will be 20 hours. The Commission estimates that the average internal cost of
compliance for each annual filing will be approximately $4,300 ((10 hours x $392) + (5 hours x
$76)) and for each three year filing will be $6,260 ((15 hours x $392) + (5 hours x $76). 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
3

Figure for an Attorney is from SIFMA’s Management & Professional Earnings in the Securities
Industry 2013, 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

Figure for an Administrative Assistant is from SIFMA’s Office Salaries in the Securities Industry
2013, 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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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 will make approximately 12 such filings
annually. The SEC estimates that each exchange will incur an annual burden of 6 hours, for an
estimated internal cost of compliance of $456, with this requirement. These figures were derived
in the following manner: 0.5 hours of in-house clerical work x 12 filings = 6 hours, and 6 hours
x $76 / hour = $456. The Commission estimates that these four 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 24 hours (6 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) 60 hours for four 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) 24 hours for four respondents combined to prepare and submit supplementary materials
and monthly reports.
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) $400 in miscellaneous clerical expenses for four
respondents combined to prepare and submit amendments to Form 1-N required under Rule 6a4(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) $240 in
miscellaneous clerical expenses 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.

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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 will 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 $263/hour, 6 has a related cost of $10,520. The SEC also estimates that it will
devote approximately 10 hours of administrative time to review each Form 1-N which, at
$71/hour, 7 has a related cost of $710. The total cost to review each Form 1-N is $11,230. If the
SEC receives one Form 1-N, the total estimated cost to review this form is $11,230.
The SEC estimates that it will devote approximately 8 hours of professional time to
review amendments and updates to Form 1-N which, at $263/hour, has a related cost of $2,184
(($263 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
$71/hour, has a related cost of $284. The total cost to review amendments and updates to each
Form 1-N is $2,468. If the SEC receives four amendments to Forms 1-N, one from each
respondent as estimated above, the total estimated cost to review these forms is $9,872.
Thus, the SEC estimates that its aggregate annual costs to review amendments and updates
to Form 1-N filings will be $9,872 (four respondents x one amendment or update per year per
respondent x $2,468/amendment). In addition, the SEC estimates that its total operational cost to
review periodic information updates and monthly reports required by Rule 6a-4 will be
approximately $2,730 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 such staff time ($162.50 to review 1 Rule 6a-3
filing x .35 x 48 responses).
15.

Changes in Burden

The original estimates provided that after the first seven respondents filed, the SEC
believed 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 will 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 four Security Futures Product Exchanges are likely to continue making
amendments and updates to their Form 1-N and to continue providing periodic information and
monthly reports. The burden estimates above associated with amendments and updates to the Form
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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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 to omit the expiration date.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

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.