Securities Lawyer's Deskbook                          published by The University of Cincinnati College of Law

Rule 401 -- Definitions

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1. For purposes of this Regulation (17 CFR ß ß 242.400 through 242.406) only, the following terms shall have the meanings set forth in this section.
   
   
   1. Applicable margin rules and margin rules applicable to an account mean the rules and regulations applicable to financial relations between a security futures intermediary and a customer with respect to security futures and related positions carried in a securities account or futures account as provided in Rule 402(a) of this Regulation.
      
      
   2. Broker shall have the meaning provided in section 3(a)(4) of the Exchange Act.
      
      
   3. Contract multiplier means the number of units of a narrow-based security index expressed as a dollar amount, in accordance with the terms of the security future contract.
      
      
   4. Current market value means, on any day:
      
      
      1. With respect to a security future:
         
         
         1. If the instrument underlying such security future is a stock, theproduct of the daily settlement price of such security future as shown by any regularly published reporting or quotation service, and the applicable number of shares per contract; or
            
            
         2. If the instrument underlying such security future is a narrow-based security index, as defined in section 3(a)(55)(B) of the Exchange Act, the product of the daily settlement price of such security future as shown by any regularly published reporting or quotation service, and the applicable contract multiplier.
            
            
      2. With respect to a security other than a security future, the most recent closing sale price of the security, as shown by any regularly published reporting or quotation service. If there is no recent closing sale price, the security futures intermediary may use any reasonable estimate of the market value of the security as of the most recent close of business.
         
         
   5. Customer excludes an exempted person and includes:
      
      
      1. Any person or persons acting jointly:
         
         
         1. On whose behalf a security futures intermediary effects a security futures transaction or carries a security futures position; or
            
            
         2. Who would be considered a customer of the security futures intermediary according to the ordinary usage of the trade;
            
            
      2. Any partner in a security futures intermediary that is organized as a partnership who would be considered a customer of the security futures intermediary absent the partnership relationship; and
         
         
      3. Any joint venture in which a security futures intermediary participates and which would be considered a customer of the security futures intermediary if the security futures intermediary were not a participant.
         
         
   6. Daily settlement price means, with respect to a security future, the settlement price of such security future determined at the close of trading each day, under the rules of the applicable exchange, clearing agency, or derivatives clearing organization.
      
      
   7. Dealer shall have the meaning provided in section 3(a)(5) of the Exchange Act.
      
      
   8. Equity means the equity or margin equity in a securities or futures account, as computed in accordance with the margin rules applicable to the account and subject to adjustment under Rule 404(c), (d) and (e) of this Regulation.
      
      
   9. Exempted person means:
      
      
      1. A member of a national securities exchange, a registered broker or dealer, or a registered futures commission merchant, a substantial portion of whose business consists of transactions in securities, commodity futures, or commodity options with persons other than brokers, dealers, futures commission merchants, floor brokers, or floor traders, and includes a person who:
         
         
         1. Maintains at least 1000 active accounts on an annual basis for persons other than brokers, dealers, persons associated with a broker or dealer, futures commission merchants, floor brokers, floor traders, and persons affiliated with a futures commission merchant, floor broker, or floor trader that are effecting transactions in securities, commodity futures, or commodity options;
            
            
         2. Earns at least $ 10 million in gross revenues on an annual basis from transactions in securities, commodity futures, or commodity options with persons other than brokers, dealers, persons associated with a broker or dealer, futures commission merchants, floor brokers, floor traders, and persons affiliated with a futures commission merchant, floor broker, or floor trader; or
            
            
         3. Earns at least 10 percent of its gross revenues on an annual basis from transactions in securities, commodity futures, or commodity options with persons other than brokers, dealers, persons associated with a broker or dealer, futures commission merchants, floor brokers, floor traders, and persons affiliated with a futures commission merchant, floor broker, or floor trader.
            
            
      2. For purposes of paragraph (a)(9)(i) of this section only, persons affiliated with a futures commission merchant, floor broker, or floor trader means any partner, officer, director, or branch manager of such futures commission merchant, floor broker, or floor trader (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with such futures commission merchant, floor broker, or floor trader, or any employee of such a futures commission merchant, floor broker, or floor trader.
         
         
      3. A member of a national securities exchange, a registered broker or dealer, or a registered futures commission merchant that has been in existence for less than one year may meet the definition of exempted person based on a six-month period.
         
         
   10. Exempted security shall have the meaning provided in section 3(a)(12) of the Exchange Act.
       
       
   11. Floor broker shall have the meaning provided in Section 1a(16) of the CEA (7 U.S.C. 1a(16)).
       
       
   12. Floor trader shall have the meaning provided in Section 1a(17) of the CEA (7 U.S.C. 1a(17)).
       
       
   13. Futures account shall have the meaning provided in Exchange Act Rule 15c3-3(a).
       
       
   14. Futures commission merchant shall have the meaning provided in Section 1a of the CEA (7 U.S.C. 1a).
       
       
   15. Good faith, with respect to making a determination or accepting a statement concerning financial relations with a person, means that the security futures intermediary is alert to the circumstances surrounding such financial relations, and if in possession of information that would cause a prudent person not to make the determination or accept the notice or certification without inquiry, investigates and is satisfied that it is correct.
       
       
   16. Listed option means a put or call option that is:
       
       
       1. Issued by a clearing agency that is registered under section 17A of the Exchange Act or cleared and guaranteed by a derivatives clearing organization that is registered under Section 5b of the CEA (7 U.S.C. 7a-1); and
          
          
       2. Traded on or subject to the rules of a self-regulatory authority.
          
          
   17. Margin call means a demand by a security futures intermediary to a customer for a deposit of cash, securities or other assets to satisfy the required margin for security futures or related positions or a special margin requirement.
       
       
   18. Margin deficiency means the amount by which the required margin in an account is not satisfied by the equity in the account, as computed in accordance with Rule 404 of this Regulation.
       
       
   19. Margin equity security shall have the meaning provided in Regulation T.
       
       
   20. Margin security shall have the meaning provided in Regulation T.
       
       
   21. Member shall have the meaning provided in section 3(a)(3) of the Exchange Act, and shall include persons registered under section 15(b)(11) of such Act that are permitted to effect transactions on a national securities exchange without the services of another person acting as executing broker.
       
       
   22. Money market mutual fund means any security issued by an investment company registered under section 8 of the Investment Company Act of 1940 that is considered a money market fund under Rule 2a-7 of such Act.
       
       
   23. Persons associated with a broker or dealer shall have the meaning provided in section 3(a)(18) of the Exchange Act.
       
       
   24. Regulation T means Regulation T promulgated by the Board of Governors of the Federal Reserve System, 12 CFR part 220, as amended from time to time.
       
       
   25. Regulation T collateral value, with respect to a security, means the current market value of the security reduced by the percentage of required margin for a position in the security held in a margin account under Regulation T.
       
       
   26. Related position, with respect to a security future, means any position in an account that is combined with the security future to create an offsetting position as provided in Rule 403(b)(2) of this Regulation.
       
       
   27. Related transaction, with respect to a position or transaction in a security future, means:
       
       
       1. Any transaction that creates, eliminates, increases or reduces an offsetting position involving a security future and a related position, as provided in Rule 403(b)(2) of this Regulation; or
          
          
       2. Any deposit or withdrawal of margin for the security future or a related position, except as provided in Rule 405(b) of this Regulation.
          
          
   28. Securities account shall have the meaning provided in Echange Act Rule 15c3-3(a).
       
       
   29. Security futures intermediary means any creditor as defined in Regulation T with respect to its financial relations with any person involving security futures.
       
       
   30. Self-regulatory authority means a national securities exchange registered under section 6 of the Exchange Act, a national securities association registered under section 15A of such Act, a contract market registered under Section 5 of the CEA (7 U.S.C. 7) or Section 5f of the CEA (7 U.S.C. 7b-1), or a derivatives transaction execution facility registered under Section 5a of the CEA (7 U.S.C. 7a).
       
       
   31. Special margin requirement shall have the meaning provided in Rule 404(e)(1)(ii) of this Regulation.
       
       
   32. Variation settlement means any credit or debit to a customer account, made on a daily or intraday basis, for the purpose of marking to market a security future or any other contract that is:
       
       
       1. Issued by a clearing agency that is registered under section 17A of the Exchange Act or cleared and guaranteed by a derivatives clearing organization that is registered under Section 5b of the CEA (7 U.S.C. 7a-1); and
          
          
       2. Traded on or subject to the rules of a self-regulatory authority.
          
          
2. Terms used in this Regulation and not otherwise defined in this section shall have the meaning set forth in the margin rules applicable to the account.
   
   
3. Terms used in this Regulation and not otherwise defined in this section or in the margin rules applicable to the account shall have the meaning set forth in the Exchange Act and the CEA; if the definitions of a term in the Act and the CEA are inconsistent as applied in particular circumstances, such term shall have the meaning set forth in rules, regulations, or interpretations jointly promulgated by the Commission and the CFTC.
   
   

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