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Proposed Rule

Notice Registration as a Futures Commission Merchant or Introducing Broker for Certain Securities Brokers or Dealers

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Information about this document as published in the Federal Register.

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AGENCY:

Commodity Futures Trading Commission.

ACTION:

Proposed rules.

SUMMARY:

In accordance with certain provisions of the Commodity Futures Modernization Act of 2000 (“CFMA”), the Commodity Futures Trading Commission (“Commission”) is proposing to amend Rule 3.10, which specifies the information that various applicants for registration must file. The amendment would provide for notice registration as a futures commission merchant (“FCM”) or introducing broker (“IB”), as applicable, in the case of a broker or dealer (“BD”) registered with the Securities and Exchange Commission (“SEC”) that, among other things, limits its involvement with commodity futures contracts to security futures products. In accordance with Start Printed Page 27477certain other provisions of the CFMA, the Commission is proposing to amend Rule 170.15, which requires each registered FCM to be a member of a registered futures association. The amendment would exempt notice-registered BDs from this requirement.

DATES:

Comments must be received by June 18, 2001.

ADDRESSES:

Comments on the proposed rule amendments may be sent to Jean A. Webb, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. In addition, comments may be sent by facsimile transmission to (202) 418-5521, or by electronic mail to secretary@cftc.gov. Reference should be made to “Notice Registration as a Futures Commission Merchant or Introducing Broker for Certain Securities Brokers or Dealers.”

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FOR FURTHER INFORMATION CONTACT:

Barbara S. Gold, Assistant Chief Counsel, or Lawrence B. Patent, Associate Chief Counsel, Division of Trading and Markets, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581, (202) 418-5450, electronic mail: bgold@cftc.gov, or lpatent@cftc.gov.

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SUPPLEMENTARY INFORMATION:

I. Background

On December 21, 2000, the CFMA was signed into law.[1] Among other things, the CFMA removed the restriction in the Commodity Exchange Act (“CEA”) on the trading of futures contracts on individual equity securities and narrow-based indices of equity securities.[2] Under the revised law, security futures products [3] may be traded on a designated contract market or on a registered derivatives transaction execution facility.[4]

Section 4d of the CEA provides that any person who engages in soliciting or accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market or derivatives transaction execution facility—e.g., for a security futures product—must be registered with the Commission as (1) an FCM, if it also accepts any money, securities, or property, or extends credit in lieu thereof, to margin, guarantee, or secure contracts, or (2) otherwise as an IB.[5] Section 4f(a)(1) of the CEA provides that application for registration as an FCM or IB “shall be made in such form and manner as prescribed by the Commission.” [6] Pursuant to this authority, the Commission adopted Rule 3.10, which currently requires that an applicant for registration as an FCM or IB file a Form 7-R [7] along with a Form 1-FR-FCM or Form 1-FR-IB, as applicable.[8] In addition, Rule 170.15 requires that each person required to register as an FCM must become and remain a member of at least one registered futures association (i.e., NFA).

However, as a result of the CFMA, new Section 4f(a)(2) of the CEA now provides that notwithstanding Section 4f(a)(1), any BD that is registered with the SEC [9] shall be registered as an FCM or IB, as applicable, “effective contemporaneously with the submission of notice,” if—

(A) the broker or dealer limits its solicitation of orders, acceptance of orders, or execution of orders, or placing of orders on behalf of others involving any contracts of sale of any commodity for future delivery, on or subject to the rules of any contract market or registered derivatives transaction execution facility to security futures products;

(B) the broker or dealer files written notice with the Commission in such form as the Commission, by rule, may prescribe containing such information as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors;

(C) the registration of the broker or dealer is not suspended pursuant to an order of the Securities and Exchange Commission; and

(D) the broker or dealer is a member of a national securities association registered pursuant to section 15A(a) of the Securities Exchange Act of 1934.

Moreover, new Section 4f(a)(4)(C)(i) of the CEA provides that a BD that is registered as an FCM pursuant to notice registration shall not be required to become a member of a registered futures association. Accordingly, by this Federal Register release, the Commission is proposing to amend Rule 3.10 to provide for FCM and IB notice registration thereunder and to amend Rule 170.15 to exclude from its scope BDs notice-registered as FCMs.[10]

II. Proposed Amendments

A. Rule 3.10

Rule 3.10 currently is structured as follows: paragraph (a), “Application for registration,” contains the information that an application for registration under the rule must contain; paragraph (b), “Duration of registration,” generally provides that registration under paragraph (a) will continue until withdrawal or revocation; paragraph (c), Start Printed Page 27478“Exemption from registration for certain persons,” provides an exemption from registration as an FCM for certain persons; and paragraph (d), “Annual filing,” prescribes an annual review of a printout of registration information on file with NFA for persons registered pursuant to paragraph (a).

The Commission is proposing to amend Rule 3.10 in several ways. First, paragraph (a)(1)(i) would be revised to alert applicants for registration that there is an alternative registration procedure under new Rule 3.10(a)(3). Second, paragraph (a)(3) would be added. Captioned “Notice registration as a futures commission merchant or introducing broker for certain securities brokers or dealers,” it would add an exception to the FCM and IB registration requirements of Rule 3.10(a) for BDs who meet the criteria of new Section 4f(a)(2) of the CEA. Registration under paragraph (a)(3) would be made “by following such procedures for notice registration as may be specified” by NFA. This registration would be effective upon the filing of the notice prescribed by NFA, as mandated by Section 252(b)(2) of the CFMA. Finally, paragraph (d) would be amended to relieve these notice registrants from the annual update requirement.

The Commission's proposal is consistent with the Commission's previous delegation of registration authority to NFA under Rule 3.2 and through various Commission orders. The Commission believes that its proposal is also consistent with Section 125 of the CFMA, which requires the Commission to report to Congress later this year on a study of the CEA and the Commission's rules, regulations and orders governing the conduct of persons required to be registered under the CEA. One area that the study must identify is “the regulatory functions the Commission currently performs that can be delegated to a registered futures association * * * and the regulatory functions that the Commission has determined must be retained and the reasoning therefor.”

As referred to above, notice registrant FCMs and IBs are exempt from NFA membership.[11] Although the Commission cannot require NFA to perform registration functions for persons that are not NFA members,[12] the Commission may authorize NFA to perform any registration function.[13] Commission staff have discussed this matter with NFA, and NFA has agreed to undertake the function of processing notice registrations for BDs as discussed herein. If the Commission adopts these amendments to Rule 3.10, it expects to issue an order authorizing NFA to perform this function.

B. Rule 170.15

Section 17(m) of the CEA states that—

[n]otwithstanding any other provision of law, the Commission may approve rules of futures associations that, directly or indirectly, require persons eligible for membership in such associations to become members of at least one such association upon a determination by the Commission that such rules are necessary or appropriate to achieve the purposes and objectives of [the CEA].

Pursuant to this provision, the Commission adopted Rule 170.15, which provides that each person required to register as an FCM must become and remain a member of at least one registered futures association.[14] However, and as noted above, because new section 4f(a)(4)(C)(i) of the CFMA exempts BDs who notice-register as FCMs from the requirement to become a member of a registered futures association, the Commission is proposing to amend Rule 170.15. The amendment would add a provision to exempt FCMs registered in accordance with Rule 3.10(a)(3) from the requirement to become and remain a member of a registered futures association.

III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (“RFA”), 5 U.S.C. 601-611 (1994), requires that agencies, in proposing rules, consider the impact of those rules on small businesses. The rule amendments discussed herein would affect persons seeking to be registered under notice registration procedures as an FCM or IB pursuant to new Section 4f(a)(2). The Commission has previously established certain definitions of “small entities” to be used by the Commission in evaluating the impact of its rules on such entities in accordance with the RFA.[15] The Commission previously determined that registered FCMs are not small entities for the purpose of the RFA.[16] With respect to IBs, the Commission has stated that it would evaluate within the context of a particular rule proposal whether all or some affected IBs would be considered to be small entities and, if so, the economic impact on them of any rule.[17]

These amendments would provide exemptive relief from provisions of the Commission's regulations that otherwise would be applicable to such persons. Consequently, the Commission believes that the adoption of these rule amendments would reduce the burden of compliance by persons seeking to be registered as an FCM or IB. Accordingly, the Acting Chairman of the Commission hereby certifies, pursuant to 5 U.S.C. 605(b), that the proposed rule will not have a significant economic impact on a substantial number of small entities. Nonetheless, the Commission specifically requests comment on the impact this proposed rule may have on small entities.

B. Paperwork Reduction Act

This proposed rulemaking contains information collection requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).[18] The Commission has submitted a copy of this part to the Office of Management and Budget (“OMB”) for its review.

Collection of Information

Registration of future commission merchants, introducing brokers, commodity trading advisors, commodity pool operators and leverage transaction merchants, OMB Control Number 3038-0023.

The burden associated with the proposed addition of Rule 3.10(a)(3) is estimated to be 1,000 hours, which will result from the notice registration as an FCM or IB of various persons who currently are registered as BDs with the SEC.

The estimated burden of the proposed new rule was calculated as follows:

Estimated number of respondents: 5,000.

Reports annually by each respondent: 1.

Total annual Responses: 5,000.

Estimated average Number of Hours Per Response: 2.

Estimated Total Number of Hours of Annual Burden in Fiscal Year: 1,000.

There are no paperwork burdens associated with the proposed amendments to Rule 3.10(d), which would clarify that the annual filing prescribed therein does not apply to notice-registered BDs, or to Rule 170.15, which would exclude notice-registered BDs from the requirement that each registered FCM must become and remain a member of NFA.

Organizations and individuals desiring to submit comments on the Start Printed Page 27479information collection requirements should direct them to the Office of Information and Regulatory Affairs, OMB, Room 10235 New Executive Building, Washington, DC 20503, Attention: Desk Officer for the Commodity Futures Trading Commission.

The Commission considers comments by the public on this proposed collection of information in—

  • Evaluating whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have a practical use;
  • Evaluating the accuracy of the Commission's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
  • Enhancing the quality, usefulness, and clarity of the information to be collected; and
  • Minimizing the burden of collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submission of responses.

OMB is required to make a decision concerning the collection of information contained in these proposed regulations between 30 and 60 days after publication of this document in the Federal Register. A comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. This does not affect the deadline for the public to comment to the Commission on the proposed regulations.

Copies of the information collection submission to OMB are available from the CFTC Clearance Officer, 1155 21st Street, NW, Washington, DC 20581, (202) 418-5160.

C. Cost-Benefit Analysis

Section 119 of the CFMA amended Section 15 of the CEA to require that the Commission, before promulgating a regulation under the CEA or issuing an order, consider the costs and benefits of the Commission's action in light of five criteria.[19] The main considerations relevant to this proposal are the first two considerations set forth in the CEA, “protection of market participants and the public” and “efficiency, competitiveness and financial integrity of the futures markets.” The Commission believes that persons who are registered as BDs with the SEC are appropriate subjects for notice registration where their futures-related activity is restricted to security futures products. The Commission also believes that these additional registrants may promote the efficiency and competitiveness of those futures markets on which security future products may be traded and that their presence as intermediaries in these markets may serve to promote the financial integrity of those markets. The Commission further notes that the CFMA specifically mandates that registered BDs be noticed-registered with the Commission as an FCM or IB.

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List of Subjects

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PART 3—REGISTRATION

1. The authority citation for part 3 continues to read as follows:

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Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21, 23.

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2. Section 3.10 is amended by revising paragraph (a)(1)(i), by adding a new paragraph (a)(3) and by revising the first sentence of paragraph (d), to read as follows:

Registration of futures commission merchants, introducing brokers, commodity trading advisors, commodity pool operators and leverage transaction merchants.

(a) Application for registration. (1)(i) Except as provided in paragraph (a)(3) of this section, application for registration as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator or leverage transaction merchant must be on Form 7-R, completed and filed with the National Futures Association in accordance with the instructions thereto.

* * * * *

(3) Notice registration as a futures commission merchant or introducing broker for certain securities brokers or dealers. (i) Any broker or dealer that is registered with the Securities and Exchange Commission may be registered as a futures commission merchant or introducing broker, as applicable, by following such procedures for notice registration as may be specified by the National Futures Association, if—

(A) The broker or dealer limits its solicitation of orders, acceptance of orders, or execution of orders, or placing of orders on behalf of others involving any contracts of sale of any commodity for future delivery, on or subject to the rules of any contract market or registered derivatives transaction execution facility, to security futures products as defined in section 1a(32) of the Act;

(B) The registration of the broker or dealer is not suspended pursuant to an order of the Securities and Exchange Commission; and

(C) The broker or dealer is a member of a national securities association registered pursuant to section 15A(a) of the Securities Exchange Act of 1934.

(ii) The registration will be effective upon the filing of the notice prescribed by the National Futures Association in accordance with the instructions thereto.

* * * * *

(d) Annual filing. Any person registered as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator or leverage transaction merchant in accordance with paragraph (a)(1) and (a)(2) of this section must file with the National Futures Association a Form 7-R, completed in accordance with the instructions thereto, annually on a date specified by the National Futures Association. * * *

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PART 170—REGISTERED FUTURES ASSOCIATIONS

3. The authority citation for part 170 continues to read as follows:

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Authority: 7 U.S.C. 6p, 12a and 21, unless otherwise noted.

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Subpart C—Membership in a Registered Futures Association

4. Section 170.15 is revised to read as follows:

Futures commission merchants.

(a) Except as provided in paragraph (b) of this section, each person required to register as a futures commission merchant must become and remain a member of at least one futures Start Printed Page 27480association which is registered under section 17 of the Act and which provides for the membership therein of such futures commission merchant, unless no such futures association is so registered.

(b) The requirements of paragraph (a) of this section shall not apply to a futures commission merchant registered in accordance with § 3.10(a)(3) of this chapter.

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Issued in Washington, DC on May 14, 2001 by the Commission.

Edward W. Colbert,

Deputy Secretary of the Commission.

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Footnotes

1.  Pub. L. No. 106-554, 114 Stat. 2763. The text of the CFMA may be accessed on the Internet at http://agriculture.house.gov/​txt5660.pdf.

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2.  See Section 251(a) of the CFMA. This trading previously had been prohibited by Section 2(a)(1)(B)(v) of the CEA.

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3.  The term “security futures product” is defined in Section 1a(32) of the CEA to mean “a security future or any put, call, straddle, option, or privilege on any security future.” The term “security future” is defined in Section 1a(31) of the CEA. Because the CFMA also provides that options on security futures cannot be traded until at least December 21, 2003, security futures are the only security futures product that may be available for trading during the next 31 months.

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4.  The CFMA also specifically prescribes certain dates on which security futures trading can commence. Specifically, principal-to-principal transactions between institutions cannot commence until August 21, 2001 and retail transactions cannot commence until December 21, 2001. Both starting dates are conditioned upon the registration of a futures association (i.e., National Futures Association (“NFA”)) as a national securities association under the Securities Exchange Act of 1934 (“ ‘34 Act”). Section 202(a) of the CFMA; Section 6(g)(5) of the '34 Act.

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5.  See Sections 1a(20) and (23) of the CEA, which define the terms “futures commission merchant” and “introducing broker,” respectively.

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6.  Prior to the enactment of the CFMA, this provision was found in Section 4f(a) of the CEA. The CFMA amended Section 4(f) by redesignating paragraph (a) as paragraph (a)(1) and by adding new paragraphs (a)(2) and (a)(3) (Section 252(b)(2) of the CFMA) and (a)(4) (Section 252(c) of the CFMA).

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7.  Rule 3.10(a)(1)(i). The Form 7-R, which requires general information such as a list of the applicant's principals and the applicant's disciplinary history, must be completed and filed with NFA in accordance with the instructions thereto. NFA is registered with the Commission as a registered futures association pursuant to Section 17 of the CEA. By Rule 3.2 and various orders issued by the Commission, the Commission has delegated to NFA the authority to register, among other persons, FCMs and IBs. Commission rules referred to herein are found at 17 CFR Ch. I (2001).

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8.  Rule 3.10(a)(1)(ii). The Form 1-FR (-FCM or -IB) includes detailed financial statements and schedules that display the applicant's financial condition. Where the applicant is registered with the SEC as a BD, it may accompany its Form 7-R with a copy of its Financial and Operational Combined Uniform Single Report under the '34 Act, Part II or Part IIA. See Rule 1.10(h).

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9.  Because the CFMA speaks in terms of a “broker or dealer,” the term “BD” as used in this release applies equally to a broker, a dealer or a person registered as both a broker and a dealer.

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10.  Section 4k(1) of the CEA generally requires each person who is an associated person (“AP”) of an FCM or IB to register as such. Rule 3.12 generally requires an applicant for registration as an AP to file a Form 8-R, which requires basic biographical information, along with a sponsor's certification. It is not necessary for the Commission to similarly propose notice registration under Rule 3.12 for the APs of those FCMs and IBs who would be subject to the proposed notice registration under Rule 3.10, because the CFMA exempts these APs from registration altogether. Specifically, Section 252(d) of the CFMA amends Section 4(k) of the CEA to provide that:

Any associated person of a broker or dealer that is registered with the Securities and Exchange Commission, and who limits its solicitation of orders, acceptance of orders, or execution of orders, or placing of orders on behalf of others involving any contracts of sale of any commodity for future delivery or any options on such a contract, on or subject to the rules of any contract market or registered derivatives transaction execution facility to security futures products, shall be exempt from [Section 4k(1)] of this Act and the rules thereunder.

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11.  Section 252(c) of the CFMA; Section 4f(a)(4)(C) of the CEA.

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12.  See Section 17(o)(1) of the CEA.

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13.  Sections 8a(10) and 17(o)(2) of the CEA.

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14.  NFA is the only registered futures association.

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15.  47 FR at 18618-21 (April 30, 1982).

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16.  47 FR at 18619-20.

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17.  47 FR at 18618, 18620.

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19.  These considerations include: (A) protection of market participants and the public; (B) efficiency, competitiveness, and financial integrity of futures markets; (C) price discovery; (D) sound risk management practices; and (E) other public interest considerations.

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[FR Doc. 01-12489 Filed 5-16-01; 8:45 am]

BILLING CODE 6351-01-P