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2010-456

  • FR Doc 2010-456[Federal Register: January 20, 2010 (Volume 75, Number 12)]

    [Proposed Rules]

    [Page 3281-3330]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr20ja10-26]

    [[Page 3281]]

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    Part II

    Commodity Futures Trading Commission

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    17 CFR Parts 1, 3, 4, et al.

    Regulation of Off-Exchange Retail Foreign Exchange Transactions and

    Intermediaries; Proposed Rule

    [[Page 3282]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 1, 3, 4, 5, 10, 140, 145, 147, 160, and 166

    RIN 3038-AC61

    Regulation of Off-Exchange Retail Foreign Exchange Transactions

    and Intermediaries

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rules.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

    ``CFTC'') is proposing to adopt a comprehensive regulatory scheme

    (``Proposal'') to implement the CFTC Reauthorization Act of 2008

    (``CRA'') \1\ with respect to off-exchange transactions in foreign

    currency with members of the retail public (i.e., ``retail forex

    transactions''). The Commodity Exchange Act, as amended by the CRA,

    generally provides that the Commission's jurisdiction extends to

    contracts of sale of a commodity for future delivery (or an option on

    such a contract) or an option (other than an option executed or traded

    on a national securities exchange), and to certain leveraged or

    margined contracts in foreign currency that are offered to or entered

    into with retail customers. The Commission is proposing a scheme that

    would put in place requirements for, among other things, registration,

    disclosure, recordkeeping, financial reporting, minimum capital, and

    other operational standards, based on both the CFTC's existing

    regulations for commodity interest transactions and commodity interest

    intermediaries, as well as rules of the National Futures Association

    (``NFA'') that are already existing with respect to retail forex

    transactions offered by NFA's members. Additionally, the Proposal would

    amend existing regulations as needed to clarify their application to,

    and inclusion in, the new regulatory scheme for retail forex.

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    \1\ Food, Conservation, and Energy Act of 2008, Pub. L. 110-246,

    122 Stat. 1651, 2189-2204 (2008).

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    DATES: Comments must be received on or before March 22, 2010.

    ADDRESSES: You may submit comments, identified by RIN 3038-AC61, by any

    of the following methods:

    Federal eRulemaking Portal: http://www.regulations.gov/

    search/index.jsp. Follow the instructions for submitting comments.

    E-mail: secretary@cftc.gov. Include ``Regulation of Retail

    Forex'' in the subject line of the message.

    Fax: (202) 418-5521.

    Mail: Send to David Stawick, Secretary, Commodity Futures

    Trading Commission, 1155 21st Street, NW., Washington, DC 20581.

    Courier: Same as Mail above.

    All comments received will be posted without change to http://

    www.cftc.gov, including any personal information provided.

    FOR FURTHER INFORMATION CONTACT: For information regarding financial

    and related reporting requirements, contact: Thomas Smith, Chief

    Accountant and Deputy Director, Division of Clearing and Intermediary

    Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone

    number: 202-418-5495; facsimile number: 202-418-5547; and electronic

    mail: tsmith@cftc.gov. Jennifer Bauer, Special Counsel, Division of

    Clearing and Intermediary Oversight, Division of Clearing and

    Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581.

    Telephone number: 202-418-5472; facsimile number: 202-418-5547; and

    electronic mail: jbauer@cftc.gov.

    For all other information contact: William Penner, Deputy Director,

    Division of Clearing and Intermediary Oversight, 1155 21st Street, NW.,

    Washington, DC 20581. Telephone number: 202-418-5450; facsimile number:

    202-418-5547; and electronic mail: wpenner@cftc.gov. Christopher

    Cummings, Special Counsel, Division of Clearing and Intermediary

    Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone

    number (202) 418-5450; facsimile number: 202-418- 5547; and electronic

    mail: ccummings@cftc.gov.

    Peter Sanchez, Special Counsel, Division of Clearing and

    Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581.

    Telephone number (202) 418-5450; facsimile number: 202-418-5547; and

    electronic mail: psanchez@cftc.gov.

    SUPPLEMENTARY INFORMATION: The CRA provides the Commission with broad

    authority to ``make, promulgate and enforce such rules and regulations

    as, in the judgment of the Commission, are reasonably necessary to

    effectuate any of the provisions of [the Commodity Exchange] Act'' in

    connection with off-exchange foreign currency futures, options, and

    options on futures, as well as leveraged off-exchange contracts offered

    to or entered into with retail customers.\2\ The Commission is given

    similarly broad authority to promulgate and enforce rules regarding

    registration of persons who solicit, exercise discretionary trading

    authority or operate or solicit funds in connection with any of these

    types of transactions.\3\

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    \2\ See, 7 U.S.C. 2(c)(2)(B)(v) and 7 U.S.C.

    2(c)(2)(C)(ii)(III).

    \3\ See, 7 U.S.C. 2(c)(2)(B)(iv)(III) and 7 U.S.C.

    2(c)(2)(C)(iii)(III).

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    Pursuant to this authority, the Commission is proposing a scheme

    that would put in place requirements for, among other things,

    registration, disclosure, recordkeeping, financial reporting, minimum

    capital, and other operational standards, based on both the CFTC's

    existing regulations for commodity interest transactions and commodity

    interest intermediaries, as well as rules of the National Futures

    Association (``NFA'') that are already existing with respect to retail

    forex transactions offered by NFA's members.

    Subject to certain exceptions (e.g., for certain regulated

    financial intermediaries not under the Commission's jurisdiction as

    established in the CRA), the Proposal would require persons offering to

    be or acting as counterparties to retail forex transactions but not

    primarily or substantially engaged in the exchange traded futures

    business, to register as retail foreign exchange dealers (``RFEDs'')

    with the CFTC. Registered futures commission merchants (``FCMs'') that

    are ``primarily or substantially'' (as defined in the Proposal) engaged

    in the activities set forth in the Act's definition of an FCM would be

    permitted to engage in retail forex transactions without also

    registering as RFEDs.

    The Proposal would further require certain entities other than

    RFEDs and FCMs that intermediate retail forex transactions to register

    with the Commission as introducing brokers (``IBs''), commodity trading

    advisors (``CTAs''), commodity pool operators (``CPOs''), or associated

    persons (``APs'') of such entities, as appropriate, and to be subject

    to the Act and regulations applicable to that registrant category. In

    addition, the Proposal would require any IB that introduces retail

    forex transactions to an RFED or FCM to be guaranteed by that RFED or

    FCM.

    The Proposal would also implement the $20 million minimum net

    capital standard established in the CRA for registering as an RFED or

    offering retail forex transactions as an FCM; propose an additional

    volume-based minimum capital threshold calculated on the amount an FCM

    or RFED owes as counterparty to retail forex transactions; and require

    RFEDs or FCMs engaging in retail forex transactions to collect security

    deposits in a minimum amount in order to prudentially limit the

    leverage available to their retail

    [[Page 3283]]

    customers on such transactions at 10 to 1.

    I. Background

    A. The Commodity Futures Trading Commission Act of 1974

    Congress created the Commission in 1974 as an independent agency

    with the mandate to regulate commodity futures and option markets in

    the United States by the enactment of the Commodity Futures Trading

    Commission Act of 1974.\4\ While the bill was being considered, the

    Department of the Treasury (``Treasury'') sent a letter to the Senate

    Committee with jurisdiction over the bill, expressing concerns that

    Treasury had regarding the effect that passage would have on the off-

    exchange foreign currency (``forex'') market that existed at the time

    between large, institutional customers.\5\ The letter contained

    proposed language for the bill which would have maintained the status

    quo for institutional off-exchange forex trading, leaving jurisdiction

    over on-exchange trading in futures and options contracts on forex with

    the newly-created Commission. The bill was subsequently amended to add

    the suggested language contained in Treasury's letter, which was

    intended to give the Commission jurisdiction over retail forex

    transactions and to exclude from the Commission's jurisdiction the off-

    exchange, institutional ``interbank'' market in foreign currencies.

    This language, which has come to be known as the ``Treasury

    Amendment,'' provided that:

    \4\ Public Law 93-643, 88 Stat. 1389 (1974).

    \5\ See, Letter from Donald L.E. Ritger, Acting General Counsel,

    Department of the Treasury, to the Hon. Herman E. Talmadge (July 30,

    1974), reprinted at 1974 U.S.C.C.A.N. 5843, 5887-89.

    Nothing in this Act shall be deemed to govern or in any way be

    applicable to transactions in foreign currency * * * unless such

    transactions involve the sale thereof for future delivery conducted

    on a board of trade.\6\

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    \6\ Id. at 51.

    As is discussed below, over time, and on numerous occasions, the

    Commission and the courts have opined on the proper boundaries of this

    exclusion.

    The Commission first addressed the possible scope of the Treasury

    Amendment with regard to off-exchange transactions in securities issued

    by the Government National Mortgage Association (``GNMA''). In an

    interpretive letter issued by the Commission's Office of General

    Counsel, Commission staff stated that the remarks by the Senate

    Committee were

    an expression that regulation by the Commission is unnecessary

    where there exists an informal market among institutional

    participants in transactions for future delivery in the specified

    financial instruments only so long as it is supervised by those

    agencies having regulatory responsibility over those participants.

    However, where that market is not supervised and where those

    transactions are conducted with participation by members of the

    general public, we do not understand the Committee to have intended

    that a regulatory gap should exist. In these circumstances, we

    believe the Commodity Exchange Act should be construed broadly to

    assure that the public interest will be protected by Commission

    regulation of those transactions.\7\

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    \7\ Dealers in GNMA Certificates as a Board of Trade, CFTC Staff

    Interpretive Letter No. 77-12, [1977-1980 Transfer Binder] Comm.

    Fut. L. Rep. (CCH) ] 20,467 (Aug. 17, 1977).

    The scope of the exclusion, again with regard to off-exchange

    transactions in GNMA securities, was addressed by the U.S. Court of

    Appeals for the Seventh Circuit (``Seventh Circuit'') when it

    determined that the Treasury Amendment did not exclude options on

    government securities from the Commission's authority.\8\ Specifically,

    the court determined that although trading in GNMA securities was

    excluded from the Commission's jurisdiction, trading in options on such

    instruments was within the Commission's authority. As the court stated:

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    \8\ Board of Trade of Chicago v. SEC, 677 F. 2d 1137, 1154 (7th

    Cir. 1982), vacated as moot, 459 U.S. 1026 (1982).

    From the legislative history, it is quite clear that the

    Treasury Amendment was adopted by Congress only to prevent dual

    regulation by the CFTC and bank regulatory agencies of the banks and

    other sophisticated institutions that ordinarily trade in financial

    instruments.\9\

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    \9\ Id. at 1154.

    Following that discussion, in 1985, the Commission issued a

    Statutory Interpretation concerning the Treasury Amendment that

    specifically dealt with forex.\10\ Responding to reports that forex

    futures contracts were being offered to retail customers on an off-

    exchange basis, under the assumption that such transactions were

    excluded from the Commission's jurisdiction, the Commission reaffirmed

    and republished its views, as follows:

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    \10\ Trading in Foreign Currencies for Future Delivery, 50 FR

    42983 (Oct. 23, 1985).

    [T]he Commission wishes to make very clear that any marketing to

    the general public of futures transactions in foreign currencies

    conducted outside the facilities of a contract market is strictly

    outside the scope of the [Treasury] Amendment. As a result, such an

    off-exchange offer or sale of futures contracts involving foreign

    currencies is unlawful under section 4(a) of the Act, 7 U.S.C. 6(a)

    (1982).\11\

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    \11\ Id. at 42985.

    The boundaries of the Treasury Amendment were again tested in

    Salomon Forex v. Tauber,\12\ where a sophisticated investor sought to

    invalidate a multi-million dollar trading debt by claiming that the

    Treasury Amendment only excluded spot or forward forex transactions

    from the Commission's jurisdiction, and that trading in off-exchange

    futures and options were within the Commission's regulatory authority.

    If such transactions were deemed to be within the Commission's

    authority, then the transactions could only occur legally on an

    approved exchange. The Court determined that the Treasury Amendment

    excluded off-exchange trading in futures and options as well as

    ``spot'' and ``forward'' transactions from the Commission's authority,

    if it involved ``sophisticated, large-scale foreign currency traders.''

    \13\ Although this holding has sometimes been misinterpreted to imply

    that off-exchange forex transactions with the general public were

    outside the Commission's jurisdiction, this holding concerned only

    large-scale traders and banks that made up the informal network of the

    foreign currency ``interbank'' market. Indeed, the Court itself noted

    that: ``[t]his case does not involve mass marketing to small investors,

    which would appear to require trading through an exchange and our

    holding in no way implies that such marketing is exempt from the CEA.''

    \14\

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    \12\ 795 F. Supp. 768 (E.D. Va. 1992), aff'd, 8 F.3d 966 (4th

    Cir. 1993).

    \13\ Id. at 978.

    \14\ Id.

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    B. The Futures Trading Practices Act of 1992

    The Futures Trading Practices Act of 1992 reorganized certain

    sections of the Commodity Exchange Act, 7 U.S.C. 1, et seq. (2000) (the

    ``Act'') and gave the Commission significant exemptive authority over

    the activities of a wide variety of persons, including FCMs, CTAs, and

    CPOs.

    It was pursuant to this exemptive authority that the Commission

    addressed some aspects of the over-the-counter (``OTC'') markets by

    adopting Part 35 of its regulations, which provides an exemption from

    regulation for certain swap agreements.\15\ However, the Commission did

    not use its newly-

    [[Page 3284]]

    granted exemptive authority in the context of retail forex.\16\

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    \15\ See, Exemption for Certain Swap Agreements, 58 FR 5587

    (Jan. 22, 1993).

    \16\ See, e.g., Sections 4(c) and 4(d) of the Act, 7 U.S.C. 6(c)

    and 6(d).

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    Rather, the Commission's efforts were directed to combating forex

    fraud activities through increased enforcement and public awareness. In

    response to increased fraud activity in the forex markets, the CFTC

    issued a fraud advisory to the public on March 30, 1998.\17\

    Notwithstanding the Commission's guidance and the legislative history,

    the ambiguity of the Treasury Amendment continued to present

    opportunities for defendants to challenge the Commission's jurisdiction

    in the courts, which consumed much of the Commission staff's time and

    resources.\18\ Unfortunately, these challenges would persist until the

    adoption of the Commodity Futures Modernization Act of 2000

    (``CFMA'').\19\

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    \17\ Fraud Advisory from the CFTC: Foreign Currency Trading

    (Forex) Fraud, available at: http://www.cftc.gov/customerprotection/

    fraudawarenessandprevention/fraudadvisories/fraudadv_forex.html.

    The Commission also issued brochures to alert customers to the

    possible scams involving forex fraud. See CFTC Brochure on Forex

    Fraud, available at: http://www.cftc.gov/enf/enf-forex.htm and

    http://www.cftc.gov/stellent/groups/public/

    @cpfraudawarenessandprotection/documents/file/enfforexbrochure.pdf

    (last visited Oct. 15, 2009).

    \18\ For instance, in Dunn & Delta Consultants, Inc. v. CFTC,

    519 U.S. 465, 469 (1997), the U.S. Supreme Court held that foreign

    currency options were ``transactions in foreign currency'' within

    the meaning of the Treasury Amendment.

    \19\ Consolidated Appropriations Act of 2001, Public Law 106-

    554, App. E, 114 Stat. 2763 (2000), available at Commodity Futures

    Modernization Act of 2000, [2000-2002 Transfer Binder] Comm. Fut. L.

    Rep. (CCH) ] 28,433 (Dec. 21, 2000).

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    Under the Treasury Amendment, retail forex transactions were

    excluded from the Commission's jurisdiction unless they were conducted

    on a ``board of trade.'' This broad phrase caused further confusion

    when courts tried to interpret its meaning in order to delineate where

    the Commission's jurisdiction ended. The U.S. Court of Appeals for the

    Ninth Circuit (``Ninth Circuit'') relied on the language in the Senate

    Committee report to interpret the clause and believed that a proper

    reading of the Treasury Amendment excluded all off-exchange forex

    transactions--even with retail customers--from the Commission's

    jurisdiction and that the Commission only had jurisdiction over forex

    transactions traded on organized exchanges.\20\ Other courts

    interpreting the same clause came to the conclusion that retail off-

    exchange forex transactions were within the Commission's jurisdiction

    and that the legislative history indicates that only large

    institutional trades were intended to be excluded from the Commission's

    oversight.\21\

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    \20\ CFTC v. Frankwell Bullion Ltd., 99 F. 3d 299 (9th Cir.

    1996).

    \21\ See, CFTC v. Baragosh, 278 F.3d 319 (4th Cir. 2002), which

    relied on the Conference Committee Report, not mentioned in

    Frankwell Bullion, to arrive at the opposite conclusion from the

    Ninth Circuit; See also, CFTC v. Standard Forex, No. CV-93-0088

    (CPS). 1993 WL 809966 (E.D.N.Y. Aug. 9, 1993).

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    C. The Commodity Futures Modernization Act of 2000

    The CFMA amended the Act to clarify the jurisdiction of the

    Commission in the area of forex futures and options trading. For the

    first time, off-exchange retail forex transactions were expressly

    permitted, provided the counterparty was one of certain enumerated,

    regulated entities listed in the Act--e.g., a registered FCM.\22\

    Transactions between certain institutional entities (eligible contract

    participants, or ``ECPs'' \23\) remained outside the Commission's

    jurisdiction altogether, based on several provisions of the Act and the

    Commission's regulations.\24\ Shortly after the adoption of the CFMA,

    however, the Commission and the National Futures Association (``NFA'')

    \25\ noted that firms were registering as FCMs but not engaging in any

    exchange-traded activities. Rather, they were limiting their activities

    solely to retail forex. Additionally, the Commission noted that firms

    were registering as FCMs but conducting retail forex transactions

    through unregistered affiliates. Nothing in the Act or CFMA's

    amendments to the Act prohibited these ``shell FCMs'' from conducting

    business through their unregistered affiliates.

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    \22\ See, 7 U.S.C. 2(c)(2)(B). Broadly stated, these entities

    included: (1) A financial institution; (2) a registered broker/

    dealer (``B-D'') or FCM; (3) an insurance company; (4) a financial

    holding company; and (5) an investment bank holding company.

    \23\ Section 1(c)(12) of the Act defines the term ``eligible

    contract participant.'' Entities classified as ECPs include

    financial institutions, insurance companies, certain commodity pools

    and individuals who meet certain asset thresholds. Non-ECPs,

    generally speaking, are retail customers.

    \24\ For example, Section 2(d) provides that most sections of

    the Act do not apply to derivative transactions between ECPs;

    Section 2(g) provides that most sections of the Act do not apply to

    swap transactions between ECPs; and the Part 35 safe harbor for swap

    agreements, which pre-dates the CFMA, provides another basis for

    excluding jurisdiction.

    \25\ NFA is a registered futures association, pursuant to

    Section 17(b) of the Act. It is an industry-wide, self-regulatory

    organization for the U.S. futures industry.

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    Although the CFMA provided some additional clarity for off-exchange

    retail forex transactions, it did not provide the Commission with

    rulemaking authority, and the Commission was thus required to provide

    guidance to allow participants to navigate the statute. For instance,

    Advisory 06-01 made clear that the Commission had jurisdiction over

    retail forex and only certain financial institutions that are

    enumerated in the Act could act as counterparties for retail customers

    in that regard. Similarly, Commission staff issued an Advisory in 2002

    which sets out parameters for unlicensed intermediaries, such as pool

    operators, account managers and introducers, in retail forex

    transactions.\26\ Most recently, in August 2007, Commission staff

    issued an Advisory that addressed the following areas: registration of

    associated persons (``APs'') of FCMs, CPOs and introducing brokers

    (``IBs''); permissible unregistered forex affiliates; segregated funds;

    guaranteed IBs; combined account statements for forex and exchange-

    traded futures; and forex trading platforms.\27\

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    \26\ Division of Trading and Markets Advisory Concerning Foreign

    Currency Trading by Retail Customers, available at: http://

    www.cftc.gov/stellent/groups/public/@cpfraudawarenessandprotection/

    documents/file/forex_advisoryretailcustomers.pdf (last visited Oct.

    13, 2009).

    \27\ Division of Clearing and Intermediary Oversight Advisory

    Concerning Retail Off-Exchange Foreign Currency Trading, available

    at: http://www.cftc.gov/stellent/groups/public/

    @cpfraudawarenessandprotection/documents/file/forex_

    advretailcustomers2007.pdf (last updated August 30, 2007).

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    Following passage of the CFMA, legal challenges to the Commission's

    jurisdiction persisted and certain courts began to analyze the elements

    of a futures contract--the basis of the Commission's jurisdiction over

    off-exchange retail forex transactions--using new criteria. Some firms

    began offering to retail customers transactions that had the elements

    of futures contracts, but that were marketed as ``spot'' transactions.

    However, unlike true spot transactions where delivery is contemplated,

    these transactions were ``rolled over'' at expiration (generally within

    a few days) and carried forward indefinitely. These ``rolling spot'' or

    ``look-alike'' contracts were the basis of many forex fraud cases

    brought by the Commission. However, the Commission's ability to pursue

    fraud in this area was put in doubt by the decision of the Seventh

    Circuit in CFTC v. Zelener.\28\ The Zelener case

    [[Page 3285]]

    introduced a different framework for analyzing what constitutes a

    ``spot'' transaction and created confusion about the applicability of

    the CFMA to certain retail forex transactions. This departed from a

    line of previous non-forex cases that distinguished between futures and

    spot or forward contracts based on a multi-factor analysis of the

    economic elements in the contract.\29\

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    \28\ CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004), reh'g and

    reh'g en banc denied, CFTC v. Zelener, 387 F.3d 624 (7th Cir. 2004).

    The U.S. Court of Appeals for the Sixth Circuit relied on Zelener

    when it issued its opinion in CFTC v. Erskine, 512 F.3d 309 (6th

    Cir. 2008), determining that the foreign currency contracts at issue

    were not futures contracts and upholding the district court's

    summary judgment against the Commission for lack of jurisdiction.

    \29\ See, e.g. CFTC v. Co Petro Mktg. Group, Inc. 680 F.2d 573

    (9th Cir. 1982).

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    The court in Zelener determined that the contracts at issue were

    not off-exchange futures contracts, but rather contracts in the

    commodity itself, and thus excluded from the Commission's jurisdiction.

    The Seventh Circuit declined to rehear the case en banc and a split of

    authority among the circuits was created. Some courts continued to

    follow the traditional multifactor test while others followed the

    Zelener approach and only considered the language within the four

    corners of the contract.\30\

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    \30\ See, e.g., CFTC v. UForex Consulting, LLC, 551 F.Supp.2d

    513 (W.D.La. 2008); CFTC v. Erskine, 512 F. 3d 309 (6th Cir. 2008).

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    D. The Commodity Futures Trading Commission Reauthorization Act of 2008

    The CRA \31\ was intended, among other things, to further clarify

    the Commission's jurisdiction in the area of retail forex, particularly

    in light of the proliferation of look-alike forex transactions such as

    those in the Zelener and Erskine cases, and to give the Commission

    additional authority to regulate retail forex transactions and to

    register persons involved in intermediating these products with members

    of the public. To remedy the large number of fraud cases where

    jurisdiction had been questioned, the CRA gave the Commission

    jurisdiction over certain leveraged retail foreign exchange contracts

    without regard to whether it could prove the contracts were off-

    exchange futures contracts.\32\ The CRA thus grants the Commission

    anti-fraud authority in leveraged retail forex transactions even if the

    transactions at issue are not futures or options. This allows the

    Commission to protect the public from fraud and provides a workable

    solution to the split in the decisions in the Federal appellate courts

    regarding when a so-called ``spot'' contract is a futures contract.

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    \31\ Food, Conservation, and Energy Act of 2008, Public Law 110-

    246, 122 Stat. 1651. 2189-2204 (2008).

    \32\ See, 7 U.S.C. 2(c)(2)(C)(iv).

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    The CRA also created a new category of registrant, the retail

    foreign exchange dealer, or ``RFED,'' and gave the Commission

    rulemaking authority over, and required registration of, intermediaries

    engaging in retail forex.\33\ The CRA provided that RFEDs and these

    other intermediaries must be NFA members and must register with the

    Commission subject to such terms as the Commission may prescribe.\34\

    Among other requirements, the CRA established a $20 million minimum

    capital requirement for RFEDs and FCMs that offer retail forex.\35\

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    \33\ Previously, firms serving as counterparties to retail forex

    typically registered as FCMs (if they were not included in any of

    the other permissible categories), even though they did not engage

    in exchange-traded futures business, and thus did not meet the

    statutory definition of an FCM.

    \34\ See, 7 U.S.C. (2)(c)(2)(B)(i)(II)(gg). The Commission plans

    on delegating the registration function for RFEDs to NFA, as is the

    case with the registration of FCMs, IBs, CTAs, CPOs and APs.

    \35\ See, 7 U.S.C. (2)(c)(2)(B)(ii).

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    The grant of authority over look-alike forex contracts is very

    broad and is intended to encompass transactions that do not result in

    actual delivery, or for which no legitimate business purpose exists for

    the customer to enter into the transaction. It is not intended to

    interfere with the large, sophisticated interbank market or to place

    additional requirements on businesses with a need to engage in forex

    transactions in connection with their legitimate business activities.

    The CRA further provides that look-alike forex contracts are

    subject to the CFTC's authority if they are offered on a leveraged or

    margined basis, or financed by the offeror, counterparty, or someone

    acting with the offeror or counterparty.\36\ The Commission's

    authority, however, does not extend to securities, or to contracts that

    result in actual delivery within two days or that create an enforceable

    obligation to deliver between buyer and seller that have the ability to

    deliver or accept delivery in connection with their line of

    business.\37\ Thus, the CRA charges the Commission with regulating

    speculative forms of retail forex trading, but excludes from the

    Commission's purview true spot transactions that have a legitimate

    business purpose or that result in actual delivery.

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    \36\ See, 7 U.S.C. 2(c)(2)(C)(i)(I)(bb).

    \37\ See, 7 U.S.C. 2(c)(2)(C)(i)(II)(bb)(AA); H.R. Rep. No. 110-

    627, at 979 (2008) (Conf. Rep.).

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    The Commission is proposing these regulations pursuant to separate

    authority provisions of the CRA with respect to the participants in the

    forex market and with respect to the transactions themselves. Off-

    exchange forex futures and options transactions are subject to numerous

    provisions of the Act including sections 4(b), 4b, 4c(b), 4o, 6(c) and

    6(d),\38\ 6c, 6d, 8(a), 13(a), 13(b), if they are offered or entered

    into by an FCM, an RFED, or an affiliate of an FCM that is not one of

    the otherwise regulated entities specified in the Act.\39\ The same

    provisions apply to look-alike forex transactions.\40\

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    \38\ Although the Commission had jurisdiction with regard to

    market manipulation in prior versions of the Act, the CRA removed

    that authority with regard to sections 6(c) and 6(d). All other

    cited sections remain in full effect.

    \39\ See, 7 U.S.C. (2)(c)(2)(B)(iii). In addition to the

    sections included in the CFMA for forex futures and options

    transactions, the CRA adds sections 4(b), 4o, 13(a), and 13(b).

    \40\ See, 7 U.S.C. (2)(c)(2)(C)(ii)(II).

    ---------------------------------------------------------------------------

    Notwithstanding the grant of authority with regard to certain

    sections of the Act specified above, the Commission has full rulemaking

    authority over the agreements, contracts or transactions in retail

    forex where ``reasonably necessary to effectuate any of the provisions

    or to accomplish any of the purposes of [the] Act.'' \41\ The

    Commission has full rulemaking authority over the futures and options

    transactions where such transactions are offered or entered into by

    FCMs, their affiliates or RFEDs; \42\ and retains rulemaking authority

    with regard to look-alike transactions only where such transactions are

    offered or entered into by RFEDs.\43\

    ---------------------------------------------------------------------------

    \41\ See, 7 U.S.C. 2(c)(2)(B)(iv)(III); 2(c)(2)(B)(v);

    (2)(c)(2)(C)(ii)(III); (2)(c)(2)(C)(iii)(III).

    \42\ See, 7 U.S.C. (2)(c)(2)(B)(v).

    \43\ See, 7 U.S.C. (2)(c)(2)(C)(ii)(III).

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    E. The Commission's Proposed Rules

    In proposing the following rules, the Commission has endeavored,

    wherever possible, to apply the principles that have guided it in the

    regulation of on-exchange instruments. Thus, many of the concepts in

    the proposed rules will be familiar to industry participants and

    practitioners. There are, however, essential differences between the

    trading of futures contracts on designated contract markets (``DCMs'')

    that are cleared through Commission registered derivatives clearing

    organizations (``DCOs'') and off-exchange transactions between forex

    firms and retail customers. Many of the statutory and regulatory

    safeguards that are a critical feature of the trading and clearance of

    transactions in futures and options on futures on DCMs and DCOs,

    respectively, simply are not present in off-exchange retail forex

    transactions.

    The Commission's proposed regulations are designed to deal with

    those differences, including the principal-to-principal nature of the

    transactions and the inherent conflicts of interest between the retail

    customer and the marketmaker/counterparty. In

    [[Page 3286]]

    the nine years since the passage of the CFMA, the Commission has

    observed a number of improper practices that have raised concern, among

    them solicitation fraud, a lack of transparency in the pricing and

    execution of transactions, unresponsiveness to customer complaints, and

    the targeting of unsophisticated, elderly, low net worth and other

    vulnerable individuals.\44\

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    \44\ Between December 2000 and September 2009, the Commission

    has filed 114 forex-related enforcement actions on behalf of more

    than 26,000 customers. Those efforts have thus far resulted in the

    award of approximately $476 million in restitution and disgorgement,

    and $576 million in civil monetary penalties. An overwhelming

    majority of these cases have involved solicitation fraud.

    ---------------------------------------------------------------------------

    In addition to the regulations explicitly mandated by the CRA--

    including new registration requirements \45\ and enhanced financial

    requirements--the proposed regulations will require forex registrants

    to maintain records of customer complaints; require forex

    counterparties to guarantee the performance of all persons who

    introduce accounts to the counterparty; require counterparties to

    disclose, with the Risk Disclosure Statement, the percentage of

    profitable nondiscretionary forex customer accounts; and require forex

    counterparties to designate a chief compliance officer to be

    responsible for development and implementation of customer protection

    policies and procedures.

    ---------------------------------------------------------------------------

    \45\ The Commission's proposed regulations include registration

    requirements for all persons engaged in the solicitation or

    acceptance of orders for retail forex transactions involving non-

    ECPs, the exercise of discretionary trading authority in such

    transactions, or the operation or solicitation of funds for pooled

    investment vehicles in connection with such transactions.

    Accordingly, the proposed rules include requirements that such

    persons become registered as CTAs, CPOs or IBs, as appropriate. The

    Commission is aware that the statutory definitions of these entities

    do not anticipate persons engaged in off-exchange activities. The

    Commission has determined, however, that pursuant to its plenary

    power to regulate such off-exchange retail forex transactions in

    section 2(c) of the Act, it will entrust such transactions only to

    persons registered as CTAs, CPOs and IBs, inasmuch as these are

    categories of registrants with which the Commission and the public

    are already familiar. This will allow the Commission to regulate

    off-exchange retail forex transactions efficiently and effectively.

    For example, the proposed regulations would make use of the

    established standards for registration and denial of registration

    contained in the Act as well as the Commission's previous

    interpretations of these standards. See 41 FR 44560 at 44561-62

    (Oct. 6, 1976).

    ---------------------------------------------------------------------------

    As noted above, the Commission believes that these additional

    requirements are militated both by the essential differences between

    on-exchange transactions and off-exchange retail forex transactions,

    and the history of fraudulent practices in this sector of the forex

    market.

    II. Section-by-Section Analysis

    A. Structure and Approach

    The CRA requires the Commission to register and regulate specified

    persons who intermediate off-exchange retail forex transactions. In

    order to comply with this mandate, the Commission must adopt

    regulations providing for the registration of RFEDs and other off-

    exchange retail forex intermediaries not excluded from Commission

    jurisdiction, and must specify the financial, operational and other

    requirements applicable to persons so registered. To the extent

    practicable, the Commission has endeavored to assemble the new off-

    exchange retail forex provisions in a single new part of the

    Commission's regulations, proposed to be designated part 5.\46\ The

    goal is to provide a single convenient location for regulations

    applicable to off-exchange retail forex transactions and

    intermediaries. Unfortunately, developing a completely self-contained

    part of the Commission's regulations that would contain all of the off-

    exchange retail forex regulations is not practicable because it has

    also been necessary to draft amendments to various provisions of

    existing regulations maintained in other parts of 17 CFR Chapter 1.

    Among the reasons for these proposed additional amendments are the

    following: (1) Some regulatory provisions of general application name

    the specific registration categories they affect, and do not presently

    refer to RFEDs; (2) persons registered under certain existing

    registration categories (e.g., FCMs) will be able to engage in off-

    exchange retail forex transactions under those existing registrations,

    subject to additional requirements, and restating the requirements

    pertaining to those registration categories in part 5 would be

    unwieldy; \47\ and (3) certain existing regulatory provisions that

    should apply to off-exchange retail forex transactions and to the

    persons engaging in them are worded in terms of on-exchange futures and

    commodity options transactions, and not in a way that would encompass

    off-exchange retail forex transactions.

    ---------------------------------------------------------------------------

    \46\ Former part 5 (Designation of and Continuing Compliance by

    Contract Markets) was removed and reserved. 66 FR 42256 (Aug. 10,

    2001).

    \47\ For example, essentially replicating the text of part 4

    (which concerns CPOs and CTAs) within the new part 5 in order to

    cover providers of forex trading advice and operators of pooled

    forex trading vehicles would have needlessly increased the volume of

    the Commission's regulations, when a simple incorporation of the

    same requirements by reference accomplishes the same purpose.

    ---------------------------------------------------------------------------

    B. Proposed Amendments to Existing Regulations

    Many of the proposed amendments to regulations outside of proposed

    part 5 amount to merely adding references to off-exchange retail forex

    transactions, off-exchange retail forex customers and/or RFEDs to

    existing regulations.\48\ Accordingly, those proposed amendments will

    not be separately discussed. Other proposed amendments, however,

    involve a substantive change to the existing regulation because the

    existing regulation must operate differently in the context of off-

    exchange retail forex trading.\49\ These substantive changes are

    discussed below.

    ---------------------------------------------------------------------------

    \48\ See, proposed amendments to Regulations 1.4, 1.35, 1.36,

    1.37, 1.40, 1.52, 1.65, 3.1, 3.4, 3.10, 3.12, 3.21, 3.30, 3.31,

    3.33, 3.44, 3.45, 3.50, 3.60, 4.23, 4.25, 4.30, 4.33, 10.1, 160.1,

    160.3, 160.4, 160.30 and 166.2.

    \49\ See, proposed amendments to Regulations 1.1, 1.3, 1.10,

    1.46, 3.1, 4.7, 4.12, 4.13, 4.14, 4.24, 4.34 and 166.5. In several

    instances, staff took the opportunity of this review and proposed

    rulemaking to propose deletion of obsolete material that either

    refers to already deleted regulatory provisions or has become

    outdated due to the passage of time. See proposed amendments to

    Regulations 1.52, 3.12, 3.31 and 160.18.

    ---------------------------------------------------------------------------

    1. Part 1 of the Commission's Regulations--General Regulations

    a. Regulation 1.1--Fraud in or in connection with transactions in

    foreign currency subject to the Commodity Exchange Act.

    This existing provision is specific to off-exchange retail forex

    transactions. Consistent with the concept of a self-contained off-

    exchange retail forex part of the regulations, existing Regulation 1.1

    is proposed to be deleted and its content to be incorporated into

    Regulation 5.2 of proposed part 5.

    b. Regulation 1.3--Definitions.

    The definition of ``guarantee agreement'' is proposed to be amended

    to take account of IBs who may be guaranteed by RFEDs.\50\ The

    definition of ``commodity interest'' is proposed to be amended to

    include off-exchange retail forex transactions over which the

    Commission has jurisdiction by virtue of the CRA.\51\ Including off-

    exchange retail forex transactions within the ``commodity interest''

    definition permits a wide range of provisions, especially within part 4

    of the Commission's regulations, to apply to such transactions without

    the need to separately revise each provision to expressly address off-

    exchange retail forex, as well as futures contracts and commodity

    options.\52\

    ---------------------------------------------------------------------------

    \50\ Regulation 1.3(nn).

    \51\ Regulation 1.3(yy).

    \52\ See, e.g., Regulation 4.6 as well as various provisions of

    Regulations 4.22 (reporting to pool participants), 4.23 and 4.33

    (recordkeeping), and 4.24 and 4.34 (required disclosures).

    ---------------------------------------------------------------------------

    [[Page 3287]]

    c. Regulation 1.10--Financial reports of futures commission

    merchants and introducing brokers.

    Proposed new provisions would require all IBs and all applicants

    for registration as IBs in connection with retail off-exchange forex

    transactions to enter into a guarantee agreement with an RFED or an

    FCM.\53\ To date, those persons who have introduced off-exchange retail

    forex customers to counterparties have not been required to register as

    IBs, and fraudulent solicitation and sales practices have been

    commonplace. See supra note 46. The Commission believes that by

    requiring guarantee agreements between all off-exchange retail forex

    IBs and the FCM/RFED counterparties to which they introduce off-

    exchange retail forex customers, the counterparties will be forced to

    more carefully vet the persons who solicit business on their behalf and

    the practices those persons employ.

    ---------------------------------------------------------------------------

    \53\ Regulations 1.10(a)(4), 1.10(j)(3), 1.10(j)(9)(i)(A)(2) and

    1.10(j)(9)(i)(B)(2). See also, Proposed Regulation 5.18(h).

    ---------------------------------------------------------------------------

    The Commission will be preparing a new Part C guarantee agreement

    to the Form 1-FR-IB, modeled on the guarantee agreement existing in

    Part B of Form 1-FR-IB, that will provide that FCMs and RFEDs that

    guarantee performance by an introducing broker that introduces off-

    exchange retail forex transactions will be jointly and severally liable

    for all obligations of the introducing broker under the Act and

    Commission regulations with respect to the solicitation of, and

    transactions involving, all retail forex customer accounts of the

    introducing broker entered into on or after the effective date of the

    guarantee agreement. The Commission believes that the guarantee

    requirement serves the public's interest in a marketplace where

    improper practices by IBs are discouraged while still permitting FCMs

    and RFEDs to make use of outside salespeople. An IB that is guaranteed

    by an FCM or RFED will not be subject to the minimum capital

    requirements set forth in Regulation 1.17(a)(1)(iii).

    d. Regulation 1.46--Application and closing out of offsetting long

    and short positions.

    Like FCMs engaging in on-exchange futures and option transactions

    under the existing regulation, RFEDs and FCMs engaging in off-exchange

    retail forex transactions would be required to close out offsetting

    long and short positions in an off-exchange retail forex customer's

    account. But unlike existing Regulation 1.46, the requirement on RFEDs

    and FCMs engaging in off-exchange retail forex transactions to close

    out offsetting positions would apply regardless of whether the off-

    exchange retail forex customer has instructed otherwise.\54\ Also,

    unlike the existing provision for transactions in on-exchange futures

    and option contracts, no exception is proposed for omnibus accounts

    because they are not used in off-exchange retail forex trading. An RFED

    or FCM could, if permitted by the rules of a self-regulatory

    organization (``SRO'') of which the RFED or FCM is a member, offset at

    the retail forex customer's request off-exchange retail forex

    transactions of the same size, if the retail forex customer holds other

    transactions of a different size, but the RFED or FCM would be required

    to offset a transaction against the oldest transaction of the same

    size.\55\

    ---------------------------------------------------------------------------

    \54\ NFA's experience supports the conclusion that keeping open

    long and short positions in a retail forex customer's account

    removes the opportunity for the customer to profit on the

    transactions, increases the fees paid by the customer and invites

    abuse.

    \55\ Regulation 1.46(a)(2).

    ---------------------------------------------------------------------------

    2. Part 4 of the Commission's Regulations--CPOs and CTAs

    a. Regulation 4.7--Exemption from certain part 4 requirements for

    commodity pool operators with respect to offerings to qualified

    eligible persons and for commodity trading advisors with respect to

    advising qualified eligible persons.

    As proposed, in determining whether a person is a ``qualified

    eligible person'' (``QEP'') the NFA-specified minimum security deposit

    for off-exchange retail forex transactions would be included in the

    calculation of the portfolio requirement.\56\ Such amounts are roughly

    equivalent to exchange-specified initial margin and option premium. In

    addition, in order to treat RFEDs and FCMs comparably, RFEDs would be

    included among the persons that do not have to meet the portfolio

    requirement to be QEPs.\57\

    ---------------------------------------------------------------------------

    \56\ Regulation 4.7(a)(1)(v)(B).

    \57\ Regulation 4.7(a)(2)(i)(B).

    ---------------------------------------------------------------------------

    b. Regulation 4.12--Exemption from provisions of part 4.

    As proposed, the NFA-specified minimum security deposit for off-

    exchange retail forex transactions would be included among the amounts

    that cannot exceed 10 percent of the fair market value of a pool's

    assets in order for the operator to claim exemption under Regulation

    4.12(b). Again, such amounts are roughly equivalent to on-exchange

    initial margin and option premiums.\58\

    ---------------------------------------------------------------------------

    \58\ Regulation 4.12(b)(i)(C).

    ---------------------------------------------------------------------------

    c. Regulation 4.13--Exemption from registration as a commodity pool

    operator.

    As proposed, the NFA-specified minimum security deposit for off-

    exchange retail forex transactions would be included among the amounts

    that cannot exceed 5 percent of the liquidation value of the pool's

    portfolio in order for the operator to claim exemption from

    registration under Regulation 4.13(a)(3). Again, such amounts are

    roughly equivalent to initial margin and option premiums.\59\

    ---------------------------------------------------------------------------

    \59\ Regulation 4.13(a)(3)(ii).

    ---------------------------------------------------------------------------

    d. Regulation 4.14--Exemption from registration as a commodity

    trading advisor.

    As proposed, an RFED that provided trading advice solely in

    connection with its business as an RFED would be exempt from

    registration as a CTA. This is consistent with treating FCMs and RFEDs

    comparably, where appropriate.\60\

    ---------------------------------------------------------------------------

    \60\ Regulation 4.14(a)(7)(ii). As noted in the Conference

    Report that accompanied the CRA, ``To the extent their risk profiles

    are similar, the managers intend for FCMs and RFEDs to be regulated

    substantially equivalently in terms of their off-exchange retail

    foreign currency business.'' H.R. Rep. No. 110-627, at 980 (2008)

    (Conf. Rep.). The Conference Report is available via the Internet on

    the CFTC's website.

    ---------------------------------------------------------------------------

    e. Regulations 4.24 and 4.34--General disclosures required for CPO

    and CTA Disclosure Documents.

    As proposed, the prescribed risk disclosure language for the front

    of the Disclosure Document would be required to include language

    warning that off-exchange retail forex transactions may not be given

    the same preferential treatment as commodity customer claims under the

    Bankruptcy Code.\61\ This warning is necessary because definitions for

    such terms as ``commodity contract,'' ``customer'' and ``customer

    property'' in Subchapter IV of Chapter 7 of the Bankruptcy Code do not

    include or refer to off-exchange transactions, generally, or to off-

    exchange retail forex transactions or customers engaged in such

    transaction, specifically.\62\

    ---------------------------------------------------------------------------

    \61\ Regulations 4.24(b) and 4.34(b).

    \62\ 11 U.S.C. 761 et seq.

    ---------------------------------------------------------------------------

    3. Part 166 of the Commission's Regulations--Customer Protection Rules

    a. Section 166.5--Dispute settlement procedures.

    As proposed, the section of the Commission's customer protection

    regulations dealing with dispute settlement procedures would be amended

    to expressly apply where a claim or grievance arises out of a retail

    forex transaction and the defined term customer would be amended to

    include

    [[Page 3288]]

    a retail forex customer.\63\ The existing text could be read to exclude

    customer claims arising out of retail forex transactions from coverage

    under Regulation 166.5.

    ---------------------------------------------------------------------------

    \63\ Regulations 166.5(a)(1) and (a)(2).

    ---------------------------------------------------------------------------

    C. New Part 5

    As noted earlier, the proposed new part 5 to the Commission's

    regulations is intended to permit, as much as possible, reference to a

    single portion of the regulations for matters concerning off-exchange

    retail forex. Although it has been necessary to make changes to

    provisions elsewhere in the regulations, the Commission believes that

    in most cases, initial reference to part 5 should be sufficient to

    resolve questions (or to direct the reader by cross-reference to the

    appropriate provision elsewhere).

    1. Proposed Regulation 5.1--Definitions

    Proposed part 5 begins with a set of definitions of terms specific

    to off-exchange retail forex and to the regulatory requirements that

    apply to off-exchange retail forex. ``Retail forex transaction'' is

    defined by reference to the description in sections 2(c)(2)(B) and

    2(c)(2)(C) of the Act. The proposed definition expressly excludes

    futures and commodity option contracts traded on a designated contract

    market or derivatives transaction execution facility.\64\ ``Retail

    foreign exchange dealer'' is defined as anyone who offers to be or who

    is a counterparty to a retail forex transaction, except for those

    persons excluded from the definition by the CRA.\65\ In order to apply

    the IB, CPO, CTA and AP registration and other requirements to

    analogous retail forex market participants, notwithstanding that

    statutory and regulatory definitions of the identifying terms do not

    necessarily comprehend involvement in retail forex trading, the terms

    are separately defined for the purposes of part 5.\66\ ``Affiliated

    person of a futures commission merchant'' (a term not previously

    defined in the Commission's regulations) and an AP of such a person are

    defined by reference to section 2(c)(2)(B)(i)(II)(cc)(BB) of the

    Act.\67\ ``Primarily or substantially'' is defined for use in

    determining whether a registered FCM is primarily or substantially

    engaged in FCM activities, such that it need not also register as an

    RFED in order to conduct retail forex business.\68\ Certain terms used

    in determining the financial and reporting requirements applicable to

    persons engaged in retail forex business are also defined in Regulation

    5.1 to clarify their use elsewhere in part 5.\69\

    ---------------------------------------------------------------------------

    \64\ See, proposed Regulation 5.1(m).

    \65\ See, proposed Regulation 5.1(h).

    \66\ See, proposed Regulations 5.1(d), (e) and (f).

    \67\ See, proposed Regulations 5.1(a) and (c).

    \68\ See, proposed Regulation 5.1(g)

    \69\ See, proposed Regulations 5.1(b), (i), (j), (k) and (l).

    ---------------------------------------------------------------------------

    2. Proposed Regulation 5.2--Prohibited Transactions: Antifraud

    As noted above, under the proposal, existing Regulation 1.1

    prohibiting fraud in connection with foreign currency transactions

    would be removed and replaced with new Regulation 5.2, which, in

    addition to prohibiting fraudulent conduct in connection with retail

    forex transactions, now prohibits anyone from acting as the

    counterparty for a retail forex transaction in an account for which

    that person has discretionary trading authority.

    3. Proposed Regulation 5.3--Registration

    The CRA amends the Act to require that certain intermediaries for

    forex futures and options and for look-alike contracts (i.e., those at

    issue in Zelener) register in such capacity as the Commission shall

    determine and become members of a registered futures association.\70\

    The Commission has determined that the appropriate registration

    categories for those intermediaries are as follows. Persons who solicit

    or accept orders for an RFED, an FCM, or an affiliate of an FCM should

    be registered as IBs. Persons who exercise discretionary trading

    authority over accounts should be registered as CTAs. Persons who

    operate or solicit funds or property for a pooled investment vehicle

    should be registered as CPOs. Finally, associated persons of the

    foregoing should be registered as APs. The proposed regulations include

    provisions to implement this part of the CRA.

    ---------------------------------------------------------------------------

    \70\ See, 7 U.S.C. 2(c)(2)(B)(iv) and 2(c)(2)(C)(iii).

    ---------------------------------------------------------------------------

    Prior to the passage of the CRA, many entities registered as FCMs

    solely to engage in retail forex transactions. The CRA provides that

    registered FCMs who currently trade retail forex may continue to do so

    as FCMs, or may be required to register as RFEDs, depending on their

    circumstances. A traditional FCM that is primarily or substantially

    engaged in exchange-traded futures business may continue to engage in

    retail forex as an FCM, and need not register as an RFED.\71\ Currently

    registered FCMs who solely trade in retail forex, or FCMs who are not

    primarily or substantially dealing in exchange-traded futures, will be

    required to register as RFEDs. Because there will be two categories of

    registrants competing for these customers, the stated Congressional

    intent is that an entity should not be advantaged or disadvantaged as a

    result of registering as an RFED instead of an FCM.\72\ The Commission

    has therefore endeavored to draft regulations that provide equivalent

    treatment of FCMs and RFEDs wherever possible.

    ---------------------------------------------------------------------------

    \71\ The Commission is directed to determine, through notice and

    comment rulemaking such as this, what ``primarily or substantially''

    means in this context. H.R. Rep. No. 110-627, at 980 (2008) (Conf.

    Rep.); see also, Proposed Regulation 5.1(g).

    \72\ See, H.R. Rep. No. 110-627, at 980 (2008) (Conf. Rep.).

    ---------------------------------------------------------------------------

    The enactment of the CFMA permitted registered FCMs and certain of

    their unregistered affiliates to act as counterparties to retail forex

    transactions, but it did not specifically require that intermediaries

    such as introducing brokers, account managers or pool operators be

    registered in order to engage in forex transactions with retail

    participants. This created problems when unregistered entities began

    soliciting retail customers. The lack of vetting by a regulatory agency

    or an SRO created a situation where members of the general public were

    being solicited by entities and persons regarding whom they were unable

    to obtain any background information. In some cases, persons banned

    from registering in the futures industry as a result of past misconduct

    were operating as unregistered intermediaries in retail forex

    transactions because of the lack of minimum requirements to operate in

    the forex business. Pursuant to the CRA, certain affiliates of FCMs may

    continue to be proper forex counterparties if the affiliated FCM makes

    and keeps the risk assessment records required in Section 4f(c)(2)(B)

    of the Act and the affiliate has at least $20 million in adjusted net

    capital.\73\ However, under the proposed regulations, the affiliates

    will have to register in the appropriate capacity in order to serve as

    a counterparty.

    ---------------------------------------------------------------------------

    \73\ See, 7 U.S.C. 2(c)(2)(B)(i)(II)(cc)(BB).

    ---------------------------------------------------------------------------

    Proposed Regulation 5.3 imposes the registration requirements

    called for by the CRA upon specified categories of persons

    intermediating retail forex transactions. RFEDs are required to

    register as such.\74\ FCMs not ``primarily or substantially'' engaged

    in FCM business are required to register as RFEDs,\75\ and FCM-

    affiliated persons that serve as retail forex counterparties are also

    required to register as RFEDs.\76\ Persons introducing forex accounts

    are required to register as IBs.\77\ Operators

    [[Page 3289]]

    of pooled investment vehicles that engage in retail forex transactions

    are required to register as CPOs, and persons providing forex trading

    advice are required to register as CTAs.\78\ Finally, associated

    persons of all of the foregoing are required to register as APs.

    ---------------------------------------------------------------------------

    \74\ See, proposed Regulation 5.3(a)(6).

    \75\ See, proposed Regulation 5.3(a)(4).

    \76\ See, proposed Regulation 5.3(a)(1).

    \77\ See, proposed Regulation 5.3(a)(5).

    \78\ See, proposed Regulations 5.3(a)(2) and 5.3(a)(3).

    ---------------------------------------------------------------------------

    The CRA's registration requirements do not apply to certain

    otherwise regulated entities (e.g., broker-dealers), their associated

    persons, or persons who would be exempt from registration if they were

    engaging in such transactions on or subject to the rules of a contract

    market with regard to forex futures or options \79\ or look-alike

    contracts.\80\ This is consistent with the original intent of the

    Treasury Amendment that entities engaging in forex transactions should

    not be subject to regulation by multiple regulators concerning the same

    activity. Proposed Regulation 5.3 excludes from the registration

    requirement the persons specified in the CRA.

    ---------------------------------------------------------------------------

    \79\ See, 7 U.S.C. 2(c)(2)(B)(iv)(II).

    \80\ See, 7 U.S.C. 2(c)(2)(C)(iii)(II).

    ---------------------------------------------------------------------------

    4. Proposed Regulation 5.4--Operative Requirements for CPOs and CTAs

    Proposed Regulation 5.4 applies all of the disclosure,

    recordkeeping, reporting and other existing requirements currently

    applicable to CPOs and CTAs in the context of on-exchange futures and

    commodity option contracts to persons defined as, and required to

    register as, CPOs and CTAs because those persons operate pooled

    investment vehicles that engage in retail forex transactions or because

    they provide retail forex trading advice.

    5. Proposed Regulation 5.5--Risk Disclosure by FCMs, RFEDs and IBs

    Proposed Regulation 5.5 requires RFEDs, FCMs and IBs to provide

    retail forex customers with a risk disclosure statement similar to that

    currently required by Regulation 1.55, but tailored to address the

    risks, conflicts of interest and unique characteristics of retail forex

    trading. For example, the required risk disclosure statement would also

    be required to disclose the number of non-discretionary retail forex

    accounts maintained by an RFED or FCM, the percentage of such accounts

    that were profitable for each of the four most recent quarters, and a

    statement that past performance is not necessarily indicative of future

    results.\81\

    ---------------------------------------------------------------------------

    \81\ See, proposed Regulation 5.5(e).

    ---------------------------------------------------------------------------

    Under Section 2(c) of the Act, the Commission's jurisdiction with

    regard to off-exchange forex transactions extends to transactions

    involving entities that are not eligible contract participants as

    defined in Section 1a of the Act (i.e., retail customers). These

    transactions serve no broad price discovery function, and the

    Commission believes both that the vast majority of retail customers who

    enter these transactions do so solely for speculative purposes, and

    that relatively few of these participants trade profitably. Whether or

    not this is actually the case, the Commission believes that disclosure

    of the percentage of profitable accounts maintained by RFEDs and FCMs

    engaging in off-exchange retail forex will provide the retail customer

    with vital information when deciding whether or not to engage in such

    transactions.

    6. Proposed Regulations 5.6 and 5.7--Minimum Financial Requirements

    Under proposed Regulation 5.7, RFEDs and FCMs engaging in retail

    forex trading are required to meet the minimum net capital requirements

    prescribed in the CRA.\82\ Proposed Regulation 5.6 sets forth the

    ``early warning'' notification requirements pursuant to which RFEDs and

    FCMs engaging in retail forex trading are required to notify SROs and

    the Commission if an RFED or an FCM engaging in retail forex trading

    has experienced declines in capital, has discovered a material

    inadequacy in internal controls or has become undercapitalized.\83\

    Because there is no equivalent to the futures regime of strict

    segregation of customer funds in off-exchange retail foreign currency

    dealing, the notice requirement for RFEDs with respect to

    undersegregation is not included in the proposed regulation. However, a

    requirement has been proposed that an RFED or FCM engaging in off-

    exchange retail forex transactions give notice if it is holding liquid

    assets less than the aggregate retail forex obligation (as defined).

    The aggregate retail forex obligation is proposed to be the net

    obligation to all off-exchange retail foreign currency customers at all

    times (excluding deficit accounts).

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    \82\ Analogous to Regulation 1.17 for FCMs trading only futures

    and commodity options.

    \83\ The proposed requirement is analogous to existing

    Regulation 1.12 for FCMs that trade only on-exchange futures and

    commodity option contracts.

    ---------------------------------------------------------------------------

    The minimum net capital regulation for RFEDs and FCMs offering off-

    exchange retail forex is proposed based on the significantly higher

    minimum net capital level for RFEDs and FCMs offering retail forex

    established in the CRA. The Commission believes that the higher level

    of $20 million reflects Congressional intent to ensure that

    substantially undercapitalized ``shell'' FCM off-exchange retail forex

    dealers and their affiliates, from whom it may be impossible to recover

    funds in the event of customer claims, do not engage in off-exchange

    retail forex activity. The existing regulation for the calculation of

    FCM net capital has been proposed for the calculation of net capital

    for RFEDs and FCMs offering off-exchange retail forex, with the intent

    that an FCM offering retail forex should only have one calculation of

    its adjusted net capital. However, the CRA's higher dollar threshold of

    minimum capital required, $20 million, will apply, as well as an

    additional early warning requirement of 110%, resulting in a notice

    reporting net capital level of $22 million. The proposed early warning

    level of 110% is lower than the FCM early warning level of 150% due to

    the substantially higher minimum dollar threshold established in the

    CRA, which results in an adequate minimum early warning ``buffer'' of

    no less than $2 million.

    An amount of minimum net capital in addition to the minimum $20

    million is proposed to the extent that an FCM or RFED has a total

    retail forex obligation in excess of $10,000,000. After that threshold,

    as proposed the FCM or RFED must have net capital of no less than

    $20,000,000 plus five percent of the total retail forex obligation in

    excess of $10,000,000. This proposal is intended to address concerns

    that, although the capital level contained in the CRA is believed to be

    high at $20,000,000, at particularly high levels of retail customer

    obligations there should be commensurate increases in an entity's

    minimum required net capital. The NFA has enacted a similar requirement

    applicable to all its forex dealer members except those that only

    provide ``straight through processing.'' The Commission's proposal has

    no exceptions for FCMs engaging in off-exchange retail forex or for

    RFEDs.

    Under the existing net capital regulation for FCMs contained in

    Commission Regulation 1.17, an FCM that becomes undercapitalized must

    immediately cease business and transfer its customers' positions to

    another FCM, unless the Commission believes that it will be able to

    quickly remedy the situation, in which case the Commission may provide

    up to an additional 10 business days to return to compliance before

    ceasing business. Because the retail forex contracts at issue are not

    exchange-traded, and therefore, positions are not fungible among retail

    forex FCMs and RFEDs, should an RFED become undercapitalized, the

    [[Page 3290]]

    Commission proposes that it either liquidate or transfer all off-

    exchange retail forex accounts (with a transfer envisioned as a full

    novation of the retail forex contracts for such accounts by assignment

    and assumption of the contracts by another RFED or FCM) under the

    direction and supervision of the Commission or the entity's designated

    self-regulatory organization (``DSRO''). The same 10 business day

    period has been proposed for the Commission or DSRO to delay such

    liquidation or transfer if determined appropriate. The proposal

    requires the refund or transfer of all funds associated with off-

    exchange retail forex accounts contemporaneous with the liquidation or

    transfer. The possibility of an entity needing to refund all customers'

    accounts and liquidate all positions in such circumstances makes it

    necessary to include a proposal to require such entity to maintain

    liquid assets available equal to the amount owed to off-exchange retail

    forex customers.

    Although not permissible to be counted as a liquid asset for

    fulfilling the requirement of Regulation 5.8, under the proposed net

    capital regulation, the unsecured receivable resulting from an RFED or

    FCM offsetting currency exposure with one of several enumerated parties

    (regulated financial intermediaries or foreign equivalents approved by

    NFA) will be treated as a current asset. The Commission proposes this,

    with the counterparty limitation, to balance an RFED's or FCM's need to

    hedge its net position from offering off-exchange retail forex with the

    concern that such receivables are collectible for net capital purposes.

    Without this proposed addition to the net capital calculation, RFEDs

    and FCMs would have to take a 100% capital charge for such unrealized

    gains. The Commission understands that NFA, under subparagraph (c) of

    its Section 11 Financial Requirements for Forex Dealer Members, has

    been permitting existing forex dealer members to not take such a charge

    to the extent the counterparty has been considered regulated and

    approved by NFA, and is not an affiliate of the Forex Dealer Member.

    Thus, the Commission proposes that a DSRO be afforded the continuing

    ability to assess the appropriateness of counterparties for this

    purpose going forward, while making explicit the ability of an entity

    to cover the net exposure without the burden of a 100% net capital

    charge being applied. Also, the existing net capital charge with

    respect to options has been applied to off-exchange retail forex

    transactions that are options. This net capital charge, with respect to

    the existing net capital regulation for FCMs, is derived from the SEC's

    net capital charges for options that are not options on futures.

    Because these retail forex transactions are, by nature, off-exchange

    transactions, the resulting charge under the SEC rule would be the

    charge for ``unlisted'' options. This charge is based on the notional

    transactional size of the option which may result in a very significant

    capital implication for retail forex transactions which are options.

    However, this result is consistent with the existing requirements for

    all off-exchange or unlisted foreign exchange options for existing FCMs

    and broker-dealers.

    7. Proposed Regulation 5.8--Aggregate Retail Forex Assets

    Proposed Regulation 5.8 requires RFEDs and FCMs engaging in retail

    forex transactions to compute the net credit balance resulting from

    combining all money, securities and property deposited by retail forex

    customers into their accounts, adjusted for realized and unrealized net

    profit or loss, and not including any accounts that contain net

    liquidating balances (the ``retail forex obligation'' of the RFED or

    FCM).\84\ Under proposed Regulation 5.8(a) each RFED or FCM engaging in

    retail forex transactions is required to hold assets of the type

    permitted under Regulation 1.25 equal to the retail forex obligation.

    Such assets would have to be maintained at one or more qualifying

    institutions in the U.S., or in money center countries (as defined in

    Regulation 1.49) where such countries have agreements acceptable to NFA

    that authorize sharing account information with NFA.

    ---------------------------------------------------------------------------

    \84\ Defined in proposed Regulation 5.1(l).

    ---------------------------------------------------------------------------

    The requirement to hold assets equal to the retail forex obligation

    is separate from the adjusted net capital requirement. In computing

    their adjusted net capital, pursuant to proposed Regulation 5.8(d),

    RFEDs and FCMs could not include assets held for purposes of complying

    with proposed Regulation 5.8(a) as current assets, or otherwise

    recording any property received from retail forex customers as an asset

    without recording a corresponding liability to such customers.

    The requirement to maintain assets equal to or in excess of the

    retail forex obligation is intended to provide some degree of

    protection for customers in the absence of the protections afforded by

    the segregation of customer funds that is required in the context of

    futures and commodity options trading.\85\ The Commission recognizes

    that the retail forex obligation is not an equivalent substitute for

    the segregated funds regime, which cannot be replicated in the context

    of off-exchange retail forex trading. Unlike segregation of customer

    funds deposited for futures trading, such amounts would not be provided

    any preferential treatment to unsecured creditors in a bankruptcy, and

    would not be held in separately titled accounts under the CEA. Because

    of the lack of bankruptcy preference with respect to the funds of

    retail forex customers held at FCMs or RFEDs, the Commission does not

    intend to propose a separation of funds requirement which may be

    misconstrued as being similar to the protections that are afforded to

    customers engaged in exchange-traded futures and options. As previously

    discussed, Regulation 5.8 has been proposed to ensure that RFEDs and

    FCMs hold liquid assets in appropriate jurisdictions should they be

    required to be refunded to customers or seized to compensate customers.

    NFA first established under Section 14 of its Financial Requirements

    its version of this requirement, due to its difficulty in ultimately

    obtaining any funds for restitution with respect to failures of forex

    dealers and cases of fraud. The proposal follows the NFA's rule in this

    regard while further requiring that the types of assets held to meet

    the requirement must also be of the kind and character permitted for

    the investments of futures customer funds under existing Commission

    Regulation 1.25. These types of assets are limited to generally liquid

    financial instruments, which the Commission believes to be an

    appropriate limitation, should it become necessary to liquidate retail

    forex accounts, transfer funds, or seize or freeze funds in the event

    of fraud.

    ---------------------------------------------------------------------------

    \85\ The retail forex obligation is also a factor in one of the

    options for computation of the RFED's or FCM's net capital

    requirement. See, proposed Regulation 5.7(a)(1)(i)(B).

    ---------------------------------------------------------------------------

    8. Proposed Regulation 5.9--Security Deposits for Retail Forex

    Transactions

    Proposed Regulation 5.9(a) would require each RFED and each FCM

    that engages in retail forex transactions, in advance of any such

    transaction, to collect from the retail forex customer a security

    deposit (in cash or in financial instruments that meet the requirements

    of Regulation 1.25) equal to ten percent of the notional value of the

    retail forex transaction, ten percent of the notional value of short

    retail forex options in addition to the premium received, or the full

    premium received for long options,

    [[Page 3291]]

    as the case may be. Pursuant to proposed Regulation 5.9(b), the RFED or

    FCM would be required to collect additional security deposit or to

    liquidate the retail forex customer's position if the amount of

    security deposit collected fails to meet the requirements of paragraph

    (a).

    The extreme volatility of the foreign currency markets exposes

    retail forex customers to substantial risk. Forex dealers currently

    extend leverage to their customers at ratios of between 25:1 to 400:1

    or higher, which allows customers to control contracts worth

    significantly more than their cash investment. Given these high

    leverage ratios, even minor fluctuations in currency rates can

    exponentially increase a customer's losses and gains. Even a small move

    against a customer's position can result in a significant loss. Under

    current practices, customer positions are usually closed out once the

    losses in an account exceed the initial investment. However, if, for

    any reason, the positions are not closed out at a zero balance, the

    customer could be liable for additional losses.

    Customers also face counterparty risk, as there is no central

    counterparty for forex transactions. Customers may not know that

    customer funds held by a forex counterparty do not receive the

    bankruptcy protections applicable to funds held by an FCM engaged in

    on-exchange trading on the customers behalf.\86\ Given the risks that

    inhere in the trading of off-exchange forex contracts by retail

    customers, the only funds that should be invested in the off-exchange

    retail forex market are those that the investor can afford to lose. The

    Commission's proposed regulation regarding security deposits is

    intended both to mitigate the risk to which customers are exposed and

    to provide some capital to cover customer funds held by a failing firm

    (albeit without the bankruptcy preference applicable to funds held in

    segregation for exchange-traded contracts). In determining the

    appropriate leverage or security deposit level to propose, the

    Commission considered current industry practices, as well as NFA's

    current leverage restrictions of 100 to 1 on major currencies and 25 to

    1 on non-major currencies, and the proposal by the Financial Industry

    Regulatory Authority (``FINRA'') to limit the maximum leverage on

    certain retail forex transactions offered by broker-dealers to 4 to

    1.\87\

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    \86\ As discussed above, an FCM holding customer funds for

    trading on-exchange futures contracts is required to have, at all

    times, in its possession and control, segregated property sufficient

    to pay all customers with credit balances, without deduction for

    customer debit balances (which must be made up from the FCM's own

    capital). In an FCM bankruptcy, customers share the segregated

    property pro rata in proportion to their claims, without any support

    from a compensation fund. See, generally, Part 190 of the

    Commission's Regulations, 17 CFR Part 190 (2009).

    \87\ NFA leverage rules are set forth in Section 12, ``Security

    Deposits for Forex Transactions with FDMs'', of the NFA rules. On

    June 4, 2009, FINRA submitted to the U.S. Securities and Exchange

    Commission a proposed rule change to adopt FINRA Rule 2380 to limit

    the leverage ratio offered by broker-dealers for certain forex

    transactions to be a maximum of 1.5:1. 74 FR 32022 (July 6, 2009).

    FINRA subsequently adopted 2 amendments to this proposal, the second

    of which revised the maximum leverage ratio from 1.5:1 to 4:1. See

    SR-FINRA-2009-40 available on FINRA's website at http://

    www.finra.org/Industry/Regulation/RuleFilings/2009/P118864.

    ---------------------------------------------------------------------------

    9. Proposed Regulations 5.10 and 5.11--Risk Assessment

    Proposed Regulation 5.10 imposes risk assessment recordkeeping

    requirements, and Regulation 5.11 establishes risk assessment reporting

    requirements, for RFEDs. These sections are patterned on the

    corresponding existing requirements for FCMs in existing Regulations

    1.14 and 1.15, because the same rationale behind risk assessment

    procedures for FCMs applies equally to RFEDs.

    10. Proposed Regulation 5.12--Financial Reporting to Regulators

    Proposed Regulation 5.12 requires applicants for registration as

    RFEDs to submit their applications for registration with a Form 1-FR-

    FCM, the same financial reporting form that FCMs are required to file,

    certified by an independent public accountant.\88\ Registered RFEDs

    would be required to file Form 1-FR-FCM monthly and annually. In

    addition, RFEDs, like FCMs, when notified in writing by NFA or the

    Commission, would have to file Form 1-FR-FCM or such other financial

    information as NFA or the Commission may request at such other times as

    may be specified in the notice.\89\ The proposed regulation for RFED

    financial reporting is intended to require the substantial equivalent

    of independent IB and FCM financial reporting to the Commission and

    DSROs, with certified financial reports required from independent

    auditors qualified under existing Commission Regulation 1.16 and

    similar reports on material inadequacies by such auditors. The existing

    reporting requirements as separately proposed to be amended for FCMs,

    including methods of receiving reports, determining fiscal year ends

    and permitting extensions of time to file, have been proposed for

    RFEDs.

    ---------------------------------------------------------------------------

    \88\ See, Regulation 1.10.

    \89\ See, Regulation 1.10(b)(4).

    ---------------------------------------------------------------------------

    11. Proposed Regulation 5.13--Reporting to Customers

    RFEDs and FCMs engaging in retail forex transactions are required

    by proposed Regulation 5.13 to furnish each retail forex customer with

    monthly statements and confirmation statements in a manner comparable

    to that required of FCMs under Regulation 1.33. The Commission believes

    that proposed Regulation 5.13 has been drafted in such a manner as to

    make the required statements meaningful and useful to customers in

    light of the distinctive characteristics of retail forex transactions

    relative to exchange-traded futures and commodity option transactions.

    FCMs could combine their forex monthly and/or confirmation statements

    with statements they may otherwise be required by Regulation 1.33 to

    furnish, so long as the futures and commodity options information and

    the retail forex information are each properly identified as such. The

    proposed section also provides that the required statements can be

    furnished electronically with the customer's (revocable) consent, and

    RFEDs are required to keep copies of monthly and confirmation

    statements in accordance with the requirements of Regulation 1.31.

    12. Proposed Regulation 5.14--Financial Recordkeeping

    Proposed Regulation 5.14(a) requires RFEDs to keep the same ledgers

    or similar records as FCMs are required to keep under Regulation 1.18,

    showing transactions affecting assets, liabilities, income, expense and

    capital accounts, classified in the manner set forth in Form 1-FR-FCM,

    or in categories consistent with generally accepted accounting

    principles. Proposed Regulation 5.14(b) requires recordkeeping

    regarding net capital computations, comparable to existing Regulation

    1.18(b) for FCMs.

    13. Proposed Regulations 5.15 and 5.16--Unlawful Representations and

    Prohibitions of Guarantees Against Loss

    As with CPOs and CTAs dealing only in futures and commodity

    options, RFEDs, FCMs, IBs, CPOs and CTAs subject to Part 5, as well as

    their principals and those who solicit for them, are prohibited by

    proposed Regulation 5.15 from representing that the Commission or the

    Federal government has sponsored, recommended or approved them in any

    [[Page 3292]]

    way.\90\ RFEDs, FCMs and IBs are prohibited under proposed Regulation

    5.16 from guaranteeing against or limiting customer losses, from

    failing to collect margin or security deposits, or from representing

    that they will do any of those things.\91\ This prohibition does not

    prevent an RFED, FCM or IB from sharing in a loss resulting from error

    or mishandling of an order, and guarantees entered into prior to

    effectiveness of the prohibition will only be affected if an attempt is

    made to extend, modify or renew them.

    ---------------------------------------------------------------------------

    \90\ Similar prohibitions already apply to CPOs and CTAs

    (section 4o(b) of the Act) and to leverage transaction merchants

    (Regulation 31.19). See also NFA Compliance Rule 2-22 which speaks

    to all NFA members. The Commission believes that a broad statement

    of the prohibition is appropriate here to ensure that customers do

    not misapprehend the implications of registration as previously

    unregistered off-exchange retail forex market participants come into

    compliance with the registration requirements imposed on them by the

    CRA.

    \91\ See, Regulation 1.56 for the existing prohibition affecting

    FCMs and IBs engaged in futures and commodity option transactions.

    ---------------------------------------------------------------------------

    14. Proposed Regulation 5.17--Authorization to Trade

    Proposed Regulation 5.17 requires RFEDs, FCMs, IBs and their APs to

    have specific authorization by the customer before effecting a retail

    forex transaction. For the most part, proposed Regulation 5.17 follows

    existing Regulation 166.2 for on-exchange futures and commodity option

    transactions. The Commission believes that registrants acting as off-

    exchange retail forex counterparties should have to obtain

    authorization for each transaction like other registrants.

    15. Proposed Regulation 5.18--Trading Standards

    Proposed Regulation 5.18 contains provisions specific to retail

    forex transactions that were developed to prevent some of the deceptive

    or unfair practices identified by the Commission and NFA in recent

    years. Each retail forex counterparty \92\ would be required to

    establish and enforce internal rules, procedures and controls: (1) To

    prevent ``front running,'' where transactions in accounts of the retail

    forex counterparty or its related persons \93\ are executed before a

    like customer order; (2) to establish settlement prices fairly and

    objectively; and (3) to record and maintain transaction records and

    make them available to customers (including time and price information,

    account records, trading platform price changes and volume, and any

    algorithm used to determine bid and ask prices). Paragraph (c) of the

    proposed Regulation prohibits a retail forex counterparty from

    disclosing that it holds another person's order unless disclosure is

    necessary for execution. Paragraphs (d) and (e) ensure that related

    persons of retail forex counterparties do not open accounts with other

    retail forex counterparties without the knowledge and authorization of

    the account surveillance personnel of the retail forex counterparties

    with which they are related. Paragraph (f) prohibits retail forex

    counterparties from: (1) Entering a retail forex transaction to be

    executed at a price that is not at or near prices at which other retail

    forex customers have executed transactions with the retail forex

    counterparty during the same time period unless done pursuant to NFA

    rules; (2) changing prices after execution unless pursuant to NFA

    rules; (3) providing a customer a new bid price that is higher (or

    lower) than previously without providing a new asked price that is

    higher (or lower) as well; and (4) establishing a new position for a

    customer (except to offset an existing position) if the retail forex

    counterparty holds one or more outstanding orders of other retail forex

    customers for the same currency pair at a comparable price.

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    \92\ ``Retail forex counterparty'' is defined for purposes of

    Regulation 5.18 to include RFEDs, FCMs and affiliated persons of

    FCMs.

    \93\ ``Related person'' of a forex counterparty is defined for

    purposes of Regulation 5.18 as a general partner, officer, director,

    owner of more than a ten percent interest, associated person,

    employee, relative or spouse of the foregoing or relative of a

    spouse who shares the same home.

    ---------------------------------------------------------------------------

    Additionally, paragraph (g) of proposed Regulation 5.18 would

    require each retail forex counterparty and each CPO, CTA and IB subject

    to part 5 to maintain records of all communications they receive

    concerning possible violations of the Act or Commission regulations

    involving their retail forex business. The required records would

    include the complainant's identity (if provided), the date of the

    transaction or contract at issue, and the name of the person who

    received the communication. The retail forex counterparty, CPO, CTA or

    IB would be required to provide copies of such records to the

    Commission.

    The Commission believes that, given the volume of cases it has

    prosecuted in recent years involving retail forex fraud, requiring the

    maintenance of detailed records of customer complaints will provide

    such intermediaries with a comprehensive view of the types and numbers

    of problems that exist within their operations, and will provide the

    Commission with ready access to information regarding such problems.

    Paragraph (h) of proposed Regulation 5.18 would require each person

    who applies for registration as an IB in order to solicit or accept

    off-exchange retail forex orders, and each person who succeeds to the

    business of an IB that solicits or accepts retail forex orders to enter

    into a guarantee agreement with an FCM or an RFED. As discussed above

    in relation to revisions to Commission Regulation 1.10, the Commission

    believes that the requirement that RFEDs and FCMs enter a guarantee

    agreement with the IBs that solicit business on their behalf serves the

    public's interest by discouraging FCMs and RFEDs from associating with

    IBs without regard to the sales practices they employ.

    Paragraph (i) of proposed Regulation 5.18 would require retail

    forex counterparties to calculate on a quarterly basis the percentage

    of non-discretionary accounts that were profitable, and to maintain

    records of those calculations together with supporting data for five

    years in accordance with Regulation 1.31. As discussed above, Proposed

    Regulation 5.5 requires that RFEDs, FCMs and IBs provided retail forex

    customers with a risk disclosure statement that includes the percentage

    of accounts that were profitable for each of the four most recent

    quarters. Proposed Regulation 5.8 buttresses this requirement by

    directing retail forex counterparties to make such calculations on a

    quarterly basis and maintain records reflecting the calculation.

    Finally, paragraph (j) would require each retail forex counterparty

    to designate at least one principal to serve as its chief compliance

    officer, who would be required to certify annually to the Commission

    and to NFA that the retail forex counterparty had in place policies and

    procedures reasonably designed to achieve compliance with the Act and

    the Commission's regulations. The Commission intends that retail forex

    counterparties adhere to the highest professional standards and that

    they take their compliance responsibilities seriously. With the

    requirement of a high level compliance officer and annual

    certification, Commission registrants will be expected to meet these

    standards and required to identify the person within the entity

    responsible for meeting them.

    16. Proposed Regulation 5.19--Pending Legal Proceedings

    Proposed Regulation 5.19 requires RFEDs, FCMs CPOs, CTAs and IBs to

    disclose pending legal matters and specifies the manner in which such

    matters are to be reported to the Commission, as well as the criteria

    for determining which proceedings are

    [[Page 3293]]

    required to be disclosed. As discussed above, given the high incidence

    of fraud in connection with retail forex transactions, the Commission

    desires to monitor legal actions taken against registrants. Requiring

    reporting of such actions is one of the most direct ways of determining

    where problems exist and what registrants may have failed to deal

    fairly with customers.

    17. Proposed Regulation 5.20--Special Calls for Information

    Proposed Regulation 5.20 is patterned on existing Regulations 21.00

    through 21.03. The purpose of proposed Regulation 5.20 is to ensure

    that the Commission has the authority to obtain information regarding

    retail forex accounts and transactions when such information is

    necessary to enable the Commission to carry out its responsibilities

    under the Act, and to set forth the responsibilities and duties of

    RFEDs, FCMs, and IBs when a special call is issued.

    18. Proposed Regulation 5.21--Supervision of Retail Forex Accounts

    Proposed Regulation 5.21 imposes the same supervision requirements

    set forth in existing Regulation 166.3 upon Commission registrants

    subject to Part 5. A separate provision for retail forex is included in

    order to avoid any question whether the same duties apply to persons

    with supervisory responsibilities in the context of retail forex

    trading activity.

    19. Proposed Regulation 5.22--Registered Futures Association Membership

    In addition to registering with the Commission, the CRA provides

    that RFEDs and persons who provide retail forex trading advice, operate

    retail forex pools or solicit retail forex customers or accounts must

    also become members of a registered futures association.\94\

    Accordingly, proposed Regulation 5.22 requires registered futures

    association membership for RFEDs, and for each person (1) required to

    register as an IB because the person accepts orders for retail forex

    transactions; (2) required to register as a CPO because the person

    operates, or solicits funds, securities or property for, a pooled

    investment vehicle that engages in retail forex transactions; or (3)

    required to register as a CTA because the person exercises

    discretionary trading authority, or obtains written authority over, an

    account in connection with retail forex transactions.

    ---------------------------------------------------------------------------

    \94\ See, 7 U.S.C. 2(c)(2)(B)(i)(II)(gg); 2(c)(2)(B)(iv);

    2(c)(2)(C)(i)(II)(aa); and 2(c)(2)(C)(iii).

    ---------------------------------------------------------------------------

    20. Proposed Regulation 5.23--Bulk Transfers and Bulk Liquidations

    Proposed Regulation 5.23 is patterned generally upon existing

    Regulation 1.65, but has been modified to take into account certain

    rules of the National Futures Association, that have been approved by

    the Commission, that govern the transfer or liquidation of the accounts

    of retail forex customers.\95\ Proposed Regulation 5.23 permits

    transfers that are requested by the retail forex customer or expressly

    consented to by the retail forex customer's prior, specific consent in

    writing, or those done in accordance with rules adopted by the DSRO of

    the RFED, FCM or IB, as the case may be, and approved by the Commission

    that establish notice and other requirements for such assignments and

    transfers. The proposed regulation also duplicates, for the most part,

    the requirements applicable to bulk transfer notices to the Commission

    under Regulation 1.65. However, the draft regulation requires notice

    not only of bulk transfers, but also bulk liquidations, and effectively

    defines the term ``bulk'' to mean the transfer or liquidation of 50

    percent or more of the total retail forex customer accounts carried by

    the RFED, FCM or IB.\96\

    ---------------------------------------------------------------------------

    \95\ See, proposed Regulation 5.23(a)(1).

    \96\ See, proposed Regulation 5.23(a)(2).

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    21. Proposed Regulation 5.24--Applicability of Other Parts of the

    Commission's Regulations

    Proposed Regulation 5.24 states that, insofar as consistent with

    the requirements of part 5, the requirements of other parts of the

    Commission's regulations that apply to a person shall apply to that

    person as though those provisions were expressly set forth in part 5.

    For example, Regulation 1.31 sets forth the Commission's generally

    applicable recordkeeping requirements and speaks in terms of

    ``persons.'' Proposed Regulation 5.24 is intended to incorporate such

    provisions by reference to the extent that part 5 does not impose

    contradictory requirements.

    22. Proposed Regulation 5.25--Applicability of Act

    Proposed Section 5.25 incorporates various provisions of the Act

    which apply generally to registrants, specifying that the provisions of

    those sections are to be read to include the categories of forex

    registrants identified in proposed Section 5.1, and that the provisions

    of those sections are to be read to include off-exchange retail forex

    transactions and those that that engage in them. Specifically, the

    provisions of Sections 4b, 4c(b), 4f, 4g, 4k, 4m, 4n, 4o, 6(c)-(e), 6b,

    6c, 8(a)-(e), 8a, and 12(f) apply to off-exchange retail forex

    transactions just as they do to exchange-traded transactions.

    III. Related Matters

    A. Regulatory Flexibility Act

    FCMs and CPOs: The Regulatory Flexibility Act (``RFA'') \97\

    requires that agencies, in proposing rules, consider the impact of

    those rules on small businesses.\98\ The Commission has already

    established certain definitions of ``small entities'' to be used in

    evaluating the impact of its rules on such small entities in accordance

    with the RFA.\99\ In that statement, the Commission concluded that

    neither FCMs nor registered CPOs should be considered to be small

    entities for purposes of the RFA. With respect to FCMs, the

    Commission's determination was based in part upon their obligation to

    meet the capital requirement established by the Commission and the

    purposes of protecting financial integrity.\100\

    ---------------------------------------------------------------------------

    \97\ 5 U.S.C. et seq.

    \98\ By its terms, the RFA does not apply to ``individuals.''

    See 48 FR 14933, n. 115 (April 6, 1983). Because associated persons

    must be individuals, (see Commission Regulation 1.3(aa) and proposed

    Regulations 5.1(c), (d)(2), (e)(2), (g)(2) and (i)(2)), the RFA does

    not apply to APs and no analysis of the economic impact of this rule

    proposal on such persons is required.

    \99\ 47 FR 18618 (April 30, 1982).

    \100\ Id. at 18619.

    ---------------------------------------------------------------------------

    As for CPOs, the Commission determined that registered CPOs are not

    small entities based upon its existing regulatory standard for

    exempting certain small CPOs from the requirement to register under the

    Act.\101\ (A CPO need not register with the Commission if the gross

    capital contributions for all pools under its management do not exceed

    $400,000 and there are not more than fifteen participants in any one of

    those pools.\102\)

    ---------------------------------------------------------------------------

    \101\ Id. at 18619-20.

    \102\ 17 CFR 4.13(a)(2) (2009).

    ---------------------------------------------------------------------------

    Thus, with respect to FCMs and registered CPOs, the Commission

    believes that the Proposal will not have a significant economic impact

    on a substantial number of small entities.

    CTAs: The Commission has previously decided to evaluate, within the

    context of a particular rule proposal, whether all or some CTAs should

    be considered to be small entities, and if so, to then analyze the

    economic impact on them of any such rule.\103\ CTAs

    [[Page 3294]]

    wishing to advise retail forex customers may include both currently

    registered CTAs and previously unregistered persons who now will be

    required to register. As to the first group, there should be no

    significant new economic impact. As to the second group, registration

    will require the submission of application forms, fingerprinting of

    principals, and payment of registration fees. To the extent that CTAs

    can be considered to be small entities, the Commission does not

    consider either the proposed registration fee or the proposed

    fingerprinting requirement for newly registered CTAs to have

    significant economic impact.\104\

    ---------------------------------------------------------------------------

    \103\ 47 FR at 18620.

    \104\ 48 FR 35248 at 35276 (August 3, 1983).

    ---------------------------------------------------------------------------

    IBs: In its 1982 policy statement, the Commission proposed that for

    purposes of the RFA and future rulemakings, the Commission would not

    consider introducing brokers to be ``small entities'' for essentially

    the same reasons that FCMs had previously been determined not to be

    small entities.\105\ However, this determination was based, in part, on

    the fact that IBs, like FCMs, are required to maintain a specified

    level of adjusted net capital. Under the proposal, retail forex IBs

    would not be subject to a capital requirement; rather, they would have

    to operate pursuant to a guarantee agreement. Nevertheless, as

    discussed above with regard to CTAs, registration of previously

    unregistered entities will require the submission of application forms,

    fingerprinting of principals, and payment of registration fees. To the

    extent that IBs can be considered to be small entities, the Commission

    does not consider either the proposed registration fee or the proposed

    fingerprinting requirement for IBs subject to Part 5 to have

    significant economic impact.

    ---------------------------------------------------------------------------

    \105\ 47 FR at 18619.

    ---------------------------------------------------------------------------

    RFEDs: RFEDs are a new category of registrant. Accordingly, the

    Commission has not addressed the question of whether such persons are,

    in fact, small entities for purposes of the RFA. The Commission does

    not believe that there are regulatory alternatives to those being

    proposed which would be consistent with the statutory mandate to

    provide protection to the public against irresponsible or fraudulent

    business practices. For purposes of the RFA and future rulemakings, the

    Commission is hereby proposing that RFEDs not be considered to be

    ``small entities'' for essentially the same reasons that FCMs have

    previously been determined not to be small entities.\106\ As with FCMs,

    a requirement to maintain a specified level of adjusted net capital

    would be imposed upon RFEDs to ensure that they maintain sufficient

    capital resources to guarantee their financial accountability and to

    promote responsible and reliable business operations. Moreover, the

    Commission has sought to fashion its proposed regulatory program for

    RFEDs in a manner which is responsive to the function, purposes, and

    size of the entity being regulated consistent with the objective of the

    RFA. In particular, the minimum capital requirement required by the CRA

    effectuates the Congressional purpose that RFEDs maintain sufficient

    reserve of capital to remain economically viable. For the reasons

    stated above, the Commission hereby proposes not to define RFEDs as

    small entities for RFA purposes.

    ---------------------------------------------------------------------------

    \106\ Id.

    ---------------------------------------------------------------------------

    B. Paperwork Reduction Act

    The Proposal contains information collection requirements. The

    Paperwork Reduction Act of 1995 (``PRA'') \107\ imposes certain

    requirements of federal agencies (including the Commission) in

    conducting or sponsoring any collection of information as defined by

    the PRA. The Commission has submitted to the Director of the Office of

    Management and Budget (``OMB''), pursuant to the provisions of the PRA,

    an explanation and details of the information collection and

    recordkeeping requirements which would be necessary to implement the

    Proposal.

    ---------------------------------------------------------------------------

    \107\ 44 U.S.C. 3501, et seq.

    ---------------------------------------------------------------------------

    1. Collection of Information

    If adopted, the Proposal would require existing and new registrants

    in the FCM, RFED, CTA, CPO and IB categories to submit certain filings

    to the Commission which had not been previously required; these

    collections of information are found primarily in the new part 5 of the

    proposed regulations. To the extent industry participants are currently

    registered as CTAs, CPOs, IBs or FCMs, and intend to engage in retail

    forex transactions, the obligations imposed by the proposed rules would

    not be significantly altered, but the existing collections will be

    amended to reflect additional, new registrants within these categories,

    and the part 5 collection will include any additional information

    collections not captured in existing collections. The estimated numbers

    of respondents, annual responses by each, average hours per response

    and annual reporting burden reflected in section 2 immediately below

    represent estimates from the last update of the collection plus new

    respondents, responses and a new calculation of associated burdens.

    Since several of the proposals contained herein consist of proposed

    amendments to rules which have already been assigned OMB control

    numbers, the Commission assumes that the amended rules will be assigned

    the same OMB control number. Similarly, the Commission is proposing

    that the new registrants use amendments to existing forms in order to

    comply with registration and financial reporting requirements, those

    forms, as amended, will in all likelihood retain the same OMB control

    number which they have at present. Finally, as to RFEDs, a new category

    of registrant, new OMB control numbers will be assigned to new

    collections; to the extent existing regulations have been amended to

    include RFEDs, the collections associated with those regulations will

    be amended to reflect the new category of registrant. Each effected

    collection and the new part 5 collection are discussed separately

    below.

    2. Existing Collections

    a. Collection 3038-0024 (Part 1 of the Regulations)

    Generally speaking, collections occurring by operation of part 1

    regulations affect FCMs and IBs. Those entities that will be required

    to register as RFEDs are currently registered as FCMs, so existing

    Collection 3038-0024 has been amended, where appropriate, to reflect

    fewer FCM respondents. The collection has also been amended, where

    appropriate, to reflect additional IB registrants, who were not

    previously required to register to conduct off-exchange retail forex

    business and now will be.

    Estimated number of respondents: 2,160.

    Annual responses by each respondent: 38,894.

    Estimated average hours per response: 1.9.

    Annual reporting burden: 21,229.

    b. Collection 3038-0023 (Part 3 of the Regulations)

    Part 3 of the Commission's regulations concern registration

    requirements. Existing Collection 3038-0023 has been amended to reflect

    the obligations associated with the registration of new entrants, such

    as CTAs, CPOs, IBs, and APs, that had not previously been required to

    register in order to conduct off-exchange retail forex transactions.

    Since the registration requirements are in all respects the same as for

    current registrants, the collection has been amended only insofar as it

    concerns the increased estimated number of respondents and the

    corresponding estimated annual burden.

    [[Page 3295]]

    Estimated number of respondents: 71,857.

    Annual responses by each respondent: 73,694.

    Estimated average hours per response: 0.09.

    Annual reporting burden: 6,632.

    c. Collection 3038-0005 (Part 4 of the Commission's Regulations)

    Part 4 of the Commission's regulations concerns the operations of

    CTAs and CPOs, and the circumstances under which they may be exempted

    from registration. As discussed above, the estimated average time spent

    per response has not been altered. However, adjustments have been made

    to the collection to account for additional CPOs and CTAs: filing for

    exemptions from the Part 4 rules, developing and distributing required

    disclosure documents; complying with required reporting requirements.

    Estimated number of respondents: 9,486.

    Annual responses by each respondent: 37,930.

    Estimated average hours per response: 17.

    Annual reporting burden: 183,700.\108\

    ---------------------------------------------------------------------------

    \108\ Due to a mathematical error in the previous Collection

    3038-0005, the current estimated numbers reflect a large increase in

    the burden to respondents. The estimated increase in the annual

    responses to by each respondent is increased by 721 as a result of

    this rulemaking. The estimated annual increase in the hours of

    reporting burden is increased by 4,833 as a result of this

    rulemaking.

    ---------------------------------------------------------------------------

    d. Collection 3038-0055 (Part 160 of the Regulations)

    Part 160 requires financial institutions to provide notice to

    customers regarding privacy policies and practices. As discussed above,

    the estimated average time spent per response has not been amended;

    rather, the collection has been amended to reflect new registrants that

    will have to comply with the part 160 requirements.

    Estimated number of respondents: 4,066.

    Annual responses by each respondent: 96.

    Estimated average hours per response: 0.24.

    Annual reporting burden: 6,186.

    3. New Collection 3038--NEW (Proposed Part 5 of the Regulations)

    Part 5 of the proposed regulations requires various information

    collections by various registrants. The Commission is seeking a new and

    separate control number for collections occurring pursuant to part 5.

    Among the sections requiring information collections in the new part 5

    is Regulation 5.5, which would require the development and distribution

    of risk disclosure documents by RFEDs, FCMs and IBs transacting off-

    exchange retail forex. Regulation 5.6 would require reporting by RFEDs

    that fail to meet minimum financial requirements or are otherwise

    required to provide early warning notices. Regulation 5.11 would

    require annual risk assessment reporting by RFEDs, and Regulation 5.12

    would require financial reports of RFEDs applying for registration.

    Regulation 5.13 concerns reporting to customers by RFEDS and FCMs.

    Regulation 5.18 generally concerns trading and operational standards

    for retail forex counterparties and intermediaries. Among the sections

    within Regulation 5.18 requiring collections of information are

    5.18(g), which requires all counterparties and intermediaries to

    forward to the Commission records of communications received concerning

    facts giving rise to possible violations of the Act or Regulations, and

    5.18(j), which requires forex counterparties to provide the Commission

    with an annual compliance certification. Regulation 5.19 would require

    all forex counterparties and intermediaries to provide the Commission

    with notice of legal proceedings to which they are parties. Finally,

    Regulation 5.23 concerns the notices that must be given in the event of

    bulk transfers or liquidations.

    OMB Control Number 3038--NEW.

    Estimated number of respondents: 1,156.

    Annual responses by each respondent: 4,493.

    Estimated average hours per response: 1.8.

    Annual reporting burden: 4,202.

    Copies of the information collection submission to OMB are

    available from the CFT Clearance Officer, 1155 21st Street, NW.,

    Washington, DC 20581, (202) 418-5160. The Commission considers comments

    by the public on this proposed collection of information in--

    Evaluating whether the proposed collections of information are

    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, utility and clarity of the information to be

    collected; and

    Minimizing the burden of the 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

    submissions of responses.

    Organizations and individuals desiring to submit comments on the

    information collection should contact the Office of Information and

    Regulatory Affairs, Office of Management and Budget, Room 10235, New

    Executive Office Building, Washington, DC 20503, ATTN: Desk Officer of

    the Commodity Futures Trading Commission. OMB is required to make a

    decision concerning the collection of information contained in the

    Proposal between 30 and 60 days after publication of his document in

    the Federal Register. Therefore, 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 comment

    to the Commission on the proposed rules.

    C. Cost-Benefit Analysis

    Section 15(a) of the Act \109\ requires the Commission to consider

    the costs and benefits of its action before issuing new regulations

    under the Act. By its terms, section 15(a) does not require the

    Commission to quantify the costs and benefits of a new regulation or to

    determine whether the benefits of the regulation outweigh its costs.

    Rather, section 15(a) simply requires the Commission to ``consider the

    costs and benefits'' of its action.

    Section 15(a) further specifies that costs and benefits shall be

    evaluated in light of five broad areas of market and public concern,

    enumerated below. Accordingly, the Commission could, in its discretion,

    give greater weight to any one of the five enumerated areas and could,

    in its discretion, determine that, notwithstanding its costs, a

    particular rule was necessary or appropriate to protect the public

    interest or to effectuate any of the provisions or to accomplish any of

    the purposes of the Act.

    ---------------------------------------------------------------------------

    \109\ 7 U.S.C. 19(a).

    ---------------------------------------------------------------------------

    As discussed in more detail above, the Proposal would create a

    comprehensive scheme to implement the requirements of the CRA. It would

    put in place requirements including registration, disclosure,

    recordkeeping, financial reporting, minimum capital and other

    operational standards. This would be achieved through both amendments

    to existing regulations and the creation of a new, free-standing part

    to the Commission's regulations. The Commission is considering the

    costs

    [[Page 3296]]

    and benefits of the Proposal in light of the specific provisions of

    section 15(a) as follows:

    1. Protection of market participants and the public. The Proposal

    should enhance considerably the protection of market participants and

    the public because it requires, for the first time, the registration of

    several categories of market participants and requires adherence to

    operational standards that had not previously applied. The benefits

    that inhere in the imposition of these requirements to a sector of the

    off-exchange market that has been largely unregulated to this point,

    and which is geared towards the retail public, are manifest.

    2. Efficiency and competition. In its Conference Report, Congress

    indicated that the Commission should avoid creating two different

    regulatory regimes for similar business models with respect to FCMs or

    RFEDs engaging in off-exchange retail forex transactions.\110\

    Accordingly, the Commission has endeavored to ensure that these

    entities be treated in comparable fashion relative to one another.

    Moreover, the Commission has endeavored, wherever possible, to propose

    regulations in the proposed part 5 that are analogous to regulations

    imposed upon intermediaries engaged in on-exchange transactions.

    Accordingly, the Commission believes that it has provided an evenhanded

    regulatory scheme that will be familiar to industry participants.

    ---------------------------------------------------------------------------

    \110\ As noted in the Conference Report that accompanied the

    CRA, ``To the extent their risk profiles are similar, the managers

    intend for FCMs and RFEDs to be regulated substantially equivalently

    in terms of their off-exchange retail foreign currency business.''

    H.R. Rep. No. 110-627, at 980 (2008) (Conf. Rep.). The Conference

    Report is available via the Internet on the CFTC's Web site.

    ---------------------------------------------------------------------------

    3. Financial integrity of futures markets and price discovery. The

    Proposal's regulations concern retail, off-exchange markets. These

    markets serve primarily as a vehicle for members of the retail public

    to engage in speculative transactions. Accordingly, the Commission does

    not perceive a significant intersection between the operations of these

    markets and the financial integrity or price discovery functions of the

    markets generally.

    4. Sound risk management practices. The Proposal includes

    requirements regarding capital, financial reporting, risk assessment

    recordkeeping, and risk assessment reporting that are comparable to

    those required of entities engaged in on-exchange trading. The

    Commission believes that the benefits of these risk management

    requirements--which strive to ensure the financial soundness of firms--

    have been borne out on the exchange-traded side and will be of

    significant benefit with regard to its oversight of retail forex

    counterparties.

    5. Other public interest considerations. The retail, off-exchange

    forex market has been largely unregulated until now. The Commission

    believes that the Proposal is beneficial in that will provide needed

    protections for members of the public engaging in these transactions.

    The Proposal will also bring much needed oversight to the forex

    counterparties and intermediaries that interact with the public.

    After considering these factors, the Commission has determined to

    issue the Proposal. The Commission invites public comment on its

    application of the cost-benefit provision. Commenters also are invited

    to submit any data that they may have quantifying the costs and

    benefits of the Proposal with their comment letters.

    List of Subjects

    17 CFR Part 1

    Definitions, Minimum financial and reporting requirements.

    Recordkeeping requirements, Prohibited transactions in commodity

    options, Miscellaneous.

    17 CFR Part 3

    Definitions, Customer protection, Licensing, Registration.

    17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators,

    Commodity trading advisors, Consumer protection, Exemption from

    registration, Reporting and recordkeeping requirements.

    17 CFR Part 5

    Bulk transfers, Commodity pool operators, Commodity trading

    advisors, Consumer protection, Customer's money, securities and

    property, Definitions, Foreign exchange, Minimum financial and

    reporting requirements, Prohibited transactions in retail foreign

    exchange, Recordkeeping requirements, Retail foreign exchange dealers,

    Risk assessment, Special calls, Trading practices.

    17 CFR Part 10

    Adjudicatory proceedings, Rules of practice.

    17 CFR Part 140

    Authority delgations (Government agencies, Conflict of interests,

    Organization and functions (Government agencies).

    17 CFR Part 145

    Confidential business information, Freedom of information.

    17 CFR Part 147

    Sunshine Act.

    17 CFR Part 160

    Consumer financial information, Definitions, Nonpublic personal

    information, Privacy.

    17 CFR Part 166

    Arbitration, Authorization to trade, Customer protection,

    Definitions, Dispute settlement; Litigation; Reparations.

    For the reasons presented above, the Commission hereby proposes to

    amend Chapter I of Title 17 of the Code of Federal Regulations as

    follows:

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

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

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e,

    6f, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12c,

    13a, 13a-1, 16, 16a, 19, 21, 23 and 24.

    Sec. 1.1 [Removed and Reserved]

    2. Section 1.1 is removed and reserved.

    3. Section 1.3 is amended by revising paragraphs (nn) and (yy) to

    read as follows:

    Sec. 1.3 Definitions.

    * * * * *

    (nn) Guarantee agreement. This term means an agreement of guaranty

    in the form set forth in part B or C of Form 1-FR, executed by a

    registered futures commission merchant or retail foreign exchange

    dealer, as appropriate, and by an introducing broker or applicant for

    registration as an introducing broker on behalf of an introducing

    broker or applicant for registration as an introducing broker in

    satisfaction of the alternative adjusted net capital requirement set

    forth in Sec. 1.17(a)(1)(iii).

    * * * * *

    (yy) Commodity Interest. This term means:

    (1) Any contract for the purchase or sale of a commodity for future

    delivery;

    (2) Any contract, agreement or transaction subject to Commission

    regulation under section 4c or 19 of the Act; and

    (3) Any contract, agreement or transaction subject to Commission

    jurisdiction under section 2(c)(2) of the Act.

    4. Section 1.4 is revised to read as follows:

    [[Page 3297]]

    Sec. 1.4 Use of electronic signatures.

    For purposes of complying with any provision in the Commodity

    Exchange Act or the rules or regulations in this Chapter I that

    requires a document to be signed by a customer of a futures commission

    merchant or introducing broker, a retail forex customer of a retail

    foreign exchange dealer or futures commission merchant, a pool

    participant or a client of a commodity trading advisor, an electronic

    signature executed by the customer, participant or client will be

    sufficient, if the futures commission merchant, retail foreign exchange

    dealer, introducing broker, commodity pool operator or commodity

    trading advisor elects generally to accept electronic signatures;

    Provided, however, That the electronic signature must comply with

    applicable Federal laws and other Commission rules; And, Provided

    further, That the futures commission merchant, retail foreign exchange

    dealer, introducing broker, commodity pool operator or commodity

    trading advisor must adopt and utilize reasonable safeguards regarding

    the use of electronic signatures, including at a minimum safeguards

    employed to prevent alteration of the electronic record with which the

    electronic signature is associated, after such record has been

    electronically signed.

    5. Section 1.10 is amended by revising paragraph (j) to read as

    follows:

    Sec. 1.10 Financial reports of futures commission merchants and

    introducing brokers.

    * * * * *

    (j) Requirements for guarantee agreement. (1) A guarantee agreement

    filed pursuant to this section must be signed in a manner sufficient to

    be a binding guarantee under local law by an appropriate person on

    behalf of the futures commission merchant or retail foreign exchange

    dealer and the introducing broker, and each signature must be

    accompanied by evidence that the signatory is authorized to enter the

    agreement on behalf of the futures commission merchant, retail foreign

    exchange dealer, or introducing broker and is such an appropriate

    person. For purposes of this paragraph (j), an appropriate person shall

    be the proprietor, if the firm is a sole proprietorship; a general

    partner, if the firm is a partnership; and either the chief executive

    officer or the chief financial officer, if the firm is a corporation;

    and, if the firm is a limited liability company or limited liability

    partnership, either the chief executive officer, the chief financial

    officer, the manager, the managing member, or those members vested with

    the management authority for the limited liability company or limited

    liability partnership.

    (2) No futures commission merchant or retail foreign exchange

    dealer may enter into a guarantee agreement if:

    (i) It knows or should have known that its adjusted net capital is

    less than the amount set forth in Sec. 1.12(b) of this part or Sec.

    5.6(b) of this chapter, as applicable; or

    (ii) There is filed against the futures commission merchant or

    retail foreign exchange dealer an adjudicatory proceeding brought by or

    before the Commission pursuant to the provisions of sections 6(c),

    6(d), 6c, 6d, 8a or 9 of the Act or Sec. Sec. 3.55, 3.56 or 3.60 of

    this chapter.

    (3) A retail foreign exchange dealer may enter into a guarantee

    agreement only with an introducing broker as defined in Sec.

    5.1(f)(1). A retail foreign exchange dealer may not enter into a

    guarantee agreement with an introducing broker as defined in Sec.

    1.3(mm) of this part.

    (4) A guarantee agreement filed in connection with an application

    for initial registration as an introducing broker in accordance with

    the provisions of Sec. 3.10(a) of this chapter shall become effective

    upon the granting of registration or, if appropriate, a temporary

    license, to the introducing broker. A guarantee agreement filed other

    than in connection with an application for initial registration as an

    introducing broker shall become effective as of the date agreed to by

    the parties.

    (5)(i) If the registration of the introducing broker is suspended,

    revoked, or withdrawn in accordance with the provisions of this

    chapter, the guarantee agreement shall expire as of the date of such

    suspension, revocation or withdrawal.

    (ii) If the registration of the futures commission merchant or

    retail foreign exchange dealer is suspended or revoked, the guarantee

    agreement shall expire 30 days after such suspension or revocation, or

    at such earlier time as may be approved by the Commission, the

    introducing broker, and the introducing broker's designated self-

    regulatory organization.

    (6) A guarantee agreement may be terminated at any time during the

    term thereof:

    (i) By mutual written consent of the parties, signed by an

    appropriate person on behalf of each party, with prompt written notice

    thereof, signed by an appropriate person on behalf of each party, to

    the Commission and to the designated self-regulatory organizations of

    the futures commission merchant or retail foreign exchange dealer and

    the introducing broker;

    (ii) For good cause shown, by either party giving written notice of

    its intention to terminate the agreement, signed by an appropriate

    person, to the other party to the agreement, to the Commission, and to

    the designated self-regulatory organizations of the futures commission

    merchant or retail foreign exchange dealer and the introducing broker;

    or

    (iii) By either party giving written notice of its intention to

    terminate the agreement, signed by an appropriate person, at least 30

    days prior to the proposed termination date, to the other party to the

    agreement, to the Commission, and to the designated self-regulatory

    organizations of the futures commission merchant or retail foreign

    exchange dealer and the introducing broker.

    (7) The termination of a guarantee agreement by a futures

    commission merchant, retail foreign exchange dealer or an introducing

    broker, or the expiration of such an agreement, shall not relieve any

    party from any liability or obligation arising from acts or omissions

    which occurred during the term of the agreement.

    (8) An introducing broker may not simultaneously be a party to more

    than one guarantee agreement: Provided, however, That the provisions of

    this paragraph (j)(8) shall not be deemed to preclude an introducing

    broker from entering into a guarantee agreement with another futures

    commission merchant or retail foreign exchange dealer if the

    introducing broker, futures commission merchant or retail foreign

    exchange dealer which is a party to the existing agreement has provided

    notice of termination of the existing agreement in accordance with the

    provisions of paragraph (j)(6) of this section, and the new guarantee

    agreement does not become effective until the day following the date of

    termination of the existing agreement: And, provided further, That the

    provisions of this paragraph (j)(8) shall not be deemed to preclude an

    introducing broker from entering into a guarantee agreement with

    another futures commission merchant or retail foreign exchange dealer

    if the futures commission merchant or retail foreign exchange dealer

    which is a party to the existing agreement ceases to remain registered

    and the existing agreement would therefore expire in accordance with

    the provisions of paragraph (j)(6)(ii) of this section.

    (9)(i)(A) An introducing broker that is a party to a guarantee

    agreement that has been terminated in accordance with the provisions of

    paragraph (j)(6) of this

    [[Page 3298]]

    section, or that is due to expire in accordance with the provisions of

    paragraph (j)(5)(ii) of this section, must cease doing business as an

    introducing broker on or before the effective date of such termination

    or expiration unless, on or before 10 days prior to the effective date

    of such termination or expiration or such other period of time as the

    Commission or the designated self-regulatory organization may allow for

    good cause shown, the introducing broker files with its designated

    self-regulatory organization either a new guarantee agreement effective

    as of the day following the date of termination of the existing

    agreement, or, in the case of a guarantee agreement that is due to

    expire in accordance with the provisions of paragraph (j)(4)(ii) of

    this section, a new guarantee agreement effective on or before such

    expiration, or either:

    (1) A Form 1-FR-IB certified by an independent public accountant in

    accordance with Sec. 1.16 as of a date not more than 45 days prior to

    the date on which the report is filed; or

    (2) A Form 1-FR-IB as of a date not more than 17 business days

    prior to the date on which the report is filed and a Form 1-FR-IB

    certified by an independent public accountant in accordance with Sec.

    1.16 as of a date not more than one year prior to the date on which the

    report is filed: Provided, however, that an introducing broker as

    defined in Sec. 5.1(f)(1) of this chapter that is party to a guarantee

    agreement that has been terminated or that has expired must cease doing

    business as an introducing broker on or before the effective date of

    such termination or expiration unless, on or before 10 days prior to

    the effective date of such termination or expiration or such other

    period of time as the Commission or the designated self-regulatory

    organization may allow for good cause shown, the introducing broker

    files with its designated self-regulatory organization a new guarantee

    agreement effective on or before the termination or expiration date of

    the terminating or expiring guarantee agreement.

    (B) Each person filing a Form 1-FR-IB in accordance with this

    section must include with the financial report a statement describing

    the source of his current assets and representing that his capital has

    been contributed for the purpose of operating his business and will

    continue to be used for such purpose.

    (ii)(A) Notwithstanding the provisions of paragraph (j)(9)(i) of

    this section or of Sec. 1.17(a), an introducing broker that is a party

    to a guarantee agreement that has been terminated in accordance with

    the provisions of paragraph (j)(6)(ii) of this section shall not be

    deemed to be in violation of the minimum adjusted net capital

    requirement of Sec. 1.17(a)(1)(iii) or (a)(2) for 30 days following

    such termination. Such an introducing broker must cease doing business

    as an introducing broker on or after the effective date of such

    termination, and may not resume doing business as an introducing broker

    unless and until it files a new agreement or either:

    (1) A Form 1-FR-IB certified by an independent public accountant in

    accordance with Sec. 1.16 as of a date not more than 45 days prior to

    the date on which the report is filed; or

    (2) A Form 1-FR-IB as of a date not more than 17 business days

    prior to the date on which the report is filed and a Form 1-FR-IB

    certified by an independent public accountant in accordance with Sec.

    1.16 as of a date not more than one year prior to the date on which the

    report is filed: Provided, however, that an introducing broker as

    defined in Sec. 5.1(f)(1) of this chapter that is party to a guarantee

    agreement that has been terminated must cease doing business as an

    introducing broker from and after the effective date of such

    termination, and may not resume doing business as an introducing broker

    as defined in Sec. 5.1(f)(1) of this chapter unless and until it files

    a new guarantee agreement.

    (B) Each person filing a Form 1-FR-IB in accordance with this

    section must include with the financial report a statement describing

    the source of his current assets and representing that his capital has

    been contributed for the purpose of operating his business and will

    continue to be used for such purpose.

    * * * * *

    6. Section 1.35 is amended by revising paragraphs (a), (a-1) and

    (b) to read as follows:

    Sec. 1.35 Records of cash commodity, futures, and option

    transactions.

    (a) Futures commission merchants, retail foreign exchange dealers,

    introducing brokers, and members of contract markets. Each futures

    commission merchant, retail foreign exchange dealer, introducing

    broker, and member of a contract market shall keep full, complete, and

    systematic records, together with all pertinent data and memoranda, of

    all transactions relating to its business of dealing in commodity

    futures, retail forex transactions, commodity options, and cash

    commodities (including currencies). Each futures commission merchant,

    retail foreign exchange dealer, introducing broker, and member of a

    contract market shall retain the required records, data, and memoranda

    in accordance with the requirements of Sec. 1.31, and produce them for

    inspection and furnish true and correct information and reports as to

    the contents or the meaning thereof, when and as requested by an

    authorized representative of the Commission or the United States

    Department of Justice. Included among such records shall be all orders

    (filled, unfilled, or canceled), trading cards, signature cards, street

    books, journals, ledgers, canceled checks, copies of confirmations,

    copies of statements of purchase and sale, and all other records, data

    and memoranda, which have been prepared in the course of its business

    of dealing in commodity futures, retail forex transactions, commodity

    options, and cash commodities. Among such records each member of a

    contract market must retain and produce for inspection are all

    documents on which trade information is originally recorded, whether or

    not such documents must be prepared pursuant to the rules or

    regulations of either the Commission or the contract market. For

    purposes of this section, such documents are referred to as ``original

    source documents.''

    (a-1) Futures commission merchants, retail foreign exchange

    dealers, introducing brokers, and members of contract markets:

    Recording of customers' and option customers' orders. (1) Each futures

    commission merchant, each retail foreign exchange dealer and each

    introducing broker receiving a customer's, retail forex customer's or

    option customer's order, as applicable, shall immediately upon receipt

    thereof prepare a written record of the order including the account

    identification, except as provided in paragraph (a-1)(5) of this

    section, and order number, and shall record thereon, by timestamp or

    other timing device, the date and time, to the nearest minute, the

    order is received, and in addition, for option customers' orders, the

    time, to the nearest minute, the order is transmitted for execution.

    (2)(i) Each member of a contract market who on the floor of such

    contract market receives a customer's or option customer's order which

    is not in the form of a written record including the account

    identification, order number, and the date and time, to the nearest

    minute, the order was transmitted or received on the floor of such

    contract market, shall immediately upon receipt thereof prepare a

    written record of the order in nonerasable ink, including the account

    identification, except as provided in paragraph (a-1)(5) of this

    section or appendix C to this part, and order number and shall record

    thereon,

    [[Page 3299]]

    by timestamp or other timing device, the date and time, to the nearest

    minute, the order is received.

    (ii) Except as provided in paragraph (a-1)(3) of this section:

    (A) Each contract market member who on the floor of such contract

    market receives an order from another member present on the floor which

    is not in the form of a written record shall, immediately upon receipt

    of such order, prepare a written record of the order or obtain from the

    member who placed the order a written record of the order, in non-

    erasable ink including the account identification and order number and

    shall record thereon, by time-stamp or other timing device, the date

    and time, to the nearest minute, the order is received; or

    (B) When a contract market member present on the floor places an

    order, which is not in the form of a written record, for his own

    account or an account over which he has control, with another member of

    such contract market for execution:

    (1) The member placing such order immediately upon placement of the

    order shall record the order and time of placement to the nearest

    minute on a sequentially-numbered trading card maintained in accordance

    with the requirements of paragraph (d) of this section;

    (2) The member receiving and executing such order immediately upon

    execution of the order shall record the time of execution to the

    nearest minute on a trading card or other record maintained pursuant to

    the requirements of paragraph (d) of this section; and

    (3) The member receiving and executing the order shall return such

    trading card or other record to the member placing the order. The

    member placing the order then must submit together both of the trading

    cards or other records documenting such trade to contract market

    personnel or the clearing member, in accordance with contract market

    rules adopted pursuant to paragraph (j)(1) of this section.

    (iii) Each contract market may adopt rules, which must be submitted

    to the Commission pursuant to section 5a(a)(12)(A) of the Act and

    Commission Regulation 1.41, that provide alternative requirements to

    those contained in paragraph (a-1)(2)(ii) of this section. Such rules

    shall, at a minimum, require that the contemporaneous written records:

    (A) Contain the terms of the order;

    (B) Include reliable timing data for the initiation and execution

    of the order which would permit complete and effective reconstruction

    of the order placement and execution; and

    (C) Be submitted to contract market personnel or clearing members

    in accordance with contract market rules adopted pursuant to paragraph

    (j)(1) of this section.

    (3)(i) The requirements of paragraph (a-1)(2)(ii) of this section

    will not apply if a contract market maintains in effect rules which

    have been submitted to the Commission pursuant to section 5a(a)(12)(A)

    of the Act and Commission Regulation 1.41, which provide for an

    exemption where:

    (A) A contract market member places with another member of such

    contract market an order that is part of a spread transaction;

    (B) The member placing the order personally executes one or more

    legs of the spread; and

    (C) The member receiving and executing such order immediately upon

    execution of the order records the time of execution to the nearest

    minute on his trading card or other record maintained in accordance

    with the requirements of paragraph (d) of this section.

    (ii) Each contract market shall, as part of its trade practice

    surveillance program, conduct surveillance for compliance with the

    recordkeeping and other requirements under paragraphs (a-1) (2) and (3)

    of this section, and for trading abuses related to the execution of

    orders for members present on the floor of the contract market.

    (4) Each member of a contract market reporting the execution from

    the floor of the contract market of a customer's or option customer's

    order or the order of another member of the contract market received in

    accordance with paragraphs (a-1)(2)(i) or (a-1)(2)(ii)(A) of this

    section, shall record on a written record of the order, including the

    account identification, except as provided in paragraph (a-1)(5) of

    this section, and order number, by timestamp or other timing device,

    the date and time to the nearest minute such report of execution is

    made. Each member of a contract market shall submit the written records

    of customer orders or orders from other contract market members to

    contract market personnel or to the clearing member responsible for the

    collection of orders prepared pursuant to this paragraph as required by

    contract market rules adopted in accordance with paragraph (j)(1) of

    this section. The execution price and other information reported on the

    order tickets must be written in nonerasable ink.

    (5) Post-execution allocation of bunched orders. Specific customer

    account identifiers for accounts included in bunched orders need not be

    recorded at time of order placement or upon report of execution if the

    requirements of paragraphs (a-1)(5)(i)-(iv) of this section are met.

    (i) Eligible account managers. The person placing and directing the

    allocation of an order eligible for post-execution allocation must have

    been granted written investment discretion with regard to participating

    customer accounts. The following persons shall qualify as eligible

    account managers:

    (A) A commodity trading advisor registered with the Commission

    pursuant to the Act or excluded or exempt from registration under the

    Act or the Commission's rules, except for entities exempt under Sec.

    4.14(a)(3) or Sec. 4.14(a)(6) of this chapter;

    (B) An investment adviser registered with the Securities and

    Exchange Commission pursuant to the Investment Advisers Act of 1940 or

    with a state pursuant to applicable state law or excluded or exempt

    from registration under such Act or applicable state law or rule;

    (C) A bank, insurance company, trust company, or savings and loan

    association subject to federal or state regulation; or

    (D) A foreign adviser that exercises discretionary trading

    authority solely over the accounts of non-U.S. persons, as defined in

    Sec. 4.7(a)(1)(iv) of this chapter.

    (ii) Information. Eligible account managers shall make the

    following information available to customers upon request:

    (A) The general nature of the allocation methodology the account

    manager will use;

    (B) Whether accounts in which the account manager may have any

    interest may be included with customer accounts in bunched orders

    eligible for post-execution allocation; and

    (C) Summary or composite data sufficient for that customer to

    compare its results with those of other comparable customers and, if

    applicable, any account in which the account manager has an interest.

    (iii) Allocation. Orders eligible for post-execution allocation

    must be allocated by an eligible account manager in accordance with the

    following:

    (A) Allocations must be made as soon as practicable after the

    entire transaction is executed, but in any event account managers must

    provide allocation information to futures commission merchants no later

    than a time sufficiently before the end of the day the order is

    executed to ensure that clearing records identify the ultimate customer

    for each trade.

    [[Page 3300]]

    (B) Allocations must be fair and equitable. No account or group of

    accounts may receive consistently favorable or unfavorable treatment.

    (C) The allocation methodology must be sufficiently objective and

    specific to permit independent verification of the fairness of the

    allocations using that methodology by appropriate regulatory and self-

    regulatory authorities and by outside auditors.

    (iv) Records. (A) Eligible account managers shall keep and must

    make available upon request of any representative of the Commission,

    the United States Department of Justice, or other appropriate

    regulatory agency, the information specified in paragraph (a-1)(5)(ii)

    of this section.

    (B) Eligible account managers shall keep and must make available

    upon request of any representative of the Commission, the United States

    Department of Justice, or other appropriate regulatory agency, records

    sufficient to demonstrate that all allocations meet the standards of

    paragraph (a-1)(5)(iii) of this section and to permit the

    reconstruction of the handling of the order from the time of placement

    by the account manager to the allocation to individual accounts.

    (C) Futures commission merchants that execute orders or that carry

    accounts eligible for post-execution allocation, and members of

    contract markets that execute such orders, must maintain records that,

    as applicable, identify each order subject to post-execution allocation

    and the accounts to which contracts executed for such order are

    allocated.

    (D) In addition to any other remedies that may be available under

    the Act or otherwise, if the Commission has reason to believe that an

    account manager has failed to provide information requested pursuant to

    paragraph (a-1)(5)(iv)(A) or (a-1)(5)(iv)(B) of this section, the

    Commission may inform in writing any designated contract market or

    derivatives transaction execution facility and that designated contract

    market or derivatives transaction execution facility shall prohibit the

    account manager from submitting orders for execution except for

    liquidation of open positions and no futures commission merchants shall

    accept orders for execution on any designated contract market or

    derivatives transaction execution facility from the account manager

    except for liquidation of open positions.

    (E) Any account manager that believes he or she is or may be

    adversely affected or aggrieved by action taken by the Commission under

    paragraph (a-1)(5)(iv)(D) of this section shall have the opportunity

    for a prompt hearing in accordance with the provisions of Sec.

    21.03(g) of this chapter.

    * * * * *

    (b) Futures commission merchants, retail foreign exchange dealers,

    introducing brokers, and clearing members of contract markets. Each

    futures commission merchant, each retail foreign exchange dealer, and

    each clearing member of a contract market and, for purposes of

    paragraph (b)(3) of this section, each introducing broker, shall, as a

    minimum requirement, prepare regularly and promptly, and keep

    systematically and in permanent form, the following:

    (1) A financial ledger record which will show separately for each

    customer or retail forex customer or option customer all charges

    against and credits to such customer's or retail forex customer's or

    option customer's account, including but not limited to customer or

    retail forex customer funds deposited, withdrawn, or transferred, and

    charges or credits resulting from losses or gains on closed

    transactions;

    (2) A record of transactions which will show separately for each

    account (including proprietary accounts):

    (i) All commodity futures transactions executed for such account,

    including the date, price, quantity, market, commodity and future;

    (ii) All retail forex transactions executed for such account,

    including the date, price, quantity, and currency; and

    (iii) All commodity option transactions executed for such account,

    including the date, whether the transaction involved a put or call,

    expiration date, quantity, underlying contract for future delivery or

    underlying physical, strike price, and details of the purchase price of

    the option, including premium, mark-up, commission and fees; and

    (3) A record or journal which will separately show for each

    business day complete details of:

    (i) All commodity futures transactions executed on that day,

    including the date, price, quantity, market, commodity, future and the

    person for whom such transaction was made;

    (ii) All retail forex transactions executed on that day for such

    account, including the date, price, quantity, currency and the person

    for whom such transaction was made; and

    (iii) All commodity option transactions executed on that day,

    including the date, whether the transaction involved a put or call, the

    expiration date, quantity, underlying contract for future delivery, or

    underlying physical, strike price, details of the purchase price of the

    option, including premium, mark-up, commission and fees and the person

    for whom the transaction was made; and

    (iv) In the case of an introducing broker, the record or journal

    required by this paragraph (b)(3) shall also include the futures

    commission merchant or retail foreign exchange dealer carrying the

    account for which each commodity futures, retail forex and commodity

    option transaction was executed on that day. Provided, however, that

    where reproductions on microfilm, microfiche or optical disk are

    substituted for hard copy in accordance with the provisions of Sec.

    1.31(b) of this part, the requirements of paragraphs (b)(1) and (b)(2)

    of this section will be considered met if the person required to keep

    such records is ready at all times to provide, and immediately provides

    in the same city as that in which such person's commodity' retail forex

    or commodity option books and records are maintained, at the expense of

    such person, reproduced copies which show the records as specified in

    paragraphs (b)(1) and (b)(2) of this section, on request of any

    representatives of the Commission or the U.S. Department of Justice.

    * * * * *

    7. Section 1.36 is amended by revising paragraph (a) to read as

    follows:

    Sec. 1.36 Record of securities and property received from customers

    and option customers.

    (a) Each futures commission merchant and each retail foreign

    exchange dealer shall maintain, as provided in Sec. 1.31, a record of

    all securities and property received from customers, retail forex

    customers or option customers in lieu of money to margin, purchase,

    guarantee, or secure the commodity, retail forex or commodity option

    transactions of such customers, retail forex customers or option

    customers. Such record shall show separately for each customer, retail

    forex customer or option customer: a description of the securities or

    property received; the name and address of such customer, retail forex

    customer or option customer; the dates when the securities or property

    were received; the identity of the depositories or other places where

    such securities or property are segregated or held; the dates of

    deposits and withdrawals from such depositories; and the dates of

    return of such securities or property to such customer, retail forex

    customer or option customer, or other disposition thereof, together

    with the facts and circumstances of such other disposition. In the

    event any futures commission

    [[Page 3301]]

    merchant deposits with the clearing organization of a contract market,

    directly or with a bank or trust company acting as custodian for such

    clearing organization, securities and/or property which belong to a

    particular customer or option customer, such futures commission

    merchant shall obtain written acknowledgment from such clearing

    organization that it was informed that such securities or property

    belong to customers or option customers of the futures commission

    merchant making the deposit. Such acknowledgment shall be retained as

    provided in Sec. 1.31.

    * * * * *

    8. Section 1.37 is amended by revising paragraph (a)(1) to read as

    follows:

    Sec. 1.37 Customer's or option customer's name, address, and

    occupation recorded; record of guarantor or controller of account.

    (a)(1) Each futures commission merchant, retail foreign exchange

    dealer, introducing broker, and member of a contract market shall keep

    a record in permanent form which shall show for each commodity futures,

    retail forex or option account carried or introduced by it the true

    name and address of the person for whom such account is carried or

    introduced and the principal occupation or business of such person as

    well as the name of any other person guaranteeing such account or

    exercising any trading control with respect to such account. For each

    such commodity option account, the records kept by such futures

    commission merchant, introducing broker, and member of a contract

    market must also show the name of the person who has solicited and is

    responsible for each option customer's account or assign account

    numbers in such a manner to identify that person.

    * * * * *

    9. Section 1.40 is revised to read as follows:

    Sec. 1.40 Crop, market information letters, reports; copies required.

    Each futures commission merchant, each retail foreign exchange

    dealer, each introducing broker and each member of a contract market

    shall, upon request, furnish or cause to be furnished to the Commission

    a true copy of any letter, circular, telegram, or report published or

    given general circulation by such futures commission merchant, retail

    foreign exchange dealer, introducing broker or member which concerns

    crop or market information or conditions that affect or tend to affect

    the price of any commodity or exchange rate, and the true source of or

    authority for the information contained therein.

    10. Section 1.46 is amended by revising paragraphs (a) and (b) to

    read as follows:

    Sec. 1.46 Application and closing out of offsetting long and short

    positions.

    (a) Application of purchases and sales. (1) Except with respect to

    purchases or sales which are for omnibus accounts, or where the

    customer or account controller has instructed otherwise, any futures

    commission merchant who, on or subject to the rules of a designated

    contract market or registered derivatives transaction execution

    facility:

    (i) Purchases any commodity for future delivery for the account of

    any customer when the account of such customer at the time of such

    purchase has a short position in the same future of the same commodity

    on the same market;

    (ii) Sells any commodity for future delivery for the account of any

    customer when the account of such customer at the time of such sale has

    a long position in the same future of the same commodity on the same

    market;

    (iii) Purchases a put or call option for the account of any option

    customer when the account of such option customer at the time of such

    purchase has a short put or call option position with the same

    underlying futures contract or same underlying physical, strike price,

    expiration date and contract market as that purchased; or

    (iv) Sells a put or call option for the account of any option

    customer when the account of such option customer at the time of such

    sale has a long put or call option position with the same underlying

    futures contract or same underlying physical, strike price, expiration

    date and contract market as that sold--shall on the same day apply such

    purchase or sale against such previously held short or long futures or

    option position, as the case may be, and shall, for futures

    transactions, promptly furnish such customer a statement showing the

    financial result of the transactions involved and, if applicable, that

    the account was introduced to the futures commission merchant by an

    introducing broker and the names of the futures commission merchant and

    introducing broker.

    (2) Any futures commission merchant or retail foreign exchange

    dealer who:

    (i) Engages in a retail forex transaction involving the purchase of

    any currency for the account of any retail forex customer when the

    account of such retail forex customer at the time of such purchase has

    an open retail forex transaction for the sale of the same currency;

    (ii) Engages in a retail forex transaction involving the sale of

    any currency for the account of any retail forex customer when the

    account of such retail forex customer at the time of such sale has an

    open retail forex transaction for the purchase of the same currency;

    (iii) Purchases a put or call option involving foreign currency for

    the account of any option customer when the account of such option

    customer at the time of such purchase has a short put or call option

    position with the same underlying currency, strike price, and

    expiration date as that purchased; or

    (iv) Sells a put or call option involving foreign currency for the

    account of any option customer when the account of such option customer

    at the time of such sale has a long put or call option position with

    the same underlying currency, strike price, and expiration date as that

    sold--shall immediately apply such purchase or sale against such

    previously held opposite transaction, and shall promptly furnish such

    retail forex customer a statement showing the financial result of the

    transactions involved and, if applicable, that the account was

    introduced to the futures commission merchant or retail foreign

    exchange dealer by an introducing broker and the names of the futures

    commission merchant or retail foreign exchange dealer, and the

    introducing broker.

    (b) Close-out against oldest open position. In all instances

    wherein the short or long futures, retail forex transaction or option

    position in such customer's, retail forex customer's or option

    customer's account immediately prior to such offsetting purchase or

    sale is greater than the quantity purchased or sold, the futures

    commission merchant or retail foreign exchange dealer shall apply such

    offsetting purchase or sale to the oldest portion of the previously

    held short or long position: Provided, That upon specific instructions

    from the customer or option customer the offsetting transaction shall

    be applied as specified by the customer or option customer without

    regard to the date of acquisition of the previously held position; and

    Provided, further, that a futures commission merchant or retail foreign

    exchange dealer, if permitted by the rules of a registered futures

    association, may offset, at the customer's request, retail forex

    transactions of the same size, even if the customer holds other

    transactions of a different size, but in each case must offset the

    transaction against the oldest

    [[Page 3302]]

    transaction of the same size. Such instructions may also be accepted

    from any person who, by power of attorney or otherwise, actually

    directs trading in the customer's, retail forex customer's or option

    customer's account unless the person directing the trading is the

    futures commission merchant or retail foreign exchange dealer

    (including any partner thereof), or is an officer, employee, or agent

    of the futures commission merchant or retail foreign exchange dealer.

    With respect to every such offsetting transaction that, in accordance

    with such specific instructions, is not applied to the oldest portion

    of the previously held position, the futures commission merchant or

    retail foreign exchange dealer shall clearly show on the statement

    issued to the customer, retail forex customer or option customer in

    connection with the transaction, that because of the specific

    instructions given by or on behalf of the customer, retail forex

    customer or option customer the transaction was not applied in the

    usual manner, i.e., against the oldest portion of the previously held

    position. However, no such showing need be made if the futures

    commission merchant or retail foreign exchange dealer has received such

    specific instructions in writing from the customer, retail forex

    customer or option customer for whom such account is carried.

    * * * * *

    11. Section 1.52 is amended by:

    a. Revising paragraphs (a) and (c);

    b. Revising paragraphs (g)(3) and (g)(4); and

    c. Revising paragraphs (h), (j), and (k) to read as follows:

    Sec. 1.52 Self-regulatory organization adoption and surveillance of

    minimum financial requirements.

    (a) Each self-regulatory organization must adopt, and submit for

    Commission approval, rules prescribing minimum financial and related

    reporting requirements for all its members who are registered futures

    commission merchants or registered retail foreign exchange dealers.

    Each self-regulatory organization other than a contract market must

    adopt, and submit for Commission approval, rules prescribing minimum

    financial and related reporting requirements for all its members who

    are registered introducing brokers. Each contract market which elects

    to have a category of membership for introducing brokers must adopt,

    and submit for Commission approval, rules prescribing minimum financial

    and related reporting requirements for all its members who are

    registered introducing brokers. Each self-regulatory organization shall

    submit for Commission approval any modification or other amendments to

    such rules. Such requirements must be the same as, or more stringent

    than, those contained in Sec. Sec. 1.10 and 1.17, for futures

    commission merchants and introducing brokers, and Sec. 5.7 for retail

    foreign exchange dealers. The definition of adjusted net capital must

    be the same as that prescribed in Sec. 1.17(c) for futures commission

    merchants and introducing brokers, and Sec. 5.7(b)(2) for futures

    commission merchants offering or engaging in retail forex transactions

    and for retail foreign exchange dealers: Provided, however, A

    designated self-regulatory organization may permit its member

    registrants which are registered with the Securities and Exchange

    Commission as securities brokers or dealers to file (in accordance with

    Sec. 1.10(h)) a copy of their Financial and Operational Combined

    Uniform Single Report under the Securities Exchange Act of 1934, Part

    II, Part IIA, or Part II CSE, in lieu of Form 1-FR: And, provided

    further, A designated self-regulatory organization may permit its

    member introducing brokers to file a Form 1-FR-IB in lieu of a Form 1-

    FR-FCM.

    * * * * *

    (c) Any two or more self-regulatory organizations may file with the

    Commission a plan for delegating to a designated self-regulatory

    organization, for any registered futures commission merchant, any

    registered retail foreign exchange dealer, or any registered

    introducing broker which is a member of more than one such self-

    regulatory organization, the responsibility of:

    (1) Monitoring and auditing for compliance with the minimum

    financial and related reporting requirements adopted by such self-

    regulatory organizations in accordance with paragraph (a) of this

    section; and

    (2) Receiving the financial reports necessitated by such minimum

    financial and related reporting requirements.

    * * * * *

    (g) * * *

    (3) Reduces multiple monitoring and auditing for compliance with

    the minimum financial rules of the self-regulatory organizations

    submitting the plan for any futures commission merchant, retail foreign

    exchange dealer, or introducing broker which is a member of more than

    one self-regulatory organization;

    (4) Reduces multiple reporting of the financial information

    necessitated by such minimum financial and related reporting

    requirements by any futures commission merchant, retail foreign

    exchange dealer, or introducing broker which is a member of more than

    one self-regulatory organization; * * *

    (h) After the Commission has approved a plan or part of one under

    Sec. 1.52(g), a self-regulatory organization relieved of

    responsibility must notify each of its members which is subject to such

    a plan:

    (1) Of the limited nature of its responsibility for such a member's

    compliance with its minimum financial and related reporting

    requirements; and

    (2) Of the identity of the designated self-regulatory organization

    which has been delegated responsibility for such a member.

    * * * * *

    (j) Whenever a registered futures commission merchant, a registered

    retail foreign exchange dealer, or a registered introducing broker

    holding membership in a self-regulatory organization ceases to be a

    member in good standing of that self-regulatory organization, such

    self-regulatory organization must, on the same day that event takes

    place, give telegraphic notice of that event to the principal office of

    the Commission in Washington, DC, and send a copy of that notification

    to such futures commission merchant, retail foreign exchange dealer, or

    such introducing broker.

    (k) Nothing in this section shall preclude the Commission from

    examining any futures commission merchant, retail foreign exchange

    dealer, or introducing broker for compliance with the minimum financial

    and related reporting requirements to which such futures commission

    merchant, retail foreign exchange dealer, or introducing broker is

    subject.

    * * * * *

    PART 3--REGISTRATION

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

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,

    6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21

    and 23.

    13. Section 3.1 is amended by revising paragraph (c) to read as

    follows:

    Sec. 3.1 Definitions.

    * * * * *

    (c) Sponsor. Sponsor means the futures commission merchant, retail

    foreign exchange dealer, introducing broker, commodity trading advisor,

    commodity pool operator or leverage transaction merchant which makes

    the certification required by Sec. 3.12 of this part for the

    registration of an associated person of such sponsor.

    * * * * *

    14. Section 3.4 is amended by revising paragraph (a) to read as

    follows:

    [[Page 3303]]

    Sec. 3.4 Registration in one capacity not included in registration in

    any other capacity.

    (a) Except as may be otherwise provided in the Act or in any rule,

    regulation, or order of the Commission, each futures commission

    merchant, retail foreign exchange dealer, floor broker, floor trader,

    associated person, commodity trading advisor, commodity pool operator,

    introducing broker, and leverage transaction merchant must register as

    such under the Act. Registration in one capacity under the Act shall

    not include registration in any other capacity: Provided, however, That

    a registered floor broker need not also register as a floor trader in

    order to engage in activity as a floor trader.

    * * * * *

    15. Section 3.10 is amended by:

    a. Revising the heading;

    b. Revising paragraph (a)(1);

    c. Revising paragraph (b); and

    d. Revising paragraph (d) to read as follows:

    Sec. 3.10 Registration of futures commission merchants, retail

    foreign exchange dealers, 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, retail foreign exchange dealers,

    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.

    (ii) Applicants for registration as a futures commission merchant,

    retail foreign exchange dealer or introducing broker must accompany

    their Form 7-R with a Form 1-FR-FCM or Form 1-FR-IB, respectively, in

    accordance with the provisions of Sec. 1.10 of this chapter: Provided,

    however, That an applicant for registration as a futures commission

    merchant or introducing broker which is registered with the Securities

    and Exchange Commission as a securities broker or dealer may accompany

    its Form 7-R with a copy of its Financial and Operational Combined

    Uniform Single Report under the Securities Exchange Act of 1934, Part

    II or Part II A, in accordance with the provisions of Sec. 1.10(h) of

    this chapter.

    * * * * *

    (b) Duration of registration. (1) A person registered as a futures

    commission merchant, retail foreign exchange dealer, introducing

    broker, commodity trading advisor, commodity pool operator or leverage

    transaction merchant in accordance with paragraph (a) of this section

    will continue to be so registered until the effective date of any

    revocation or withdrawal of such registration. Such person will be

    prohibited from engaging in activities requiring registration under the

    Act or from representing himself to be a registrant under the Act or

    the representative or agent of any registrant during the pendency of

    any suspension of such registration.

    (2) A person registered as an introducing broker who was a party to

    a guarantee agreement with a futures commission merchant or retail

    foreign exchange dealer in accordance with Sec. 1.10(j) of this

    chapter will have its registration cease thirty days after the

    termination of such guarantee agreement unless the procedures set forth

    in Sec. 1.10(j)(8) of this chapter are followed.

    * * * * *

    (d) On a date to be established by the National Futures

    Association, and in accordance with procedures established by the

    National Futures Association, each registrant as a futures commission

    merchant, retail foreign exchange dealer, introducing broker, commodity

    trading advisor, commodity pool operator or leverage transaction

    merchant shall, on an annual basis, review and update registration

    information maintained with the National Futures Association. The

    failure to complete the review and update within thirty days following

    the date established by the National Futures Association shall be

    deemed to be a request for withdrawal from registration, which shall be

    processed in accordance with the provisions of Sec. 3.33(f).

    * * * * *

    16. Section 3.12 is amended by

    a. Revising the heading;

    b. Revising paragraph (a);

    c. Revising paragraph (f)(1)(iii)(E);

    d. Revising paragraph (f)(4);

    e. Revising paragraph (h)(1)(i) and paragraph (h)(1)(iii); and

    f. Removing paragraph (j)

    The revisions read as follows:

    Sec. 3.12 Registration of associated persons of futures commission

    merchants, retail foreign exchange dealers, introducing brokers,

    commodity trading advisors, commodity pool operators and leverage

    transaction merchants.

    (a) Registration required. It shall be unlawful for any person to

    be associated with a futures commission merchant, retail foreign

    exchange dealer, introducing broker, commodity trading advisor,

    commodity pool operator or leverage transaction merchant as an

    associated person unless that person shall have registered under the

    Act as an associated person of that sponsoring futures commission

    merchant, retail foreign exchange dealer, introducing broker, commodity

    trading advisor, commodity pool operator or leverage transaction

    merchant in accordance with the procedures in paragraphs (c), (d), (f),

    or (i), of this section or is exempt from such registration pursuant to

    paragraph (h) of this section.

    * * * * *

    (f) * * *

    (1) * * *

    (iii) * * *

    (E) Associated person's supervision of any person or persons

    engaged in any of the foregoing solicitations or acceptances, with

    respect to any customers common to it and any other futures commission

    merchant, retail foreign exchange dealer, introducing broker, commodity

    trading advisor, commodity pool operator, or leverage transaction

    merchant with which the associated person is associated.

    * * * * *

    (4) If a person is associated with a futures commission merchant,

    with a retail foreign exchange dealer, or with an introducing broker

    and he directs customers seeking a managed account to use the services

    of a commodity trading advisor(s) approved by the futures commission

    merchant, retail foreign exchange dealer or introducing broker and all

    such customers' accounts solicited or accepted by the associated person

    are carried by the futures commission merchant, retail foreign exchange

    dealer or introduced by the introducing broker with which the

    associated person is associated, such a person shall be deemed to be

    associated solely with the futures commission merchant, retail foreign

    exchange dealer or introducing broker and may not also register as an

    associated person of the commodity trading advisor(s).

    * * * * *

    (h) * * *

    (1) * * *

    (i) Registered under the Act as a futures commission merchant,

    retail foreign exchange dealer, floor broker, or as an introducing

    broker;

    * * * * *

    (iii) The chief operating officer, general partner or other person

    in the supervisory chain-of-command, provided the futures commission

    merchant, retail foreign exchange dealer, introducing broker, commodity

    trading advisor, commodity pool operator, or leverage transaction

    merchant engages in commodity interest related activity for customers

    as no more

    [[Page 3304]]

    than ten percent of its total revenue on an annual basis, the firm is

    not subject to a pending proceeding brought by the Commission or a

    self-regulatory organization alleging fraud or failure to supervise,

    and has not been found in such a proceeding to have committed fraud or

    failed to supervise, as required by the Act, the rules promulgated

    thereunder or the rules of a self-regulatory organization, the person

    for whom exemption is sought and the person designated in accordance

    with paragraphs (h)(1)(iii)(C) or (h)(1)(iii)(D) of this section are

    listed as principals of the firm, the fitness examination conducted by

    the National Futures Association with respect to these persons

    discloses no derogatory information that would disqualify any of such

    persons as a principal or as an associated person, and the firm files

    with the National Futures Association corporate or partnership

    resolutions stating that:

    (A) Such supervisory person is not authorized to:

    (1) Solicit or accept customers', retail forex customers', or

    leverage customers' orders,

    (2) Solicit a client's or prospective client's discretionary

    account,

    (3) Solicit funds, securities or property for a participation in a

    commodity pool, or

    (4) Exercise any line supervisory authority over those persons so

    engaged;

    (B) Such supervisory person has no authority with respect to

    hiring, firing or other personnel matters involving persons engaged in

    activities subject to regulation under the Act;

    (C) Another person (or persons) designated therein, who is

    registered as an associated person(s) or who has applied for

    registration as an associated person(s) and is not subject to a pending

    proceeding brought by the Commission or a self-regulatory organization

    alleging fraud or failure to supervise, and has not been found in such

    a proceeding to have committed fraud or failed to supervise, as

    required by the Act, the rules promulgated thereunder or the rules of a

    self-regulatory organization, holds and exercises full and final

    supervisory authority, including authority to hire and fire personnel,

    over the customer commodity interest related activities of the firm;

    and

    (D) If the person (or persons) so designated in accordance with

    paragraph (h)(1)(iii)(C) of this section ceases to have the authority

    referred to therein, the firm will notify the National Futures

    Association within twenty days of such occurrence by means of a

    subsequent resolution which resolution must also include the name of

    another associated person (or persons) who has been vested with full

    supervisory authority, including authority to hire and fire personnel,

    over the customer commodity interest related activities of the firm in

    the event that all of those previously designated in accordance with

    paragraph (h)(1)(iii)(C) of this section have been relieved of such

    authority. Subsequent changes in supervisory authority shall be

    reported in the same manner; or

    * * * * *

    17. Section 3.21 is amended by:

    a. Revising paragraph (b)(3); and

    b. Revising paragraph (c)(1) through (3) and (c)(4)(i) to read as

    follows:

    Sec. 3.21 Exemption from fingerprinting requirement in certain cases.

    * * * * *

    (b) * * *

    (3) With respect to the fingerprints of a principal. An officer, if

    the futures commission merchant, retail foreign exchange dealer,

    commodity trading advisor, commodity pool operator, introducing broker,

    or leverage transaction merchant with which the principal will be

    affiliated is a corporation, a general partner, if a partnership, or

    the sole proprietor, if a sole proprietorship.

    (c) Outside directors. Any futures commission merchant, retail

    foreign exchange dealer, introducing broker, commodity trading advisor,

    commodity pool operator or leverage transaction merchant that has a

    principal who is a director but is not also an officer or employee of

    the firm may, in lieu of submitting a fingerprint card in accordance

    with the provisions of Sec. Sec. 3.10(a)(2) and 3.31(a)(2), file a

    ``Notice Pursuant to Rule 3.21(c)'' with the National Futures

    Association. Such notice shall state, if true, that such outside

    director:

    (1) Is not engaged in:

    (i) The solicitation or acceptance of customers' orders or retail

    forex customers' orders,

    (ii) The solicitation of funds, securities or property for a

    participation in a commodity pool,

    (iii) The solicitation of a client's or prospective client's

    discretionary account,

    (iv) The solicitation or acceptance of leverage customers' orders

    for leverage transactions;

    (2) Does not regularly have access to the keeping, handling or

    processing of:

    (i) Commodity interest transactions;

    (ii) Customer funds, retail forex customer funds, leverage customer

    funds, foreign futures or foreign options secured amount, or adjusted

    net capital; or

    (3) Does not have direct supervisory responsibility over persons

    engaged in the activities referred to in paragraphs (c)(1) and (c)(2)

    of this section; and

    (4) * * *:

    (i) The name of the futures commission merchant, retail foreign

    exchange dealer, introducing broker, commodity trading advisor,

    commodity pool operator, leverage transaction merchant, or applicant

    for registration in any of these capacities of which the person is an

    outside director;

    * * * * *

    18. Section 3.30 is amended by revising paragraph (a) to read as

    follows:

    Sec. 3.30 Current address for purpose of delivery of communications

    from the Commission or the National Futures Association.

    (a) The address of each registrant, applicant for registration and

    principal, as submitted on the application for registration (Form 7-R

    or Form 8-R) or as submitted on the biographical supplement (Form 8-R)

    shall be deemed to be the address for delivery to the registrant,

    applicant or principal for any communications from the Commission or

    the National Futures Association, including any summons, complaint,

    reparation claim, order, subpoena, special call, request for

    information, notice, and other written documents or correspondence,

    unless the registrant, applicant or principal specifies another address

    for this purpose: Provided, That the Commission or the National Futures

    Association may address any correspondence relating to a biographical

    supplement submitted for or on behalf of a principal to the futures

    commission merchant, retail foreign exchange dealer, commodity trading

    advisor, commodity pool operator, introducing broker, or leverage

    transaction merchant with which the principal is affiliated and may

    address any correspondence relating to the registration of an

    associated person to the futures commission merchant, retail foreign

    exchange dealer, commodity trading advisor, commodity pool operator,

    introducing broker, or leverage transaction merchant with which the

    associated person or the applicant for registration is or will be

    associated as an associated person.

    * * * * *

    19. Section 3.31 is amended by revising paragraphs (a)(1), (b),

    (c), and (d) to read as follows:

    Sec. 3.31 Deficiencies, inaccuracies, and changes, to be reported.

    (a)(1) Each applicant or registrant as a futures commission

    merchant, retail foreign exchange dealer, commodity

    [[Page 3305]]

    trading advisor, commodity pool operator, introducing broker, or

    leverage transaction merchant shall, in accordance with the

    instructions thereto, promptly correct any deficiency or inaccuracy in

    Form 7-R or Form 8-R which no longer renders accurate and current the

    information contained therein. Each such correction shall be made on

    Form 3-R and shall be prepared and filed in accordance with the

    instructions thereto. Provided, however, that where a registrant is

    reporting a change in the form of organization from or to a sole

    proprietorship, the registrant must file a Form 7-W regarding the pre-

    existing organization and a Form 7-R regarding the newly formed

    organization.

    * * * * *

    (b) Each applicant or registrant as a floor broker, floor trader or

    associated person, and each principal of a futures commission merchant,

    retail foreign exchange dealer, commodity trading advisor, commodity

    pool operator, introducing broker, or leverage transaction merchant

    must, in accordance with the instructions thereto, promptly correct any

    deficiency or inaccuracy in the Form 8-R or supplemental statement

    thereto which renders no longer accurate and current the information

    contained in the Form 8-R or supplemental statement. Each such

    correction must be made on Form 3-R and must be prepared and filed in

    accordance with the instructions thereto.

    (c)(1) After the filing of a Form 8-R or a Form 3-R by or on behalf

    of any person for the purpose of permitting that person to be an

    associated person of a futures commission merchant, retail foreign

    exchange dealer, commodity trading advisor, commodity pool operator,

    introducing broker, or a leverage transaction merchant, that futures

    commission merchant, retail foreign exchange dealer, commodity trading

    advisor, commodity pool operator, introducing broker or leverage

    transaction merchant must, within thirty days after the occurrence of

    either of the following, file a notice thereof with the National

    Futures Association indicating:

    (i) The failure of that person to become associated with the

    futures commission merchant, retail foreign exchange dealer, commodity

    trading advisor, commodity pool operator, introducing broker, or

    leverage transaction merchant, and the reasons therefor; or

    (ii) The termination of the association of the associated person

    with the futures commission merchant, retail foreign exchange dealer,

    commodity trading advisor, commodity pool operator, introducing broker,

    or leverage transaction merchant, and the reasons therefor.

    (2) Each person registered as, or applying for registration as, a

    futures commission merchant, retail foreign exchange dealer, commodity

    trading advisor, commodity pool operator, introducing broker or

    leverage transaction merchant must, within thirty days after the

    termination of the affiliation of a principal with the registrant or

    applicant, file a notice thereof with the National Futures Association.

    (3) Any notice required by paragraph (c) of this section must be

    filed on Form 8-T or on a Uniform Termination Notice for Securities

    Industry Registration.

    (d) Each contract market or derivatives transaction execution

    facility that has granted trading privileges to a person who is

    registered, has received a temporary license, or has applied for

    registration as a floor broker or floor trader, must notify the

    National Futures Association within sixty days after such person has

    ceased having trading privileges on such contract market or derivatives

    transaction execution facility.

    (Approved by the Office of Management and Budget under control number

    3038-0023)

    20. Section 3.33 is amended by revising paragraphs (a) introductory

    text, (b) introductory text, (b)(6), and (e) to read as follows:

    Sec. 3.33 Withdrawal from registration.

    (a) A futures commission merchant, retail foreign exchange dealer,

    introducing broker, commodity trading advisor, commodity pool operator,

    leverage transaction merchant, floor broker or floor trader may request

    that its registration be withdrawn in accordance with the requirements

    of this section if:

    * * * * *

    (b) A request for withdrawal from registration as a futures

    commission merchant, retail foreign exchange dealer, introducing

    broker, commodity trading advisor, commodity pool operator, or leverage

    transaction merchant must be made on Form 7-W, and a request for

    withdrawal from registration as a floor broker or floor trader must be

    made on Form 8-W, completed and filed with National Futures Association

    in accordance with the instructions thereto. The request for withdrawal

    must be made by a person duly authorized by the registrant and must

    specify:

    * * * * *

    (6) If a basis for withdrawal from registration under paragraph

    (a)(1) of this section is that the registrant has ceased engaging in

    activities requiring registration, then, with respect to each capacity

    for which the registrant has ceased such activities:

    (i) That all customer, retail forex customer or option customer

    agreements, if any, have been terminated;

    (ii) That all customer, retail forex customer or option customer

    positions, if any, have been transferred on behalf of customers or

    option customers or closed;

    (iii) That all customer, retail forex customer or option customer

    cash balances, securities, or other property, if any, have been

    transferred on behalf of customers, retail forex customers or option

    customers or returned, and that there are no obligations to customers,

    retail forex customers or option customers outstanding;

    (iv) In the case of a commodity pool operator, that all interests

    in, and assets of, any commodity pool have been redeemed, distributed,

    or transferred, on behalf of the participants therein, and that there

    are no obligations to such participants outstanding;

    (v) In the case of a leverage transaction merchant:

    (A) Either that all leverage customer agreements, if any, and all

    leverage contracts have been terminated, and that all leverage customer

    cash balances, securities or other property, if any, have been

    returned, or

    (B) Alternatively, that pursuant to Commission approval, the

    leverage contract obligations of the leverage transaction merchant have

    been assumed by another leverage transaction merchant and all leverage

    customer cash balances, securities or other property, if any, have been

    transferred to such leverage transaction merchant on behalf of leverage

    customers or returned, and that there are no obligations to leverage

    customers outstanding;

    (vi) The nature and extent of any pending customer, retail forex

    customer, option customer, leverage customer, or commodity pool

    participant claims against the registrant, and, to the best of the

    registrant's knowledge and belief, the nature and extent of any

    anticipated or threatened customer, option customer, leverage customer,

    or commodity pool participant claims against the registrant; and

    (vii) In the case of a futures commission merchant or a retail

    foreign

    [[Page 3306]]

    exchange dealer which is a party to a guarantee agreement, that all

    such agreements have been or will be terminated in accordance with the

    provisions of Sec. 1.10(j) of this chapter not more than thirty days

    after the filing of the request for withdrawal from registration.

    * * * * *

    (e) A request for withdrawal from registration as a futures

    commission merchant, retail foreign exchange dealer, introducing

    broker, commodity trading advisor, commodity pool operator, leverage

    transaction merchant on Form 7-W, and a request for withdrawal from

    registration as a floor broker or floor trader on Form 8-W, must be

    filed with the National Futures Association and a copy of such request

    must be sent by the National Futures Association within three business

    days of the receipt of such withdrawal request to the Commodity Futures

    Trading Commission, Division of Clearing and Intermediary Oversight,

    Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. In

    addition, any floor broker or floor trader requesting withdrawal from

    registration must file a copy of his Form 8-W with each contract market

    that has granted him trading privileges. Within three business days of

    any determination by the National Futures Association under Sec.

    3.10(d) to treat the failure by a registrant to file an annual Form 7-R

    as a request for withdrawal, the National Futures Association shall

    send the Commission notice of that determination.

    * * * * *

    21. Section 3.44 is amended by revising paragraphs (a)(1) through

    (5) to read as follows:

    Sec. 3.44 Temporary licensing of applicants for guaranteed

    introducing broker registration.

    (a) * * *

    (1) A properly completed guarantee agreement (Form 1-FR part B)

    from a futures commission merchant or retail foreign exchange dealer

    which is eligible to enter into such an agreement pursuant to Sec.

    1.10(j)(2) of this chapter;

    (2) A Form 7-R properly completed in accordance with the

    instructions thereto;

    (3) A Form 8-R for the applicant, if a sole proprietor, and each

    principal (including each branch office manager) thereof, properly

    completed in accordance with the instructions thereto, all of whom

    would be eligible for a temporary license if they had applied as

    associated persons.

    (4) A certification executed by a person duly authorized by the

    futures commission merchant or retail foreign exchange dealer that has

    executed the guarantee agreement required by paragraph (a)(1) of this

    section, stating that:

    (i) The futures commission merchant or retail foreign exchange

    dealer has verified the information on the Forms 8-R filed pursuant to

    paragraph (a)(3) of this section which relate to education and

    employment history of the applicant's principals (including each branch

    office manager) thereof during the preceding three years; and

    (ii) To the best of the futures commission merchant's or retail

    foreign exchange dealer's knowledge, information, and belief, all of

    the publicly available information supplied by the applicant and its

    principals and each branch office manager of the applicant on the Form

    7-R and Forms 8-R, as appropriate, is accurate and complete; and

    (5) The fingerprints of the applicant, if a sole proprietor, and of

    each principal (including each branch office manager) thereof on

    fingerprint cards provided by the National Futures Association for that

    purpose: Provided, that a principal who has a current Form 8-R on file

    with the National Futures Association or the Commission is not required

    to submit a fingerprint card.

    * * * * *

    22. Section 3.45 is amended by revising paragraph (b) to read as

    follows:

    Sec. 3.45 Restrictions upon activities.

    * * * * *

    (b) An applicant for registration as an introducing broker who has

    received a temporary license may be guaranteed by a futures commission

    merchant or retail foreign exchange dealer other than the futures

    commission merchant or retail foreign exchange dealer which provided

    the initial guarantee agreement described in Sec. 3.44(a)(1) of this

    subpart: Provided, That, at least 10 days prior to the effective date

    of the termination of the existing guarantee agreement in accordance

    with the provisions of Sec. 1.10 (j)(4)(ii) or (j)(5) of this chapter,

    or such other period of time as the National Futures Association may

    allow for good cause shown, the applicant files with the National

    Futures Association--

    (1) Written notice of such termination and

    (2) A new guarantee agreement with another futures commission

    merchant or retail foreign exchange dealer effective the day following

    the last effective date of the existing guarantee agreement.

    23. Section 3.50 is amended by revising paragraph (b)(2) to read as

    follows:

    Sec. 3.50 Service.

    * * * * *

    (b) * * *

    (2) Any futures commission merchant or retail foreign exchange

    dealer which has entered into a guarantee agreement in accordance with

    Sec. 1.10(j) of this chapter, if the applicant or registrant is

    registered as or applying for registration as an introducing broker.

    * * * * *

    24. Section 3.60 is amended by revising paragraph (b)(2)(i)(B) to

    read as follows:

    Sec. 3.60 Procedure to deny, condition, suspend, revoke or place

    restrictions upon registration pursuant to sections 8a(2), 8a(3) and

    8a(4) of the Act.

    * * * * *

    (b) * * *

    (2)(i) * * *

    (B) In the case of a sponsor which is a futures commission

    merchant, a retail foreign exchange dealer or a leverage transaction

    merchant, the sponsor is not subject to the reporting requirements of

    Sec. 1.12(b), Sec. 5.6(b) or Sec. 31.7(b) of this chapter,

    respectively; and

    * * * * *

    PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    25. The authority citation for part 4 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m, 6n, 6o, 12a and

    23.

    26. Section 4.7 is amended by:

    a. Revising paragraph (a)(1)(v)(B); and

    b. Revising paragraph (a)(2)(i) to read as follows:

    Sec. 4.7 Exemption from certain part 4 requirements for commodity

    pool operators with respect to offerings to qualified eligible persons

    and for commodity trading advisors with respect to advising qualified

    eligible persons.

    * * * * *

    (a) * * *

    (1) * * *

    (v) * * *

    (B) Has had on deposit with a futures commission merchant, for its

    own account at any time during the six-month period preceding either

    the date of sale to that person of a pool participation in the exempt

    pool or the date that the person opens an exempt account with the

    commodity trading advisor, at least $200,000 in exchange-specified

    initial margin and option premiums, together with NFA-specified minimum

    security deposit for retail forex transactions (as defined in section

    5.1(m) of this chapter) for commodity interest transactions; or

    * * * * *

    [[Page 3307]]

    (2) * * *

    (i)(A) A futures commission merchant registered pursuant to section

    4d of the Act, or a principal thereof;

    (B) A retail foreign exchange dealer registered pursuant to section

    2(c)(2)(B)(i)(II)(gg) of the Act, or a principal thereof;

    * * * * *

    27. Section 4.12 is amended by revising paragraph (b)(1)(i)(C) to

    read as follows:

    Sec. 4.12 Exemption from provisions of part 4.

    * * * * *

    (b) * * *

    (1) * * *

    (i) * * *

    (C) Will not enter into commodity interest transactions for which

    the aggregate initial margin and premiums, and NFA-specified minimum

    security deposit for retail forex transactions (as defined in Sec.

    5.1(m) of this chapter) exceed 10 percent of the fair market value of

    the pool's assets, after taking into account unrealized profits and

    unrealized losses on any such contracts it has entered into; Provided,

    however, That in the case of an option that is in-the-money at the time

    of purchase, the in-the-money amount as defined in Sec. 190.01(x) may

    be excluded in computing such 10 percent; and

    * * * * *

    28. Section 4.13 is amended by:

    a. Revising paragraph (a)(3)(ii)(A): and

    b. Revising paragraph (a)(3)(ii)(B)(1) to read as follows:

    Sec. 4.13 Exemption from registration as a commodity pool operator.

    * * * * *

    (a) * * *

    (3) * * *

    (ii) * * *

    (A) The aggregate initial margin, premiums, and NFA-specified

    minimum security deposit for retail forex transactions (as defined in

    section 5.1(m) of this chapter) required to establish such positions,

    determined at the time the most recent position was established, will

    not exceed 5 percent of the liquidation value of the pool's portfolio,

    after taking into account unrealized profits and unrealized losses on

    any such positions it has entered into; Provided, That in the case of

    an option that is in-the-money at the time of purchase, the in-the-

    money amount as defined in Sec. 190.01(x) of this chapter may be

    excluded in computing such 5 percent; or

    (B) * * *

    (1) The term ``notional value'' shall be calculated for each such

    futures position by multiplying the number of contracts by the size of

    the contract, in contract units (taking into account any multiplier

    specified in the contract), by the current market price per unit, and

    for each such option position by multiplying the number of contracts by

    the size of the contract, adjusted by its delta, in contract units

    (taking into account any multiplier specified in the contract), by the

    strike price per unit, and for each such retail forex transaction, by

    calculating the value in U.S. Dollars of such transaction, at the time

    the transaction was established, excluding for this purpose the value

    in U.S. Dollars of offsetting long and short transactions, if any; and

    * * * * *

    29. Section 4.14 is amended by revising paragraph (a)(7) to read as

    follows:

    Sec. 4.14 Exemption from registration as a commodity trading advisor.

    * * * * *

    (a) * * *

    (7)(i) It is registered under the Act as a leverage transaction

    merchant and the person's trading advice is solely in connection with

    its business as a leverage transaction merchant;

    (ii) It is registered under the Act as a retail foreign exchange

    dealer and the person's trading advice is solely in connection with its

    business as a retail foreign exchange dealer.

    * * * * *

    30. Section 4.23 is amended by:

    a. Revising paragraph (a)(1);

    b. Revising paragraph (a)(7); and

    c. Revising paragraph (b)(1) and (2) to read as follows:

    Sec. 4.23 Recordkeeping.

    (a) Concerning the commodity pool: (1) An itemized daily record of

    each commodity interest transaction of the pool, showing the

    transaction date, quantity, commodity interest, and, as applicable,

    price or premium, delivery month or expiration date, whether a put or a

    call, strike price, underlying contract for future delivery or

    underlying physical, the futures commission merchant and/or retail

    foreign exchange dealer carrying the account and the introducing

    broker, if any, whether the commodity interest was purchased, sold

    (including, in the case of a retail forex transaction, offset),

    exercised, expired (including, in the case of a retail forex

    transaction, whether it was rolled forward), and the gain or loss

    realized.

    * * * * *

    (7) Copies of each confirmation of a commodity interest transaction

    of the pool, each purchase and sale statement and each monthly

    statement for the pool received from a futures commission merchant or

    retail foreign exchange dealer.

    * * * * *

    (b) Concerning the commodity pool operator: (1) An itemized daily

    record of each commodity interest transaction of the commodity pool

    operator and each principal thereof, showing the transaction date,

    quantity, commodity interest, and, as applicable, price or premium,

    delivery month or expiration date, whether a put or a call, strike

    price, underlying contract for future delivery or underlying physical,

    the futures commission merchant or retail foreign exchange dealer

    carrying the account and the introducing broker, if any whether the

    commodity interest was purchased, sold, exercised, or expired, and the

    gain or loss realized.

    (2) Each confirmation of a commodity interest transaction, each

    purchase and sale statement and each monthly statement furnished by a

    futures commission merchant or retail foreign exchange dealer to:

    (i) The commodity pool operator relating to a personal account of

    the pool operator; and

    (ii) Each principal of the pool operator relating to a personal

    account of such principal.

    * * * * *

    31. Section 4.24 is amended by:

    a. Revising paragraph (b)(1) introductory text and the first three

    sentences of the Risk Disclosure Statement in paragraph (b)(1);

    b. Adding paragraph (b)(4);

    c. Revising paragraph (e)(6);

    d. Revising paragraph (g);

    e. Revising paragraphs (h)(2) and (h)(4)(iii);

    f. Revising paragraph (i)(2)(ii);

    g. Redesignating paragraph (i)(2)(xii) as paragraph (i)(2)(xiii)

    and adding new paragraph (i)(2)(xii);

    h. Revising paragraphs (j)(1)(vi) and (j)(3); and

    i. Revising paragraphs (l)(1)(iii), (l)(2) introductory text and

    (l)(2)(i).

    The addition and revisions to read as follows:

    Sec. 4.24 General disclosures required.

    * * * * *

    (b) Risk Disclosure Statement. (1) The following Risk Disclosure

    Statement must be prominently displayed immediately following any

    disclosures required to appear on the cover page of the Disclosure

    Document as provided by the Commission, by any applicable federal or

    state securities laws and regulations or by any applicable laws of non-

    United States jurisdictions.

    [[Page 3308]]

    RISK DISCLOSURE STATEMENT

    YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION

    PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD

    BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE

    LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET

    ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN

    THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR

    ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. * * *

    * * * * *

    (4) If the pool may engage in retail Forex transactions, the Risk

    Disclosure Statement must further state:

    YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY ENGAGE IN

    OFF-EXCHANGE FOREIGN CURRENCY TRADING. SUCH TRADING IS NOT CONDUCTED IN

    THE INTERBANK MARKET. THE FUNDS THAT THE POOL USES FOR OFF-EXCHANGE

    FOREIGN CURRENCY TRADING WILL NOT RECEIVE THE SAME PROTECTIONS AS FUNDS

    USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED FUTURES AND OPTION

    CONTRACTS. IF THE POOL DEPOSITS SUCH FUNDS WITH A COUNTERPARTY AND THAT

    COUNTERPARTY BECOMES INSOLVENT, THE POOL'S CLAIM FOR AMOUNTS DEPOSITED

    OR PROFITS EARNED ON TRANSACTIONS WITH THE COUNTERPARTY MAY NOT BE

    TREATED AS A COMMODITY CUSTOMER CLAIM FOR PURPOSES OF SUBCHAPTER IV OF

    CHAPTER 7 OF THE BANKRUPTCY CODE AND THE REGULATIONS THEREUNDER. THE

    POOL MAY BE A GENERAL CREDITOR AND ITS CLAIM MAY BE PAID, ALONG WITH

    THE CLAIMS OF OTHER GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE

    AFTER PRIORITY CLAIMS ARE PAID. EVEN POOL FUNDS THAT THE COUNTERPARTY

    KEEPS SEPARATE FROM ITS OWN FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF

    PRIORITY AND OTHER GENERAL CREDITORS.

    * * * * *

    (e) * * *

    (6) If known, the futures commission merchant and/or retail foreign

    exchange dealer through which the pool will execute its trades, and, if

    applicable, the introducing broker through which the pool will

    introduce its trades to the futures commission merchant and/or retail

    foreign exchange dealer.

    * * * * *

    (g) Principal risk factors. A discussion of the principal risk

    factors of participation in the offered pool. This discussion must

    include, without limitation, risks relating to volatility, leverage,

    liquidity, counterparty creditworthiness, as applicable to the types of

    trading programs to be followed, trading structures to be employed and

    investment activity (including retail forex transactions) expected to

    be engaged in by the offered pool.

    (h) * * *

    (2) A description of the trading and investment programs and

    policies that will be followed by the offered pool, including the

    method chosen by the pool operator concerning how futures commission

    merchants and/or retail foreign exchange dealers carrying the pool's

    accounts shall treat offsetting positions pursuant to Sec. 1.46 of

    this chapter, if the method is other than to close out all offsetting

    positions or to close out offsetting positions on other than a first-

    in, first-out basis, and any material restrictions or limitations on

    trading required by the pool's organizational documents or otherwise.

    This description must include, if applicable, an explanation of the

    systems used to select commodity trading advisors, investee pools and

    types of investment activity to which pool assets will be committed;

    * * * * *

    (4) * * *

    (iii) If assets deposited by the pool as margin or as security

    deposit generate income, to whom that income will be paid.

    (i) * * *

    (2) * * *

    (ii) Brokerage fees and commissions, including interest income paid

    to futures commission merchants, and any fees incurred to maintain an

    open position in retail forex transactions;

    * * * * *

    (xii) Any costs or fees included in the spread between bid and

    asked prices for retail forex transactions; and

    * * * * *

    (j) * * *

    (1) * * *

    (vi) Any other person providing services to the pool or soliciting

    participants for the pool, or acting as a counterparty to the pool's

    retail forex transactions (as defined in section 5.1(m) of this

    chapter).

    * * * * *

    (3) Included in the description of such conflicts must be any

    arrangement whereby a person may benefit, directly or indirectly, from

    the maintenance of the pool's account with the futures commission

    merchant and/or retail foreign exchange dealer, or from the

    introduction of the pool's account to a futures commission merchant

    and/or retail foreign exchange dealer by an introducing broker (such as

    payment for order flow or soft dollar arrangements) or from an

    investment of pool assets in investee pools or funds or other

    investments.

    * * * * *

    (l) * * *

    (1) * * *

    (iii) The pool's futures commission merchants and/or retail foreign

    exchange dealers and its introducing brokers, if any.

    (2) With respect to a futures commission merchant and/or retail

    foreign exchange dealer or an introducing broker, an action will be

    considered material if:

    (i) The action would be required to be disclosed in the notes to

    the futures commission merchant's, retail foreign exchange dealer's or

    introducing broker's financial statements prepared pursuant to

    generally accepted accounting principles;

    * * * * *

    32. Section 4.25 is amended by revising paragraph (c)(3)(ii) to

    read as follows:

    Sec. 4.25 Performance disclosures.

    * * * * *

    (c) * * *

    (3) * * *

    (ii) If a major commodity trading advisor has not previously traded

    accounts, the pool operator must prominently display the following

    statement:

    (Name of the major commodity trading advisor), A COMMODITY TRADING

    ADVISOR THAT HAS DISCRETIONARY TRADING AUTHORITY OVER (percentage of

    the pool's funds available for commodity interest trading allocated to

    that trading advisor) PERCENT OF THE POOL'S COMMODITY INTEREST TRADING

    HAS NOT PREVIOUSLY DIRECTED ANY ACCOUNTS.

    * * * * *

    Subpart C--Commodity Trading Advisors

    33. Section 4.30 is revised to read as follows:

    Sec. 4.30 Prohibited activities.

    No commodity trading advisor may solicit, accept or receive from an

    existing or prospective client funds,

    [[Page 3309]]

    securities or other property in the trading advisor's name (or extend

    credit in lieu thereof) to purchase, margin, guarantee or secure any

    commodity interest of the client; Provided, however, That this section

    shall not apply to a future commission merchant that is registered as

    such under the Act or to a leverage transaction merchant that is

    registered as a commodity trading advisor under the Act or to a retail

    foreign exchange dealer that is registered as such under the Act.

    34. Section 4.33 is amended by:

    a. Revising paragraph (a)(6); and

    b. Revising paragraphs (b)(1) and (2) to read as follows:

    Sec. 4.33 Recordkeeping.

    * * * * *

    (a) * * *

    (6) Copies of each confirmation of a commodity interest

    transaction, each purchase and sale statement and each monthly

    statement received from a futures commission merchant or a retail

    foreign exchange dealer.

    * * * * *

    (b) Concerning the commodity trading advisor:

    (1) An itemized daily record of each commodity interest transaction

    of the commodity trading advisor, showing the transaction date,

    quantity, commodity interest, and, as applicable, price or premium,

    delivery month or expiration date, whether a put or a call, strike

    price, underlying contract for future delivery or underlying physical,

    the futures commission merchant and/or retail foreign exchange dealer

    carrying the account and the introducing broker, if any, whether the

    commodity interest was purchased, sold (including, in the case of a

    retail forex transaction, offset), exercised, expired (including, in

    the case of a retail forex transaction, whether it was rolled forward),

    and the gain or loss realized.

    (2) Each confirmation of a commodity interest transaction, each

    purchase and sale statement and each monthly statement furnished by a

    futures commission merchant or retail foreign exchange dealer to:

    (i) The commodity trading advisor relating to a personal account of

    the trading advisor; and

    (ii) Each principal of the trading advisor relating to a personal

    account of such principal.

    * * * * *

    35. Section 4.34 is amended by:

    a. Revising paragraph (b);

    b. Revising paragraph (e)(2);

    c. Revising paragraphs (g) and (h);

    d. Revising paragraph (i)(2);

    e. Revising paragraphs (j)(1) and (j)(3);

    f. Revising paragraphs (k)(1)(ii), (k)(1)(iii), (k)(2) introductory

    text, and (k)(2)(i) to read as follows:

    Sec. 4.34 General disclosures required.

    * * * * *

    (b) Risk Disclosure Statement. (1) The following Risk Disclosure

    Statement must be prominently displayed immediately following any

    disclosures required to appear on the cover page of the Disclosure

    Document as provided by the Commission, by any applicable federal or

    state securities laws and regulations or by any applicable laws of non-

    United States jurisdictions:

    RISK DISCLOSURE STATEMENT

    THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL.

    YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS

    SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING

    WHETHER TO TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU

    SHOULD BE AWARE OF THE FOLLOWING:

    IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF

    THE PREMIUM AND OF ALL TRANSACTION COSTS.

    IF YOU PURCHASE OR SELL A COMMODITY FUTURES CONTRACT OR SELL A

    COMMODITY OPTION OR ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING YOU

    MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS OR SECURITY

    DEPOSIT AND ANY ADDITIONAL FUNDS THAT YOU DEPOSIT WITH YOUR BROKER TO

    ESTABLISH OR MAINTAIN YOUR POSITION. IF THE MARKET MOVES AGAINST YOUR

    POSITION, YOU MAY BE CALLED UPON BY YOUR BROKER TO DEPOSIT A

    SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN

    ORDER TO MAINTAIN YOUR POSITION. IF YOU DO NOT PROVIDE THE REQUESTED

    FUNDS WITHIN THE PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT A

    LOSS, AND YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR ACCOUNT.

    UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR

    IMPOSSIBLE TO LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE, WHEN

    THE MARKET MAKES A ``LIMIT MOVE.''

    THE PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING ADVISOR,

    SUCH AS A ``STOP-LOSS'' OR ``STOP-LIMIT'' ORDER, WILL NOT NECESSARILY

    LIMIT YOUR LOSSES TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY

    MAKE IT IMPOSSIBLE TO EXECUTE SUCH ORDERS.

    A ``SPREAD'' POSITION MAY NOT BE LESS RISKY THAN A SIMPLE ``LONG''

    OR ``SHORT'' POSITION.

    THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY

    INTEREST TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF

    LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.

    IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO

    SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE

    NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE

    SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR

    ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS, AT PAGE (insert page

    number), A COMPLETE DESCRIPTION OF EACH FEE TO BE CHARGED TO YOUR

    ACCOUNT BY THE COMMODITY TRADING ADVISOR.

    THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER

    SIGNIFICANT ASPECTS OF THE COMMODITY INTEREST MARKETS. YOU SHOULD

    THEREFORE CAREFULLY STUDY THIS DISCLOSURE DOCUMENT AND COMMODITY

    INTEREST TRADING BEFORE YOU TRADE, INCLUDING THE DESCRIPTION OF THE

    PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE (insert page

    number).

    (2)(i) If the commodity trading advisor may trade foreign futures

    or options contracts pursuant to the offered trading program, the Risk

    Disclosure Statement must further state the following:

    YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY

    ENGAGE IN TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON

    MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY

    LINKED TO A UNITED STATES MARKET MAY BE SUBJECT TO REGULATIONS WHICH

    OFFER DIFFERENT OR DIMINISHED PROTECTION. FURTHER, UNITED STATES

    REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE

    RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES

    JURISDICTIONS WHERE YOUR TRANSACTIONS MAY BE EFFECTED. BEFORE YOU TRADE

    YOU SHOULD

    [[Page 3310]]

    INQUIRE ABOUT ANY RULES RELEVANT TO YOUR PARTICULAR CONTEMPLATED

    TRANSACTIONS AND ASK THE FIRM WITH WHICH YOU INTEND TO TRADE FOR

    DETAILS ABOUT THE TYPES OF REDRESS AVAILABLE IN BOTH YOUR LOCAL AND

    OTHER RELEVANT JURISDICTIONS.

    (ii) If the commodity trading advisor may engage in retail forex

    transactions pursuant to the offered trading program, the Risk

    Disclosure Statement must further state the following:

    YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY

    ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING. SUCH TRADING IS NOT

    CONDUCTED IN THE INTERBANK MARKET. THE FUNDS DEPOSITED WITH A

    COUNTERPARTY FOR SUCH TRANSACTIONS WILL NOT RECEIVE THE SAME

    PROTECTIONS AS FUNDS USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED

    FUTURES AND OPTION CONTRACTS. IF THE COUNTERPARTY BECOMES INSOLVENT AND

    YOU HAVE A CLAIM FOR AMOUNTS DEPOSITED OR PROFITS EARNED ON

    TRANSACTIONS WITH THE COUNTERPARTY, YOUR CLAIM MAY NOT BE TREATED AS A

    COMMODITY CUSTOMER CLAIM FOR PURPOSES OF SUBCHAPTER IV OF CHAPTER 7 OF

    THE BANKRUPTCY CODE AND REGULATIONS THEREUNDER. YOU MAY BE A GENERAL

    CREDITOR AND YOUR CLAIM MAY BE PAID, ALONG WITH THE CLAIMS OF OTHER

    GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE AFTER PRIORITY

    CLAIMS ARE PAID. EVEN FUNDS THAT THE COUNTERPARTY KEEPS SEPARATE FROM

    ITS OWN FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF PRIORITY AND OTHER

    GENERAL CREDITORS.

    FURTHER, YOU SHOULD CAREFULLY REVIEW THE INFORMATION CONTAINED IN

    THE RISK DISCLOSURE STATEMENT OF THE FUTURES COMMISSION MERCHANT OR

    RETAIL FOREIGN EXCHANGE DEALER THAT YOU SELECT TO CARRY YOUR ACCOUNT.

    (3) If the commodity trading advisor is not also a registered

    futures commission merchant or a registered retail foreign exchange

    dealer, the trading advisor must make the additional following

    statement in the Risk Disclosure Statement, to be included as the last

    paragraph thereof:

    THIS COMMODITY TRADING ADVISOR IS PROHIBITED BY LAW FROM ACCEPTING

    FUNDS IN THE TRADING ADVISOR'S NAME FROM A CLIENT FOR TRADING COMMODITY

    INTERESTS. YOU MUST PLACE ALL FUNDS FOR TRADING IN THIS TRADING PROGRAM

    DIRECTLY WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE

    DEALER, AS APPLICABLE.

    * * * * *

    (e) * * *

    (2) The futures commission merchant and/or retail foreign exchange

    dealer with which the commodity trading advisor will require the client

    to maintain its account or, if the client is free to choose the futures

    commission merchant or retail foreign exchange dealer with which it

    will maintain its account, the trading advisor must make a statement to

    that effect; and

    * * * * *

    (g) Principal risk factors. A discussion of the principal risk

    factors of this trading program. This discussion must include, without

    limitation, risks due to volatility, leverage, liquidity, and

    counterparty creditworthiness, as applicable to the trading program and

    the types of transactions and investment activity expected to be

    engaged in pursuant to such program (including retail forex

    transactions, if any).

    (h) Trading program. A description of the trading program, which

    must include the method chosen by the commodity trading advisor

    concerning how futures commission merchants and/or retail foreign

    exchange dealers carrying accounts it manages shall treat offsetting

    positions pursuant to Sec. 1.46 of this chapter, if the method is

    other than to close out all offsetting positions or to close out

    offsetting positions on other than a first-in, first-out basis, and the

    types of commodity interests and other interests the commodity trading

    advisor intends to trade, with a description of any restrictions or

    limitations on such trading established by the trading advisor or

    otherwise.

    (i) * * *

    (2) Where any fee is determined by reference to a base amount

    including, but not limited to, ``net assets,'' ``gross profits,'' ``net

    profits,'' ``net gains,'' ``pips'' or ``bid-asked spread,'' the trading

    advisor must explain how such base amount will be calculated. Where any

    fee is based on the difference between bid and asked prices on retail

    forex transactions (as defined in Sec. 5.1 of this chapter), the

    trading advisor must explain how such fee will be calculated;

    * * * * *

    (j) Conflicts of interest. (1) A full description of any actual or

    potential conflicts of interest regarding any aspect of the trading

    program on the part of:

    (i) The commodity trading advisor;

    (ii) Any futures commission merchant and/or retail foreign exchange

    dealer with which the client will be required to maintain its commodity

    interest account;

    (iii) Any introducing broker through which the client will be

    required to introduce its account to a futures commission merchant and/

    or retail foreign exchange dealer; and

    (iv) Any principal of the foregoing.

    * * * * *

    (3) Included in the description of any such conflict must be any

    arrangement whereby the trading advisor or any principal thereof may

    benefit, directly or indirectly, from the maintenance of the client's

    commodity interest account with a futures commission merchant and/or

    retail foreign exchange dealer, or the introduction of such account

    through an introducing broker (such as payment for order flow or soft

    dollar arrangements).

    (k) * * *

    (1) * * *

    (ii) Any futures commission merchant or retail foreign exchange

    dealer with which the client will be required to maintain its commodity

    interest account; and

    (iii) Any introducing broker through which the client will be

    required to introduce its account to the futures commission merchant

    and/or retail foreign exchange dealer.

    (2) With respect to a futures commission merchant, retail foreign

    exchange dealer or introducing broker, an action will be considered

    material if:

    (i) The action would be required to be disclosed in the notes to

    the futures commission merchant's, retail foreign exchange dealer's or

    introducing broker's financial statements prepared pursuant to

    generally accepted accounting principles;

    * * * * *

    36. Part 5 is added to read as follows:

    PART 5--OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS

    Sec.

    5.1 Definitions.

    5.2 Prohibited transactions.

    5.3 Registration of persons engaged in retail forex transactions.

    5.4 Applicability of part 4 of this chapter to commodity pool

    operators and commodity trading advisors.

    5.5 Distribution of ``Risk Disclosure Statement'' by retail foreign

    exchange dealers, futures commission merchants and introducing

    brokers regarding retail forex transactions.

    5.6 Maintenance of minimum financial requirements by retail foreign

    exchange dealers and futures commission

    [[Page 3311]]

    merchants offering or engaging in retail forex transactions.

    5.7 Minimum financial requirements for retail foreign exchange

    dealers and futures commission merchants offering or engaging in

    retail forex transactions.

    5.8 Aggregate retail forex assets.

    5.9 Security deposits for retail forex transactions.

    5.10 Risk assessment recordkeeping requirements for retail foreign

    exchange dealers.

    5.11 Risk assessment reporting requirements for retail foreign

    exchange dealers.

    5.12 Financial reports of retail foreign exchange dealers.

    5.13 Reporting to customers of retail foreign exchange dealers and

    futures commission merchants; monthly and confirmation statements.

    5.14 Records to be kept by retail foreign exchange dealers and

    futures commission Merchants.

    5.15 Unlawful representations.

    5.16 Prohibition of guarantees against loss.

    5.17 Authorization to trade.

    5.18 Trading and operational standards.

    5.19 Pending legal proceedings.

    5.20 Special calls for account and transaction information.

    5.21 Supervision.

    5.22 Registered futures association membership.

    5.23 Notice of bulk transfers and bulk liquidations.

    5.24 Applicability of other parts of this chapter.

    5.25 Applicability of the Act.

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,

    6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19,

    21, 23.

    Sec. 5.1 Definitions.

    (a) Affiliated person of a futures commission merchant means a

    person described in section 2(c)(2)(B)(i)(II)(cc)(BB) of the Act;

    (b) Aggregate retail forex assets means an amount of liquid assets

    held in accordance with section 5.8 of this part;

    (c) Associated person of an affiliated person of a futures

    commission merchant means any natural person associated with an

    affiliated person of a futures commission merchant as a partner,

    officer or employee (or any natural person occupying a similar status

    or performing similar functions), in any capacity which involves:

    (1) The solicitation or acceptance of retail forex customers'

    orders (other than in a clerical capacity); or

    (2) The supervision of any person or persons so engaged;

    (d)(1) Commodity pool operator, for purposes of this part, means

    any person who operates or solicits funds, securities, or property for

    a pooled investment vehicle that is not an eligible contract

    participant as defined in section 1a(12) of the Act, and that engages

    in retail forex transactions;

    (2) Associated person of a commodity pool operator, for purposes of

    this part, means any natural person associated with a commodity pool

    operator as defined in paragraph (d)(1) of this section as a partner,

    officer, employee, consultant or agent (or any natural person occupying

    a similar status or performing similar functions), in any capacity

    which involves:

    (i) The solicitation of funds, securities, or property for a

    participation in a pooled investment vehicle; or

    (ii) The supervision of any person or persons so engaged;

    (e)(1) Commodity trading advisor, for purposes of this part, means

    any person who exercises discretionary trading authority or obtains

    written authorization to exercise discretionary trading authority over

    any account for or on behalf of any person that is not an eligible

    contract participant as defined in section 1a(12) of the Act, in

    connection with retail forex transactions;

    (2) Associated person of a commodity trading advisor, for purposes

    of this part, means any natural person associated with a commodity

    trading advisor as defined in paragraph (e)(1) of this section as a

    partner, officer, employee, consultant or agent (or any natural person

    occupying a similar status or performing similar functions), in any

    capacity which involves:

    (i) The solicitation of a client's or prospective client's

    discretionary account; or

    (ii) The supervision of any person or persons so engaged;

    (f)(1) Introducing broker, for purposes of this part, means any

    person who solicits or accepts orders from a customer that is not an

    eligible contract participant as defined in section 1a(12) of the Act,

    in connection with retail forex transactions;

    (2) Associated person of an introducing broker, for purposes of

    this part, means any natural person associated with an introducing

    broker as defined in paragraph (g)(1) of this section as a partner,

    officer, employee, or agent (or any natural person occupying a similar

    status or performing similar functions), in any capacity which

    involves:

    (i) The solicitation or acceptance of retail forex customers'

    orders (other than in a clerical capacity); or

    (ii) The supervision of any person or persons so engaged;

    (g) Primarily or substantially means, when used to describe the

    extent of a futures commission merchant's engagement in the activities

    described in section 1a(20) of the Act, that:

    (1) Such activities account for more than fifty percent of the

    futures commission merchant's gross revenues, computed in accordance

    with generally accepted accounting principles, on an annual basis;

    (2) The futures commission merchant receives gross revenues,

    computed in accordance with generally accepted accounting principles,

    from such activities in excess of $500,000 in any twelve month period;

    or

    (3) The futures commission merchant is a clearing member of a

    registered derivatives clearing organization.

    (h)(1) Retail foreign exchange dealer means any person that is, or

    that offers to be, the counterparty to a retail forex transaction,

    except for a person described in sub-paragraph (aa), (bb), (cc)(AA),

    (dd), (ee) or (ff) of section 2(c)(2)(B)(i)(II) of the Act;

    (2) Associated person of a retail foreign exchange dealer means any

    natural person associated with a retail foreign exchange dealer as

    defined in paragraph (i)(1) of this section as a partner, officer or

    employee (or any natural person occupying a similar status or

    performing similar functions), in any capacity which involves:

    (i) The solicitation or acceptance of retail forex customers'

    orders (other than in a clerical capacity); or

    (ii) The supervision of any person or persons so engaged;

    (i) Retail forex account means the account of a person who is not

    an eligible contract participant as defined in section 1a(12) of the

    Act, established with a retail foreign exchange dealer or a futures

    commission merchant, in which account retail forex transactions

    (including options on contracts for the purchase or sale of foreign

    currency) with such retail foreign exchange dealer or futures

    commission merchant as counterparty are undertaken, or which account is

    established in order to enter into such transactions.

    (j) Retail forex account agreement means the contractual agreement

    between a futures commission merchant or retail foreign exchange dealer

    and any person who is not an eligible contract participant as defined

    in section 1a(12) of the Act, which agreement contains the terms

    governing the person's retail forex account with such futures

    commission merchant or retail foreign exchange dealer.

    (k) Retail forex customer means a person, other than an eligible

    contract participant as defined in section 1a(12) of the Act, acting on

    its own behalf and trading in any account, agreement, contract or

    transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.

    [[Page 3312]]

    (l) Retail forex obligation means the net credit balance at a

    retail foreign exchange dealer or futures commission merchant that

    would be obtained by combining all money, securities and property

    deposited by a retail forex customer into a retail forex account or

    accounts, adjusted for the realized and unrealized net profit or loss,

    if any, accruing on the open trades, contracts or transactions in the

    retail forex account or accounts, without including any retail forex

    customers' accounts that contain negative net liquidating balances.

    (m) Retail forex transaction means any account, agreement, contract

    or transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the

    Act. A retail forex transaction does not include an account, agreement,

    contract or transaction in foreign currency that is a contract of sale

    of a commodity for future delivery (or an option thereon) that is

    executed, traded on or otherwise subject to the rules of a contract

    market designated pursuant to section 5(a) of the Act or a derivatives

    transaction execution facility registered pursuant to section 5a(c) of

    the Act.

    Sec. 5.2 Prohibited transactions.

    (a) Scope. The provisions of this section shall be applicable to

    any retail forex transaction.

    (b) Fraudulent conduct prohibited. It shall be unlawful for any

    person, by use of the mails or by any means or instrumentality of

    interstate commerce, directly or indirectly, in or in connection with

    any retail forex transaction:

    (1) To cheat or defraud or attempt to cheat or defraud any person;

    (2) Willfully to make or cause to be made to any person any false

    report or statement or cause to be entered for any person any false

    record; or

    (3) Willfully to deceive or attempt to deceive any person by any

    means whatsoever.

    (c) Acting as counterparty and exercising discretion prohibited.

    (1) No person who acts as the counterparty for any retail forex

    transaction may do so for an account for which the person or any

    affiliate of the person is authorized (by contract, power of attorney

    or otherwise) to cause transactions to be effected without the client's

    specific authorization.

    (2) For purposes of this paragraph (c), an ``affiliate'' of a

    person means a person controlling, controlled by or under common

    control with, the first person.

    Sec. 5.3 Registration of persons engaged in retail forex

    transactions.

    (a) Subject to paragraph (b) of this section, each of the following

    is subject to the registration provisions under the Act and to part 3

    of this chapter:

    (1)(i) Any affiliated person of a futures commission merchant, as

    defined in section 5.1(a) of this part, which affiliated person:

    (A) Solicits or accepts orders from any person that is not an

    eligible contract participant in connection with any retail forex

    transaction; or

    (B) Accepts money, securities, or property (or extends credit in

    lieu thereof) in connection with such solicitation or acceptance of

    orders in order to engage in any retail forex transaction, is required

    to register as a retail foreign exchange dealer; and

    (ii) Any associated person of an affiliated person of a futures

    commission merchant, as defined in Sec. 5.1(c) of this part, is

    required to register as an associated person of an affiliated person of

    a futures commission merchant.

    (2)(i) Any commodity pool operator, as defined in Sec. 5.1(d)(1)

    of this part, is required to register as a commodity pool operator;

    (ii) Any associated person of a commodity pool operator, as defined

    in Sec. 5.1(d)(2) of this part, is required to register as an

    associated person of a commodity pool operator;

    (3)(i) Any commodity trading advisor, as defined in Sec. 5.1(e)(1)

    of this part, is required to register as a commodity trading advisor;

    (ii) Any associated person of a commodity trading advisor, as

    defined in Sec. 5.1(e)(2) of this part, is required to register as an

    associated person of a commodity trading advisor;

    (4)(i) Any person registered as a futures commission merchant:

    (A) That is not primarily or substantially engaged in the business

    activities described in section 1a(20) of the Act;

    (B) That solicits or accepts orders from any person that is not an

    eligible contract participant in connection with any retail forex

    transaction; and

    (C) That accepts money, securities, or property (or extends credit

    in lieu thereof) in connection with such solicitation or acceptance of

    orders in order to engage in retail forex transactions, is required to

    register as a retail foreign exchange dealer;

    (ii) Any associated person of a futures commission merchant

    described in paragraph (a)(4)(i) of this section is required to

    register as an associated person of a futures commission merchant;

    (5)(i) Any introducing broker, as defined in Sec. 5.1(f)(1) of

    this part, is required to register as an introducing broker;

    (ii) Any associated person of an introducing broker, as defined in

    Sec. 5.1(f)(2) of this part, is required to register as an associated

    person of an introducing broker;

    (6)(i) Any retail foreign exchange dealer, as defined in Sec.

    5.1(h)(1) of this part is required to register as a retail foreign

    exchange dealer;

    (ii) Any associated person of a retail foreign exchange dealer, as

    defined in Sec. 5.1(h)(2) of this part, is required to register as an

    associated person of a retail foreign exchange dealer;

    (b) Any person described in paragraph (a) of this section that is

    already registered in the required capacity specified in paragraph (a)

    is not required under this section to register twice in the same

    capacity; Provided, however, that a person already registered as an

    associated person of one class of registrant may also be required to

    register as an associated person of another class of registrant in

    order to comply with this section.

    Sec. 5.4 Applicability of part 4 of this chapter to commodity pool

    operators and commodity trading advisors.

    Part 4 of this chapter applies to any person required pursuant to

    the provisions of this part 5 to register as a commodity pool operator

    or as a commodity trading advisor. Failure by any such person to comply

    with the requirements of part 4 will constitute a violation of this

    section and the relevant section of part 4.

    Sec. 5.5 Distribution of ``Risk Disclosure Statement'' by retail

    foreign exchange dealers, futures commission merchants and introducing

    brokers regarding retail forex transactions.

    (a) Except as provided in Sec. 5.23 of this part, no retail

    foreign exchange dealer, futures commission merchant, or in the case of

    an introduced account no introducing broker, may open an account that

    will engage in retail forex transactions for a retail forex customer,

    unless the retail foreign exchange dealer, futures commission merchant

    or introducing broker first:

    (1)(i) In the case of a retail foreign exchange dealer or a person

    required to register as an introducing broker solely by reason of this

    part, furnishes the retail forex customer with a separate written

    disclosure statement containing only the language set forth in

    paragraph (b) of this section and the disclosure required by paragraph

    (e) of this section;

    (ii) In the case of a futures commission merchant or a person

    required to register as an introducing broker because it engages in the

    activities described in Sec. 1.3(mm) of this chapter, furnishes the

    retail forex

    [[Page 3313]]

    customer with a separate written disclosure statement containing only

    the language set forth in paragraph (b) of this section and the

    disclosure required by paragraph (e) of this section; Provided,

    however, that the disclosure statement may be attached to other

    documents as the initial page(s) of such documents and as the only

    material on such page(s); and

    (2) Receives from the retail forex customer an acknowledgment

    signed and dated by the retail forex customer that he received and

    understood the disclosure statement.

    (b) The language set forth in the written disclosure statement

    required by paragraph (a) of this section shall be as follows:

    Risk Disclosure Statement

    OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVE THE LEVERAGED

    TRADING OF CONTRACTS DENOMINATED IN FOREIGN CURRENCY CONDUCTED WITH A

    FUTURES COMMISSION MERCHANT OR A RETAIL FOREIGN EXCHANGE DEALER AS YOUR

    COUNTERPARTY.

    BECAUSE OF THE LEVERAGE AND THE OTHER RISKS DISCLOSED HERE, YOU CAN

    RAPIDLY LOSE ALL OF THE FUNDS YOU DEPOSIT FOR SUCH TRADING AND YOU MAY

    LOSE MORE THAN YOU DEPOSIT.

    YOU SHOULD BE AWARE OF AND CAREFULLY CONSIDER THE FOLLOWING POINTS

    BEFORE DETERMINING WHETHER SUCH TRADING IS APPROPRIATE FOR YOU.

    (1) TRADING IS NOT ON A REGULATED MARKET OR EXCHANGE--YOUR DEALER

    IS YOUR TRADING PARTNER WHICH IS A DIRECT CONFLICT OF INTEREST. BEFORE

    YOU ENGAGE IN ANY RETAIL FOREIGN EXCHANGE TRADING, YOU SHOULD CONFIRM

    THE REGISTRATION STATUS OF YOUR COUNTERPARTY.

    The off-exchange foreign currency trading you are entering into is

    not conducted on an interbank market, nor is it conducted on a futures

    exchange subject to regulation as a designated contract market by the

    Commodity Futures Trading Commission. The foreign currency trades you

    transact are trades with the futures commission merchant or retail

    foreign exchange dealer as your counterparty. WHEN YOU SELL, THE DEALER

    IS THE BUYER. WHEN YOU BUY, THE DEALER IS THE SELLER. As a result, when

    you lose money trading, your dealer is making money on such trades, in

    addition to any fees, commissions, or spreads the dealer may charge.

    (2) AN ELECTRONIC TRADING PLATFORM FOR RETAIL FOREIGN CURRENCY

    TRANSACTIONS IS NOT AN EXCHANGE. IT IS AN ELECTRONIC CONNECTION FOR

    ACCESSING YOUR DEALER. THE TERMS OF AVAILABILITY OF SUCH A PLATFORM ARE

    GOVERNED ONLY BY YOUR CONTRACT WITH YOUR DEALER.

    Any trading platform that you may use to enter off-exchange foreign

    currency transactions is only connected to your futures commission

    merchant or retail foreign exchange dealer. You are accessing that

    trading platform only to transact with your dealer. You are not trading

    with any other entities or customers of the dealer by accessing such

    platform. The availability and operation of any such platform,

    including the consequences of the unavailability of the trading

    platform for any reason, is governed only by the terms of your account

    agreement with the dealer.

    (3) YOUR DEPOSITS WITH THE DEALER HAVE NO REGULATORY PROTECTIONS.

    All of your rights associated with your retail forex trading,

    including the manner and denomination of any payments made to you, are

    governed by the contract terms established in your account agreement

    with the futures commission merchant or retail foreign exchange dealer.

    Funds deposited by you with a futures commission merchant or retail

    foreign exchange dealer for trading off-exchange foreign currency

    transactions are not subject to the customer funds protections provided

    to customers trading on a contract market that is designated by the

    Commodity Futures Trading Commission. Your dealer may commingle your

    funds with its own operating funds or use them for other purposes. In

    the event your dealer becomes bankrupt, any funds the dealer is holding

    for you in addition to any amounts owed to you resulting from trading,

    whether or not any assets are maintained in separate deposit accounts

    by the dealer, may be treated as an unsecured creditor's claim.

    (4) YOU ARE LIMITED TO YOUR DEALER TO OFFSET OR LIQUIDATE ANY

    TRADING POSITIONS SINCE THE TRANSACTIONS ARE NOT MADE ON AN EXCHANGE OR

    MARKET, AND YOUR DEALER MAY SET ITS OWN PRICES.

    Your ability to close your transactions or offset positions is

    limited to what your dealer will offer to you, as there is no other

    market for these transactions. Your dealer may offer any prices it

    wishes, and it may offer prices derived from outside sources or not in

    its discretion. Your dealer may establish its prices by offering

    spreads from third party prices, but it is under no obligation to do so

    or to continue to do so. Your dealer may offer different prices to

    different customers at any point in time on its own terms. The terms of

    your account agreement alone govern the obligations your dealer has to

    you to offer prices and offer offset or liquidating transactions in

    your account and make any payments to you. The prices offered by your

    dealer may or may not reflect prices available elsewhere at any

    exchange, interbank, or other market for foreign currency.

    (5) PAID SOLICITORS MAY HAVE UNDISCLOSED CONFLICTS

    The futures commission merchant or retail foreign exchange dealer

    may compensate introducing brokers for introducing your account in ways

    which are not disclosed to you. Such paid solicitors are not required

    to have, and may not have, any special expertise in trading, and may

    have conflicts of interest based on the method by which they are

    compensated. Solicitors working on behalf of futures commission

    merchants and retail foreign exchange dealers are required to register.

    You should confirm that they are, in fact registered. You should

    thoroughly investigate the manner in which all such solicitors are

    compensated and be very cautious in granting any person or entity

    authority to trade on your behalf. You should always consider obtaining

    dated written confirmation of any information you are relying on from

    your dealer or a solicitor in making any trading or account decisions.

    FINALLY, YOU SHOULD THOROUGHLY INVESTIGATE ANY STATEMENTS BY ANY

    DEALERS OR SALES REPRESENTATIVES WHICH MINIMIZE THE IMPORTANCE OF, OR

    CONTRADICT, ANY OF THE TERMS OF THIS RISK DISCLOSURE. SUCH STATEMENTS

    MAY INDICATE POTENTIAL SALES FRAUD.

    THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND

    OTHER ASPECTS OF TRADING OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS

    WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE DEALER.

    I hereby acknowledge that I have received and understood this risk

    disclosure statement.

    -----------------------------------------------------------------------

    Date

    -----------------------------------------------------------------------

    Signature of Customer

    [[Page 3314]]

    (c) The acknowledgment required by paragraph (a) of this section

    must be retained by the retail foreign exchange dealer, futures

    commission merchant or introducing broker in accordance with Sec. 1.31

    of this chapter.

    (d) This section does not relieve a retail foreign exchange dealer,

    futures commission merchant or introducing broker from any other

    disclosure obligation it may have under applicable law.

    (e)(1) Immediately following the language set forth in paragraph

    (b) of this section, the statement required by paragraph (a) of this

    section shall include, for each of the most recent four quarters during

    which the counterparty maintained retail forex accounts:

    (i) The total number of non discretionary retail forex accounts

    maintained by the retail foreign exchange dealer or futures commission

    merchant;

    (ii) The percentage of such accounts that were profitable; and

    (iii) the percentage of such accounts that were not profitable.

    (2) Identification of retail forex accounts for purposes of this

    disclosure and calculation of each such account's profit or loss must

    be made in accordance with Sec. 5.18(i) of this part. Such statement

    of profitable trades shall include the following legend: PAST

    PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Each

    retail foreign exchange dealer or futures commission merchant shall

    provide, upon request, to any retail forex customer or prospective

    retail forex customer the total number of non discretionary retail

    forex accounts maintained by such retail foreign exchange dealer or

    futures commission merchant, the percentage of such accounts that were

    profitable, and the percentage of such accounts that were unprofitable,

    calculated in accordance with Sec. 5.18(i) of this part, for each

    quarter during the most recent five year period during which such

    retail foreign exchange dealer or futures commission merchant

    maintained non discretionary retail forex accounts.

    Sec. 5.6 Maintenance of minimum financial requirements by retail

    foreign exchange dealers and futures commission merchants offering or

    engaging in retail forex transactions.

    (a) Each futures commission merchant offering or engaging in retail

    forex transactions or who files an application for registration as a

    futures commission merchant that will offer or engage in retail forex

    transactions and each person registered as a retail foreign exchange

    dealer or who files an application for registration as a retail foreign

    exchange dealer, who knows or should have known that its adjusted net

    capital at any time is less than the minimum required by Sec. 5. 7 of

    this part or by the capital rule of a registered futures association of

    which it is a member, must:

    (1) Give telephonic notice, to be confirmed in writing by facsimile

    notice, that the applicant's or registrant's adjusted net capital is

    less than that required by Sec. 5.7 of this part. The notice must be

    given immediately after the applicant or registrant knows or should

    know that its adjusted net capital is less than that required by any of

    the aforesaid rules to which the applicant or registrant is subject;

    and

    (2) Provide together with such notice documentation in such form as

    necessary to adequately reflect the applicant's or registrant's capital

    condition as of any date such person's adjusted net capital is less

    than the minimum required. The applicant or registrant must provide

    similar documentation for other days as the Commission may request.

    (b) Each applicant or registrant, who knows or should have known

    that its adjusted net capital at any time is less than the greatest of:

    (1) $22,000,000;

    (2) 110 percent of the amount required by Sec. 5.7(a)(1)(i)(B) of

    this part; or

    (3) 110 percent of the amount of adjusted net capital required by a

    registered futures association of which the futures commission merchant

    or retail foreign exchange dealer is a member, must file written notice

    to that effect within 24 hours of such event.

    (c) If an applicant or registrant at any time fails to make or keep

    current the books and records required by these regulations, such

    applicant or registrant must, on the same day such event occurs,

    provide facsimile notice of such fact, specifying the books and records

    which have not been made or which are not current, and within 48 hours

    after giving such notice file a written report stating what steps have

    been and are being taken to correct the situation.

    (d) Whenever any applicant or registrant discovers or is notified

    by an independent public accountant, pursuant to Sec. 1.16(e)(2) of

    this chapter, of the existence of any material inadequacy, as specified

    in Sec. 1.16(d)(2) of this chapter, such applicant or registrant must

    give facsimile notice of such material inadequacy within 24 hours, and

    within 48 hours after giving such notice file a written report stating

    what steps have been and are being taken to correct the material

    inadequacy.

    (e) Whenever any self-regulatory organization learns that a member

    registrant has failed to file a notice or written report as required by

    Sec. 5.6 of this part, that self-regulatory organization must

    immediately report this failure by telephone, confirmed in writing

    immediately by facsimile notice, as provided in paragraph (h) of this

    section.

    (f) A retail foreign exchange dealer or a futures commission

    merchant offering or engaging in retail forex transactions shall

    provide written notice of a substantial reduction in capital as

    compared to that last reported in a financial report filed with the

    Commission pursuant to Sec. 5.12 of this part. This notice shall be

    provided as follows:

    (1) If any event or series of events, including any withdrawal,

    advance, loan or loss cause, on a net basis, a reduction in net capital

    of 20 percent or more, notice must be provided within two business days

    of the event or series of events causing the reduction; and

    (2) If the equity capital of the retail foreign exchange dealer or

    futures commission merchant offering or engaging in retail forex

    transactions or the equity capital of a subsidiary or affiliate of the

    retail foreign exchange dealer or futures commission merchant offering

    or engaging in retail forex transactions consolidated pursuant to Sec.

    1.17(f) of this chapter would be withdrawn by action of a stockholder

    or a partner or a limited liability company member or by redemption or

    repurchase of shares of stock by any of the consolidated entities or

    through the payment of dividends or any similar distribution, or an

    unsecured advance or loan would be made to a stockholder, partner, sole

    proprietor, limited liability company member, employee or affiliate,

    such that the withdrawal, advance or loan would cause, on a net basis,

    a reduction in excess adjusted net capital of 30 percent or more,

    notice must be provided at least two business days prior to the

    withdrawal, advance or loan that would cause the reduction: Provided,

    however, That the provisions of paragraphs (f)(1) and (f)(2) of this

    section do not apply to any retail foreign exchange transaction in the

    ordinary course of business between a retail foreign exchange dealer

    and any affiliate where the retail foreign exchange dealer makes

    payment to or on behalf of such affiliate for such transaction and then

    receives payment from such affiliate for such transaction within two

    business days from the date of the transaction.

    [[Page 3315]]

    (3) Upon receipt of such notice from a futures commission merchant

    offering or engaging in retail forex transactions or a retail foreign

    exchange dealer, the Director of the Division of Clearing and

    Intermediary Oversight or the Director's designee may require that the

    futures commission merchant offering or engaging in retail forex

    transactions or retail foreign exchange dealer provide or cause a

    Material Affiliated Person (as that term is defined in Sec. 5.10(a)(2)

    of this part) to provide, within three business days from the date of

    the request or such shorter period as the Director or designee may

    specify, such other information as the Director or designee determines

    to be necessary based upon market conditions, reports provided by the

    retail foreign exchange dealer or futures commission merchant offering

    or engaging in retail forex transactions, or other available

    information.

    (g) Whenever a person registered as a futures commission merchant

    offering or engaging in retail forex transactions or a retail foreign

    exchange dealer knows or should know that the total amount of its

    retail forex obligation exceeds the amount of the aggregate retail

    forex assets the registrant maintains in accordance with the provisions

    of Sec. 5.8 of this chapter, the registrant must report such

    deficiency immediately by telephone notice, confirmed immediately in

    writing by facsimile notice.

    (h) Every notice and written report required to be given or filed

    with the Commission by this section by an applicant must be filed with

    the regional office of the Commission with jurisdiction over the state

    in which the applicant's principal place of business is located, and

    with the National Futures Association. Every notice and written report

    required to be given or filed with the Commission by this section by a

    registrant or self-regulatory organization must be filed with the

    regional office of the Commission with jurisdiction over the state in

    which the registrant's principal place of business is located, and with

    the registrant's designated self-regulatory organization. In addition,

    every notice and written report required to be given by this section

    must also be filed with the Chief Accountant of the Division of

    Clearing and Intermediary Oversight at the Commission's principal

    office in Washington, DC.

    (i) In lieu of filing paper copies with the Commission, all filings

    or other notices prepared by a futures commission merchant or retail

    foreign exchange dealer pursuant to this section may be submitted to

    the Commission in electronic form using a form of user authentication

    assigned in accordance with procedures established by or approved by

    the Commission, and otherwise in accordance with instructions issued by

    or approved by the Commission, if the futures commission merchant,

    retail foreign exchange dealer or a designated self-regulatory

    organization has provided the Commission with the means necessary to

    read and to process the information contained in such report. Any such

    electronic submission must clearly indicate the registrant or applicant

    on whose behalf such filing is made and the use of such user

    authentication in submitting such filing will constitute and become a

    substitute for the manual signature of the authorized signer.

    Sec. 5.7 Minimum financial requirements for retail foreign exchange

    dealers and futures commission merchants offering or engaging in retail

    forex transactions.

    (a)(1)(i) Each futures commission merchant offering or engaging in

    retail forex transactions and each retail foreign exchange dealer must

    maintain adjusted net capital equal to or in excess of the greatest of:

    (A) $20,000,000;

    (B) $20,000,000 plus five percent of the futures commission

    merchant's or retail foreign exchange dealer's total retail forex

    obligation in excess of $10,000,000;

    (C) any amount required under Sec. 1.17 of this chapter, as

    applicable; or

    (D) the amount of adjusted net capital required by a registered

    futures association of which the futures commission merchant or retail

    foreign exchange dealer is a member.

    (ii) Section 1.17 of this chapter shall apply to retail foreign

    exchange dealers as if such retail foreign exchange dealers were

    futures commission merchants, or as applicable, applicants or

    registrants, as stated in Sec. 1.17 for the purpose of determining the

    adjusted net capital under this section. For the purpose of applying

    this section, ``applicant'' or ``registrant'' shall include retail

    foreign exchange dealers and futures commission merchants offering or

    engaging in retail forex transactions and applicants therefore.

    (2) No person applying for registration as a retail foreign

    exchange dealer or a futures commission merchant that will engage in

    retail forex transactions shall be so registered unless such person

    affirmatively demonstrates to the satisfaction of a registered futures

    association that it complies with the financial requirements of this

    section.

    (3) Each registrant must be in compliance with this section at all

    times and must be able to demonstrate such compliance to the

    satisfaction of the Commission or the registrant's designated self-

    regulatory organization.

    (4) A registrant who is not in compliance with this section, or is

    unable to demonstrate such compliance as required by paragraph (a)(3)

    of this section, shall, as directed by and under the supervision of the

    Commission or the registrant's designated self-regulatory organization,

    either liquidate or transfer all retail forex accounts (including the

    novation of retail forex contracts) and refund or transfer all funds

    associated with such retail forex accounts and immediately cease

    offering or engaging in retail forex transactions until such time as

    the firm is able to demonstrate to the Commission or the registrant's

    designated self-regulatory organization such compliance: Provided,

    however, That if such registrant immediately demonstrates to the

    satisfaction of the Commission or the registrant's designated self-

    regulatory organization the ability to achieve compliance, the

    Commission or the registrant's designated self-regulatory organization

    may in its discretion allow such registrant up to a maximum of 10

    business days, or such additional time as determined by the Commission,

    in which to achieve compliance without having to liquidate positions or

    transfer accounts and cease doing business as required above. Nothing

    in this paragraph (a)(4) shall be construed as preventing the

    Commission or the registrant's designated self-regulatory organization

    from taking action against a registrant for non-compliance with any of

    the provisions of this section.

    (b) For the purposes of this section:

    (1) Where the applicant or registrant has an asset or liability

    which is defined in Securities Exchange Act Rule 15c3-1 (Sec.

    240.15c3-1 of this title) the inclusion or exclusion of all or part of

    such asset or liability for the computation of adjusted net capital

    shall be in accordance with Sec. 240.15c3-1 of this title, unless

    specifically stated otherwise in this section or in Sec. 1.17 of this

    chapter.

    (2) The adjusted net capital of an applicant or registrant for the

    purpose of this section shall be determined by the application of Sec.

    1.17 pursuant to paragraph (a)(1)(ii) of this section, with the

    following additions:

    (i) All positions in retail forex accounts and other financial

    positions and instruments of the applicant or registrant must be marked

    to market and adjusted daily by referencing to current market prices or

    rates of exchange.

    [[Page 3316]]

    (ii) Current assets must exclude any retail forex account which

    liquidates to a deficit or contains a debit ledger balance only and is

    not secured in accordance with Sec. 1.17(c)(3).

    (iii) Current assets must exclude any unsecured receivable accrued

    from any over-the-counter transaction in foreign currency, options on

    foreign currency or options on contracts for the purchase or sale of

    foreign currency, or arising from the deposit of collateral or

    compensating balances with respect to such transactions, unless such

    unsecured receivable is from a person who is an eligible contract

    participant that also is:

    (A) A bank or trust company regulated by a United States banking

    regulator;

    (B) A broker-dealer registered with the Securities and Exchange

    Commission and a member of the Financial Industry Regulatory Authority;

    (C) A futures commission merchant registered with the Commission

    and a member of the National Futures Association;

    (D) A retail foreign exchange dealer registered with the Commission

    and a member of the National Futures Association;

    (E) An entity regulated as a foreign equivalent of any of the

    persons listed in paragraphs (b)(2)(iii)(A) through (D) of this

    section, if such person is regulated in a money center country as

    defined in Sec. 1.49 of this chapter and recognized by the futures

    commission merchant's or retail foreign exchange dealer's designated

    self-regulatory organization as a foreign equivalent;

    (F) Any other entity approved by the futures commission merchant's

    or retail foreign exchange dealer's designated self-regulatory

    organization.

    (iv) The value attributed to any retail forex transaction that is

    an option shall be the difference between the option's exercise value

    or striking value and the market value of the underlying. In the case

    of a call, if the market value of the underlying is less than the

    exercise value or striking value of such call, it shall be given no

    value; and, in the case of a put, if the market value of the underlying

    is more than the exercise value or striking value of the put, it shall

    be given no value.

    (v)(A) In computing adjusted net capital, the capital deductions

    set forth in Sec. 1.17(c)(5)(ii) of this chapter shall apply to retail

    forex transactions other than options. The capital deductions which

    apply are six percent for net positions in Euros, British pounds,

    Canadian dollars, Japanese yen, or Swiss francs and 20 percent for net

    positions in all other foreign currencies, Provided, however, That

    there shall be no capital deductions for retail forex transactions

    covered (as defined in Sec. 1.17(j) of this chapter) by the applicant

    or registrant by open futures contracts to the extent such futures

    contracts are not otherwise designated as cover for any other net

    capital purposes. For purposes of this paragraph (b)(2)(v)(A), such

    retail forex transactions shall be treated as if they were inventory

    and cover were therefore applicable. A retail foreign exchange dealer

    or futures commission merchant may not use an affiliate (unless

    approved by the firm's designated self-regulatory organization) or any

    person that is considered unregulated under the rules of the firm's

    designated self-regulatory organization to cover its currency positions

    for purposes of this section.

    (B) In computing adjusted net capital, the capital deductions set

    forth in Sec. 1.17(c)(5)(vi) of this chapter shall apply to all retail

    forex transactions that are options.

    (C) For the purpose of applying capital deductions on open

    proprietary futures positions under Sec. 1.17(c)(5)(x) of this

    chapter, net or individual positions in retail forex transactions shall

    not constitute cover under Sec. 1.17(j) for the purpose of applying

    such charges.

    (c) An applicant or registrant must prepare, and keep current,

    ledgers or other similar records which show or summarize, with

    appropriate references to supporting documents, each transaction

    affecting the applicant's or registrant's asset, liability, income,

    expense and capital accounts, and in which (except as otherwise

    permitted in writing by the Commission) all the applicant's or

    registrant's asset, liability and capital accounts are classified into

    the account classification subdivisions specified on Form 1-FR-FCM.

    Each applicant or registrant shall prepare and keep current such

    records.

    (d) An applicant or registrant must make and keep as a record in

    accordance with Sec. 5.14 of this part formal computations of its

    adjusted net capital and of its minimum financial requirements pursuant

    to this section as of the close of business each month and on other

    such dates called for by the Commission, the National Futures

    Association, or another self-regulatory organization of which the firm

    is a member. Such computations must be completed and made available for

    inspection by any representative of the Commission, the National

    Futures Association, a self-regulatory organization of which the firm

    is a member, or the United States Department of Justice commencing the

    first month-end after the date the application for registration is

    filed.

    Sec. 5.8 Aggregate retail forex assets.

    (a) Each retail foreign exchange dealer and futures commission

    merchant offering or engaging in retail forex transactions shall

    calculate its total retail forex obligation and shall at all times hold

    assets solely of the type permissible under Sec. 1.25 of this chapter

    equal to or in excess of the total retail forex obligation at one or

    more qualifying institutions in the United States or money center

    countries as defined in Sec. 1.49 of this chapter.

    (b) For assets held in the United States, a qualifying institution

    is:

    (1) A bank or trust company regulated by a United States banking

    regulator;

    (2) A broker-dealer registered with the Securities and Exchange

    Commission and a member of the Financial Industry Regulatory Authority;

    or

    (3) A futures commission merchant registered with the Commission

    and a member of the National Futures Association.

    (c) For assets held in a money center country, a qualifying

    institution is:

    (1) A bank or trust company regulated in a money center country,

    Provided that the bank or trust company has regulatory capital in

    excess of $1 billion;

    (2) An entity regulated in a money center country as an equivalent

    of a broker-dealer or futures commission merchant as determined by the

    retail foreign exchange dealer's or futures commission merchant's

    designated self-regulatory organization, Provided that the entity

    maintains regulatory capital in excess of $100 million; or

    (3) A futures commission merchant registered with the Commission

    and a member of the National Futures Association.

    (d) Assets held in a money center country are not eligible to meet

    the requirements of paragraph (a) of this section unless the retail

    foreign exchange dealer or futures commission merchant has entered into

    an agreement that is acceptable to the firm's designated self-

    regulatory organization and that authorizes the qualifying institution

    to provide account information to the Commission and the firm's

    designated self-regulatory organization.

    (e) In computing its adjusted net capital pursuant to Sec. 5.7 of

    this part, a retail foreign exchange dealer or futures commission

    merchant may not include aggregate retail forex assets as current

    assets or otherwise record any property received from retail forex

    customers as an asset without recording a corresponding liability to

    the retail forex customers.

    [[Page 3317]]

    Sec. 5.9 Security deposits for retail forex transactions.

    (a) Each futures commission merchant engaging, or offering to

    engage, in retail forex transactions and each retail foreign exchange

    dealer must collect from each retail forex customer a minimum security

    deposit in the form of cash or other financial instruments that comply

    with the requirements specified in Sec. 1.25 of this chapter for each

    retail forex transaction equal to:

    (1) Ten percent of the notional value of the retail forex

    transaction;

    (2) For short options, ten percent of the notional value of the

    retail forex transaction, plus the premium received by the futures

    commission merchant or retail foreign exchange dealer; or

    (3) For long options, the full premium charged and received by the

    futures commission merchant or retail foreign exchange dealer.

    (b) A futures commission merchant or retail foreign exchange dealer

    is required to collect additional security deposits from a retail forex

    customer or liquidate the retail forex customer's positions if the

    amount of the retail forex customer's security deposits maintained with

    the futures commission merchant or retail foreign exchange dealer are

    not sufficient to meet the requirements in paragraph (a) of this

    section.

    Sec. 5.10 Risk assessment recordkeeping requirements for retail

    foreign exchange dealers.

    (a) Requirement to maintain and preserve information. (1) Each

    retail foreign exchange dealer registered with the Commission pursuant

    to section 2(c)(2)(B)(i)(II)(gg) of the Act shall prepare, maintain and

    preserve the following information:

    (i) An organizational chart which includes the retail foreign

    exchange dealer and each of its affiliated persons. Included in the

    organizational chart shall be a designation of which affiliated persons

    are ``Material Affiliated Persons'' as that term is used in paragraph

    (a)(2) of this section, which Material Affiliated Persons file routine

    financial or risk exposure reports with the Securities and Exchange

    Commission, a federal banking agency, an insurance commissioner or

    other similar official or agency of a state, or a foreign regulatory

    authority, and which Material Affiliated Persons are dealers in

    financial instruments with off-balance sheet risk and, if a Material

    Affiliated Person is such a dealer, whether it is also an end-user of

    such instruments;

    (ii) Written policies, procedures, or systems concerning the retail

    foreign exchange dealer's:

    (A) Method(s) for monitoring and controlling financial and

    operational risks to it resulting from the activities of any of its

    affiliated persons;

    (B) Financing and capital adequacy, including information regarding

    sources of funding, together with a narrative discussion by management

    of the liquidity of the material assets of the retail foreign exchange

    dealer, the structure of debt capital, and sources of alternative

    funding;

    (C) Establishing and maintaining internal controls with respect to

    market risk, credit risk, and other risks created by the retail foreign

    exchange dealer's trading activities, including systems and policies

    for supervising, monitoring, reporting and reviewing trading activities

    in forex transactions, securities, futures contracts, commodity

    options, forward contracts and financial instruments; policies for

    hedging or managing risks created by trading activities or supervising

    accounts carried for affiliates, including a description of the types

    of reviews conducted to monitor positions; and policies relating to

    restrictions or limitations on trading activities: Provided, however,

    that if the retail foreign exchange dealer has no such written

    policies, procedures or systems, it must so state in writing;

    (iii) Fiscal year-end consolidated and consolidating balance sheets

    for the highest level Material Affiliated Person within the retail

    foreign exchange dealer's organizational structure, which shall include

    the retail foreign exchange dealer and its other Material Affiliated

    Persons, prepared in accordance with generally accepted accounting

    principles, which consolidated balance sheets shall be audited by an

    independent certified public accountant if an annual audit is performed

    in the ordinary course of business, but which otherwise may be

    unaudited, and which shall include appropriate explanatory notes. The

    consolidating balance sheets may be those prepared by the retail

    foreign exchange dealer's highest level Material Affiliated Person as

    part of its internal financial reporting process. Any additional

    information required to be filed under Sec. 5.11(a)(2)(iii) of this

    part shall also be maintained and preserved; and

    (iv) Fiscal year-end consolidated and consolidating income

    statements and consolidated cash flow statements for the highest level

    Material Affiliated Person within the retail foreign exchange dealer's

    organizational structure, which shall include the retail foreign

    exchange dealer and its other Material Affiliated Persons, prepared in

    accordance with generally accepted accounting principles, which

    consolidated statements shall be audited by an independent certified

    public accountant if an annual audit is performed in the ordinary

    course of business, but which otherwise may be unaudited, and which

    shall include appropriate explanatory notes. The consolidating

    statements may be those prepared by the retail foreign exchange

    dealer's highest level Material Affiliated Person as part of its

    internal financial reporting process. Any additional information

    required to be filed under Sec. 5.11(a)(2)(iii) shall also be

    maintained and preserved.

    (2) The determination of whether an affiliated person of a retail

    foreign exchange dealer is a Material Affiliated Person shall involve

    consideration of all aspects of the activities of, and the relationship

    between, both entities, including without limitation, the following

    factors:

    (i) The legal relationship between the retail foreign exchange

    dealer and the affiliated person;

    (ii) The overall financing requirements of the retail foreign

    exchange dealer and the affiliated person, and the degree, if any, to

    which the retail foreign exchange dealer and the affiliated person are

    financially dependent on each other;

    (iii) The degree to which the retail foreign exchange dealer and

    the affiliated person directly or indirectly engage in over-the-counter

    transactions with each other;

    (iv) The degree, if any, to which the retail foreign exchange

    dealer or its customers rely on the affiliated person for operational

    support or services in connection with the retail foreign exchange

    dealer's business;

    (v) The level of market, credit or other risk present in the

    activities of the affiliated person; and

    (vi) The extent to which the affiliated person has the authority or

    the ability to cause a withdrawal of capital from the retail foreign

    exchange dealer.

    (3) For purposes of this section and Sec. 5.11 of this part, the

    term Material Affiliated Person does not include a natural person.

    (4) The information, reports and records required by this section

    shall be maintained and preserved, and made readily available for

    inspection, in accordance with the provisions of Sec. 1.31 of this

    chapter.

    (b) Special provisions with respect to Material Affiliated Persons

    subject to the supervision of certain domestic regulators. A retail

    foreign exchange dealer shall be deemed to be in compliance with the

    recordkeeping requirements of paragraphs (a)(1)(i), (iii)

    [[Page 3318]]

    and (iv) of this section with respect to a Material Affiliated Person

    if:

    (1) The Material Affiliated Person is required to maintain and

    preserve information pursuant to Sec. 240.17h-1T of this title, or

    such other risk assessment regulations as the Securities and Exchange

    Commission may adopt, and the retail foreign exchange dealer maintains

    and makes available for inspection by the Commission in accordance with

    the provisions of this section copies of the records and reports

    maintained and filed on Form 17-H (or such other forms or reports as

    may be required) by the Material Affiliated Person with the Securities

    and Exchange Commission pursuant to Sec. Sec. 240.17h-1T and 240.17h-

    2T of this title, or such other risk assessment regulations as the

    Securities and Exchange Commission may adopt;

    (2) In the case of a Material Affiliated Person (including a

    foreign banking organization) that is subject to examination by, or the

    reporting requirements of, a Federal banking agency, the retail foreign

    exchange dealer or such Material Affiliated Person maintains and makes

    available for inspection by the Commission in accordance with the

    provisions of this section copies of all reports submitted by such

    Material Associated Person to the Federal banking agency pursuant to

    section 5211 of the Revised Statutes, section 9 of the Federal Reserve

    Act, section 7(a) of the Federal Deposit Insurance Act, section 10(b)

    of the Home Owners' Loan Act, or section 5 of the Bank Holding Company

    Act of 1956; or

    (3) In the case of a Material Affiliated Person that is subject to

    the supervision of an insurance commissioner or other similar official

    or agency of a state, the retail foreign exchange dealer or such

    Material Affiliated Person maintains and makes available for inspection

    by the Commission in accordance with the provisions of this section

    copies of the annual statements with schedules and exhibits prepared by

    the Material Affiliated Person on forms prescribed by the National

    Association of Insurance Commissioners or by a state insurance

    commissioner.

    (c)(1) Special provisions with respect to Material Affiliated

    Persons subject to the supervision of a Foreign Regulatory Authority. A

    retail foreign exchange dealer shall be deemed to be in compliance with

    the recordkeeping requirements of paragraphs (a)(1)(iii) and (iv) of

    this section with respect to a Material Affiliated Person if such

    retail foreign exchange dealer maintains and makes available, or causes

    such Material Affiliated Person to make available, for inspection by

    the Commission in accordance with the provisions of this section copies

    of any financial or risk exposure reports filed by such Material

    Affiliated Person with a foreign futures authority or other foreign

    regulatory authority, provided that:

    (i) The retail foreign exchange dealer agrees to use its best

    efforts to obtain from the Material Affiliated Person and to cause the

    Material Affiliated Person to provide, directly or through its foreign

    futures authority or other foreign regulatory authority, any

    supplemental information the Commission may request and there is no

    statute or other bar in the foreign jurisdiction that would preclude

    the retail foreign exchange dealer, the Material Affiliated Person, the

    foreign futures authority or other foreign regulatory authority from

    providing such information to the Commission; or

    (ii) The foreign futures authority or other foreign regulatory

    authority with whom the Material Affiliated Person files such reports

    has entered into an information-sharing agreement with the Commission

    which is in effect as of the retail foreign exchange dealer's fiscal

    year-end and which will allow the Commission to obtain the type of

    information required herein.

    (2) The retail foreign exchange dealer shall maintain a copy of the

    original report and a copy translated into the English language. For

    the purposes of this section, the term ``Foreign Futures Authority''

    shall have the meaning set forth in section 1a(10) of the Act.

    (d) Exemptions. The Commission may exempt any retail foreign

    exchange dealer from any provision of this section if it finds that the

    exemption is not contrary to the public interest and the purposes of

    the provisions from which the exemption is sought. The Commission may

    grant the exemption subject to such terms and conditions as it may find

    appropriate.

    (e) Location of records. A retail foreign exchange dealer required

    to maintain records concerning Material Affiliated Persons pursuant to

    this section may maintain those records either at the principal office

    of the Material Affiliated Person or at a records storage facility,

    provided that, except as set forth in paragraph (c) of this section,

    the records are located within the boundaries of the United States and

    the records are kept and available for inspection in accordance with

    Sec. 1.31 of this chapter. If such records are maintained at a place

    other than the retail foreign exchange dealer's principal place of

    business, the Material Affiliated Person or other entity maintaining

    the records shall file with the Commission a written undertaking, in a

    form acceptable to the Commission, signed by a duly authorized person,

    to the effect that the records will be treated as if the retail foreign

    exchange dealer were maintaining the records pursuant to this section

    and that the entity maintaining the records will permit examination of

    such records at any time, or from time to time during business hours,

    by representatives or designees of the Commission and promptly furnish

    the Commission representative or its designee true, correct, complete

    and current hard copy of all or any part of such records. The election

    to maintain records at the principal place of business of the Material

    Affiliated Person or at a records storage facility pursuant to the

    provisions of this paragraph shall not relieve the retail foreign

    exchange dealer required to maintain and preserve such records from any

    of its responsibilities under this section or Sec. 5.11 of this part.

    (f) Confidentiality. All information obtained by the Commission

    pursuant to the provisions of this section from a retail foreign

    exchange dealer concerning a Material Affiliated Person shall be deemed

    confidential information for the purposes of section 8 of the Act.

    (g) Implementation schedule. Each retail foreign exchange dealer

    who is subject to the requirements of this section shall maintain and

    preserve the information required by paragraphs (a)(1)(i) and (ii) of

    this section commencing 60 calendar days after registration becomes

    effective and the information required by paragraphs (a)(1)(iii) and

    (iv) of this section commencing 105 calendar days following the first

    fiscal year-end occurring after registration becomes effective.

    Sec. 5.11 Risk assessment reporting requirements for retail foreign

    exchange dealers.

    (a) Reporting requirements with respect to information required to

    be maintained by section 5.10 of this part. (1) Each retail foreign

    exchange dealer registered with the Commission pursuant to Section

    2(c)(2)(B)(i)(II)(gg) of the Act shall file the following with the

    regional office of the Commission with which it files periodic

    financial reports within 60 calendar days after the effective date of

    such registration:

    (i) A copy of the organizational chart maintained by the retail

    foreign exchange dealer pursuant to Sec. 5.10(a)(l)(i) of this part.

    Where there is a material change in information provided, an updated

    organizational

    [[Page 3319]]

    chart shall be filed within sixty calendar days after the end of the

    fiscal quarter in which the change has occurred; and

    (ii) Copies of the financial, operational, and risk management

    policies, procedures and systems maintained by the retail foreign

    exchange dealer pursuant to Sec. 5.10(a)(l)(ii) of this part. If the

    retail foreign exchange dealer has no such written policies, procedures

    or systems, it must file a statement so indicating. Where there is a

    material change in information provided, such change shall be reported

    within sixty calendar days after the end of the fiscal quarter in which

    the change has occurred.

    (2) Each retail foreign exchange dealer registered with the

    Commission pursuant to section 2(c)(2)(B)(i)(II)(gg) of the Act shall

    file the following with the regional office with which it files

    periodic financial reports within 105 calendar days after the end of

    each fiscal year or, if a filing is made pursuant to a written notice

    issued under paragraph (a)(2)(iii) of this section, within the time

    period specified in the written notice:

    (i) Fiscal year-end consolidated and consolidating balance sheets

    for the highest level Material Affiliated Person within the retail

    foreign exchange dealer's organizational structure, which shall include

    the retail foreign exchange dealer and its other Material Affiliated

    Persons, prepared in accordance with generally accepted accounting

    principles, which consolidated balance sheets shall be audited by an

    independent certified public accountant if an annual audit is performed

    in the ordinary course of business, but which otherwise may be

    unaudited, and which consolidated balance sheets shall include

    appropriate explanatory notes. The consolidating balance sheets may be

    those prepared by the retail foreign exchange dealer's highest level

    Material Affiliated Person as part of its internal financial reporting

    process;

    (ii) Fiscal year-end annual consolidated and consolidating income

    statements and consolidated cash flow statements for the highest level

    Material Affiliated Person within the retail foreign exchange dealer's

    organizational structure, which shall include the retail foreign

    exchange dealer and its other Material Affiliated Persons, prepared in

    accordance with generally accepted accounting principles, which

    consolidated statements shall be audited by an independent certified

    public accountant if an annual audit is performed in the ordinary

    course of business, but which otherwise may be unaudited, and which

    consolidated statements shall include appropriate explanatory notes.

    The consolidating statements may be those prepared by the retail

    foreign exchange dealer's highest level Material Affiliated Person as

    part of its internal financial reporting process; and

    (iii) Upon receiving written notice from any representative of the

    Commission and within the time period specified in the written notice,

    such additional information which the Commission determines is

    necessary for a complete understanding of a particular affiliate's

    financial impact on the retail foreign exchange dealer's organizational

    structure.

    (3) For the purposes of this section, the term Material Affiliated

    Person shall have the meaning used in Sec. 5.10 of this part.

    (4) The reports required to be filed pursuant to paragraphs (a)(1)

    and (2) of this section shall be considered filed when received by the

    regional office of the Commission with whom the retail foreign exchange

    dealer files financial reports pursuant to Sec. 5.12 of this part.

    (b) Exemptions. The Commission may exempt any retail foreign

    exchange dealer from any provision of this section if it finds that the

    exemption is not contrary to the public interest and the purposes of

    the provisions from which the exemption is sought. The Commission may

    grant the exemption subject to such terms and conditions as it may find

    appropriate.

    (c) Special provisions with respect to Material Affiliated Persons

    subject to the supervision of certain domestic regulators. (1) In the

    case of a Material Affiliated Person that is required to maintain and

    preserve information pursuant to section 240.17h-1T of this title, or

    such other risk assessment regulations as the Securities and Exchange

    Commission may adopt, the retail foreign exchange dealer shall be

    deemed to be in compliance with the reporting requirements of paragraph

    (a)(2) of this section with respect to such Material Affiliated Person

    if the retail foreign exchange dealer maintains and makes available for

    inspection by the Commission in accordance with the provisions of this

    section copies of the records and reports maintained and filed on Form

    17-H (or such other forms or reports as may be required) by the

    Material Affiliated Person with the Securities and Exchange Commission

    pursuant to Sec. Sec. 240.17h-1T and 240.17h-2T of this title, or such

    other risk assessment regulations as the Securities and Exchange

    Commission may adopt;

    (2) In the case of a Material Affiliated Person (including a

    foreign banking organization) that is subject to examination by, or the

    reporting requirements of, a Federal banking agency, the retail foreign

    exchange dealer shall be deemed to be in compliance with the reporting

    requirements of paragraph (a)(2) of this section with respect to such

    Material Affiliated Person if the retail foreign exchange dealer or

    such Material Affiliated Person maintains in accordance with Sec. 5.10

    of this part copies of all reports filed by the Material Affiliated

    Person with the Federal banking agency pursuant to section 5211 of the

    Revised Statutes, section 9 of the Federal Reserve Act, section 7(a) of

    the Federal Deposit Insurance Act, section 10(b) of the Home Owners'

    Loan Act, or section 5 of the Bank Holding Company Act of 1956.

    (3) In the case of a retail foreign exchange dealer that has a

    Material Affiliated Person that is subject to the supervision of an

    insurance commissioner or other similar official or agency of a state,

    such retail foreign exchange dealer shall be deemed to be in compliance

    with the reporting requirements of paragraph (a)(2) of this section

    with respect to the Material Affiliated Person if:

    (i) With respect to a Material Affiliated Person organized as a

    mutual insurance company or a non-public stock company, the retail

    foreign exchange dealer or such Material Affiliated Person maintains in

    accordance with Sec. 5.14 of this part copies of the annual statements

    with schedules and exhibits prepared by the Material Affiliated Person

    on forms prescribed by the National Association of Insurance

    Commissioners or by a state insurance commissioner; and

    (ii) With respect to a Material Affiliated Person organized as a

    public stock company, the retail foreign exchange dealer or such

    Material Affiliated Person maintains, in addition to the annual

    statements with schedules and exhibits required to be maintained

    pursuant to Sec. 1.14 of this chapter, copies of the filings made by

    the Material Affiliated Person pursuant to sections 13 or 15 of the

    Securities Exchange Act of 1934 and the Investment Company Act of 1940.

    (4) No retail foreign exchange dealer shall be required to furnish

    to the Commission any examination report of any Federal banking agency

    or any supervisory recommendations or analyses contained therein with

    respect to a Material Affiliated Person that is subject to the

    regulation of a Federal banking agency. All information received by the

    Commission pursuant to this section concerning a Material Affiliated

    Person that is subject to examination by or the reporting

    [[Page 3320]]

    requirements of a Federal banking agency shall be deemed confidential

    for the purposes of section 8 of the Act.

    (5) The furnishing of any information or documents by a retail

    foreign exchange dealer pursuant to this section shall not constitute

    an admission for any purpose that a Material Affiliated Person is

    otherwise subject to the Act.

    (d) Special provisions with respect to Material Affiliated Persons

    subject to the supervision of a Foreign Regulatory Authority. A retail

    foreign exchange dealer shall be deemed to be in compliance with the

    reporting requirements of paragraph (a)(2) of this section with respect

    to a Material Affiliated Person if such retail foreign exchange dealer

    furnishes, or causes such Material Affiliated Person to make available,

    in accordance with the provisions of this section, copies of any

    financial or risk exposure reports filed by such Material Affiliated

    Person with a foreign futures authority or other foreign regulatory

    authority, provided that:

    (1) The retail foreign exchange dealer agrees to use its best

    efforts to obtain from the Material Affiliated Person and to cause the

    Material Affiliated Person to provide, directly or through its foreign

    futures authority or other foreign regulatory authority, any

    supplemental information the Commission may request and there is no

    statute or other bar in the foreign jurisdiction that would preclude

    the retail foreign exchange dealer, the Material Affiliated Person, the

    foreign futures authority or other foreign regulatory authority from

    providing such information to the Commission; or

    (2) The foreign futures authority or other foreign regulatory

    authority with whom the Material Affiliated Person files such reports

    has entered into an information sharing agreement with the Commission

    which is in effect as of the retail foreign exchange dealer's fiscal

    year-end and which will allow the Commission to obtain the type of

    information required herein. The retail foreign exchange dealer shall

    file a copy of the original report and a copy translated into the

    English language. For the purposes of this section, the term ``Foreign

    Futures Authority'' shall have the meaning set forth in section 1a(10)

    of the Act.

    (e) Confidentiality. All information obtained by the Commission

    pursuant to the provisions of this section from a retail foreign

    exchange dealer concerning a Material Associated Person shall be deemed

    confidential information for the purposes of section 8 of the Act.

    (f) Implementation schedule. Each retail foreign exchange dealer

    who is subject to the requirements of this section shall file the

    information required by paragraph (a)(1) of this section within 60

    calendar days after registration is granted, and the information

    required by paragraph (a)(2) of this section within 105 calendar days

    after registration is granted.

    Sec. 5.12 Financial reports of retail foreign exchange dealers.

    (a)(1) Each person who files an application for registration as a

    retail foreign exchange dealer with the National Futures Association

    shall submit, concurrently with the filing of such application, either:

    (i) A Form 1-FR-FCM certified by an independent public accountant

    as of a date not more than 45 days prior to the date on which such

    report is filed; or

    (ii) A Form 1-FR-FCM as of a date not more than 17 business days

    prior to the date on which such report is filed and a Form 1-FR-FCM

    certified by an independent public accountant as of a date not more

    than one year prior to the date on which such report is filed.

    (2) Each such person must include with such financial report a

    statement describing the source of his current assets and representing

    that his capital has been contributed for the purpose of operating his

    business and will continue to be used for such purpose.

    (3) The provisions of paragraph (a)(1) of this section do not apply

    to any person succeeding to and continuing the business of another

    retail foreign exchange dealer.

    (b)(1) Each person registered as a retail foreign exchange dealer

    must file a Form 1-FR-FCM as of the close of business each month. Each

    Form 1-FR must be filed no later than 17 business days after the date

    for which the report is made.

    (2) In addition to the monthly financial reports required by

    paragraph (b)(1) of this section, each person registered as a retail

    foreign exchange dealer must file a Form 1-FR-FCM as of the close of

    its fiscal year, which must be certified by an independent public

    accountant and must be filed no later than 90 days after the close of

    the retail foreign exchange dealer's fiscal year.

    (3) A Form 1-FR-FCM required to be certified by an independent

    public accountant which is filed by a retail foreign exchange dealer

    must be filed in paper form and may not be filed electronically with

    the Commission. A Form 1-FR-FCM required to be certified by an

    independent public accountant which is filed by an applicant for

    registration as a retail foreign exchange dealer with the National

    Futures Association must be filed electronically in accordance with

    electronic filing procedures established by the National Futures

    Association, however a paper copy of any such filing with the original

    manually signed certification must be maintained by the applicant for

    registration as a retail foreign exchange dealer in accordance with

    Sec. 1.31.

    (c) Each Form 1-FR-FCM required by the provisions of paragraphs

    (a)(1) and (b)(2) of this section to be certified by an independent

    public accountant must be certified in accordance with Sec. 1.16 of

    this chapter, and must be accompanied by the accountant's report on

    material inadequacies in accordance with the provisions of Sec.

    1.16(c)(5) of this chapter. In all other respects, the independent

    public accountant shall act in accordance with the provisions of Sec.

    1.16 (except paragraph (f)) of this chapter: Provided, however, that

    the term ``Sec. 5.7'' shall be substituted for the term ``Sec.

    1.17,'' and the term ``retail foreign exchange dealer'' shall be

    substituted for the term ``futures commission merchant.''

    (d) Upon receiving written notice from any representative of the

    Commission, National Futures Association, or any self-regulatory

    organization of which the firm is a member, a retail foreign exchange

    dealer or applicant for such registration, must, monthly or at such

    times as specified, furnish the Commission, National Futures

    Association, or self-regulatory organization a Form 1-FR-FCM or such

    other financial information requested in the written notice. Each such

    Form 1-FR-FCM or such other information must be furnished within the

    time period specified in the written notice, and in accordance with the

    provisions of paragraph (i) of this section.

    (e)(1) Each Form 1-FR-FCM filed pursuant to this Sec. 5.12 which

    is not required to be certified by an independent public accountant

    must be completed in accordance with the instructions to the form and

    contain:

    (i) A statement of financial condition as of the date for which the

    report is made;

    (ii) A statement of income (loss) for the period between the date

    of the most recent statement of financial condition filed with the

    Commission and the date for which the report is made;

    (iii) A statement of changes in ownership equity for the period

    between the date of the most recent statement of financial condition

    filed with the Commission and the date for which the report is made;

    (iv) A statement of changes in liabilities subordinated to claims

    of general creditors for the period between

    [[Page 3321]]

    the date of the most recent statement of financial condition filed with

    the Commission and the date for which the report is made;

    (v) A statement of the computation of the minimum capital

    requirements pursuant to Sec. 5.7 of this part as of the date for

    which the report is made; and

    (vi) In addition to the information expressly required, such

    further material information as may be necessary to make the required

    statements and schedules not misleading.

    (2) Each Form 1-FR-FCM filed pursuant to this Sec. 5.12 which is

    required to be certified by an independent public accountant must be

    completed in accordance with the instructions to the form and contain:

    (i) A statement of financial condition as of the date for which the

    report is made;

    (ii) Statements of income (loss), cash flows, changes in ownership

    equity, and changes in liabilities subordinated to claims of general

    creditors, for the period between the date of the most recent certified

    statement of financial condition filed with the Commission and the date

    for which the report is made: Provided, That for an applicant filing

    pursuant to paragraph (a) of this section the period must be the year

    ending as of the date of the statement of financial condition;

    (iii) A statement of the computation of the minimum capital

    requirements pursuant to Sec. 5.7 of this part as of the date for

    which the report is made;

    (iv) Appropriate footnote disclosures;

    (v) A reconciliation, including appropriate explanations, of the

    statement of the computation of the minimum capital requirements

    pursuant to Sec. 5.7 of this part, in the certified Form 1-FR-FCM with

    the applicant's or registrant's corresponding uncertified most recent

    Form 1-FR-FCM filing when material differences exist or, if no material

    differences exist, a statement so indicating; and

    (vi) In addition to the information expressly required, such

    further material information as may be necessary to make the required

    statements not misleading.

    (3) The statements required by paragraphs (e)(2)(i) and (ii) of

    this section may be presented in accordance with generally accepted

    accounting principles in the certified reports filed as of the close of

    the registrant's fiscal year pursuant to paragraph (b)(2) of this

    section or accompanying the application for registration pursuant to

    paragraph (a)(1) of this section, rather than in the format

    specifically prescribed by these regulations: Provided, the statement

    of financial condition is presented in a format as consistent as

    possible with the Form 1-FR-FCM and a reconciliation is provided

    reconciling such statement of financial condition to the statement of

    the computation of the minimum capital requirements pursuant to Sec.

    5.7 of this part. Such reconciliation must be certified by an

    independent public accountant in accordance with Sec. 1.16 of this

    chapter.

    (4) Attached to each Form 1-FR-FCM filed pursuant to this section

    must be an oath or affirmation that to the best knowledge and belief of

    the individual making such oath or affirmation the information

    contained in the Form 1-FR-FCM is true and correct. The individual

    making such oath or affirmation must be: If the registrant or applicant

    is a sole proprietorship, the proprietor; if a partnership, any general

    partner; if a corporation, the chief executive officer or chief

    financial officer; and, if a limited liability company or limited

    liability partnership, the chief executive officer, the chief financial

    officer, the manager, the managing member, or those members vested with

    the management authority for the limited liability company or limited

    liability partnership.

    (f) Election of fiscal year. (1) An applicant wishing to establish

    a fiscal year other than the calendar year may do so by notifying the

    National Futures Association of its election of such fiscal year, in

    writing, concurrently with the filing of the Form 1-FR-FCM pursuant to

    paragraph (a)(1) of this section, but in no event may such fiscal year

    end more than one year from the date of the Form 1-FR-FCM filed

    pursuant to paragraph (a)(1) of this section. An applicant that does

    not so notify the National Futures Association will be deemed to have

    elected the calendar year as its fiscal year.

    (2)(i) A registrant must continue to use its elected fiscal year,

    calendar or otherwise, unless a change in such fiscal year has been

    approved pursuant to this paragraph (f)(2).

    (ii) A registrant may file with its designated self-regulatory

    organization an application to change its fiscal year, a copy of which

    the registrant must file with the Commission. The application shall be

    approved or denied in writing by the registrant's designated self-

    regulatory organization. The registrant must file immediately with the

    Commission a copy of any notice it receives from its designated self-

    regulatory organization to approve or deny the registrant's application

    to change its fiscal year. A written notice of approval shall become

    effective upon the filing by the registrant of a copy with the

    Commission, and a written notice of denial shall be effective as of the

    date of the notice.

    (g) In the event a retail foreign exchange dealer or applicant for

    registration as a retail foreign exchange dealer finds that it cannot

    file its Form 1-FR-FCM for any period within the time specified in

    paragraph (b)(1) or (2) of this section without substantial undue

    hardship, it may request approval for an extension of time by filing an

    application for an extension of time with, in the case of a registrant,

    its designated self-regulatory organization, or, in the case of an

    applicant, the National Futures Association. The registrant or

    applicant also must file a copy of its application for an extension of

    time with the Commission. The application shall be approved or denied

    in writing by the National Futures Association or designated self-

    regulatory organization, as applicable. The registrant or applicant

    must file immediately with the Commission a copy of any notice it

    receives approving or denying the request for extension of time. A

    written notice of approval shall become effective upon the filing by

    the registrant or applicant of a copy with the Commission, and a

    written notice of denial shall be effective as of the date of the

    notice.

    (h) Public availability of reports. (1) Forms 1-FR-FCM filed

    pursuant to this section will be treated as exempt from mandatory

    public disclosure for purposes of the Freedom of Information Act and

    the Government in the Sunshine Act and parts 145 and 147 of this

    chapter, except for the information described in paragraph (i)(2) of

    this section.

    (2) The following information in Forms 1-FR-FCM will be publicly

    available:

    (i) The amount of the applicant's or registrant's adjusted net

    capital; the amount of its minimum net capital requirement under Sec.

    5.7 of this chapter; the amount of its adjusted net capital in excess

    of its minimum net capital requirement; and the amount of the retail

    forex obligation owed to its retail forex customers; and

    (ii) The Statement of Financial Condition and the opinion of the

    independent public accountant in the certified annual financial reports

    of retail foreign exchange dealers.

    (3) All information that is exempt from mandatory public disclosure

    under paragraph (h)(1) of this section will, however, be available for

    official use by any official or employee of the United States or any

    State, by the National Futures Association or any other self-

    [[Page 3322]]

    regulatory organization of which the person filing such report is a

    member, and by any other person to whom the Commission believes

    disclosure of such information is in the public interest. Nothing in

    this paragraph (h) will limit the authority of any self-regulatory

    organization to request or receive any information relative to its

    members' financial condition.

    (i)(1) In the case of an applicant, all filings or other notices

    provided for in this section will be considered filed when received by

    the regional office of the Commission with jurisdiction over the state

    in which the applicant's principal place of business is located and by

    the National Futures Association. In the case of a registrant, all

    filings or other notices provided for in this section will be

    considered filed when received by the regional office of the Commission

    with jurisdiction over the state in which the registrant's principal

    place of business is located and by the registrant's designated self-

    regulatory organization. Any copy that under paragraph (f)(2) or (g) is

    required to be filed with the Commission shall be filed with the

    regional office of the Commission with jurisdiction over the state in

    which the registrant's principal place of business is located.

    (2) All filings or other notices filed pursuant to this section

    which need not be certified in accordance with Sec. 1.16 may be

    submitted to the Commission in electronic form using a form of user

    authentication assigned in accordance with procedures established by or

    approved by the Commission, and otherwise in accordance with

    instructions issued by or approved by the Commission, if the retail

    foreign exchange dealer or a designated self regulatory organization

    has provided the Commission with the means necessary to read and to

    process the information contained in such report. Any such electronic

    submission must clearly indicate the registrant or applicant on whose

    behalf such filing is made and the use of such user authentication in

    submitting such filing will constitute and become a substitute for the

    manual signature of the authorized signer. In the case of a Form 1-FR

    filed via electronic transmission in accordance with procedures

    established by or approved by the Commission, such transmission must be

    accompanied by the user authentication assigned to the authorized

    signer under such procedures, and the use of such user authentication

    will constitute and become a substitute for the manual signature of the

    authorized signer for the purpose of making the oath or affirmation

    referred to in paragraph (e)(4) of this section.

    Sec. 5.13 Reporting to customers of retail foreign exchange

    dealers and futures commission merchants; monthly and confirmation

    statements.

    (a) Monthly statements. Each retail foreign exchange dealer or

    futures commission merchant must promptly furnish in writing to each

    retail forex customer, as of the close of the last business day of each

    month or as of any regular monthly date selected, except for accounts

    in which there are neither open positions at the end of the statement

    period nor any changes to the account balance since the prior statement

    period, but in any event not less frequently than once every three

    months, a statement which clearly shows:

    (1) For each retail forex customer:

    (i) The open retail forex transactions with prices at which

    acquired;

    (ii) The net unrealized profits or losses in all open retail forex

    transactions marked to the market; and

    (iii) Any money, securities or other property carried with the

    retail foreign exchange dealer or futures commission merchant; and

    (iv) A detailed accounting of all financial charges and credits to

    such retail forex accounts during the monthly reporting period,

    including money, securities or property received from or disbursed to

    such customer and realized profits and losses; and

    (2) For each retail forex customer engaging in forex option

    transactions:

    (i) All forex options purchased, sold, exercised, or expired during

    the monthly reporting period, identified by underlying retail forex

    transaction or underlying currency, strike price, transaction date, and

    expiration date;

    (ii) The open forex option positions carried for such customer as

    of the end of the monthly reporting period, identified by underlying

    retail forex transaction or underlying currency, strike price,

    transaction date, and expiration date;

    (iii) All open forex option positions marked to the market and the

    amount each position is in the money, if any;

    (iv) Any money, securities or other property carried with the

    retail foreign exchange dealer or futures commission merchant; and

    (v) A detailed accounting of all financial charges and credits to

    such retail forex account(s) during the monthly reporting period,

    including money, securities and property received from or disbursed to

    such customer, premiums charged and received, and realized profits and

    losses.

    (b) Confirmation statement. Each retail foreign exchange dealer or

    futures commission merchant must, not later than the next business day

    after any retail forex or forex option transaction, furnish:

    (1) To each retail forex customer, a written confirmation of each

    retail forex transaction caused to be executed by it for the customer,

    including offsetting transactions executed during the same business day

    and the rollover of an open retail forex transaction to the next

    business day.

    (2) To each retail forex customer engaging in forex option

    transactions, a written confirmation of each forex option transaction,

    containing at least the following information:

    (i) The retail forex customer's account identification number;

    (ii) A separate listing of the actual amount of the premium, as

    well as each mark-up thereon, if applicable, and all other commissions,

    costs, fees and other charges incurred in connection with the forex

    option transaction;

    (iii) The strike price;

    (iv) The underlying retail forex transaction or underlying

    currency;

    (v) The final exercise date of the forex option purchased or sold;

    and

    (vi) The date the forex option transaction was executed.

    (3) To each retail forex customer engaging in forex option

    transactions, upon the expiration or exercise of any forex option, a

    written confirmation statement thereof, which statement shall include

    the date of such occurrence, a description of the forex option

    involved, and, in the case of exercise, the details of the retail forex

    or physical currency position which resulted therefrom including, if

    applicable, the final trading date of the retail forex transaction

    underlying the option.

    (4) Notwithstanding the provisions of paragraphs (b)(1) through (3)

    of this section, a retail forex transaction or forex option transaction

    that is caused to be executed for a pooled investment vehicle that

    engages in retail forex transactions need be confirmed only to the

    operator of such pooled investment vehicle.

    (c) Controlled accounts. With respect to any account controlled by

    any person other than the retail forex customer or forex option

    customer for whom such account is carried, each retail foreign exchange

    dealer or futures commission merchant shall promptly furnish in writing

    to such other person the information required by paragraphs (a) and (b)

    of this section.

    (d) Recordkeeping. Each retail foreign exchange dealer or futures

    commission merchant shall retain, in accordance

    [[Page 3323]]

    with Sec. 1.31 of this chapter, a copy of each monthly statement and

    confirmation required by this section.

    (e) Introduced accounts. Each statement provided pursuant to the

    provisions of this section must, if applicable, show that the account

    for which the retail foreign exchange dealer or futures commission

    merchant is providing the statement was introduced by an introducing

    broker and the names of the retail foreign exchange dealer or futures

    commission merchant and introducing broker.

    (g) Electronic transmission of statements. (1) The statements

    required by this section may be furnished to a retail forex customer by

    means of electronic media if the retail forex customer so consents,

    Provided, however, that a retail foreign exchange dealer or futures

    commission merchant must, prior to the transmission of any statement by

    means of electronic media, disclose the electronic medium or source

    through which statements will be delivered, the duration, whether

    indefinite or not, of the period during which consent will be

    effective, any charges for such service, the information that will be

    delivered by such means, and that consent to electronic delivery may be

    revoked at any time, and provided, further, that a retail foreign

    exchange dealer or futures commission merchant must obtain the retail

    forex customer's signed consent acknowledging such disclosure prior to

    the transmission of any statement by means of electronic media.

    (2) Any statement required to be furnished to a person other than a

    retail forex customer in accordance with paragraph (g) of this section

    may be furnished by electronic media.

    (3) A retail foreign exchange dealer or futures commission merchant

    who furnishes statements to a retail forex customer by means of

    electronic media must retain a daily confirmation statement for such

    retail forex customer as of the end of the trading session, reflecting

    all transactions made during that session for the customer, in

    accordance with Sec. 1.31 of this chapter.

    (h) Combination with other statements. Any futures commission

    merchant required to deliver statements to retail forex customers in

    accordance with Sec. 1.33 of this chapter may combine into one monthly

    statement or confirmation statement, as the case may be, the

    information required by this section and the information required by

    Sec. 1.33, provided that retail forex account information is

    separately identified from any other trading or account activity of the

    retail forex customer.

    Sec. 5.14 Records to be kept by retail foreign exchange dealers and

    futures commission merchants.

    (a) No person shall be registered as a retail foreign exchange

    dealer under the Act unless, commencing on the date his application for

    such registration is filed, he prepares and keeps current ledgers or

    other similar records which show or summarize, with appropriate

    references to supporting documents, each transaction affecting his

    asset, liability, income, expense and capital accounts, and in which

    (except as otherwise permitted in writing by the Commission) all his

    asset, liability and capital accounts are classified into either the

    account classification subdivisions specified on Form 1-FR-FCM or

    categories that are in accord with generally accepted accounting

    principles as applicable. Each person so registered shall prepare and

    keep current such records.

    (b) Each applicant or registrant must make and keep as a record in

    accordance with Sec. 1.31 of this chapter formal computations of its

    adjusted net capital and of its minimum financial requirements pursuant

    to Sec. 1.17 or Sec. 5.7 of this chapter, or the requirements of the

    designated self-regulatory organization to which it is subject, as

    applicable, as of the close of business each month. Such computations

    must be completed and made available for inspection by any

    representative of the National Futures Association, in the case of an

    applicant, or of the Commission or designated self-regulatory

    organization, if any, in the case of a registrant, within 17 business

    days after the date for which the computations are made, commencing the

    first month end after the date the application for registration is

    filed.

    Sec. 5.15 Unlawful representations.

    It shall be unlawful for any person registered pursuant to the

    requirements of this part to represent or imply in any manner

    whatsoever that such person has been sponsored, recommended or

    approved, or that its abilities or qualifications have been reviewed or

    evaluated, by the Commission, the Federal government or any agency

    thereof.

    Sec. 5.16 Prohibition of guarantees against loss.

    (a) No retail foreign exchange dealer, futures commission merchant

    or introducing broker may in any way represent that it will, with

    respect to any retail foreign exchange transaction in any account

    carried by a retail foreign exchange dealer or futures commission

    merchant for or on behalf of any person:

    (1) Guarantee such person against loss;

    (2) Limit the loss of such person; or

    (3) Not call for or attempt to collect security deposits, margin,

    or other deposits as established for retail forex customers.

    (b) No person may in any way represent that a retail foreign

    exchange dealer, futures commission merchant or introducing broker will

    engage in any of the acts or practices described in paragraph (a) of

    this section.

    (c) This section shall not be construed to prevent a retail foreign

    exchange dealer, futures commission merchant or introducing broker from

    assuming or sharing in the losses resulting from an error or

    mishandling of an order.

    (d) This section shall not affect any guarantee entered into prior

    to [effective date of final rule], but this section shall apply to any

    extension, modification or renewal thereof entered into after such

    date.

    Sec. 5.17 Authorization to trade.

    No retail foreign exchange dealer, futures commission merchant,

    introducing broker or any of their associated persons may directly or

    indirectly effect a retail forex transaction for the account of any

    customer unless before the transaction the customer, or person

    designated by the customer to control the account specifically

    authorized the retail foreign exchange dealer, futures commission

    merchant, introducing broker or any of their associated persons to

    effect the transaction. A transaction is ``specifically authorized'' if

    the customer or person designated by the customer to control the

    account specifies:

    (a) The precise retail forex transaction to be effected;

    (b) The exact amount of the foreign currency to be purchased or

    sold; and

    (c) In the case of an option, the identity of the foreign currency

    or contract that underlies the option.

    Sec. 5.18 Trading and operational standards.

    (a) For purposes of this section:

    (1) The term retail forex counterparty includes, as appropriate:

    (i) A retail foreign exchange dealer as defined in Sec. 5.1 of

    this part;

    (ii) A futures commission merchant as defined in section 1a(20) of

    the Act; and

    (iii) An affiliated person of a futures commission merchant as

    defined in Sec. 5.1 of this part.

    (2) The term related person when used in reference to a retail

    forex counterparty means any general partner, officer, director, owner

    of more than ten percent of the equity interest, associated person or

    employee of the retail forex

    [[Page 3324]]

    counterparty, and any relative or spouse of any of the foregoing

    persons, or any relative of such spouse, who shares the same home as

    any of the foregoing persons.

    (b) Prior to engaging in a retail forex transaction, each retail

    forex counterparty shall, at a minimum, establish and enforce internal

    rules, procedures and controls to:

    (1) Ensure, to the extent possible, that each order received from a

    retail forex customer which order is executable at or near the price

    that the retail forex counterparty has quoted to the customer is

    entered for execution before any order in any retail forex transaction

    for any proprietary account, any other account in which a related

    person of the retail forex counterparty has an interest, or any account

    for which such a related person may originate orders without the prior

    specific consent of the account owner (if such related person has

    gained knowledge of the retail forex customer's order prior to the

    transmission of an order for a proprietary account), an account in

    which such a related person has an interest, or an account in which

    such a related person may originate orders without the prior specific

    consent of the account owner; and

    (2) Prevent related persons of forex counterparties from placing

    orders, directly or indirectly, with another person in a manner

    designed to circumvent the provisions of paragraph (b)(1) of this

    section;

    (3) Fairly and objectively establish settlement prices for retail

    forex transactions; and

    (4) Record and maintain essential information regarding customer

    orders and account activity, and to provide such information to

    customers upon request. Such information shall include:

    (i) Transaction records for the customer's account, including:

    (A) The date and time each order is received by the retail forex

    counterparty;

    (B) The price at which each order is placed, or, in the case of an

    option, the premium paid;

    (C) If the transaction was entered into by means of a trading

    platform, the price quoted on the trading platform when the order was

    placed, or, in the case of an option, the premium quoted;

    (D) The customer account identification information;

    (E) The currency pair;

    (F) The size of the transaction;

    (G) Whether the order was a buy or sell order;

    (H) The type of order, if the order was not a market order;

    (I) If a trading platform is used, the date and time the order is

    transmitted to the trading platform;

    (J) If a trading platform is used, the date and time the order is

    executed;

    (K) The size and price at which the order is executed, or in the

    case of an option, the amount of the premium paid for each option

    purchased, or the amount credited for each option sold; and

    (L) For options, whether the option is a put or call, the strike

    price, and expiration date.

    (ii) Account records that contain the following information:

    (A) The funds in the account, net of any commissions and fees;

    (B) The net profits and losses on open trades; and

    (C) The funds in the account plus or minus the net profits and

    losses on open trades. (In the case of open option positions, the

    account balance should be adjusted for the net option value);

    (iii) If a trading platform is used, daily logs showing each price

    change on the platform, the time of the change to the nearest second,

    and the trading volume at that time and price; and

    (iv) Any method or algorithm used to determine the bid or asked

    price for any retail forex transaction or the prices at which customer

    orders are executed, including, but not limited to, any markups, fees,

    commissions or other items which affect the profitability or risk of

    loss of a retail forex customer's transaction.

    (c) No retail forex counterparty shall disclose that an order of

    another person is being held by the retail forex counterparty, unless

    such disclosure is necessary to the effective execution of such order

    or is made at the request of an authorized representative of the

    Commission, or a futures association registered with the Commission

    pursuant to section 17 of the Act.

    (d) No retail forex counterparty shall knowingly handle the account

    of any related person of another retail forex counterparty unless it:

    (1) Receives written authorization from a person designated by such

    other retail forex counterparty with responsibility for the

    surveillance over such account pursuant to paragraph (b)(2) of this

    section;

    (2) Prepares immediately upon receipt of an order for such account

    a written record of such order, including the account identification

    and order number, and records thereon to the nearest minute, by time-

    stamp or other timing device, the date and time the order is received;

    and

    (3) Transmits on a regular basis to such other retail forex

    counterparty copies of all statements for such account and of all

    written records prepared upon the receipt of orders for such account

    pursuant to paragraph (b)(2) of this section.

    (e) No related person of a retail forex counterparty shall have an

    account, directly or indirectly, with another retail forex counterparty

    unless:

    (1) It receives written authorization to maintain such an account

    from a person designated by the retail forex counterparty of which it

    is a related person with responsibility for the surveillance over such

    account pursuant to paragraph (b)(2) of this section; and

    (2) Copies of all statements for such account and of all written

    records prepared by such other retail forex counterparty upon receipt

    of orders for such account pursuant to paragraph (d)(2) of this section

    are transmitted on a regular basis to the retail forex counterparty of

    which it is a related person.

    (f) No retail forex counterparty shall:

    (1) Enter into a retail forex transaction, to be executed pursuant

    to a market or limit order at a price that is not at or near the price

    at which other retail forex customers, during that same time period,

    have executed retail forex transactions with the retail forex

    counterparty; Provided, however, that this paragraph (f)(1) shall not

    prohibit such practice if done in accordance with the rules of a

    registered futures association, and of which such retail foreign

    exchange dealer, futures commission merchant or affiliated person of a

    futures commission merchant is a member;

    (2) Adjust or alter prices for a retail forex transaction after the

    transaction has been confirmed to the retail forex customer; Provided,

    however, that this paragraph (f)(2) shall not prohibit such practice if

    in accordance with the rules of a registered futures association, and

    of which such retail foreign exchange dealer, futures commission

    merchant or affiliated person of a futures commission merchant is a

    member;

    (3)(i) Provide a retail forex customer a new bid price for a retail

    forex transaction that is higher than its previous bid without

    providing a new asked price that is also higher than its previous asked

    price by a similar amount;

    (ii) Provide a retail forex customer a new bid price for a retail

    forex transaction that is lower than its previous bid without providing

    a new asked price that is also lower than its previous asked price by a

    similar amount; or

    (4) Establish a new position for a retail forex customer (except

    one that

    [[Page 3325]]

    offsets an existing position for that retail forex customer) where the

    retail forex counterparty holds outstanding orders of other retail

    forex customers for the same currency pair at a comparable price.

    (g)(1) Each retail forex counterparty and each CPO, CTA and IB

    subject to this Part 5 shall maintain a record of all communications

    received by such person concerning facts giving rise to possible

    violations of the Act, rules, regulations or orders thereunder, related

    to their retail forex business. The record shall contain the name of

    the complainant, if provided, the date of the communication, the

    agreement, contract or transaction, the substance of the communication,

    and the name of the person who received the communication.

    (2) Each retail forex counterparty and each CPO, CTA and IB subject

    to this Part 5 shall provide to the Division of Enforcement of the

    Commission, electronically, a copy of the record of each communication

    received pursuant to paragraph (g)(1) of this section. Such copy shall

    be provided to the Division of Enforcement of the Commission no later

    than 30 calendar days after the communication is received: Provided,

    however, that in the case of a communication concerning facts giving

    rise to possible fraud under the Act or Commission regulations, such

    copy shall be provided to the Division of Enforcement of the Commission

    within three business days after the communication is received.

    (h) An introducing broker as defined in Sec. 5.11(a)(1) of this

    part, or an applicant for registration as an introducing broker as

    defined in Sec. 5.1(f)(1) of this part, or any person succeeding to

    and continuing the business of another introducing broker as defined in

    Sec. 5.1(f)(1) of this part, must enter into a guarantee agreement

    with a retail foreign exchange dealer or futures commission merchant.

    (i) Each retail forex counterparty shall prepare and maintain on a

    quarterly basis a calculation of the percentage of non discretionary

    retail forex accounts open for any period of time during the quarter

    that earned a profit, and the percentage of such accounts that

    experienced a loss. The calculation of profit or loss for each retail

    forex account must be net of fees, commissions, any other expenses,

    trading losses, customer funds deposited, and customer funds withdrawn.

    Retail forex counterparties shall maintain such calculations along with

    all data supporting such calculations for five years in accordance with

    Sec. 1.31.

    (j) Each retail forex counterparty shall designate one or more

    principals to serve as a chief compliance officer(s). The chief

    compliance officer(s) shall certify to the Commission and a registered

    national futures association annually that the retail forex

    counterparty has in place processes to establish, maintain, review,

    modify and test policies and procedures reasonably designed to achieve

    compliance with the Act, rules, regulations and orders thereunder. The

    certification shall include a statement that the counterparty has in

    place compliance processes, and that the chief compliance officer(s)

    has apprised the chief executive officer of the compliance efforts to

    date and identify and address significant compliance problems and plans

    to address those problems.

    Sec. 5.19 Pending legal proceedings.

    (a) Every retail foreign exchange dealer or futures commission

    merchant and each CPO, CTA or IB subject to this Part 5 shall submit to

    the Commission copies of any dispositive or partially dispositive

    decision for which a notice of appeal has been filed, the notice of

    appeal and such further documents as the Commission may thereafter

    request filed in any material legal proceeding to which the retail

    foreign exchange dealer, futures commission merchant, CPO, CTA or IB is

    a party or to which its property or assets is subject with respect to

    retail forex transactions.

    (b) Every retail foreign exchange dealer or futures commission

    merchant and each CPO, CTA or IB subject to this Part 5 shall submit to

    the Commission copies of any dispositive or partially dispositive

    decision concerning which a notice of appeal has been filed, the notice

    of appeal, and such further documents as the Commission may thereafter

    request filed in any material legal proceeding instituted against any

    person who is a principal of the retail foreign exchange dealer,

    futures commission merchant, CPO, CTA or IB (as the term ``principal''

    is defined in Sec. 3.1(a) of this chapter) arising from conduct in

    such person's capacity as a principal of the retail foreign exchange

    dealer, futures commission merchant, CPO, CTA or IB and alleging

    violations, with regard to retail forex transactions, of:

    (1) The Act or any rule, regulation, or order thereunder; or

    (2) Provisions of state law relating to a duty or obligation owed

    by such a principal.

    (c) All documents required by this section to be submitted to the

    Commission shall be mailed via first-class or submitted by other more

    expeditious means to the Commission's headquarters office in

    Washington, DC, Attention: Director, Division of Enforcement. All

    documents required by this section to be submitted to the Commission as

    to matters pending on [effective date of final rule] shall be mailed to

    the Commission within 45 days of that effective date. Thereafter, all

    decisions and notices of appeal required to be submitted by retail

    foreign exchange dealers, futures commission merchants, CPOs, CTAs or

    IBs shall be mailed within 10 days of the filing or receipt by the

    retail foreign exchange dealer or futures commission merchant of the

    relevant notice of appeal. For purposes of paragraph (a) and (b) of

    this section, a ``material legal proceeding'' includes but is not

    limited to actions involving alleged violations of the Commodity

    Exchange Act or the Commission's regulations. However, a legal

    proceeding is not ``material'' for the purposes of this rule if the

    proceeding is not in a federal or state court or if the Commission is a

    party.

    Sec. 5.20 Special calls for account and transaction information.

    (a) Preparation and transmission of information upon special call.

    All information required upon special call shall be prepared in such

    form and manner and in accordance with such instructions, and shall be

    transmitted at such time and to such office of the Commission, as may

    be specified in the call.

    (b) Special calls for information on controlled accounts from

    retail foreign exchange dealers, futures commission merchants and

    introducing brokers. Upon call by the Commission, each retail foreign

    exchange dealer, futures commission merchant and introducing broker

    shall file with the Commission the names and addresses of all persons

    who, by power of attorney or otherwise, exercise trading control over

    any customer's account in retail forex transactions.

    (c) Special calls for information on open transactions in accounts

    carried or introduced by retail foreign exchange dealers, futures

    commission merchants, and introducing brokers. Upon special call by the

    Commission for information relating to retail forex transactions held

    or introduced on the dates specified in the call, each retail foreign

    exchange dealer, futures commission merchant, or introducing broker

    shall furnish to the Commission the following information concerning

    accounts of traders owning or controlling such retail forex transaction

    positions, as may be specified in the call:

    [[Page 3326]]

    (1) The name, address, and telephone number of the person for whom

    each account is carried;

    (2) The principal business or occupation of the person for whom

    each account is introduced or carried, as specified in the call;

    (3) The name, address and principal business or occupation of any

    person who controls the trading of each account;

    (4) The name and address of any person having a financial interest

    of ten percent or more in each account;

    (5) The number of open retail forex transaction positions

    introduced or carried in each account, as specified in the call; and

    (6) The total number of retail forex transactions against which

    delivery has been made.

    (d) Delegation of authority to the Director of the Division of

    Clearing and Intermediary Oversight and the Director of the Division of

    Market Oversight. The Commission hereby delegates, until the Commission

    orders otherwise, to the Director of the Division of Clearing and

    Intermediary Oversight and the Director of the Division of Market

    Oversight, or to the respective Director's designees, the authority set

    forth in this section to make special calls for information on

    controlled accounts from retail foreign exchange dealers, futures

    commission merchants and from introducing brokers, and to make special

    calls for information on open contracts in accounts carried or

    introduced by futures commission merchants, introducing brokers, and

    foreign brokers. Either Director may submit to the Commission for its

    consideration any matter that has been delegated pursuant to this

    section. Nothing in this section shall be deemed to prohibit the

    Commission, at its election, from exercising the authority delegated in

    this section to the Directors.

    Sec. 5.21 Supervision.

    Each Commission registrant subject to this Part 5, except an

    associated person who has no supervisory duties, must diligently

    supervise the handling by its partners, officers, employees and agents

    (or persons occupying a similar status or performing a similar

    function) of all retail forex accounts carried, operated, advised or

    introduced by the registrant and all other activities of its partners,

    officers, employees and agents (or persons occupying a similar status

    or performing a similar function) relating to its business as a

    Commission registrant.

    Sec. 5.22 Registered futures association membership.

    (a) Each person registered as a retail foreign exchange dealer must

    become and remain a member of at least one futures association that is

    registered under section 17 of the Act and that provides for the

    membership therein of such retail foreign exchange dealer.

    (b) Each person required to register as:

    (1) An introducing broker, because the person solicits or accepts

    orders for retail forex transactions;

    (2) A commodity pool operator because the person operates, or

    solicits funds, securities, or property for, a pooled investment

    vehicle that engages in retail forex transactions; or

    (3) A commodity trading advisor because the person exercises

    discretionary trading authority, or obtains written authorization to

    exercise discretionary trading authority over, an account in connection

    with retail forex transactions, must become and remain a member of at

    least one futures association that is registered under section 17 of

    the Act and that provides for the membership therein of such person.

    Sec. 5.23 Notice of bulk transfers and bulk liquidations.

    (a) Notice and Disclosure to Retail Forex Customers of a Bulk

    Transfer. (1) A retail foreign exchange dealer, futures commission

    merchant or introducing broker must obtain the written prior and

    specific consent of its retail forex customer to the assignment of any

    position or transfer of any account of the retail forex customer to

    another retail foreign exchange dealer, futures commission merchant or

    introducing broker, unless made at the retail forex customer's request.

    (2) Absent a request of the retail forex customer or the consent

    described in paragraph (a)(1) of this section, assignments of positions

    and transfers of accounts of retail forex customers may be permitted

    under rules of the retail forex dealer's, futures commission

    merchant's, or introducing broker's designated self-regulatory

    organization that establish notice and other requirements with respect

    to the assignment of positions and transfers of accounts of retail

    forex customers. If such rules permit implied consent as a result of

    the failure of the retail forex customer to object after having

    received notice of the proposed assignment or transfer, such rules must

    provide that the notice must include a statement that the retail forex

    customer is not required to accept the proposed assignment or transfer

    and may direct the transferor firm to liquidate the positions of the

    retail forex customer or transfer the account to a firm of the retail

    forex customer's selection.

    (3) For assignments and transfers made under this section, other

    than at the retail forex customer's request, the transferee retail

    foreign exchange dealer, futures commission merchant or introducing

    broker must provide to the retail forex customer the risk disclosure

    statements and forms of acknowledgment required by Part 5 of this

    chapter and receive the required signed acknowledgments within sixty

    days of such assignments or transfers. This requirement shall not

    apply:

    (i) If the transferee retail foreign exchange dealer, futures

    commission merchant or introducing broker has clear written evidence

    that the retail forex customer has received and acknowledged receipt of

    the required disclosure statements; or

    (ii) If the transfer of accounts is made from one introducing

    broker to another introducing broker guaranteed by the same retail

    foreign exchange dealer or futures commission merchant pursuant to a

    guarantee agreement in accordance with the requirements of Sec.

    1.10(j) of this chapter and such retail foreign exchange dealer or

    futures commission merchant maintains the relevant acknowledgments

    required by Part 5 of this chapter.

    (b) Notice to the Commission. Each retail foreign exchange dealer,

    futures commission merchant or introducing broker shall file with the

    Commission prior notice of any transfer of accounts of any retail forex

    customer that is not initiated at the request of the customer, where

    the transfer involves 50 percent or more of the transferor's total

    number of retail forex customer accounts.

    (c) Contents of Notice to the Commission. The notice required by

    paragraph (b) of this section shall include:

    (1) The name, principal business address and telephone number of

    the transferor futures retail foreign exchange dealer, futures

    commission merchant or introducing broker;

    (2) The name, principal business address and telephone number of

    each transferee retail foreign exchange dealer, futures commission

    merchant or introducing broker;

    (3) The designated self-regulatory organization for the transferor

    and transferee firms;

    (4) A brief statement as to the reasons for the transfer;

    (5) A copy of any notices to customers regarding the transfers; and

    (6) A statement of the number of accounts to be transferred.

    [[Page 3327]]

    (d) Notice of the Bulk Liquidation of Retail Forex Transactions. A

    retail foreign exchange dealer or futures commission merchant may not

    initiate the bulk liquidation of properly margined retail forex

    transactions unless such liquidation complies with the rules and

    procedures of the retail forex dealer's or futures commission

    merchant's designated self-regulatory organization and the retail forex

    dealer or futures commission merchant provides the Commission with

    prior written notice of the liquidation.

    (e) Contents of Notice of Bulk Liquidation. The notice required by

    paragraph (d) of this section shall include:

    (1) The name, principal business address and telephone number of

    the initiating retail foreign exchange dealer or futures commission

    merchant;

    (2) A brief statement of the reasons for the liquidation;

    (3) A copy of any notices to customers regarding the liquidation;

    and

    (4) A statement of the number of accounts to be liquidated.

    (f) Filing of Notices. The notice required by paragraph (b) and (d)

    of this section shall be filed five business days prior to the transfer

    or liquidation of the retail forex transaction with the Deputy

    Director, Compliance and Registration Section, Division of Clearing and

    Intermediary Oversight, Commodity Futures Trading Commission, Three

    Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581; the

    National Futures Association Attn: Vice President-Compliance; and the

    designated self-regulatory organization for the transferor firm.

    (g) No effect on other obligations. The requirements of this

    section shall not affect the obligations of a retail foreign exchange

    dealer, futures commission merchant or introducing broker under the

    rules of a self-regulatory organization or applicable customer account

    agreement with respect to assignments of positions or transfers of

    accounts or liquidation of positions.

    (h) Corrective notice. If a proposed transfer is not completed in

    accordance with the notice required to be filed by paragraph (b) of

    this section, a corrective notice shall be filed within five business

    days of the date such proposed transfer was to occur explaining why the

    proposed transfer was not completed.

    Sec. 5.24 Applicability of other parts of this chapter.

    Insofar as it is consistent with the requirements of this part, all

    other provisions of this chapter that apply to a person shall apply to

    such person as though such provisions were expressly set forth in this

    part.

    Sec. 5.25 Applicability of the Act.

    Except as otherwise specified in this part and unless the context

    otherwise requires, the provisions of Sections 4b, 4c(b), 4f, 4g, 4k,

    4m, 4n, 4o, 6(c)-(e), 6b, 6c, 8(a)-(e), 8a and 12(f) of the Act shall

    apply to retail forex transactions that are subject to the requirements

    of this part as though such provisions were set forth herein and

    included specific references to retail forex transactions and the

    persons defined in Sec. 5.1 of this part.

    PART 10--RULES OF PRACTICE

    37. The authority citation for part 10 continues to read as

    follows:

    Authority: Pub. L. 93-463, sec. 101(a)(11), 88 Stat. 1391; 7

    U.S.C. 2a(12).

    38. Section 10.1 is amended by revising paragraph (a) to read as

    follows:

    Sec. 10.1 Scope and applicability of rules of practice.

    * * * * *

    (a) Denial, suspension, revocation, conditioning, restricting or

    modifying of registration as a futures commission merchant, retail

    foreign exchange dealer, introducing broker, or associated person,

    floor broker, floor trader, commodity pool operator, commodity trading

    advisor or leverage transaction merchant pursuant to sections 6(c),

    8a(2), 8a(3), 8a(4) and 8a(11) of the Act, 7 U.S.C. 9 and 15, 12a(2),

    12a(3), 12a(4) and 12(a)(11), or denial, suspension, or revocation of

    designation as a contract market pursuant to sections 6(a) and 6(b) of

    the Act, 7 U.S.C. 8;

    * * * * *

    PART 140--ORGANIZATION, FUNCTIONS, AND PROCEEDINGS OF THE

    COMMISSION

    39. The authority citation for part 140 continues to read as

    follows:

    Authority: 7 U.S.C. 2 and 12a.

    40. Section 140.94 is amended by adding to read as follows:

    Sec. 140.94 Delegation of authority to the Director of the Division

    of Clearing and Intermediary Oversight.

    (a) The Commission hereby delegates, until such time as the

    Commission orders otherwise, the following functions to the Director of

    the Division of Clearing and Intermediary Oversight and to such members

    of the Commission's staff acting under his direction as he may

    designate from time to time:

    (1) All functions reserved to the Commission in Sec. 5.7 of this

    chapter;

    (2) All functions reserved to the Commission in Sec. 5.10 of this

    chapter;

    (3) All functions reserved to the Commission in Sec. 5.11 of this

    chapter;

    (4) All functions reserved to the Commission in Sec. 5.12 of this

    chapter, except for those relating to nonpublic treatment of reports

    set forth in Sec. 5.12(i) of this chapter; and

    (5) All functions reserved to the Commission in Sec. 5.14 of this

    chapter.

    (b) The Director of the Division of Clearing and Intermediary

    Oversight may submit any matter which has been delegated to him under

    paragraph (a) of this section to the Commission for its consideration.

    (c) Nothing in this section may prohibit the Commission, at its

    election, from exercising the authority delegated to the Director of

    the Division of Clearing and Intermediary Oversight under paragraph (a)

    of this section.

    PART 145--COMMISSION RECORDS AND INFORMATION

    41. The authority citation for part 145 continues to read as

    follows:

    Authority: Pub. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80

    Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat.

    1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389

    (5 U.S.C. 4a(j)); unless otherwise noted.

    42. Section 145.5 is amended by revising paragraphs (d)(1)(viii)

    and (h) to read as follows:

    Sec. 145.5 Disclosure of nonpublic records.

    * * * * *

    (d) * * *

    (1) * * *

    (viii) The following reports and statements that are also set forth

    in paragraph (h) of this section, except as specified in 17 CFR

    1.10(g)(2), 17 CFR 31.13(m), or 17 CFR 5.12(h): Forms 1-FR required to

    be filed pursuant to 17 CFR 1.10 or 17 CFR 5.12; FOCUS reports that are

    filed in lieu of Forms 1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR

    required to be filed pursuant to 17 CFR 31.13; the accountant's report

    on material inadequacies filed in accordance with 17 CFR 1.16(c)(5);

    and all reports and statements required to be filed pursuant to 17 CFR

    1.17(c)(6);

    * * * * *

    (h) Contained in or related to examinations, operating, or

    condition reports prepared by, on behalf of, or for the use of the

    Commission or any other agency responsible for the regulation or

    supervision of financial institutions, including, but not limited to

    the following reports and statements that are also set forth in

    paragraph (d)(1)(viii) of this section, except as specified in 17

    [[Page 3328]]

    CFR 1.10(g)(2), 17 CFR 5.12(h) or 17 CFR 31.13(m): Forms 1-FR required

    to be filed pursuant to 17 CFR 1.10 or 17 CFR 5.12; FOCUS reports that

    are filed in lieu of Forms 1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR

    required to be filed pursuant to 17 CFR 31.13; the accountant's report

    on material inadequacies filed in accordance with 17 CFR 1.16(c)(5);

    and all reports and statements required to be filed pursuant to 17 CFR

    1.17(c)(6); and

    * * * * *

    PART 147--OPEN COMMISSION MEETINGS

    43. The authority citation for part 147 continues to read as

    follows:

    Authority: Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C.

    552b); sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C.

    4a(j) (Supp. V, 1975)), unless otherwise noted.

    44. Section 147.3 is amended by revising paragraphs (b)(4)(i)(H)

    and (b)(8) to read as follows:

    Sec. 147.3 General requirement of open meetings; grounds upon which

    meetings may be closed.

    * * * * *

    (b) * * *

    (4) * * *

    (i) * * *

    (H) The following reports and statements that are also set forth in

    paragraph (b)(8) of this section, except as specified in 17 CFR

    1.10(g)(2), 17 CFR 5.12, or 17 CFR 31.13(m): Forms 1-FR required to be

    filed pursuant to 17 CFR 1.10, 17 CFR 5.12(h)(2), or 17 CFR 31.13(m);

    FOCUS reports that are filed in lieu of Forms 1-FR pursuant to 17 CFR

    1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR 31.13; the

    accountant's report on material inadequacies filed in accordance with

    17 CFR 1.16(c)(5); and all reports and statements required to be filed

    pursuant to 17 CFR 1.17(c)(6);

    * * * * *

    (8) Disclose information contained in or related to examination,

    operating, or condition reports prepared by, on behalf of, or for the

    use of the Commission or any other agency responsible for the

    regulation or supervision of financial institutions, including, but not

    limited to the following reports and statements that are also set forth

    in paragraph (b)(4)(i)(H) of this section, except as specified in 17

    CFR 1.10(g)(2), 17 CFR 5.12, or 17 CFR 31.13(m): Forms 1-FR required to

    be filed pursuant to 17 CFR 1.10, 17 CFR 5.12(h)(2), or 17 CFR

    31.12(m); FOCUS reports that are filed in lieu of Forms 1-FR pursuant

    to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR

    31.13; the accountant's report on material inadequacies filed in

    accordance with 17 CFR 1.16(c)(5); and all reports and statements

    required to be filed pursuant to 17 CFR 1.17(c)(6);

    * * * * *

    PART 160--PRIVACY OF CONSUMER FINANCIAL INFORMATION

    45. The authority citation for part 160 continues to read as

    follows:

    Authority: 7 U.S.C. 7b-2 and 12a(5); 15 U.S.C. 6801, et seq.

    46. Section 160.1 is amended by revising paragraph (b) to read as

    follows:

    Sec. 160.1 Purpose and scope.

    * * * * *

    (b) Scope. This part applies only to nonpublic personal information

    about individuals who obtain financial products or services primarily

    for personal, family, or household purposes from the institutions

    listed below. This part does not apply to information about companies

    or about individuals who obtain financial products or services

    primarily for business, commercial, or agricultural purposes. This part

    applies to all futures commission merchants, retail foreign exchange

    dealers, commodity trading advisors, commodity pool operators and

    introducing brokers that are subject to the jurisdiction of the

    Commission, regardless whether they are required to register with the

    Commission. These entities are hereinafter referred to in this part as

    ``you.'' This part does not apply to foreign (non-resident) futures

    commission merchants, retail foreign exchange dealers, commodity

    trading advisors, commodity pool operators and introducing brokers that

    are not registered with the Commission. Nothing in this part modifies,

    limits or supersedes the standards governing individually identifiable

    health information promulgated by the Secretary of Health and Human

    Services under the authority of sections 262 and 264 of the Health

    Insurance Portability and Accountability Act of 1996, 42 U.S.C. 1320d-

    1320d-8.

    47. Section 160.3 is amended by:

    a. Revising paragraph (a) introductory text and paragraph (a)(2);

    b. Redesignating paragraphs (k)(2)(i)(B) through (F) as paragraphs

    (k)(2)(i)(C) through (G) and republishing them, and adding new

    paragraph (k)(2)(i)(B);

    c. Revising paragraphs (n)(1)(i) and (n)(2)(i);

    d. Revising paragraph (o)(1)(i);

    e. Revising paragraph (u)(2)(i)(A);

    f. Redesignating paragraphs (w)(2) through (4) as paragraphs (w)(3)

    through (5) and adding new paragraph (w)(2); and

    g. Adding new paragraph (x) to read as follows:

    Sec. 160.3 Definitions.

    * * * * *

    (a) Affiliate of a futures commission merchant, retail foreign

    exchange dealer, commodity trading advisor, commodity pool operator or

    introducing broker means any company that controls, is controlled by,

    or is under common control with a futures commission merchant, retail

    foreign exchange dealer, commodity trading advisor, commodity pool

    operator or introducing broker that is subject to the jurisdiction of

    the Commission. In addition, a futures commission merchant, retail

    foreign exchange dealer, commodity trading advisor, commodity pool

    operator or introducing broker subject to the jurisdiction of the

    Commission will be deemed an affiliate of a company for purposes of

    this part if:

    * * * * *

    (2) Rules adopted by the Federal Trade Commission or another

    federal functional regulator under Title V of the GLB Act treat the

    futures commission merchant, retail foreign exchange dealer, commodity

    trading advisor, commodity pool operator or introducing broker as an

    affiliate of that company.

    * * * * *

    (k) * * *

    (2) * * *

    (i) * * *

    (B) You are a retail foreign exchange dealer with whom a consumer

    has opened an account, or that effects or engages in retail forex

    transactions with or for a consumer, even if you do not hold any assets

    of the consumer.

    (C) You are an introducing broker that solicits or accepts specific

    orders for trades;

    (D) You are a commodity trading advisor with whom a consumer has a

    contract or subscription, either written or oral, regardless of whether

    the advice is standardized, or is based on, or tailored to, the

    commodity interest or cash market positions or other circumstances or

    characteristics of the particular consumer;

    (E) You are a commodity pool operator, and you accept or receive

    from the consumer, funds, securities, or property for the purpose of

    purchasing an interest in a commodity pool;

    (F) You hold securities or other assets as collateral for a loan

    made to the consumer, even if you did not make the loan or do not

    effect any transactions on behalf of the consumer; or

    [[Page 3329]]

    (G) You regularly effect or engage in commodity interest

    transactions with or for a consumer even if you do not hold any assets

    of the consumer.

    * * * * *

    (n)(1) * * *

    (i) Any futures commission merchant, retail foreign exchange

    dealer, commodity trading advisor, commodity pool operator or

    introducing broker that is registered with the Commission as such or is

    otherwise subject to the Commission's jurisdiction; and

    * * * * *

    (2) * * *

    (i) Any person or entity, other than a futures commission merchant,

    retail foreign exchange dealer, commodity trading advisor, commodity

    pool operator or introducing broker that, with respect to any financial

    activity, is subject to the jurisdiction of the Commission under the

    Act.

    * * * * *

    (o)(1) * * *

    (i) Any product or service that a futures commission merchant,

    retail foreign exchange dealer, commodity trading advisor, commodity

    pool operator, or introducing broker could offer that is subject to the

    Commission's jurisdiction; and

    * * * * *

    (u) * * *

    (2) * * *

    (i) * * *

    (A) Information a consumer provides to you on an application to

    open a commodity interest trading account, to invest in a commodity

    pool, or to obtain another financial product or service;

    * * * * *

    (w) * * *

    (2) Any retail foreign exchange dealer;

    * * * * *

    (x) Retail foreign exchange dealer has the same meaning as in Sec.

    5.3(i)(1) of this chapter.

    48. Section 160.4 is amended by:

    a. Revising paragraph (c)(2)(ii); and

    b. Revising paragraph (e)(1)(iv) to read as follows:

    Sec. 160.4 Initial privacy notice to consumers required.

    * * * * *

    (c) * * *

    (2) * * *

    (ii) Opens a retail forex account, or opens a commodity interest

    account through an introducing broker or with a futures commission

    merchant that clears transactions for its customers through you on a

    fully-disclosed basis;

    * * * * *

    (e) * * *

    (1) * * *

    (iv) You have established a customer relationship with a customer

    in a bulk transfer in accordance with Sec. 1.65, if you are a

    transferee futures commission merchant, retail foreign exchange dealer

    or introducing broker.

    * * * * *

    49. Section 160.30 is amended by revising the introductory text to

    read as follows:

    Sec. 160.30 Procedures to safeguard customer records and information.

    Every futures commission merchant, retail foreign exchange dealer,

    commodity trading advisor, commodity pool operator and introducing

    broker subject to the jurisdiction of the Commission must adopt

    policies and procedures that address administrative, technical and

    physical safeguards for the protection of customer records and

    information. These policies and procedures must be reasonably designed

    to:

    * * * * *

    PART 166--CUSTOMER PROTECTION RULES

    50. The authority citation for part 166 remains as follows:

    Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, 6h, 6k, 6l, 6o, 7,

    12a and 23, as amended by the Commodity Futures Modernization Act of

    2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).

    51. Section 166.2 is revised as follows:

    Sec. 166.2 Authorization to trade.

    No futures commission merchant, retail foreign exchange dealer,

    introducing broker or any of their associated persons may directly or

    indirectly effect a transaction in a commodity interest for the account

    of any customer unless before the transaction the customer, or person

    designated by the customer to control the account:

    (a) With respect to any commodity interest as defined in Sec.

    1.3(yy)(1) through (3) of this chapter, specifically authorized the

    futures commission merchant, retail foreign exchange dealer,

    introducing broker or any of their associated persons to effect the

    transaction (a transaction is ``specifically authorized'' if the

    customer or person designated by the customer to control the account

    specifies--

    (1) The precise commodity interest to be purchased or sold and

    (2) The exact amount of the commodity interest to be purchased or

    sold); or

    (b) With respect to any commodity interest as defined in Sec.

    1.3(yy)(1) or (2) of this chapter, authorized in writing the futures

    commission merchant, introducing broker or any of their associated

    persons to effect transactions in commodity interests for the account

    without the customer's specific authorization; Provided, however, That

    if any such futures commission merchant, introducing broker or any of

    their associated persons is also authorized to effect transactions in

    foreign futures or foreign options without the customer's specific

    authorization, such authorization must be expressly documented.

    52. Section 166.5 is amended by:

    a. Removing paragraph (a)(1)(iv), redesignating paragraphs

    (a)(1)(i) through (a)(1)(iii) as paragraphs (a)(1)(i)(A) through

    (a)(1)(i)(C), and adding new paragraph (a)(1)(ii);

    b. Revising paragraphs (a)(2) and (a)(3);

    c. Revising paragraphs (c)(5)(i)(A) and (c)(5)(i)(C) to read as

    follows:

    Sec. 166.5 Dispute settlement procedures.

    (a) * * *

    (ii) Arises out of any retail forex transaction (as defined in

    Sec. 5.1(m) of this chapter).

    (2) The term customer as used in this section includes an option

    customer (as defined in Sec. 1.3(jj) of this chapter), a retail forex

    customer (as defined in Sec. 5.1(k) of this chapter) and any person

    for or on behalf of whom a member of a designated contract market, or a

    participant transacting on or through such designated contract market,

    effects a transaction on such contract market, except another member of

    or participant in such designated contract market; Provided, however, a

    person who is an ``eligible contract participant'' as defined in

    section 1a(12) of the Act shall not be deemed to be a customer within

    the meaning of this section.

    (3) The term Commission registrant as used in this section means a

    person registered under the Act as a futures commission merchant,

    retail foreign exchange dealer, introducing broker, floor broker,

    commodity pool operator, commodity trading advisor, or associated

    person.

    * * * * *

    (c) * * *

    (5) * * *

    (i) * * *

    (A) The designated contract market, if applicable and if available,

    upon which the transaction giving rise to the dispute was executed or

    could have been executed;

    * * * * *

    (C) At least one other organization that will provide the customer

    with the opportunity to select the location of the arbitration

    proceeding from among

    [[Page 3330]]

    several major cities in diverse geographic regions and that will

    provide the customer with the choice of a panel or other decision-maker

    composed of at least one or more persons, of which at least a majority

    are not members or associated with a member of the designated contract

    market, if applicable, or employee thereof, and that are not otherwise

    associated with the designated contract market (mixed panel), if

    applicable: Provided, however, that the list of qualified organizations

    provided by a Commission registrant that is a floor broker need not

    include a registered futures association unless a registered futures

    association has been authorized to act as a decision-maker in such

    matters.

    * * * * *

    Issued in Washington, DC, on January 7, 2010, by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. 2010-456 Filed 1-19-10; 8:45 am]

    BILLING CODE P

    Last Updated: April 2, 2010



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