Font Size: AAA // Print // Bookmark

2011-4799

  • Federal Register, Volume 76 Issue 46 (Wednesday, March 9, 2011)[Federal Register Volume 76, Number 46 (Wednesday, March 9, 2011)]

    [Proposed Rules]

    [Pages 12888-12896]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2011-4799]

    =======================================================================

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

    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 3

    RIN 3038-AD50

    Registration of Intermediaries

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rules.

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

    SUMMARY: The Commodity Futures Trading Commission (Commission) hereby

    proposes regulations to further implement new statutory provisions

    enacted by Title VII of the Dodd-Frank Wall Street Reform and Consumer

    Protection Act (Dodd-Frank Act) regarding registration of

    intermediaries. Specifically, the Commission proposes certain

    conforming amendments to the Commission's regulations regarding the

    registration of intermediaries, consistent with other Commission

    rulemakings issued pursuant to the Dodd-Frank Act; and other

    modernizing and technical amendments to the regulations.

    DATES: Comments must be received on or before May 9, 2011.

    ADDRESSES: You may submit comments, identified by RIN 3038-AD50 and

    Part 3, by any of the following methods:

    Agency Web site, http://www.cftc.gov, via its Comments

    Online process at http://comments.cftc.gov. Follow the instructions for

    submitting comments through the Web site.

    Mail: David A. Stawick, Secretary of the Commission,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581.

    Hand Delivery/Courier: same as mail above.

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

    Follow the instructions for submitting comments.

    Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the Commission to consider

    information that you believe is exempt from disclosure under the

    Freedom of Information Act, a petition for confidential treatment of

    the exempt information may be submitted according to the procedures

    established in Sec. 145.9.\1\

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

    \1\ Commission regulations referred to herein are found at 17

    CFR Ch. 1 (2010), as amended by 75 FR 55409, Sep. 23, 2010, and may

    be accessed on the Commission's Web site.

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

    The Commission reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, such as obscene language. All

    submissions that have been redacted or removed that contain comments on

    the merits of the rulemaking will be retained in the public comment

    file and will be considered as required under the Administrative

    Procedure Act and other applicable laws, and may be accessible under

    the Freedom of Information Act.

    FOR FURTHER INFORMATION CONTACT: Andrew Chapin, Associate Director,

    Division of Clearing and Intermediary Oversight, (202) 418-5465,

    achapin@cftc.gov; or Claire Noakes, Attorney Advisor, Division of

    Clearing and Intermediary Oversight, (202) 418-5444, cnoakes@cftc.gov;

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\2\

    Title VII of the Dodd-Frank Act amended the Commodity Exchange Act

    (CEA) \3\ to establish a comprehensive new regulatory framework to

    reduce risk, increase transparency, and promote market integrity within

    the financial system by, among other things: (1) Providing for the

    registration and comprehensive regulation of swap dealers (SDs) and

    major swap participants (MSPs); (2) imposing clearing and trade

    execution requirements on standardized derivative products; (3)

    creating rigorous recordkeeping and real-time reporting regimes; and

    (4) enhancing the Commission's rulemaking and enforcement authorities

    with respect to all registered entities and intermediaries subject to

    the Commission's oversight. The regulations in this proposal concern

    conforming, modernizing and technical

    [[Page 12889]]

    amendments to part 3 governing the registration of intermediaries.

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

    \2\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376

    (2010). The text of the Dodd-Frank Act may be accessed at: http://www.cftc.gov/ucm/groups/public/swaps/documents/file/hr4173_enrolledbill.pdf.

    \3\ 7 U.S.C. 1 et seq.

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

    II. Proposed Regulations

    The Commission's existing registration process for futures,

    commodity options and retail foreign exchange intermediaries, their

    associated persons (APs), and floor traders and floor brokers is set

    forth in part 3. Currently, part 3 does not address SDs and MSPs, nor

    does it reference a swap execution facility (SEF).\4\ The Commission

    recently published two other notices of proposed rulemaking that would

    apply certain provisions of part 3 to SDs and MSPs.\5\ This proposal

    would amend further part 3 to conform the regulations regarding

    registration by incorporating references to SDs, MSPs and SEFs where

    appropriate. The Commission expects to harmonize any distinctions

    between this proposal and the other rulemakings in the order that they

    become final. Therefore, this proposal does not contain the changes to

    part 3 proposed elsewhere; it is intended to work in conjunction with

    these other proposed rulemakings.

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

    \4\ Section 1(a)(50) of the CEA generally provides that a SEF is

    a trading system or platform in which multiple participants have the

    ability to execute or trade swaps by accepting bids and offers made

    by multiple participants in the facility or system.

    \5\ 75 FR 70881, Nov. 19, 2010; 75 FR 71379, Nov. 23, 2010.

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

    A. Conforming Amendments

    Some of the proposed amendments involve substantive changes to

    existing regulations because of the particular attributes or

    characteristics of SDs, MSPs and SEFs. Other proposed amendments to

    part 3 consist entirely of adding references, where appropriate, to

    SDs, MSPs and SEFs in existing regulations, based on the fact that the

    Commission has not decided to issue regulations that impose a

    registration requirement on floor brokers and floor traders that solely

    engage in swaps activity. As a result, SEFs were not added alongside

    the term designated contract market if the provision was only

    addressing registration activities of floor brokers and floor traders.

    SDs and MSPs were not added if the provision was only addressing

    registration activities of APs, because at this time the Commission has

    not decided to issue regulations requiring registration of APs of SDs

    and MSPs.\6\

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

    \6\ See 75 FR at 71380, Nov. 23, 2010.

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

    Specific section-by-section proposed revisions follow.

    1. Section 3.1--Definitions

    Current Sec. 3.1(a) sets forth the definition of a principal, and

    Sec. 3.1(a)(3) carves out from the definition of principal certain

    persons that have made capital contributions in the form of

    subordinated debt to a registrant, including unaffiliated banks

    operating in the U.S. and U.S. branches of foreign banks. The

    Commission is proposing to clarify the carve-out by referencing terms

    defined elsewhere in federal regulations. More specifically, the

    proposal would tie the carve-out to the definitions of ``foreign bank''

    and ``office of a foreign bank'' currently used by the Board of

    Governors of the Federal Reserve System under regulation K\7\ for

    foreign banking organizations.

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

    \7\ See generally 12 CFR 211.

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

    Currently, any foreign bank that had made capital contributions in

    the form of subordinated debt would be included within the definition

    of principal.\8\ In response to the likelihood that foreign-domiciled

    persons with capital contributions from foreign banks might register as

    SDs, the Commission is proposing to expand the carve-out. The proposed

    expansion would cover any foreign bank itself that currently operates

    an office licensed in the U.S. In so doing, the Commission would be

    relying on the approval process of the office by the Board of Governors

    of the Federal Reserve System as a proxy for discerning whether the

    foreign bank itself is otherwise regulated. The Commission specifically

    seeks comments on whether this provision is warranted to ensure uniform

    listing of principals by domestic and foreign-domiciled registrants,

    and whether the expansion would ensure that the list of principals

    remains a meaningful reflection of the persons who actually exercise

    control over the registrant's regulated activities.

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

    \8\ In the Commission's initial proposal of this exemption, the

    Commission was concerned with whether the bank was ``otherwise

    regulated,'' but did not attempt to determine whether any foreign

    bank qualified as such. See 56 FR 37026, 37031, Aug. 2, 1991.

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

    2. Section 3.10--Registration of Futures Commission Merchants, Retail

    Foreign Exchange Dealers, Introducing Brokers, Commodity Trading

    Advisors, Commodity Pool Operators and Leverage Transaction Merchants.

    Section 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

    Current Sec. 3.10(c) generally sets forth exemptions from

    registration for certain persons. The Commission is proposing to add an

    exemption from registration in new paragraph (c)(5) to clarify that an

    individual employed by either an SD or a MSP and acting as its AP is

    not required separately to register as an SD or MSP, respectively,

    solely arising out of their activities as an AP. The Commission

    specifically seeks comment as to whether this exemption is necessary to

    clarify the registration responsibilities of employees, in light of the

    current absence of a registration requirement as an AP of an SD or a

    MSP, and in light of the proposed definition requiring persons who

    engage in certain activities to register as an SD or MSP.\9\

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

    \9\ See 75 FR 80173, Dec. 21, 2010.

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

    The Commission also is proposing to amend Sec. 3.12(h)(1)(i) to

    provide that a person is not required to register as an AP in any

    capacity if he or she is registered in one of the other enumerated

    categories, including an SD or MSP. The Commission specifically seeks

    comment as to whether this exemption is necessary, in light of the

    improbability that an individual, rather than an entity, would register

    as an SD or MSP.

    Section 3.10(c)(2) and (3) also currently provide exemptions from

    registration as a futures commission merchant for foreign brokers and

    other foreign intermediaries conducting activities in commodity

    interest transactions on designated contract markets solely on behalf

    of customers located outside the U.S. The Commission is proposing to

    expand the exemption to commodity interest transactions made on or

    subject to the rules of an SEF. The Commission is proposing this

    expansion to create uniformity in treatment of commodity interest

    transactions that do not involve a U.S. customer, regardless of whether

    the transaction is made on a designated contract market or an SEF.

    Additionally, the Commission seeks comment as to whether it should

    expand the existing

    [[Page 12890]]

    exemption from registration to foreign brokers and other foreign

    intermediaries that execute a bilateral swap transaction and

    voluntarily clear it on a derivatives clearing organization on an

    omnibus basis. Further, the Commission seeks comment as to whether such

    an exemption should distinguish between bilateral swap transactions

    that occur within the U.S., or those that occur abroad.

    3. Derivatives Transaction Execution Facilities

    The Dodd-Frank Act abolished derivatives transaction execution

    facilities as a market category. Additionally, no derivatives

    transaction execution facility has ever registered with the Commission.

    Therefore, that term is proposed to be deleted from Sec. Sec. 3.2(c),

    3.2(c)(2), 3.10(a)(3)(i)(A), 3.10(c)(2)(i), 3.10(c)(3)(i),

    3.10(c)(4)(ii) and (iv), 3.11(a)(2) and (3), 3.11(b), 3.31(d),

    3.40(a)(2)(iv), 3.42(a)(6), and 3.46(a)(8).

    B. Modernization and Technical Amendments

    The Commission proposes to make certain modernization and technical

    amendments to part 3. These are discussed below.

    1. Section 3.1--Definitions

    Section 3.1(a)(2) defines a principal to include persons who exceed

    a threshold for equity ownership. As a technical matter, the Commission

    is proposing to harmonize the references to outstanding classes of

    securities in Sec. 3.1(a)(2)(i) and (ii) to refer to ``outstanding

    shares of any class of equity securities, other than non-voting

    securities'' throughout. This term should address any existing

    ambiguity related to calculations involving authorized but unissued

    securities, or debt securities. Also, the Commission is proposing to

    move the concept of indirect owners found in the definition of

    beneficial ownership in Sec. 3.1(d) to Sec. 3.1(a)(4) to serve as a

    backstop to the requirement to list indirect owners in Sec. 3.1(a)(2).

    2. Section 3.31--Deficiencies, Inaccuracies, and Changes To Be

    Reported. Section 3.33--Withdrawal from Registration

    Current Sec. 3.31 sets forth procedural requirements for a

    registrant to update and/or correct information previously provided to

    the Commission and the National Futures Association (NFA). Among other

    goals, the purpose of the registration process is to ensure that

    principals are subject to proper fitness checks prior to the registrant

    engaging in regulated activities. Historically, the Commission required

    re-registration upon a change in a registrant's name, a change in its

    form of organization,\10\ or a change in its control, with limited

    exemptions.\11\ In practice, however, re-registering creates a new NFA

    identification number, which disassociates past disciplinary

    information connected to the previous NFA identification number with

    the re-registered entity's new NFA identification number. A member of

    the public would need to take additional steps to uncover the

    disciplinary information associated with the previous entity's NFA

    identification number by researching whether any principals of the new

    entity were also principals of the old entity. Also, re-registration

    could disrupt the continuity of business of a registrant if a

    background check is not completed before a principal is added.

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

    \10\ In 1979, Sec. 1.15 stated, ``a new registration shall be

    required in the event of a change: (a) In the name of the

    registrant; (b) In the form of organization of the registrant * *

    *.''

    \11\ See, e.g., 57 FR 23136, 23142, Jun. 2, 1992, requiring

    written certifications that control remains the same after a

    reorganization in order to avoid re-registration, or requiring a

    corporate resolution prohibiting a new director from exercising

    control until NFA could complete its background check in order to

    avoid re-registration.

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

    The Commission recognizes that the rules no longer explicitly

    require re-registration in response to changes in a registrant's name,

    its form of organization, or its control. Instead, NFA determines

    whether a firm must re-register, subject to certain safe-harbors from

    re-registration in Sec. 3.31(a)(2) and (3). For example, current Sec.

    3.31(a)(2) permits firms to avoid re-registration after a change to the

    form of the organization if the successor organization consents to be

    liable for all obligations of the predecessor organization, and (a)(3)

    permits firms to avoid re-registration, despite the addition of a new

    principal. Otherwise, these exemptions do not address what happens when

    a firm changes both its form of organization and some of its

    principals, such as during a merger.

    The Commission seeks to improve the transparency and predictability

    of the re-registration requirements in expectation of an influx of new

    registrants. Therefore, the Commission is proposing to amend Sec.

    3.31(a) to explicitly address additional scenarios. Proposed Sec.

    3.31(a)(2) restates an existing requirement to re-register if a sole

    proprietorship is involved, in recognition of the unique attributes of

    the sole proprietor name type under NFA's online registration system.

    Proposed Sec. 3.31(a)(3) requires re-registration in the event of a

    change in name or form of organization, but preserves the existing safe

    harbor if there is no change in principal and the registrant wishes to

    consent to liability for its predecessor organization. Proposed Sec.

    3.31(a)(4) preserves the existing safe harbor from re-registration for

    additions of a new principal. Proposed Sec. 3.31(a)(5), however,

    requires re-registration if a registrant changes its legal name or its

    form of the organization and adds a principal.

    Currently, a registration is tied to an entity's legal name that is

    registered with a state, and that denotes information about its form of

    organization. The Commission believes it is appropriate to connect the

    NFA identification number to that name and form of organization. It is

    unavoidable that members of the public will need to take an additional

    step to acquire information about a previous registrant by researching

    shared principals, because an entity that is a bad actor could still

    voluntarily withdraw its registration to obtain a new NFA

    identification number and disassociate itself from past disciplinary

    actions. The Commission specifically requests comment on whether the

    additional transparency under the new provisions of Sec. 3.31 is

    beneficial and necessary to fulfill the Commission's mandate to protect

    customers, and whether the existing safe harbors from re-registration

    should be maintained.

    Also, the Commission is proposing to amend Sec. 3.33(a) to compel

    a registrant to request a withdrawal of its registration at the same

    time it files articles of dissolution or a certificate of cancellation.

    For example, if a partnership decides to wind-up its affairs and cancel

    its partnership statement with the state, it must request withdrawal

    from registration at least contemporaneously with, or on a voluntary

    basis prior to, it canceling its partnership statement.

    3. Consolidation of Existing Regulations

    The Commission is also proposing that several provisions of part 3

    should be consolidated to streamline the regulations. None of these

    proposals create new regulatory requirements. First, the Commission

    proposes to move the delegation provision found in Sec. 3.12(g) into

    Sec. 3.75, ``Delegation and reservation of authority.'' Second, the

    Commission is proposing to amend Sec. 3.11 to add a new paragraph (c)

    to replace the existing exemption from registration as a floor trader

    for registered floor brokers that was previously found in Sec. 3.4(a).

    Similarly, proposed Sec. 3.21, ``Exemption from fingerprinting

    requirement in certain

    [[Page 12891]]

    cases,'' contains an exemption from submitting fingerprint cards for

    persons who have a current form 8-R on file, which would replace the

    same exemption found in Sec. Sec. 3.31(a)(3) and 3.44(a)(5). In both

    cases, the regulations permitted a principal that was moving between

    registrants to dispense with the fingerprint card filing requirement.

    The proposed rules consolidate this exemption with the other exemptions

    in Sec. 3.21.

    4. Registration Forms

    The Commission also is proposing to amend certain provisions to

    update several references to the forms used during the registration

    process. For example, certain provisions in part 3 refer to a

    registrant's use of the form 3-R. However, under NFA's online

    registration system, a registrant cannot presently fill out a form 3-R,

    either electronically or on paper. Instead, a registrant can update its

    existing form 7-R or form 8-R, and a record of those changes will be

    automatically created by NFA and designated as the registrant's

    completed form 3-R. For clarity, the Commission is proposing to

    reference the distinction between actually filing out a form and

    creating a record of changes to another form in proposed Sec. Sec.

    3.11(b), 3.31(a)(1), 3.31(b), and 3.31(c)(1). Elsewhere, Sec. Sec.

    3.42(a)(8) and 3.46(a)(10) refer to a numerical list of items on forms

    7-R and 8-R, but these forms no longer contain numbers associated with

    the particular questions. The Commission therefore is proposing to

    amend these regulations to instead reference the failure to disclose

    relevant disciplinary history information, or the failure to disclose

    an event leading to a required disclosure. These proposals do not

    create any new regulatory requirement, but merely clarify existing

    obligations.

    C. Corrections

    As published, the regulations contain vestigial definitions,

    outdated cross-references to other regulations, and typographical

    errors that are in need of clarification or updating. The Commission is

    proposing to amend the following: Sec. Sec. 3.1(e), 3.11(b),

    3.10(c)(4)(iii), 3.12(b), 3.12(c), 3.12(h)(1)(ii), 3.13(d)(2),

    3.21(a)(1-2), 3.21(b)(1)-(2), 3.21(c)(4)(iii), 3.22(b), 3.30(b),

    3.42(a), 3.44(a)(5), 3.46(a), and 3.46(a)(6) to address such errors.

    III. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') was adopted to address the

    concerns that government regulations may have a significant and/or

    disproportionate effect on small businesses. To mitigate this risk, the

    RFA requires agencies to conduct an initial and final regulatory

    flexibility analysis for each rule of general applicability for which

    the agency issues a general notice of proposed rulemaking.\12\ These

    analyses must describe the impact of the proposed rule on small

    entities, including a statement of the objectives and the legal bases

    for the rulemaking; an estimate of the number of small entities to be

    affected; identification of Federal rules that may duplicate, overlap,

    or conflict with the proposed rules; and a description of any

    significant alternatives to the proposed rule that would minimize any

    significant impacts on small entities.\13\

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

    \12\ 5 U.S.C. 601 et seq.

    \13\ 5 U.S.C. 603, 604.

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

    The proposed rules will amend existing rules in part 3 regarding

    the registration of intermediaries consistent with other Commission

    rulemakings issued pursuant to the Dodd-Frank Act. The proposed rules

    also will make other technical and modernizing amendments to part 3.

    The rules proposed by the Commission shall affect only FCMs,

    introducing brokers, commodity trading advisors, commodity pool

    operators, SDs and MSPs, and the rules will impose no new significant

    obligations on any of these entities. Therefore, the Commission has

    determined that the proposed rules will not create a significant

    economic impact on a substantial number of small entities. Accordingly,

    the Chairman, on behalf of the Commission, hereby certifies pursuant to

    5 U.S.C. 605(b) that the proposed rules will not have a significant

    impact on a substantial number of small entities.

    B. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (PRA), an agency may not

    conduct or sponsor, and a person is not required to respond to, a

    collection of information unless it displays a currently valid control

    number.\14\ The proposed rules will not impose any new recordkeeping or

    information collection requirements, or other collections of

    information that require approval of the Office of Management and

    Budget under the PRA. The Commission invites public comment on the

    accuracy of its estimate that no additional information collection

    requirements or changes to existing collection requirements would

    result from the rules proposed herein.

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

    \14\ 44 U.S.C. 3501 et seq.

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

    C. Cost-Benefit Analysis

    Section 15(a) of the CEA \15\ requires the Commission to consider

    the costs and benefits of its actions before issuing new rules under

    the Act. By its terms, it does not require the Commission to quantify

    the costs and benefits of new rules or to determine whether the

    benefits of the proposed rules outweigh their costs; it requires the

    Commission to ``consider'' the cost and benefits of its actions.

    Section 15(a) of the CEA further specifies that the costs and benefits

    of the proposed rules shall be evaluated in light of five broad areas

    of market and public concern: (1) Protection of market participants and

    the public; (2) efficiency, competitiveness, and financial integrity of

    the futures markets; (3) price discovery; (4) sound risk management

    practices; and (5) other public interest considerations. The Commission

    may, in its discretion, give greater weight to any one of the five

    enumerated areas of concern and may, in its discretion, determine that,

    notwithstanding its costs, a particular rule is necessary or

    appropriate to protect the public interest or to effectuate any of the

    provisions or to accomplish any of the purposes of the CEA.

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

    \15\ 7 U.S.C. 19(a).

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

    The proposed rules would amend existing rules in part 3 regarding

    the registration of intermediaries to ensure that the Commission's

    current rules are consistent with other Commission rulemakings issued

    pursuant to the Dodd-Frank Act. The proposed rules also would make

    other technical and modernizing amendments to part 3. As these rules

    impose no new significant obligations, the Commission does not

    anticipate that they will result in either costs or benefits in light

    of the five areas of concern enumerated in Sec. 15(a) of the CEA. The

    substantive proposed rulemakings with which this rulemaking is

    associated have addressed the costs and benefits of the proposals, as

    required by Sec. 15(a) of the CEA.

    The Commission invites public comment on its cost-benefit

    considerations. Commenters also are invited to submit any data or other

    information that they may have quantifying or qualifying the costs.

    List of Subjects in 17 CFR Part 3

    Administrative practice and procedure, Brokers, Commodity futures,

    Major swap participants, Reporting and recordkeeping requirements, Swap

    dealers.

    [[Page 12892]]

    For the reasons stated in the preamble, the Commission proposes to

    amend 17 CFR part 3 as follows:

    PART 3--REGISTRATION

    Authority and Issuance

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

    Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1,

    6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12,

    12a, 13b, 13c, 16a, 18, 19, 21, 23.

    2. Amend Sec. 3.1 by revising paragraph (a) introductory text,

    (a)(2), and (a)(3), adding paragraph (a)(4), and removing and reserving

    paragraphs (d) and (e) to read as follows:

    Sec. 3.1 Definitions.

    (a) Principal. Principal means, with respect to an entity that is

    an applicant for registration, a registrant or a person required to be

    registered under the Act or these regulations:

    * * * * *

    (2)(i) Any individual who directly or indirectly, through

    agreement, holding company, nominee, trust or otherwise, is the owner

    of ten percent or more of the outstanding shares of any class of equity

    securities, other than non-voting securities, is entitled to vote or

    has the power to sell or direct the sale of ten percent or more of the

    outstanding shares of any class of equity securities, other than non-

    voting securities, or is entitled to receive ten percent or more of the

    profits of the entity; or

    (ii) Any person other than an individual that is the direct owner

    of ten percent or more of the outstanding shares of any class of equity

    securities, other than non-voting securities; or

    (3) Any person that has contributed ten percent or more of the

    capital of the entity, provided, however, that if such capital

    contribution consists of subordinated debt contributed by either

    (i) An unaffiliated bank insured by the Federal Deposit Insurance

    Corporation,

    (ii) An unaffiliated ``foreign bank,'' as defined in 12 CFR

    211.21(n) that currently operates an ``office of a foreign bank,'' as

    defined in 12 CFR 211.21(t), which is licensed under 12 CFR 211.24(a),

    (iii) Such unaffiliated office of a foreign bank that is licensed,

    or

    (iv) An insurance company subject to regulation by any State, such

    bank, foreign bank, office of a foreign bank, or insurance company will

    not be deemed to be a principal for purposes of this section, provided

    such debt is not guaranteed by another party not listed as a principal.

    (4) Any individual who, directly or indirectly, creates or uses a

    trust, proxy, power of attorney, pooling arrangement or any other

    contract, arrangement, or device with the purpose or effect of

    divesting such person of direct or indirect ownership of an equity

    security of the entity, other than a non-voting security, or preventing

    the vesting of such ownership, or of avoiding making a contribution of

    ten percent or more of the capital of the entity, as part of a plan or

    scheme to evade being deemed a principal of the entity, shall be deemed

    to be a principal of the entity.

    * * * * *

    (d) [Reserved.]

    (e) [Reserved.]

    * * * * *

    3. Amend Sec. 3.2 by revising paragraphs (c) introductory text and

    (c)(2) to read as follows:

    Sec. 3.2 Registration processing by the National Futures Association;

    notification and duration of registration.

    * * * * *

    (c) The National Futures Association shall notify the registrant,

    or the sponsor in the case of an applicant for registration as an

    associated person, and each designated contract market that has granted

    the applicant trading privileges in the case of an applicant for

    registration as a floor broker or floor trader, if registration has

    been granted under the Act.

    * * * * *

    (2) If an applicant for registration as a floor broker or floor

    trader receives a temporary license in accordance with Sec. 3.40, the

    National Futures Association shall notify the designated contract

    market that has granted the applicant trading privileges that only a

    temporary license has been granted.

    * * * * *

    4. Amend Sec. 3.10 by revising paragraphs (a)(3)(i)(A), (c)(2)(i),

    (c)(3)(i), (c)(4)(ii), (c)(4)(iii), and (c)(3)(iv) and add paragraph

    (c)(5) to read as follows:

    Sec. 3.10 Registration of futures commission merchants, introducing

    brokers, commodity trading advisors, commodity pool operators and

    leverage transaction merchants.

    (a) * * *

    (3) * * *

    (i) * * *

    (A) The broker or dealer limits its solicitation of orders,

    acceptance of orders, or execution of orders, or placing of orders on

    behalf of others involving any contracts of sale of any commodity for

    future delivery, on or subject to the rules of any contract market, to

    security futures products as defined in section 1a(44) of the Act;

    * * * * *

    (c) * * *

    (2)(i) A foreign broker, as defined in Sec. 1.3(xx) of this

    chapter, is not required to register as a futures commission merchant

    if it submits any commodity interest transactions executed on or

    subject to the rules of designated contract market or swap execution

    facility for clearing on an omnibus basis through a futures commission

    merchant registered in accordance with section 4d of the Act.

    * * * * *

    (3)(i) A person located outside the United States, its territories

    or possessions engaged in the activity of: An introducing broker, as

    defined in Sec. 1.3(mm) of this chapter; a commodity trading advisor,

    as defined in Sec. 1.3(bb) of this chapter; or a commodity pool

    operator, as defined in Sec. 1.3(cc) of this chapter, in connection

    with any commodity interest transaction made on or subject to the rules

    of any designated contract market or swap execution facility only on

    behalf of persons located outside the United States, its territories or

    possessions, is not required to register in such capacity provided that

    any such commodity interest transaction executed on or subject to the

    rules of designated contract market or swap execution facility is

    submitted for clearing through a futures commission merchant registered

    in accordance with section 4d of the Act.

    * * * * *

    (4) * * *

    (ii) Such a person introduces, on a fully-disclosed basis in

    accordance with Sec. 1.57 of this chapter, any institutional customer,

    as defined in Sec. 1.3(g) of this chapter, to a registered futures

    commission merchant for the purpose of trading on a designated contract

    market;

    (iii) Such person's affiliated futures commission merchant has

    filed with the National Futures Association (Attn: Vice President,

    Compliance) an acknowledgement that the affiliated futures commission

    merchant will be jointly and severally liable for any violations of the

    Act or the Commission's regulations committed by such person in

    connection with those introducing activities, whether or not the

    affiliated futures commission merchant submits for clearing any trades

    resulting from those introducing activities; and

    (iv) Such person does not solicit any person located in the United

    States, its territories or possessions for trading on a designated

    contract market, nor does such person handle the customer funds of any

    person located in the United States, its territories or possessions for

    [[Page 12893]]

    the purpose of trading on any designated contract market.

    * * * * *

    (5) An associated person of a swap dealer or an associated person

    of a major swap participant, as defined in 1a(4) of the Act, is not

    required to register as a swap dealer or major swap participant,

    respectively, solely as a consequence of being an associated person of

    a swap dealer, or an associated person of a major swap participant.

    * * * * *

    5. Amend Sec. 3.11 by revising paragraphs (a)(2), (a)(3) and (b)

    and adding paragraph (c) to read as follows:

    Sec. 3.11 Registration of floor brokers and floor traders.

    (a) * * *

    (2) An applicant for registration as a floor broker or floor trader

    will not be registered or issued a temporary license as a floor broker

    or floor trader unless the applicant has been granted trading

    privileges by a board of trade designated as a contract market by the

    Commission.

    (3) When the Commission or the National Futures Association

    determines that an applicant for registration as a floor broker or

    floor trader is not disqualified from such registration or temporary

    license, the National Futures Association will notify the applicant and

    any contract market that has granted the applicant trading privileges

    that the applicant's registration or temporary license as a floor

    broker or floor trader is granted.

    (b) Duration of registration. A person registered as a floor broker

    or floor trader in accordance with paragraph (a) of this section, and

    whose registration has neither been revoked nor withdrawn, will

    continue to be so registered unless such person's trading privileges on

    all contract markets have ceased: Provided, that if a floor broker or

    floor trader whose trading privileges on all contract markets have

    ceased for reasons unrelated to any Commission action or any contract

    market disciplinary proceeding and whose registration is not revoked,

    suspended or withdrawn is granted trading privileges as a floor broker

    or floor trader, respectively, by any contract market where he held

    such privileges within the preceding sixty days, such registration as a

    floor broker or floor trader, respectively, shall be deemed to continue

    and no new Form 8-R or Form 3-R record of a change to Form 8-R need be

    filed solely on the basis of the resumption of trading privileges. A

    floor broker or floor trader is 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

    or of all such trading privileges. Each contract market that has

    granted trading privileges to a person who is registered, or has

    applied for registration, as a floor broker or floor trader, must

    provide notice in accordance with Sec. 3.31(d) after such person's

    trading privileges on such contract market have ceased.

    (c) Exceptions. (1) A registered floor broker need not also

    register as a floor trader in order to engage in activity as a floor

    trader.

    (2) [Reserved]

    6. Amend Sec. 3.12 by revising paragraphs (b), (c), (g) and (h) to

    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.

    * * * * *

    (b) Duration of registration. A person registered in accordance

    with paragraphs (c), (d), (f), or (i) of this section and whose

    registration has not been revoked will continue to be so registered

    until the revocation or withdrawal of the registration of each of the

    registrant's sponsors, or until the cessation of the association of the

    registrant with each of his sponsors. 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 his or his sponsor's registration. Each of the

    registrant's sponsors must file a notice in accordance with Sec.

    3.31(c) reporting the termination of the association of the associated

    person.

    (c) Application for registration. Except as otherwise provided in

    paragraphs (d), (f), and (i) of this section, application for

    registration as an associated person in any capacity must be on Form 8-

    R, completed and filed in accordance with the instructions thereto.

    * * * * *

    (g) Petitions for exemption. Any person adversely affected by the

    operation of this section may file a petition with the Secretary of the

    Commission, which petition must set forth with particularity, the

    reasons why that person believes that an applicant should be exempted

    from the requirements of this section and why such an exemption would

    not be contrary to the public interest and the purposes of the

    provision from which exemption is sought. The petition will be granted

    or denied by the Commission on the basis of the papers filed. The

    Commission may grant such a petition if it finds that the exemption is

    not contrary to the public interest and the purposes of the provision

    from which exemption is sought. The petition may be granted subject to

    such terms and conditions as the Commission may find appropriate.

    (h) Exemption from registration. (1) A person is not required to

    register as an associated person in any capacity if that person is:

    (i) Registered under the Act as a futures commission merchant,

    retail foreign exchange dealer, swap dealer, major swap participant,

    floor broker, or as an introducing broker;

    (ii) Engaged in the solicitation of funds, securities, or property

    for a participation in a commodity pool, or the supervision of any

    person or persons so engaged, pursuant to registration with the

    Financial Industry Regulatory Authority as a registered representative,

    registered principal, limited representative or limited principal, and

    that person does not engage in any other activity subject to regulation

    by the Commission;

    * * * * *

    7. Amend Sec. 3.13 by revising paragraph (d)(2) to read as

    follows:

    Sec. 3.13 Registration of agricultural trade option merchants and

    their associated persons.

    * * * * *

    (d) * * *

    (2) Applicants for registration as an associated person of an

    agricultural trade option merchant must meet the following conditions.

    Such persons must:

    * * * * *

    8. Amend Sec. 3.21 by revising paragraphs (a)(1), (a)(2), (b)(1),

    (b)(2), (b)(3), and (c)(4)(iii), and add paragraph (a)(3) to read as

    follows:

    Sec. 3.21 Exemption from fingerprinting requirement in certain cases.

    (a) * * *

    (1) A legible, accurate and complete photocopy of a fingerprint

    card that has been submitted to the Federal Bureau of Investigation for

    identification and appropriate processing and of each report, record,

    and notation made available by the Federal Bureau of Investigation with

    respect to that fingerprint card if such identification and processing

    has been completed satisfactorily by the Federal Bureau of

    Investigation not more than ninety days

    [[Page 12894]]

    prior to the filing with the National Futures Association of the

    photocopy;

    (2) A statement that such person's application for initial

    registration in any capacity was granted within the preceding ninety

    days, provided that the provisions of paragraph (a)(2) of this section

    shall not be applicable to any person who, by Commission rule,

    regulation, or order, was not required to file a fingerprint card in

    connection with such application for initial registration; or

    (3) A statement that such person has a current Form 8-R on file

    with the Commission or the National Futures Association.

    (b) * * *

    (1) With respect to the fingerprints of an associated person: An

    officer, if the sponsor is a corporation; a general partner, if a

    partnership; or the sole proprietor, if a sole proprietorship;

    (2) With respect to fingerprints of a floor broker or floor trader:

    The applicant for registration; or

    (3) With respect to the fingerprints of a principal: An officer, if

    the futures commission merchant, retail foreign exchange dealer, swap

    dealer, major swap participant, 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) * * *

    (4) * * *

    (iii) The internal controls used to ensure that the outside

    director for whom exemption under paragraph (c) of this section is

    sought does not have access to the keeping, handling or processing of

    the items described in paragraphs (c)(2)(i) and (c)(2)(ii) of this

    section; and

    * * * * *

    9. Amend Sec. 3.22 by revising paragraph (b) to read as follows:

    Sec. 3.22 Supplemental filings.

    * * * * *

    (b) That the person, or any individual who, based upon his or her

    relationship with that person is required to file a Form 8-R in

    accordance with the requirements of this part, as applicable, must,

    within such period of time as the Commission or the National Futures

    Association may specify, complete and file with the Commission or the

    National Futures Association a current Form 7-R, or if appropriate, a

    Form 8-R, in accordance with the instructions thereto.

    * * * * *

    10. Amend Sec. 3.30 by revising paragraph (b) to read as follows:

    Sec. 3.30 Current address for purpose of delivery of communications

    from the Commission or the National Futures Association.

    * * * * *

    (b) Each registrant, while registered and for two years after

    termination of registration, and each principal, while affiliated and

    for two years after termination of affiliation, must notify in writing

    the National Futures Association of any change of the address on the

    application for registration, biographical supplement, or other address

    filed with the National Futures Association for the purpose of

    receiving communications from the Commission or the National Futures

    Association. Failure to file a required response to any communication

    sent to the latest such address filed with the National Futures

    Association that is caused by a failure to notify in writing the

    National Futures Association of an address change may result in an

    order of default and award of claimed monetary damages or other

    appropriate order in any National Futures Association or Commission

    proceeding, including a reparation proceeding brought under part 12 of

    this chapter.

    11. Amend Sec. 3.31 by revising paragraphs (a), (b), (c)(1)

    introductory text 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 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 that no

    longer renders accurate and current the information contained therein,

    with the exception of any change that requires withdrawal from

    registration under Sec. 3.33. Each such correction shall be prepared

    and filed in accordance with the instructions thereto to create a Form

    3-R record of such change.

    (2) Where the deficiency or inaccuracy is created by a change in

    the ``form of organization'' field on Form 7-R from or to a sole

    proprietorship, the registrant must request withdrawal from

    registration in accordance with Sec. 3.33.

    (3) Where the deficiency or inaccuracy is created by a change in

    the ``firm name'' field, if a non-natural person, or the ``form of

    organization'' field on Form 7-R, the registrant must request

    withdrawal from registration in accordance with Sec. 3.33; provided,

    however, that if there is no addition of a new principal, the

    registrant may instead update its Form 7-R to create a Form 3-R record

    of change, which is deemed in such circumstance to include a consent

    that the new legal entity shall be liable for all obligations of the

    pre-existing organization under the Act, and the rules, regulations, or

    orders that have been promulgated thereunder.

    (4) Where the deficiency or inaccuracy is created by the addition

    of a new principal not listed on the registrant's application for

    registration (or amendment of such application prior to the granting of

    registration), and there is no change in firm name or form of

    organization:

    (i) If the new principal is not a natural person, the registrant

    shall update such Form 7-R to create a Form 3-R record of change.

    (ii) If the new principal is a natural person, the registrant shall

    file a Form 8-R, completed in accordance with the instructions thereto

    and executed by such person who is a principal of the registrant and

    who was not listed on the registrant's initial application for

    registration or any amendment thereto.

    (5) Where the deficiency or inaccuracy is created by the addition

    of a new principal not listed on the registrant's application for

    registration (or amendment of such application prior to the granting of

    registration), and there is a change in the ``firm name'' field, if a

    non-natural person, or the ``form of organization'' field on the

    registrant's Form 7-R, the registrant must request withdrawal from

    registration in accordance with Sec. 3.33.

    (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 to create a Form 3-R record of change.

    (c)(1) After the filing of a Form 8-R or updating a Form 8-R to

    create a Form 3-R record of change 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

    [[Page 12895]]

    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:

    * * * * *

    (d) Each contract market 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.

    * * * * *

    12. Amend Sec. 3.33 by revising paragraph (a) introductory text 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,

    or leverage transaction merchant must request that its registration be

    withdrawn upon filing articles (or a certificate) of dissolution (or

    cancellation), and upon notice of any involuntary dissolution initiated

    by a third-party. 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:

    * * * * *

    13. Amend Sec. 3.40 by revising paragraph (a)(2)(iv) to read as

    follows:

    Sec. 3.40 Temporary licensing of applicants for associated person,

    floor broker or floor trader registration.

    (a) * * *

    (2) * * *

    (iv) Evidence that the applicant has been granted trading

    privileges by a contract market that has filed with the National

    Futures Association a certification signed by its chief operating

    officer with respect to the review of an applicant's employment, credit

    and other history in connection with the granting of trading

    privileges.

    * * * * *

    14. Amend Sec. 3.42 by revising paragraphs (a) introductory text,

    (a)(6), and (a)(8) to read as follows:

    Sec. 3.42 Termination.

    (a) A temporary license issued pursuant to Sec. 3.40 shall

    terminate:

    * * * * *

    (6) Immediately upon failure to comply with an award in an

    arbitration proceeding conducted pursuant to the rules of a designated

    contract market or registered futures association within the time

    specified in section 10(g) of the National Futures Association's Code

    of Arbitration or the comparable time period specified in the rules of

    a contract market or other appropriate arbitration forum.

    * * * * *

    (8) Immediately upon notice to the applicant and the applicant's

    sponsor or the contract market that has granted the applicant trading

    privileges that:

    (i) The applicant failed to disclose relevant disciplinary history

    information on the applicant's Form 8-R; or

    (ii) An event has occurred leading to a required disclosure on the

    applicant's Form 8-R.

    * * * * *

    15. Amend Sec. 3.44 by revising paragraph (a)(5) to read as

    follows:

    Sec. 3.44 Temporary licensing of applicants for guaranteed

    introducing broker registration.

    (a) * * *

    (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.

    * * * * *

    16. Amend Sec. 3.46 by revising paragraph (a) introductory text,

    (a)(6), (a)(8), and (a)(10) to read as follows:

    Sec. 3.46 Termination.

    (a) A temporary license issued pursuant to Sec. 3.44 shall

    terminate:

    * * * * *

    (6) Immediately upon failure to comply with an order to pay a civil

    monetary penalty, restitution, or disgorgement within the time

    permitted under section 6(e), 6b, or 6c(d) of the Act;

    * * * * *

    (8) Immediately upon failure to comply with an award in an

    arbitration proceeding conducted pursuant to the rules of a designated

    contract market, swap execution facility, or registered futures

    association within the time specified in section 10(g) of the National

    Futures Association's Code of Arbitration or the comparable time period

    specified in the rules of a designated contract market, swap execution

    facility, or other appropriate arbitration forum.

    * * * * *

    (10) Immediately upon notice to the applicant and the guarantor

    futures commission merchant that:

    (i) The applicant or any principal (including any branch officer

    manager) failed to disclose relevant disciplinary history information

    on the applicant's Form 7-R or on a principal's Form 8-R; or

    (ii) An event has occurred leading to a required disclosure on the

    applicant's Form 7-R or on a principal's Form 8-R.

    * * * * *

    17. Amend Sec. 3.75 by revising paragraph (a) to read as follows:

    Sec. 3.75 Delegation and reservation of authority.

    (a) The Commission hereby delegates, until such time as it orders

    otherwise, to the Director of the Division of Clearing and Intermediary

    Oversight or his designee the authority to grant or deny requests filed

    pursuant to Sec. 3.12(g). The Director of the Division of Clearing and

    Intermediary Oversight may submit to the Commission for its

    consideration any matter which has been delegated to him pursuant to

    Sec. 3.12(g). The Commission hereby delegates, until such time as it

    orders otherwise, the authority to perform all functions specified in

    subparts B through D to the persons authorized to perform them

    thereunder.

    * * * * *

    Issued in Washington, DC, on February 24, 2011, by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    Note: The following appendices will not appear in the Code of

    Federal Regulations.

    Appendices to Registration of Intermediaries--Commission Voting Summary

    and Statements of Commissioners

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn,

    Sommers, Chilton and O'Malia voted in the affirmative; no

    Commissioner voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rulemaking that will amend certain

    provisions of Part 3 of the Commission's regulations regarding the

    registration of intermediaries. The proposed amendments are

    necessary to conform existing regulations to the new requirements in

    the Dodd-Frank Act. The proposed rulemaking would amend Part 3 to

    ensure that the registration process applies to new categories of

    registrants, such as swap dealers and major swap participants. The

    proposed

    [[Page 12896]]

    amendments also will modernize existing provisions that will apply

    to all Commission registrants.

    [FR Doc. 2011-4799 Filed 3-8-11; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: March 9, 2011