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e9-24480

  • FR Doc E9-24480[Federal Register: October 13, 2009 (Volume 74, Number 196)]

    [Proposed Rules]

    [Page 52434-52441]

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

    [DOCID:fr13oc09-14]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 1

    RIN 3038-AB87

    Electronic Filing of Financial Reports and Notices

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rule.

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

    ``CFTC'') is proposing to amend certain of its regulations in

    connection with electronic filing of financial reports and other

    notices (``Proposal''). The Proposal would broaden the language in the

    Commission's regulations applicable to electronic filings of financial

    reports to clarify that, to the extent a futures commission merchant

    (``FCM'') submits a Form 1-FR to the Commission electronically, it may

    do so using any user authentication procedures established or approved

    by the Commission. The Proposal also would permit registrants to

    electronically submit filings in addition to financial reports,

    including an election to use a non-calendar fiscal year, requests for

    extensions of time to file uncertified financial reports and ``early

    warning'' notices required under Commission regulations. In connection

    with the filing of financial reports, the Commission also is proposing

    to specify, consistent with other requirements and existing practice,

    that a statement of income and loss is included as a required part of

    the non-certified 1-FR filings for FCMs and introducing brokers

    (``IBs''). The Commission also is proposing to require more immediate,

    but less prescriptive, documentation regarding a firm's capital

    condition when a firm falls below its required minimum adjusted net

    capital. Finally, the Commission is proposing several other minor

    amendments to correct certain outdated references and to make other

    clarifications to existing regulations.

    DATES: Comments must be received on or before November 12, 2009.

    ADDRESSES: You may submit comments, identified by RIN 3038-AB87, 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 ``Electronic Filing

    Amendments'' 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: Thelma Diaz, Associate Director,

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

    Washington, DC 20581. Telephone number: 202-418-5137; facsimile number:

    202-418-5547; and electronic mail: tdiaz@cftc.gov, or Lawrence T.

    Eckert, Special Counsel, Division of Clearing and Intermediary

    Oversight, 140 Broadway, New York, New York 10005. Telephone number

    (646) 746-9704; and electronic mail: leckert@cftc.gov.

    SUPPLEMENTARY INFORMATION:

    I. Background

    Section 4f(b) of the Commodity Exchange Act, as amended (the

    ``Act'') authorizes the Commission to impose by regulation minimum

    financial and related reporting requirements on futures commission

    merchants (``FCMs'') and introducing brokers (``IBs'').\1\ Commission

    Regulation 1.10 sets forth the financial reporting requirements for

    FCMs and IBs.\2\ This regulation includes a requirement for FCMs and

    IBs to file annual financial statements that have been certified by an

    independent public accountant in accordance with Regulation 1.16.

    Regulation 1.10 also requires generally that FCMs file with the

    Commission non-certified Form 1-FR-FCM financial reports each month and

    that IBs file non-certified Form 1-FR-IB financial

    [[Page 52435]]

    reports semiannually.\3\ Commission Regulation 1.12 requires FCMs, IBs

    and applicants for registration thereof to provide notice of a variety

    of predefined events as or before they occur.\4\

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    \1\ The Act is codified at 7 U.S.C. 1 et seq. (2009), and

    section 4f(b) of the Act is codified at 7 U.S.C. 6f(b). The

    Commission's regulations cited in this proposed rulemaking may be

    found at 17 CFR Ch. 1 (2009).

    \2\ For simplicity, references in this Federal Register release

    to IBs in connection with financial reporting and notice

    requirements are intended to refer to IBs that are not operating

    pursuant to a guarantee agreement.

    \3\ Commission Regulation 1.10(h) permits a registrant that also

    is registered as a securities broker-dealer with the Securities and

    Exchange Commission (``SEC'') to file a copy of its Financial and

    Operational Combined Uniform Single Report (``FOCUS'') with the

    Commission in lieu of Form 1-FR.

    \4\ For example, Regulation 1.12(a) requires immediate

    telephonic notice, to be confirmed in writing by facsimile, when a

    registrant's (or applicant's) adjusted net capital falls below that

    required by Regulation 1.17. Other provisions of Regulation 1.12

    require notification to the Commission for certain ``early warning''

    events. Regulation 1.12(b), for example, requires notification by a

    registrant or applicant if such entity's adjusted net capital drops

    below a specified threshold.

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    The Commission amended Regulation 1.10 in 1997 to provide for the

    first time the regulatory means for FCMs and IBs to file financial

    reports electronically with the Commission.\5\ Regulation 1.10(c)(2)

    permits FCMs to file non-certified financial reports with the

    Commission via electronic transmission using a Commission-assigned

    personal identification number (``PIN''). Regulation 1.10(b)(2)(iii)

    requires FCMs to continue to file certified financial reports in paper

    form, but requires IBs to file such certified reports electronically in

    accordance with procedures adopted by the National Futures Association

    (``NFA'').\6\

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    \5\ See 62 FR 10441 (March 7, 1997) (a technical amendment to

    the final rules is found at 62 FR 33007 (June 18, 1997)). Many firms

    were already filing financial reports electronically with their self

    regulatory organizations (``SROs'') at this time pursuant to SRO

    rules approved by the Commission.

    \6\ The Commission approved on an expedited basis, effective

    June 30, 2004, NFA rule amendments which require that IBs submit

    non-certified Forms 1-FR-IB or FOCUS reports electronically using

    NFA's EasyFile electronic filing system. On November 22, 2006, in

    response to a petition by NFA, the Commission adopted amendments to

    its regulations that effectively provided NFA with the ability to

    further expand its electronic financial report filing requirements

    applicable to IBs to include mandatory electronic filing of

    certified financial reports. 71 FR 54789 (Sep. 19, 2006). Although

    submissions by IBs of certified Form 1-FR-IB must be made

    electronically, NFA has not yet mandated electronic filing of

    certified FOCUS reports by IBs registered as securities brokers or

    dealers.

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    FCMs that file their non-certified financial reports electronically

    with the Commission currently do so through WinJammer,TM a

    software application initially developed jointly by the Chicago

    Mercantile Exchange (``CME'') and the Chicago Board of Trade (``CBT'').

    The WinJammer TM Group \7\ has licensed or otherwise

    provided application access to a number of SROs and regulatory

    agencies, including the Commission. IBs file financial reports with NFA

    through NFA's ``EasyFile'' system, which was developed by NFA as an

    internet-based alternative to WinJammer.TM

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    \7\ The ``WinJammer TM Group'' consists of the CME,

    CBT, and NFA, which joined the group in 2000.

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    The WinJammer TM Group currently is working on a new

    release of its application that would, among other things, move toward

    an internet-based approach to electronic filing of documents. It is

    envisioned that security access to the updated WinJammer TM

    application will no longer require a PIN, but rather will use a

    username/password combination for authentication. The new application

    is expected to provide a number of advancements over the current

    software, including the ability for FCMs to file notices on a central

    server to be maintained by the WinJammer TM Group. The use

    of a central server-approach will facilitate greater filing efficiency

    by enabling an FCM to make a single electronic filing to the server.

    The filing would be available to and would be downloaded by the

    software of the Commission, NFA and/or the relevant SRO, as applicable.

    The registrant would be responsible to check its WinJammer

    TM account for confirmation that the filing had in fact been

    received by the intended recipients. Currently, FCMs must make separate

    electronic filings with each relevant party.

    II. Proposed Rule Amendments

    A. Electronic Filing Issues

    Commission Regulation 1.10(c) generally sets forth the provisions

    governing where and how the financial reports required to be filed by

    FCMs and IBs under Regulation 1.10 must be filed. Regulation 1.10(c)(1)

    indicates with whom reports should be filed. Regulation 1.10(c)(2)

    addresses the method, rather than the location of filing and provides

    that certain non-certified financial reports may be submitted to the

    Commission via electronic transmission using a Commission-assigned

    personal identification number. Electronic submission of certified

    financial reports is addressed in Regulation 1.10(b)(2)(iii). This

    section provides that FCMs must file certified financial reports in

    paper form and IBs must file such reports electronically in accordance

    with electronic filing procedures established by NFA.

    For clarification and ease of reading, the Proposal would move

    Regulation 1.10(b)(2)(iii) into a new subparagraph of Regulation

    1.10(c)(2). Regulation 1.10(c)(2) would be amended as discussed below

    and divided into 2 new subparagraphs: Subparagraph (c)(2)(i) would

    address electronic filing by FCMs with the Commission and subparagraph

    (c)(2)(ii) would address electronic filings with NFA by IBs and by

    applicants for registration as IBs and FCMs.

    Regulation 1.10(c)(2) currently provides that non-certified

    financial reports may be submitted to the Commission ``in electronic

    form using a Commission assigned Personal Identification Number, and

    otherwise in accordance with instructions issued by the Commission * *

    *.'' As discussed above, the anticipated changes to the user

    authentication process for WinJammer TM users would no

    longer utilize a PIN. Accordingly, the Commission is proposing to

    broaden the language in the regulation relating to user authentication.

    In addition, the Commission is proposing to permit any filing or other

    notice submitted under the regulation to be transmitted electronically,

    rather than limiting such submission to financial reports as under the

    current regulation. This would enable FCMs to electronically file, for

    example, an election to use a fiscal year other than a calendar year

    under Regulation 1.10(e) or a request for an extension of time to file

    uncertified financial reports under Regulation 1.10(f). As amended,

    Regulation 1.10(c)(2)(i) would provide that ``[except with respect to

    the filing of certified financial reports which must be filed in paper

    form], all filings or other notices or applications prepared by a

    futures commission merchant pursuant to [Regulation 1.10] 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

    instruction issued by or approved by the Commission, if the futures

    commission merchant 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.'' The Commission also would

    revise the instructions to Form 1-FR-FCM to reflect this change.

    Regulation 1.10(c)(2)(ii) would provide that ``[except with respect to

    the filing of certified FOCUS reports by a registered broker or dealer

    with the SEC], all filings or other notices or applications prepared by

    an introducing broker or applicant for registration as an introducing

    broker or futures commission merchant * * * must be

    [[Page 52436]]

    filed electronically in accordance with electronic filing procedures

    established by the National Futures Association * * *.''

    Regulation 1.10(d)(4)(iii) provides that with respect to the

    electronic submission of a Form 1-FR, the transmission must be

    accompanied by the PIN or other user authentication assigned to the

    authorized signer under procedures established or approved by the

    Commission, and the use of such PIN or other user authentication will

    substitute for the manual signature of the authorized signer for the

    purposes of making the oath or affirmation required to accompany the

    filing of Form 1-FR. In light of the amendments to Regulation 1.10

    discussed above related to user authentication procedures, the Proposal

    would delete from Regulation 1.10(d)(4)(iii) references to the use of a

    PIN.

    Commission Regulation 1.12 requires FCMs, IBs and applicants for

    registration thereof to provide notice of a variety of predefined

    events as or before they occur.\8\ The regulation generally requires

    such notices to be provided in writing by facsimile and, in certain

    cases, written notice must be preceded by immediate telephonic notice.

    Regulation 1.12(i) provides the procedures for filing notices under

    Regulation 1.12. In light of the anticipated changes to the WinJammer

    TM application, the successful implementation in the past of

    the electronic filing of Form 1-FR with the Commission and the

    potential benefits in terms of efficiency and paper reduction, the

    Commission is proposing to amend Regulation 1.12(i) to allow FCMs and

    IBs to submit electronically filings otherwise required to be submitted

    in writing via facsimile under Regulation 1.12.\9\ The Proposal would

    add new subparagraph 1.12(i)(3) which would provide that ``[e]very

    notice or report required to be provided in writing under [Regulation

    1.12] may, in lieu of facsimile, be filed via electronic transmission

    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.'' An electronic submission would be required to clearly

    indicate the registrant or applicant on whose behalf such filing is

    made and the use of such user authentication in submitting such filing

    would constitute and become a substitute for the manual signature of

    the authorized signer.

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    \8\ See footnote 4, above.

    \9\ IBs file notices under Regulation 1.12 with NFA pursuant to

    NFA rules. NFA has indicated that it intends to make changes to the

    EasyFile system and/or NFA rules, as may be necessary to facilitate

    the electronic filing by IBs of notices or other information

    permitted to be submitted electronically by the Proposal but

    currently filed with NFA in paper form.

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    B. Income Statement Filing Requirement

    Commission Regulation 1.10(d) sets forth the content requirements

    for financial reports filed with the Commission: Regulation 1.10(d)(2)

    applies to certified financial reports and Regulation 1.10(d)(1)

    applies to non-certified financial reports.

    Certified financial reports are required to include, among other

    things, ``statements of income (loss)'' pursuant to Regulation

    1.10(d)(2)(ii). This requirement is not currently included as part of

    Regulation 1.10(d)(1) in connection with the filing of non-certified

    financial reports. In practice, however, FCMs and IBs typically include

    such statements with all financial report filings made with the

    Commission, whether or not such reports are required to be certified.

    FCMs that are also registered with the SEC as broker-dealers and that

    carry or clear customer accounts already are required to file with

    their designated examining authority an income statement as part of

    their monthly FOCUS filing.\10\ Other FCMs and IBs, while not

    necessarily required to file these statements, must nonetheless compute

    the firm's income and loss on a monthly basis (or semiannual basis in

    the case of IBs) in order to appropriately complete other relevant

    portions of Form 1-FR or FOCUS. Both Form 1-FR and FOCUS already are

    formatted to accept the reporting of income and loss data

    electronically.

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    \10\ Non-clearing broker-dealers file FOCUS, including the

    statement of income (loss), on a quarterly basis.

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    The income statement is an integral part of the financial report

    that the Commission believes should be available for review along with

    other relevant financial data filed on an interim basis. Additionally,

    requiring the filing of such statements should not add any additional

    burden to registrants. In fact, as mentioned, substantially all FCMs

    and IBs already include such statements as part of their non-certified

    financial reports filed with the Commission. Accordingly, the

    Commission is proposing to amend Regulation 1.10(d)(1)(ii) to require

    ``statements of income (loss)'' to be included as part of FCM and IB

    non-certified financial report filings. By requiring that firms file an

    income statement with their non-certified financial reports as well as

    with their annual certified report, the amended rule would ensure that

    Commission staff receive more current information and have the ability

    to review this information relating to a firm's financial health more

    than once a year. This amendment would not affect the ability of a

    broker-dealer to file with the Commission in accordance with Regulation

    1.10(h) the FOCUS report under the Securities and Exchange Act of 1934,

    including the income statement currently provided in that report.\11\

    Further, as is true of such statements filed as part of a certified

    financial report, income statements included as part of a non-certified

    1-FR or FOCUS filing would be afforded nonpublic treatment pursuant to

    Commission Regulation 1.10(g).

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    \11\ Under SEC Regulation 17a-5 and rules of applicable self-

    regulatory organizations, certain securities brokers or dealers may

    include as part of their quarterly FOCUS report filings a

    consolidated Statement of Income (Loss) for the relevant quarter

    rather than a Statement of Income (Loss) for the month for which the

    report is being filed (i.e., March, June, September or December).

    Such broker-dealers that also are registered as FCMs would file

    these same reports with the Commission. The Commission wishes to

    make clear that an otherwise complete FOCUS report filing made with

    the Commission that includes such a consolidated Statement of Income

    (Loss) would be deemed an acceptable filing in accordance with

    Commission Regulation 1.10(h).

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    C. Net Capital Undercapitalization Documentation

    The Commission is proposing to amend Regulations 1.12(a)(2) and

    (a)(3) to require more immediate, but less prescriptive, reporting to

    the Commission when a registrant or applicant falls below its minimum

    net capital requirement. Regulation 1.12(a) requires a registrant or

    applicant for registration as an FCM or IB that knows or should have

    known that its adjusted net capital is less than the minimum required

    by the Commission or by its designated self-regulatory organization

    (``DSRO'') to provide notice of such event immediately by telephone and

    confirm such telephonic notice in writing by facsimile. Regulation

    1.12(a)(2) further requires that, within 24 hours thereafter, the

    registrant (or applicant) must file certain financial records with the

    Commission. Specifically, an FCM (or applicant) is required to file:

    (1) A statement of financial condition; (2) a statement of the

    computation of its minimum capital requirements; (3) the statements of

    segregation requirements and funds in segregation for customers trading

    on U.S. commodity exchanges and for customers' dealer options accounts;

    and (4) the statement of secured amounts

    [[Page 52437]]

    and funds held in separate accounts for foreign futures and foreign

    options customers. Regulation 1.12(a)(3) requires an IB (or applicant)

    to file a statement of financial condition and a statement of the

    computation of its minimum capital requirements. All statements under

    Regulations 1.12(a)(2) and (a)(3) must be prepared as of the date the

    registrant's or applicant's adjusted net capital was below its minimum

    requirement.

    When a firm falls below its minimum adjusted net capital

    requirement, the Commission's interest is to understand fully the

    circumstances that gave rise to the reduction in capital and to ensure

    that there are no imminent concerns regarding the firm's ability to

    meet its obligations to the market or customers, or to otherwise

    continue normal business operations. The statements required by the

    current regulation help provide a picture of a firm's financial

    position as of the time such statements are prepared. The regulations,

    however, currently allow up to 24 hours from the receipt of original

    notice of a net capital deficiency for such documentation to be

    provided. In practice, firms that notify the Commission of a fall below

    minimum net capital under Regulation 1.12(a) often simultaneously

    provide written information to the Commission sufficient to evidence

    the firm's then-current capital condition. Such information has not

    always taken the specific form prescribed in the regulation, however.

    Upon receipt of information from a registrant, Commission staff members

    have requested further information as determined appropriate and

    necessary in the circumstances. Firms generally have been prompt in

    providing such data.

    The Commission has found that receiving more immediate information

    regarding a firm's capital condition better satisfies the Commission's

    interests and typically is of greater benefit than obtaining

    documentation in the specific form currently prescribed at the expense

    of a time delay. Accordingly, the Commission is proposing to amend

    Regulation 1.12(a) consistent with this practice. Under the Proposal, a

    firm must continue to provide immediate telephonic notice, confirmed in

    writing, in the event that its adjusted net capital falls below its

    required minimum. Paragraph 1.12(a)(2) would be amended to require that

    together with such initial telephonic notice and written confirmation,

    a firm must provide ``documentation in such form as necessary to

    adequately reflect the firm's capital condition as of any date such

    person's adjusted net capital is less than the minimum required.'' \12\

    Thus, a firm would be required to provide documentation regarding its

    capital condition at the same time as it provides its notice and

    confirmation of a capital deficiency to the Commission. The amended

    regulation would, however, provide greater flexibility with respect to

    the form such documentation must take, allowing any documentation that

    adequately reflects the firm's capital condition. The Commission

    envisions that such adequate documentation would at a minimum specify

    the firm's adjusted net capital requirement and actual adjusted net

    capital for any date during which the firm fell below its regulatory

    requirement. By requiring documentation as of ``any'' date that

    adjusted net capital is less than the required minimum, the amended

    regulation makes clear that where a firm is undercapitalized on more

    than one day, documentation related to all such time must be provided.

    The amended regulation also would require a firm to provide similar

    documentation to that initially provided for any other days the

    Commission may request.\13\ Regulation 1.12(a)(3), which provides

    supplementary documentation requirements for IBs, would be deleted

    because amended Regulation 1.12(a)(2) would subsume this section.

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    \12\ This amendment is consistent with SEC Regulation 17a-11

    which requires a broker or dealer whose net capital falls below its

    required minimum to give notice of the deficiency that same day,

    specifying the broker or dealer's net capital requirement and its

    current amount of net capital.

    \13\ Regulation 1.10(b)(4) already provides that representatives

    of the Commission may upon written notice require Form 1-FR or other

    financial information at such times as specified by the

    representative.

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    As a corollary to the amendment to Regulation 1.12(a)(2), the

    Commission is proposing to amend Regulation 1.12(i)(1). This section

    addresses the process for filing notices under Regulation 1.12 and

    currently requires, among other things, that the documentation required

    under Regulations 1.12(a)(2) and (a)(3) be filed in accordance with the

    provisions of section 1.10(d), which specifies the required content of

    financial reports. This requirement is no longer necessary as the

    specific financial statements currently referenced in Regulation

    1.12(i)(1) would no longer be required under the Proposal. Accordingly,

    the Proposal would delete this requirement. Documentation required to

    be provided under amended Regulation 1.12(a)(2) would be submitted

    either by facsimile or electronically pursuant to amended Regulation

    1.12(i)(3).

    D. Miscellaneous Amendments to Regulations

    The Commission is proposing several minor amendments to Regulations

    1.10 and 1.12 to correct certain outdated references and to otherwise

    clarify existing regulations. Regulation 1.10(c)(1) states generally

    that reports filed by IBs pursuant to paragraph (b)(2)(i) or (b)(2)(ii)

    (i.e., the filing provisions for non-certified and certified reports by

    registered IBs) are filed only with NFA. Other reports are generally

    required to be filed with the relevant regional office of the

    Commission and the registrant's SRO, except that an applicant for

    registration is required to file reports with the relevant regional

    office of the Commission and NFA. The Commission has issued orders

    delegating to NFA the processing of application requests by FCMs and

    IBs, and in practice almost all financial reports from applicants for

    registration as FCMs or IBs are filed with the NFA only.\14\

    Accordingly, the Commission is proposing to amend the language of

    Regulation 1.10(c)(1) to delete reference to an applicant's need to

    file financial reports with a regional office of the Commission.

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    \14\ The Commission order delegating to NFA the registration

    function for IB applicants is published at 48 FR 35158 (August 3,

    1983), and the order delegating the registration function for FCM

    applicants is published at 49 FR 39593 (October 9, 1984).

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    Similarly, Regulation 1.12(i)(1) currently indicates that an

    applicant for registration as an FCM must file any notices required

    under Regulation 1.12 with, among others, the regional office of the

    Commission that has jurisdiction over the state in which the

    applicant's principal place of business is located and with the

    Commission's principal office in Washington, DC. The proposed, amended

    language in Regulation 1.12(i)(1) would make clear that an applicant

    for registration as an FCM would file such notices only with NFA and

    that such notices need not be filed with the Commission. The amended

    regulation would also make clear that any notice or report filed with

    the National Futures Association will be deemed to be filed with, and

    to be the official record of, the Commission.

    The Commission also is proposing the following minor wording

    changes to Regulation 1.10(c)(1) for the purposes of consistency with

    other provisions of the regulations and/or general clarification as

    follows: (1) The reference to ``[a] report filed by an [IB] pursuant to

    paragraph (b)(2)(i) or (b)(2)(ii)'' would be amended to clarify that

    ``a report'' in this context is meant to refer to Form 1-

    [[Page 52438]]

    FR; (2) the reference to subparagraphs (b)(2)(i) and (b)(2)(ii) would

    be amended for simplicity to refer only to paragraph (b)(2) in general;

    and (3) the language of paragraph 1.10(c)(1) would be amended to make

    clear that it is intended to cover not only ``reports'' but all reports

    and other ``information.'' The Commission, NFA and SROs are permitted

    under Regulation 1.10(b)(4) to make a written request of an FCM or IB

    for information as they may determine is necessary. The proposed

    amendment would clarify that the guidance provided in Regulation

    1.10(c)(1) regarding with whom filings should be made would govern the

    filing of such requested information.

    Regulation 1.10(b)(2)(i) provides generally that an IB must file a

    Form 1-FR-IB semiannually as of the middle and close of each fiscal

    year ``unless the [IB] elects * * * to file a Form 1-FR-IB semiannually

    as of the middle and close of each calendar year.'' Regulation

    1.10(b)(2)(ii) generally states further that an IB must file a

    certified 1-FR-IB as of the close of its fiscal year ``(even if it

    files semiannual reports on a calendar year basis).'' Prior to 1993,

    Commission regulations required IBs to file Form 1-FR on a quarterly

    rather than a semiannual basis, unless the IB's SRO permitted

    semiannual filing. The regulations also allowed IBs to elect to file

    reports on a calendar year basis rather than on a fiscal year

    basis.\15\ This election was separate from the election to use a fiscal

    year other than a calendar year, which is still permitted to be made

    under Regulation 1.10(e)(1). The Commission's regulations no longer

    provide a separate option to elect to file on a calendar year rather

    than a fiscal year basis and, accordingly, the Commission is proposing

    to delete the language quoted above referencing such an election.

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    \15\ See 48 FR 35248 (Aug. 3, 1983) (adopting registration

    requirements and procedures for IBs, among others).

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    Regulation 1.10(b)(3) provides generally that an FCM or IB can

    satisfy the 1-FR filing requirements applicable to them set forth in

    Regulations 1.10(b)(1) and (2), respectively, if the FCM or IB is a

    member of a DSRO and satisfies the minimum financial standards and

    reporting requirements established by rules of the DSRO which have been

    approved ``after the effective date of these regulations by the

    Commission * * *.'' The language ``after the effective date of these

    regulations'' is no longer relevant and, accordingly, the Commission is

    proposing to delete the language.

    Finally, for purposes of clarification and consistency with the

    Commission's regulations the Commission is proposing to amend language

    within regulation 1.10(h) that references ``NFA'' by spelling out

    ``National Futures Association.''

    III. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.,

    requires that agencies, in proposing regulations, consider the impact

    of those regulations on small businesses. The amendments proposed

    herein would affect FCMs and IBs. The Commission has previously

    determined that, based upon the fiduciary nature of FCM/customer

    relationships, as well as the requirement that FCMs meet minimum

    financial requirements, FCMs should be excluded from the definition of

    small entity.

    With respect to IBs, the Commission stated that it is appropriate

    to evaluate within the context of a particular rule proposal whether

    some or all IBs should be considered to be small entities and, if so,

    to analyze the economic impact on such entities at that time.\16\ The

    Proposal will not place any additional burdens on IBs that are small

    businesses because all such parties, if any, already are subject to the

    financial reporting and notice requirements under Regulations 1.10 and

    1.12 and already file financial reports through NFA's electronic filing

    system. Additionally, although the Commission is proposing to add a

    requirement to include statements of income and loss as part of non-

    certified financial report filings, substantially all IBs already are

    filing this data in practice and, in any event, must compute the

    relevant income and loss data (although not currently required to be

    provided in a separate income statement) in order to complete

    Commission Form 1-FR or the SEC FOCUS report, as applicable, under the

    Commission's regulations.\17\ Accordingly, pursuant to Section 3(a) of

    the RFA, 5 U.S.C. 605(b), the Chairman, on behalf of the Commission,

    certifies that these proposed rule amendments will not have a

    significant economic impact on a substantial number of small entities.

    However, the Commission invites the public to comment on this finding.

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

    \16\ See 48 FR 35248, 35275-78 (Aug. 3, 1983).

    \17\ See Commission Regulations 1.10(b)(2) and 1.10(h)

    (requiring IBs to file with the Commission Form 1-FR-FCM or, as an

    alternative in the case of a registered broker or dealer with the

    SEC, the FOCUS report).

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

    B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \18\ imposes certain

    requirements on federal agencies (including the Commission) in

    connection with their conducting or sponsoring any collection of

    information as defined by the PRA. The Proposal does not require a new

    collection of information on the part of any entities subject to the

    proposed amendments. The amendments would, if adopted in final form,

    provide FCMs and IBs with an alternative method for submitting certain

    data. The amendments proposed under Regulation 1.12(a)(2) would provide

    FCMs and IBs with a more flexible approach to providing documentation

    if a registrant's adjusted net capital fell below its minimum

    requirement, but would not require a new collection or affect the

    collection burden, as discussed below. Additionally, although the

    Commission is proposing to add a requirement to include statements of

    income and loss as part of non-certified financial report filings,

    substantially all registrants that file financial reports with the

    Commission already are filing this data.

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

    \18\ 44 U.S.C. 3507(d).

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

    Collection of Information

    (Regulations and Forms Pertaining to the Financial Integrity of the

    Marketplace, OMB Control Number 3038-0024). Although the amendments if

    promulgated in final form would alter the method of collection of some

    of the information required in the above referenced collection, would

    provide a simpler approach of documenting compliance with certain

    regulatory obligations, and would add a requirement to include an

    additional statement as part of non-certified financial report filings,

    the estimated burden associated with this collection is not expected to

    increase or decrease as a result. The Commission is proposing to add a

    requirement for certain registrants to include statements of income and

    loss as part of their monthly non-certified financial report filings

    with the Commission. Substantially all registrants that file financial

    reports with the Commission already are filing this data in practice,

    however. Additionally, to the extent a firm did not already file this

    report with the Commission monthly, it would, nonetheless, need to have

    this information computed and available in order to file other

    currently required reports. Filing the information with the Commission

    would require nothing more than inputting a few extra data items into a

    form already required to be filed. Accordingly, the burden associated

    with such a filing already is included in the estimated burden for this

    collection. With respect to proposed

    [[Page 52439]]

    rule amendments that would permit certain entities to file

    electronically reports and notices that currently are filed in paper

    form, all such affected entities currently must complete these same

    reports and notices. The amendments would simply substitute electronic

    submission for the mailing of a paper filing. With respect to rule

    amendments concerning the documentation required of FCMs and IBs that

    fall below their required net capital requirements, these amendments

    would provide registrants with more flexibility in choosing the form

    documentation will take when providing the Commission with required

    information. The Commission believes, however, that the burden

    associated with preparing such documentation would be equivalent to

    that required under current regulations. Additionally, although the

    amendments allow the Commission to request registrants to provide

    additional documentation on request, this is simply a clarification of,

    rather than a change to, current regulations and practice and would not

    affect the collection burden. Accordingly, for purposes of the PRA, the

    Commission certifies that the proposed rule amendments, if promulgated

    in final form, would not impact the total annual reporting or

    recordkeeping burden associated with the above-referenced collection of

    information, which has been approved previously by the Office of

    Management and Budget (``OMB''). Pursuant to the PRA, the Commission

    has submitted a copy of this section to OMB for its review.

    The Commission considers comments by the public on this proposed

    collection of information in--

    Evaluating whether the proposed collection of information is

    necessary for the proper performance of the functions of the

    Commission, including whether the information will have a practical

    use;

    Evaluating the accuracy of the Commission's estimate of the burden

    of the proposed collection of information, including the validity of

    the methodology and assumptions used;

    Enhancing the quality, 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

    submission 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 Commission. OMB is required to make a decision

    concerning the collection of information contained in these proposed

    regulations between 30 and 90 days after publication of this 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 to

    comment to the Commission on the proposed regulations. Copies of the

    information collection submission to OMB are available from the CFTC

    Clearance Officer, 1155 21st Street, NW., Washington, DC 20581 or (202)

    418-5160.

    C. Cost-Benefit Analysis

    Section 15(a) of the Act, as amended by Section 119 of the

    Commodity Futures Modernization Act, requires the Commission to

    consider the costs and benefits of its action before issuing a new

    regulation under the Act. By its terms, Section 15(a) as amended does

    not require the Commission to quantify the costs and benefits of a new

    regulation or to determine whether the benefits of the proposed

    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:

    protection of market participants and the public; efficiency,

    competitiveness, and financial integrity of futures markets; price

    discovery; sound risk management practices; and other public interest

    considerations. The Commission, in its discretion, can choose to give

    greater weight to any one of the five enumerated areas and determine

    that, notwithstanding its costs, a particular regulation 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 Act.

    The Commission has considered the costs and benefits of this

    proposed regulation in light of the specific provisions of Section

    15(a) of the Act, as follows:

    1. Protection of market participants and the public. The proposed

    amendments should not affect the protection of market participants and

    the public as they generally provide an alternate method of delivery of

    information contained in certain reports and notice filings currently

    required or permitted by Commission regulations but do not

    substantively alter the character of such information.

    2. Efficiency and competition. The Commission anticipates that the

    proposed amendments will benefit efficiency by permitting the

    Commission and NFA to streamline their processes for receiving

    financial reports and various notice filings from FCMs and IBs and

    providing greater flexibility to registrants in providing certain

    required documentation to the Commission. The proposed amendments are

    considered by the Commission as benefiting efficiency and not impacting

    competition.

    3. Financial integrity of futures markets and price discovery. The

    proposed amendments should have no effect, from the standpoint of

    imposing costs or creating benefits, on the financial integrity of

    futures markets or the price discovery function of such markets.

    4. Sound risk management practices. The proposed amendment should

    have no effect, from the standpoint of imposing costs or creating

    benefits, on sound risk management practices.

    5. Other public interest considerations. The Commission believes

    that the proposed regulations are beneficial in that they should

    encourage improvements to future systems of electronic authorization

    and streamline the timeliness of delivery and electronic accessibility

    of notices to and by the Commission and NFA as well as allow the

    Commission and NFA to retain such reports in a more streamlined manner.

    After considering these factors, the Commission has determined to

    propose the amendments discussed above. 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 in 17 CFR Part 1

    Brokers, Commodity futures, Reporting and recordkeeping

    requirements.

    In consideration of the foregoing and pursuant to the authority

    contained in the Commodity Exchange Act and, in particular, Sections

    4f, 4g and 8a(5) thereof, 7 U.S.C. 6f, 6g and 12a(5), the Commission

    hereby proposes to amend 17 CFR part 1 as follows:

    [[Page 52440]]

    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, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,

    6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c,

    13a, 13a-1, 16, 16a, 19, 21, 23 and 24, as amended by the Commodity

    Futures Modernization Act of 2000, appendix E of Pub. L. 106-554,

    114 Stat. 2763 (2000).

    2. Section 1.10 is amended by removing paragraph (b)(2)(iii) and

    revising paragraphs (b)(2)(i), (b)(2)(ii)(A), (b)(3), (c)(1) and

    (c)(2), (d)(1)(ii), (d)(4)(iii), and (h) to read as follows:

    Sec. 1.10 Minimum financial requirements for futures commission

    merchants and introducing brokers.

    * * * * *

    (b) * * *

    (2)(i) Except as provided in paragraphs (b)(3) and (h) of this

    section, and except for an introducing broker operating pursuant to a

    guarantee agreement which is not also a securities broker or dealer,

    each person registered as an introducing broker must file a Form 1-FR-

    IB semiannually as of the middle and the close of each fiscal year.

    Each Form 1-FR-IB must be filed no later than 17 business days after

    the date for which the report is made.

    (ii)(A) In addition to the financial reports required by paragraph

    (b)(2)(i) of this section, each person registered as an introducing

    broker must file a Form 1-FR-IB as of the close of its fiscal year

    which must be certified by an independent public accountant in

    accordance with Sec. 1.16 no later than 90 days after the close of

    each introducing broker's fiscal year: Provided, however, that a

    registrant which is registered with the Securities and Exchange

    Commission as a securities broker or dealer must file this report not

    later than the time permitted for filing an annual audit report under

    Sec. 240.17a-5(d)(5) of this title.

    * * * * *

    (3) The provisions of paragraphs (b)(1) and (b)(2) of this section

    may be met by any person registered as a futures commission merchant or

    as an introducing broker who is a member of a designated self-

    regulatory organization and conforms to minimum financial standards and

    related reporting requirements set by such designated self-regulatory

    organization in its bylaws, rules, regulations, or resolutions and

    approved by the Commission pursuant to Section 4f(b) of the Act and

    Sec. 1.52: Provided, however, That each such registrant shall promptly

    file with the Commission a true and exact copy of each financial report

    which it files with such designated self-regulatory organization.

    * * * * *

    (c) Where to file reports. (1) Form 1-FR filed by an introducing

    broker pursuant to paragraph (b)(2) of this section need be filed only

    with, and will be considered filed when received by, the National

    Futures Association. Other reports or information 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

    designated self-regulatory organization, if any; and reports or other

    information required to be filed by this section by an applicant for

    registration will be considered filed when received by the National

    Futures Association. Any report or information filed with the National

    Futures Association pursuant to this paragraph shall be deemed for all

    purposes to be filed with, and to be the official record of, the

    Commission.

    (2)(i) Except as provided in the last sentence of this

    subparagraph, all filings or other notices prepared by a futures

    commission merchant 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 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. A Form 1-FR required to be certified by an

    independent public accountant in accordance with Sec. 1.16 which is

    filed by a futures commission merchant must be filed in paper form and

    may not be filed electronically.

    (ii) Except as provided in paragraph (h) of this section, all

    filings or other notices or applications prepared by an introducing

    broker or applicant for registration as an introducing broker or

    futures commission merchant pursuant to this section must be filed

    electronically in accordance with electronic filing procedures

    established by the National Futures Association. In the case of a Form

    1-FR-IB that is required to be certified by an independent public

    accountant in accordance with Sec. 1.16, a paper copy of any such

    filing with the original manually signed certification must be

    maintained by the introducing broker or applicant for registration as

    an introducing broker in accordance with Sec. 1.31.

    * * * * *

    (d) * * *

    (1) * * *

    (ii) Statements of income (loss) and 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;

    * * * * *

    (4) * * *

    (iii) 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 this

    paragraph.

    * * * * *

    (h) Filing option available to a futures commission merchant or an

    introducing broker that is also a securities broker or dealer. Any

    applicant or registrant which is registered with the Securities and

    Exchange Commission as a securities broker or dealer may comply with

    the requirements of this section by filing (in accordance with

    paragraphs (a), (b), (c), and (j) of this section) a copy of its

    Financial and Operational Combined Uniform Single Report under the

    Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE

    (FOCUS Report), in lieu of Form 1-FR; Provided, however, That all

    information which is required to be furnished on and submitted with

    Form 1-FR is provided with such FOCUS Report; and Provided, further,

    That a certified FOCUS Report filed by an introducing broker or

    applicant for registration as an introducing broker in lieu of a

    certified Form 1-FR-IB must be filed according to National Futures

    Association rules, either in paper form or electronically, in

    accordance with procedures established by the National Futures

    Association, and if filed electronically, a paper copy of such filing

    with the original manually signed certification must be maintained by

    such introducing broker or applicant in accordance with Sec. 1.31.

    * * * * *

    3. Section 1.12 is amended by:

    a. Revising paragraphs (a)(2) and (i)(1);

    b. Removing paragraph (a)(3); and

    [[Page 52441]]

    c. Adding paragraph (i)(3).

    The revisions and addition read as follows:

    Sec. 1.12 Maintenance of minimum financial requirements by futures

    commission merchants and introducing brokers.

    (a) * * *

    (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.

    * * * * *

    (i)(1) Every notice and written report required to be given or

    filed by this section (except for notices required by paragraph (f) of

    this section) by a futures commission merchant or a 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, with the principal office of the

    Commission in Washington, DC, with the designated self-regulatory

    organization, if any, and with the Securities and Exchange Commission,

    if such registrant is a securities broker or dealer. Every notice and

    written report required to be given or filed by this section by an

    applicant for registration as a futures commission merchant must be

    filed with the National Futures Association (on behalf of the

    Commission), with the designated self-regulatory organization, if any,

    and with the Securities and Exchange Commission, if such applicant is a

    securities broker or dealer. Any notice or report filed with the

    National Futures Association pursuant to this paragraph shall be deemed

    for all purposes to be filed with, and to be the official record of,

    the Commission.

    * * * * *

    (3) Every notice or report required to be provided in writing to

    the Commission under this section may, in lieu of facsimile, be filed

    via electronic transmission 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. 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.

    * * * * *

    Issued in Washington, DC on October 6, 2009 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E9-24480 Filed 10-9-09; 8:45 am]

    Last Updated: October 13, 2009