[Federal Register: April 19, 2001 (Volume 66, Number 76)]
[Proposed Rules]
[Page 20118-20121]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19ap01-11]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 41 and 140

RIN 3038-AB81


Exemption for Certain Brokers or Dealers from Provisions of the
Commodity Exchange Act and CFTC Regulations

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules and request for comment.

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SUMMARY: In accordance with certain provisions of the Commodity Futures
Modernization Act of 2000 ("CFMA"), the Commodity Futures Trading
Commission ("Commission" or "CFTC") is proposing to adopt a new
rule establishing procedures for granting orders exempting certain
brokers or dealers ("BDs") registered with the Securities and
Exchange Commission ("SEC") from provisions of the Commodity Exchange
Act (the "Act") and/or the Commission's regulations where the
Commission determines that the exemption is necessary or appropriate in
the public interest and consistent with the protection of investors.
The Commission is also requesting comments regarding particular
provisions of the Act and Commission rules from which BDs should be
exempted by rule (in addition to the specific exemptive provisions of
the CFMA).

DATES: Comments must be received by May 21, 2001.

ADDRESSES: Comments on the proposed rules may be sent to Jean A. Webb,
Secretary of the Commission, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581.
In addition, comments may be sent by facsimile transmission to
facsimile number (202) 418-5521, or by electronic mail to
secretary@cftc.gov. Reference should be made to "Exemption for Certain
Brokers or Dealers from Provisions of the Commodity Exchange Act and
CFTC Regulations."

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief
Counsel, or Christopher W. Cummings, Special Counsel, Division of
Trading and Markets, Commodity Futures Trading Commission, 1155 21st
Street, N.W., Washington, D.C. 20581, telephone number: (202) 418-5450,
facsimile number: (202) 418-5536, electronic mail: lpatent@cftc.gov, or
ccummings@cftc.gov.

SUPPLEMENTARY INFORMATION:

I. Background

    The CFMA, signed into law on December 21, 2000, effected, among
other things, removal of the restriction in the Commodity Exchange Act
(the "Act") \1\ on the trading of futures contracts on individual
equity securities and narrow-based indices of equity securities.\2\
Under the revised law, security futures products \3\ may be traded on a
designated contract market or on a registered derivatives transaction
execution facility ("DTF").\4\
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    \1\ 7 U.S.C. 1 et seq., as amended by Pub. L. No. 106-554, 114
Stat. 2763 (2000). The text of the CFMA may be accessed on the
Internet at http://agriculture.house.gov/txt5660.pdf.
    \2\ See Section 251(a) of the CFMA. This trading previously had
been prohibited by Section 2(a)(1)(B)(v) of the CEA.
    \3\ The term "security futures product" is defined in Section
1a(32) of the CEA to mean "a security future or any put, call,
straddle, option, or privilege on any security future." The term
"security future" is defined in Section 1a(31) of the CEA. Because
the CFMA also provides that options on security futures cannot be
traded until December 21, 2003 at the earliest, security futures are
the only security futures product that may be available for trading
during the next 32 months.
    \4\ The CFMA also specifically prescribes certain dates on which
security futures trading can commence. Specifically, principal-to-
principal transactions between institutions cannot commence until
August 21, 2001, and retail transactions cannot commence until
December 21, 2001. Both starting dates are conditioned upon the
registration of a futures association (i.e., National Futures
Association ("NFA")) as a limited purpose national securities
association under the Securities Exchange Act of 1934 (" '34
Act"). Section 202(a) of the CFMA; Section 6(g)(5) of the '34 Act.
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    Section 4d of the Act provides that any person who engages in
soliciting or accepting orders for the purchase or sale of any
commodity for future delivery on or subject to the rules of any
designated contract market or DTF--e.g., for a security futures
product--must be registered with the Commission as: (1) a futures
commission merchant ("FCM"), if it also accepts any money,
securities, or property, or extends credit in lieu thereof, to margin,
guarantee, or secure futures contracts; or (2) an introducing broker
("IB") if it does not accept money or other property to margin,
guarantee or secure futures contracts.\5\ Section 4f(a)(1) of the Act
provides that application for registration as an FCM or IB "shall be
made in such form and manner as prescribed by the Commission." \6\
Pursuant to this

[[Page 20119]]

authority, the Commission adopted Rule 3.10, which currently requires
that an applicant for registration as an FCM or IB file prescribed
registration and financial report forms.\7\
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    \5\ See Sections 1a(20) and (23) of the CEA, which define the
terms "futures commission merchant" and "introducing broker,"
respectively.
    \6\ Prior to the enactment of the CFMA, this provision was found
in Section 4f(a) of the CEA. The CFMA (at Section 252(b)) amended
Section 4(f) by redesignating paragraph (a) as paragraph (a)(1) and
by adding new paragraphs (a)(2) and (a)(3) (Section 252(b)(2) of the
CFMA) and (a)(4) (Section 252(c) of the CFMA).
    \7\ Commission regulations referred to herein are found at 17
CFR Ch. I (2000).
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    However, as a result of the CFMA, new Section 4f(a)(2) of the Act
\8\ now provides that, notwithstanding Section 4f(a)(1), any BD \9\
that is registered with the SEC shall be registered as an FCM or IB, as
applicable, "effective contemporaneously with the submission of
notice," if:
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    \8\ As set forth in Section 252(b) of the CFMA.
    \9\ Because the CFMA speaks in terms of a "broker or dealer,"
the term "BD" as used in this release applies equally to a broker,
a dealer or a person registered as both a broker and a dealer.
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    (A) the broker or dealer limits its solicitation of orders,
acceptance of orders, or execution of orders, or placing of orders on
behalf of others involving any contracts of sale of any commodity for
future delivery, on or subject to the rules of any contract market or
registered derivatives transaction execution facility to security
futures products;
    (B) the broker or dealer files written notice with the Commission
in such form as the Commission, by rule, may prescribe containing such
information as the Commission, by rule, may prescribe as necessary or
appropriate in the public interest or for the protection of investors;
    (C) the registration of the broker or dealer is not suspended
pursuant to an order of the Securities and Exchange Commission; and
    (D) the broker or dealer is a member of a national securities
association registered pursuant to section 15A(a) of the Securities
Exchange Act of 1934.

    Accordingly, in a separate Federal Register release the Commission
is proposing to amend Rule 3.10 to provide for FCM and IB notice
registration thereunder.\10\
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    \10\ Section 4k(1) of the Act currently requires each person who
is an associated person ("AP") of an FCM or IB to register as
such. The CFMA exempts from registration the APs of FCMs and IBs who
would be subject to notice registration.
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    New Section 4f(a)(3) of the Act \11\ provides a similar exemption
(without the notice filing requirement) from the requirement under
Section 4e of the Act to register as a floor broker ("FB") or floor
trader ("FT"). An FB or FT is exempt from registration as such if:
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    \11\ As set forth in Section 252(b) of the CFMA.
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    (A) the floor broker or floor trader is a broker or dealer
registered with the Securities and Exchange Commission;
    (B) the floor broker or floor trader 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; \12\ and
    (C) the registration of the floor broker or floor trader is not
suspended pursuant to an order of the Securities and Exchange
Commission.
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    \12\ Of course, an FT is restricted to executing orders for his
or her own account and the Commission does not view this provision
of the CFMA as expanding the scope of activities in which an FT may
engage.
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    Persons registered as FCMs or IBs pursuant to the notice
registration procedure of new Section 4f(a)(2) and persons who are
exempt from FB or FT registration pursuant to new Section 4f(a)(3) are
expressly exempted by new Section 4f(a)(4) \13\ from certain enumerated
provisions of the Act, as well as those of the Commission's rules that
were promulgated under those provisions.\14\ In addition to the
statutory exemption granted to such persons from the foregoing
specified sections of the Act, under the CFMA the Commission is
authorized, by rule, regulation or order, to exempt, conditionally or
unconditionally, from any provision of the Act or the Commission's
rules, any BD subject to the notice filing requirements of new Section
4f(a)(2) or exempt from FB or FT registration under new Section
4f(a)(3), to the extent the exemption is necessary or appropriate in
the public interest and is consistent with the protection of
investors.\15\ By this Federal Register release, the Commission is
seeking comments regarding specific sections of the Act or provisions
of the Commission's rules, beyond those already specified in the CFMA,
from which such BDs should be made exempt by rule.
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    \13\ As set forth in Section 252(c) of the CFMA.
    \14\ Those provisions include: Section 4c(b)-- regulation of
commodity options trading by the Commission; Section 4c(d)--dealer
options exemption; Section 4c(e)--Commission authority to ban dealer
options; Section 4c(g)--requirement for contemporaneous, written
record of all orders for execution on the floor or subject to the
rules of a designated contract market or DTF; Section 4d--
registration requirements for FCMs and IBs and customer funds
segregation requirement for FCMs; Section 4e--registration
requirement for FBs and FTs; Section 4h--prohibition of
misrepresentation that a person is a member of a registered entity,
that a person is registered with the Commission, or that a futures
contract will be or has been executed on a registered entity;
Section 4f(b)--FCM and IB minimum financial requirements; Section
4f(c)--FCM risk assessment requirement; Section 4j--restrictions on
dual trading in security futures products; Section 4k(1)--
registration requirement for APs of FCMs and IBs; Section 4p--
proficiency testing and ethics training requirements for
registrants; Section 6d--State causes of action under the Act and
Commission right to intervene or appeal; Section 8(d)--Commission's
obligation to investigate commodity marketing conditions and to
furnish reports to producers, consumers and distributors; Section
8(g)--Commission obligation to disclose information concerning
registrants to State governments and political subdivisions thereof;
and Section 16--Commission authority to investigate markets and to
furnish reports to the public on a regular basis. APs of BDs who
limit their futures-related activities to security futures products
are also exempt from registration under the Act and the same
provisions of the Act and rules thereunder cited in this footnote.
See Section 252(d) of the CFMA, purporting to add a new Section
4k(5) of the Act. There was a pre-existing Section 4k(5) in the Act,
so the new section should probably be designated as Section 4k(6).
    \15\ New Section 4f(a)(4)(B)(i) of the Act, as set forth in
Section 252(c) of the CFMA. The CFMA does not grant corresponding
authority to the SEC with respect to FCMs who notice-register as BDs
to engage in security futures transactions.
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    The CFMA also directs the Commission to determine, by rule or
regulation, the procedures under which an order under new Section
4f(a)(4)(B) shall be granted.\16\ In response to this directive, the
Commission is proposing the rule changes set forth herein.\17\
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    \16\ New Section 4f(a)(4)(B)(ii) of the Act, as set forth in
Section 252(c) of the CFMA.
    \17\ The final subparagraph of new Section 4f(a)(4) provides
that: (1) a person that is notice-registered as an FCM pursuant to
new Section 4f(a)(2) or an AP thereof, or that is an FB or FT exempt
from registration under new Section 4f(a)(3), need not become a
member of a registered futures association (i.e., the National
Futures Association); and (2) a registered futures association may
not prevent its members from transacting business with a person that
is exempt under new Sections 4f(a)(2) or (a)(3).
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II. Application for an Order Granting Additional Exemptive Relief

    New Section 4f(a)(4)(B)(i) of the Act provides that the Commission
may issue an order to exempt, conditionally or unconditionally, any BD
subject to notice registration under new Section 4f(a)(2) of the Act,
or any BD exempt from floor broker or floor trader registration
pursuant to new Section 4f(a)(3), from any provision of the Act or any
provision of the Commission's regulations to the extent that the
exemption is necessary or appropriate in the public interest and is
consistent with the protection of investors. New Section
4f(a)(4)(B)(ii) directs the Commission to determine the procedures by
which an exemptive order under Section 4f(a)(4)(B) shall be granted,
and vests the Commission with sole discretion to decline to entertain
any application for such an order.\18\ Accordingly, the Commission is
proposing, in this rulemaking, procedures for applying for an exemptive
order under Section 4f(a)(4)(B) of the Act. Of course, exemption from
the sections of the Act listed in Section 4f(a)(4)(A) is automatic.

[[Page 20120]]

Accordingly, it is unnecessary for persons to request such orders.
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    \18\ The CFMA places no corresponding obligation upon the SEC.
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    Proposed Rule 41.41 calls for applicants to supply either a written
application or an electronic mail submission containing the applicant's
name, main business address and phone number, information about the
applicant's registration status with the SEC (and assurance that the
registration is not subject to a suspension), the specific section(s)
of the Act or provision(s) of Commission rules from which exemption is
sought, any applicable analogous provisions of the securities laws and
regulations, an explanation of the facts and circumstances under which
the applicant believes that the requested exemptive relief is necessary
or appropriate in the public interest; and an explanation of the extent
to which the requested exemptive relief is consistent with the
protection of investors. The last two items constitute the basis upon
which the CFMA requires the Commission to base the grant of a request
for an order. The proposed rule also states that the grant or denial of
a request is within the Commission's sole discretion (as specifically
provided in the CFMA).

III. Delegation of Authority

    The Commission is proposing to delegate to the Director of the
Division of Trading and Markets authority to grant or deny applications
for exemptive orders under proposed Rule 41.41. With respect to the
granting and denying of applications for exemptive orders the
delegation is intended to expedite the procedure and to place it with
the staff members most directly involved in exemptive matters. The
Commission believes that this delegation will maximize regulatory
efficiency with respect to these proposed rule changes.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act ("RFA"), 5 U.S.C. 601-611 (1994),
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The rule amendments discussed herein
would affect persons registered under notice-registration procedures as
FCMs or as IBs, and persons who are exempt from FB or FT registration
pursuant to new Section 4f(a)(3). The Commission has previously
established certain definitions of "small entities" to be used by the
Commission in evaluating the impact of its rules on such entities in
accordance with the RFA.\19\ The Commission previously determined that
registered FCMs are not small entities for the purpose of the RFA.\20\
With respect to IBs, the Commission has stated that it would evaluate
within the context of a particular rule proposal whether all or some
affected IBs would be considered to be small entities and, if so, the
economic impact on them of any rule.\21\
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    \19\ 47 FR 18618-21 (April 30, 1982).
    \20\ 47 FR at 18619-20.
    \21\ 47 FR at 18618, 18620.
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    The amendments proposed herein do not impose any new burdens upon
persons registered as FCMs or IBs pursuant to the notice registration
procedure of new Section 4f(a)(2) and persons who are exempt from FB or
FT registration pursuant to new Section 4f(a)(3). Rather, these
amendments establish procedures for requesting additional exemptive
relief from provisions of the Act and/or the Commission's regulations
for such persons. Consequently, the Commission believes that the
adoption of these rule amendments will in many cases reduce the burden
of compliance by persons notice-registered as FCMs or IBs and persons
who are exempt from FB or FT registration pursuant to new Section
4f(a)(3). Accordingly, the Acting Chairman of the Commission hereby
certifies, pursuant to 5 U.S.C. 605(b), that the proposed rule will not
have a significant economic impact on a substantial number of small
entities. Nonetheless the Commission specifically requests comment on
the impact this proposed rule may have on small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 ("PRA") \22\ 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 Commission has submitted a copy
of this part to the Office of Management and Budget ("OMB") for its
review.
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    \22\ 44 U.S.C. 3501 et seq.
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Collection of Information
    Requests for no-action, exemptive and interpretative letters. OMB
Control Number 3038-0049.
    The effect of the proposed rule will be to increase the burden
previously approved by OMB by 1,000 hours because of the application
for exemptive orders. The burden associated with the proposed addition
of Rule 41.41 is estimated to be 1,000 hours, which will result from
the application for exemptive orders by persons currently registered as
BDs with the SEC who either choose to register as FCMs or IBs pursuant
to the notice registration procedure of new Section 4f(a)(2) of the
Act, or are exempt from FB or FT registration pursuant to new Section
4f(a)(3).
    The estimated burden of the proposed new rule was calculated as
follows:
    Estimated number of respondents: 5,000.
    Reports annually by each respondent: .4.
    Total annual Responses: 2,000.
    Estimated average Number of Hours Per Response: .5.
    Estimated Total Number of Hours of Annual Burden in Fiscal Year:
1,000.
    Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, Room 10235 New Executive
Building, Washington, DC 20503, Attention: Desk Officer for the
Commodity Futures Trading Commission.
    The Commission considers comments by the public on this proposed
collection of information in--
     Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
     Evaluating the accuracy of the Commission's estimate of
the burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the
information to be collected; and
     Minimizing the burden of collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
    OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register. A
comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of publication. This does not affect the
deadline for the public to comment to the Commission on the proposed
regulations.
    Copies of the information collection submission to OMB are
available from

[[Page 20121]]

the CFTC Clearance Officer, 1155 21st Street, NW, Washington, DC 20581,
(202) 418-5160.

C. Cost-Benefit Analysis

    Section 119 of the CFMA amended Section 15 of the Act to require
that the Commission, before promulgating a regulation under the Act or
issuing an order, consider the costs and benefits of the Commission's
action in light of five criteria.\23\ The main considerations relevant
to this proposal are the first two considerations set forth in the Act,
"protection of market participants and the public" and "efficiency,
competitiveness and financial integrity of the futures markets." The
Commission notes that the CFMA specifically mandates that procedures be
established by which notice-registered FCMs and IBs and persons exempt
from registering as FBs or FTs may seek orders granting additional
exemptive relief beyond that specifically granted by the CFMA to such
persons. The CFMA further authorizes the Commission to provide such
exemptive relief, conditionally or unconditionally, by means of
rulemaking. Accordingly, this proposal to adopt Rule 41.41 and the
accompanying request for comments on provisions as to which further
exemptive rulemaking may be appropriate are published in compliance
with requirements that Congress has determined to be in the public
interest.
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    \23\ These considerations include: (A) protection of market
participants and the public; (B) efficiency, competitiveness, and
financial integrity of futures markets; (C) price discovery; (D)
sound risk management practices; and (E) other public interest
considerations.
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Lists of Subjects

17 CFR Part 41

    Security futures products.

17 CFR Part 140

    Authority delegations.
    For the reasons stated in the preamble, the Commission proposes to
amend Chapter I of Title 17 of the Code of Federal Regulations as
follows:

PART 41--SECURITY FUTURES PRODUCTS

    1. The authority citation for Part 41 is revised to read as
follows:

    Authority: Pub. L. 106-554, 114 Stat. 2763, section 252.
    2. Section 41.41 is added to read as follows:


Sec. 41.1-41.40  [Reserved]


Sec. 41.41  Application for an exemptive order pursuant to section
4f(a)(4)(B) of the Act.

    (a) Any futures commission merchant or introducing broker
registered in accordance with the notice registration provisions of
Sec. 3.10 of this chapter, or any broker or dealer exempt from floor
broker or floor trader registration pursuant to section 4f(a)(3) of the
Act, may apply to the Commission for an order pursuant to section
4f(a)(4)(B) of the Act granting exemption to such person from any
provision of the Act or the Commission's regulations other than
sections 4c(b), 4c(d), 4c(e), 4c(g), 4d, 4e, 4h, 4f(b), 4f(c), 4j,
4k(1), 4p, 6d, 8(d), 8(g), and 16 of the Act and the rules thereunder.
    (b) An application pursuant to this section must set forth in
writing or in an electronic mail message the following information:
    (1) The name, main business address and main business telephone
number of the person applying for an order;
    (2) The capacity in which the person is registered with the
Securities and Exchange Commission and the person's CRD number (if a
member of the National Association of Securities Dealers, Inc.) or
equivalent self-regulatory organization identification, together with a
certification, if true, that the person's registration is not suspended
pursuant to an order of the Securities and Exchange Commission;
    (3) The particular section(s) of the Act and/or provision(s) of the
Commission's regulations with respect to which the person seeks
exemption;
    (4) Any provision(s) of the securities laws or rules, or of the
rules of a securities self-regulatory organization analogous to the
provision(s);
    (5) A clear explanation of the facts and circumstances under which
the person believes that the requested exemptive relief is necessary or
appropriate in the public interest; and
    (6) A clear explanation of the extent to which the requested
exemptive relief is consistent with the protection of investors.
    (c) An application for an order must be submitted to the Director
of the Division of Trading and Markets, Commodity Futures Trading
Commission, 1155 21st Street, N.W., Washington, D.C. 20581, if in paper
form, or to  tm@cftc.gov if submitted via electronic mail.
    (d) The Commission may, in its sole discretion, grant the
application, deny the application, or grant the application subject to
one or more conditions.

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

    3. The authority citation for Part 140 continues to read as
follows:

    Authority: 7 U.S.C. 4a and 12a.

    4. Section 140.91 is amended by adding and reserving paragraph
(a)(7) and adding new paragraph (a)(8) to read as follows:


Sec. 140.91  Delegation of authority to the Director of the Division of
Trading and Markets.

    (a) * * *
    (7) [Reserved.]
    (8) All functions reserved to the Commission in Sec. 41.41 of this
chapter.
* * * * *

    Issued in Washington, D.C. on April 12, 2001, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-9586 Filed 4-18-01; 8:45 am]
BILLING CODE 6351-01-P