[Federal Register: May 17, 2001 (Volume 66, Number 96)]
[Proposed Rules]
[Page 27476-27480]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17my01-15]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 3 and 170

RIN Number: 3038-AB84


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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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") is proposing to amend Rule 3.10, which
specifies the information that various applicants for registration must
file. The amendment would provide for notice registration as a futures
commission merchant ("FCM") or introducing broker ("IB"), as
applicable, in the case of a broker or dealer ("BD") registered with
the Securities and Exchange Commission ("SEC") that, among other
things, limits its involvement with commodity futures contracts to
security futures products. In accordance with

[[Page 27477]]

certain other provisions of the CFMA, the Commission is proposing to
amend Rule 170.15, which requires each registered FCM to be a member of
a registered futures association. The amendment would exempt notice-
registered BDs from this requirement.

DATES: Comments must be received by June 18, 2001.

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

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

SUPPLEMENTARY INFORMATION:

I. Background

    On December 21, 2000, the CFMA was signed into law.\1\ Among other
things, the CFMA removed the restriction in the Commodity Exchange Act
("CEA") on the trading of futures contracts on individual equity
securities and narrow-based indices of equity securities.\2\ Under the
revised law, security futures products \3\ may be traded on a
designated contract market or on a registered derivatives transaction
execution facility.\4\
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    \1\ Pub. L. No. 106-554, 114 Stat. 2763. The text of the CFMA
may be accessed on the Internet at http://agriculture.house.gov/txt5660.pdf.
    \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 at least December 21, 2003, security futures are the
only security futures product that may be available for trading
during the next 31 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 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 CEA provides that any person who engages in
soliciting or accepting orders for the purchase or sale of any
commodity for future delivery on or subject to the rules of any
contract market or derivatives transaction execution facility--e.g.,
for a security futures product--must be registered with the Commission
as (1) an FCM, if it also accepts any money, securities, or property,
or extends credit in lieu thereof, to margin, guarantee, or secure
contracts, or (2) otherwise as an IB.\5\ Section 4f(a)(1) of the CEA
provides that application for registration as an FCM or IB "shall be
made in such form and manner as prescribed by the Commission." \6\
Pursuant to this authority, the Commission adopted Rule 3.10, which
currently requires that an applicant for registration as an FCM or IB
file a Form 7-R \7\ along with a Form 1-FR-FCM or Form 1-FR-IB, as
applicable.\8\ In addition, Rule 170.15 requires that each person
required to register as an FCM must become and remain a member of at
least one registered futures association (i.e., NFA).
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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 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\ Rule 3.10(a)(1)(i). The Form 7-R, which requires general
information such as a list of the applicant's principals and the
applicant's disciplinary history, must be completed and filed with
NFA in accordance with the instructions thereto. NFA is registered
with the Commission as a registered futures association pursuant to
Section 17 of the CEA. By Rule 3.2 and various orders issued by the
Commission, the Commission has delegated to NFA the authority to
register, among other persons, FCMs and IBs. Commission rules
referred to herein are found at 17 CFR Ch. I (2001).
    \8\ Rule 3.10(a)(1)(ii). The Form 1-FR (-FCM or -IB) includes
detailed financial statements and schedules that display the
applicant's financial condition. Where the applicant is registered
with the SEC as a BD, it may accompany its Form 7-R with a copy of
its Financial and Operational Combined Uniform Single Report under
the '34 Act, Part II or Part IIA. See Rule 1.10(h).
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    However, as a result of the CFMA, new Section 4f(a)(2) of the CEA
now provides that notwithstanding Section 4f(a)(1), any BD that is
registered with the SEC \9\ shall be registered as an FCM or IB, as
applicable, "effective contemporaneously with the submission of
notice," if--
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    \9\ Because the CFMA speaks in terms of a "broker or dealer,"
the term "BD" as used in this release applies equally to a broker,
a dealer or a person registered as both a broker and a dealer.

    (A) the broker or dealer limits its solicitation of orders,
acceptance of orders, or execution of orders, or placing of orders
on behalf of others involving any contracts of sale of any commodity
for future delivery, on or subject to the rules of any contract
market or registered derivatives transaction execution facility to
security futures products;
    (B) the broker or dealer files written notice with the
Commission in such form as the Commission, by rule, may prescribe
containing such information as the Commission, by rule, may
prescribe as necessary or appropriate in the public interest or for
the protection of investors;
    (C) the registration of the broker or dealer is not suspended
pursuant to an order of the Securities and Exchange Commission; and
    (D) the broker or dealer is a member of a national securities
association registered pursuant to section 15A(a) of the Securities
Exchange Act of 1934.

Moreover, new Section 4f(a)(4)(C)(i) of the CEA provides that a BD that
is registered as an FCM pursuant to notice registration shall not be
required to become a member of a registered futures association.
Accordingly, by this Federal Register release, the Commission is
proposing to amend Rule 3.10 to provide for FCM and IB notice
registration thereunder and to amend Rule 170.15 to exclude from its
scope BDs notice-registered as FCMs.\10\
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    \10\ Section 4k(1) of the CEA generally requires each person who
is an associated person ("AP") of an FCM or IB to register as
such. Rule 3.12 generally requires an applicant for registration as
an AP to file a Form 8-R, which requires basic biographical
information, along with a sponsor's certification. It is not
necessary for the Commission to similarly propose notice
registration under Rule 3.12 for the APs of those FCMs and IBs who
would be subject to the proposed notice registration under Rule
3.10, because the CFMA exempts these APs from registration
altogether. Specifically, Section 252(d) of the CFMA amends Section
4(k) of the CEA to provide that:
    Any associated person of a broker or dealer that is registered
with the Securities and Exchange Commission, and who limits its
solicitation of orders, acceptance of orders, or execution of
orders, or placing of orders on behalf of others involving any
contracts of sale of any commodity for future delivery or any
options on such a contract, on or subject to the rules of any
contract market or registered derivatives transaction execution
facility to security futures products, shall be exempt from [Section
4k(1)] of this Act and the rules thereunder.
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II. Proposed Amendments

A. Rule 3.10

    Rule 3.10 currently is structured as follows: paragraph (a),
"Application for registration," contains the information that an
application for registration under the rule must contain; paragraph
(b), "Duration of registration," generally provides that registration
under paragraph (a) will continue until withdrawal or revocation;
paragraph (c),

[[Page 27478]]

"Exemption from registration for certain persons," provides an
exemption from registration as an FCM for certain persons; and
paragraph (d), "Annual filing," prescribes an annual review of a
printout of registration information on file with NFA for persons
registered pursuant to paragraph (a).
    The Commission is proposing to amend Rule 3.10 in several ways.
First, paragraph (a)(1)(i) would be revised to alert applicants for
registration that there is an alternative registration procedure under
new Rule 3.10(a)(3). Second, paragraph (a)(3) would be added. Captioned
"Notice registration as a futures commission merchant or introducing
broker for certain securities brokers or dealers," it would add an
exception to the FCM and IB registration requirements of Rule 3.10(a)
for BDs who meet the criteria of new Section 4f(a)(2) of the CEA.
Registration under paragraph (a)(3) would be made "by following such
procedures for notice registration as may be specified" by NFA. This
registration would be effective upon the filing of the notice
prescribed by NFA, as mandated by Section 252(b)(2) of the CFMA.
Finally, paragraph (d) would be amended to relieve these notice
registrants from the annual update requirement.
    The Commission's proposal is consistent with the Commission's
previous delegation of registration authority to NFA under Rule 3.2 and
through various Commission orders. The Commission believes that its
proposal is also consistent with Section 125 of the CFMA, which
requires the Commission to report to Congress later this year on a
study of the CEA and the Commission's rules, regulations and orders
governing the conduct of persons required to be registered under the
CEA. One area that the study must identify is "the regulatory
functions the Commission currently performs that can be delegated to a
registered futures association * * * and the regulatory functions that
the Commission has determined must be retained and the reasoning
therefor."
    As referred to above, notice registrant FCMs and IBs are exempt
from NFA membership.\11\ Although the Commission cannot require NFA to
perform registration functions for persons that are not NFA
members,\12\ the Commission may authorize NFA to perform any
registration function.\13\ Commission staff have discussed this matter
with NFA, and NFA has agreed to undertake the function of processing
notice registrations for BDs as discussed herein. If the Commission
adopts these amendments to Rule 3.10, it expects to issue an order
authorizing NFA to perform this function.
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    \11\ Section 252(c) of the CFMA; Section 4f(a)(4)(C) of the CEA.
    \12\ See Section 17(o)(1) of the CEA.
    \13\ Sections 8a(10) and 17(o)(2) of the CEA.
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B. Rule 170.15

    Section 17(m) of the CEA states that--

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

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

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act ("RFA"), 5 U.S.C. 601-611 (1994),
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The rule amendments discussed herein
would affect persons seeking to be registered under notice registration
procedures as an FCM or IB pursuant to new Section 4f(a)(2). The
Commission has previously established certain definitions of "small
entities" to be used by the Commission in evaluating the impact of its
rules on such entities in accordance with the RFA.\15\ The Commission
previously determined that registered FCMs are not small entities for
the purpose of the RFA.\16\ With respect to IBs, the Commission has
stated that it would evaluate within the context of a particular rule
proposal whether all or some affected IBs would be considered to be
small entities and, if so, the economic impact on them of any rule.\17\
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    \15\ 47 FR at 18618-21 (April 30, 1982).
    \16\ 47 FR at 18619-20.
    \17\ 47 FR at 18618, 18620.
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    These amendments would provide exemptive relief from provisions of
the Commission's regulations that otherwise would be applicable to such
persons. Consequently, the Commission believes that the adoption of
these rule amendments would reduce the burden of compliance by persons
seeking to be registered as an FCM or IB. Accordingly, the Acting
Chairman of the Commission hereby certifies, pursuant to 5 U.S.C.
605(b), that the proposed rule will not have a significant economic
impact on a substantial number of small entities. Nonetheless, the
Commission specifically requests comment on the impact this proposed
rule may have on small entities.

B. Paperwork Reduction Act

    This proposed rulemaking contains information collection
requirements within the meaning of the Paperwork Reduction Act of 1995
("PRA").\18\ The Commission has submitted a copy of this part to the
Office of Management and Budget ("OMB") for its review.
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    \18\ 44 U.S.C. 3501 et seq.
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Collection of Information
    Registration of future commission merchants, introducing brokers,
commodity trading advisors, commodity pool operators and leverage
transaction merchants, OMB Control Number 3038-0023.
    The burden associated with the proposed addition of Rule 3.10(a)(3)
is estimated to be 1,000 hours, which will result from the notice
registration as an FCM or IB of various persons who currently are
registered as BDs with the SEC.
    The estimated burden of the proposed new rule was calculated as
follows:
    Estimated number of respondents: 5,000.
    Reports annually by each respondent: 1.
    Total annual Responses: 5,000.
    Estimated average Number of Hours Per Response: 2.
    Estimated Total Number of Hours of Annual Burden in Fiscal Year:
1,000.
    There are no paperwork burdens associated with the proposed
amendments to Rule 3.10(d), which would clarify that the annual filing
prescribed therein does not apply to notice-registered BDs, or to Rule
170.15, which would exclude notice-registered BDs from the requirement
that each registered FCM must become and remain a member of NFA.
    Organizations and individuals desiring to submit comments on the

[[Page 27479]]

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

C. Cost-Benefit Analysis

    Section 119 of the CFMA amended Section 15 of the CEA to require
that the Commission, before promulgating a regulation under the CEA or
issuing an order, consider the costs and benefits of the Commission's
action in light of five criteria.\19\ The main considerations relevant
to this proposal are the first two considerations set forth in the CEA,
"protection of market participants and the public" and "efficiency,
competitiveness and financial integrity of the futures markets." The
Commission believes that persons who are registered as BDs with the SEC
are appropriate subjects for notice registration where their futures-
related activity is restricted to security futures products. The
Commission also believes that these additional registrants may promote
the efficiency and competitiveness of those futures markets on which
security future products may be traded and that their presence as
intermediaries in these markets may serve to promote the financial
integrity of those markets. The Commission further notes that the CFMA
specifically mandates that registered BDs be noticed-registered with
the Commission as an FCM or IB.
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    \19\ These considerations include: (A) protection of market
participants and the public; (B) efficiency, competitiveness, and
financial integrity of futures markets; (C) price discovery; (D)
sound risk management practices; and (E) other public interest
considerations.
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List of Subjects

17 CFR Part 3

    Brokers, Commodity futures, Reporting and recordkeeping
requirements.

17 CFR Part 170

    Authority delegations (Government agencies), Commodity futures.



    For the reasons discussed in the preamble, the Commission hereby
proposes to amend Chapter I of Title 17 of the Code of Federal
Regulations as follows:

PART 3--REGISTRATION

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

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

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


Sec. 3.10  Registration of futures commission merchants, introducing
brokers, commodity trading advisors, commodity pool operators and
leverage transaction merchants.

    (a) Application for registration. (1)(i) Except as provided in
paragraph (a)(3) of this section, application for registration as a
futures commission merchant, introducing broker, commodity trading
advisor, commodity pool operator or leverage transaction merchant must
be on Form 7-R, completed and filed with the National Futures
Association in accordance with the instructions thereto.
* * * * *
    (3) Notice registration as a futures commission merchant or
introducing broker for certain securities brokers or dealers. (i) Any
broker or dealer that is registered with the Securities and Exchange
Commission may be registered as a futures commission merchant or
introducing broker, as applicable, by following such procedures for
notice registration as may be specified by the National Futures
Association, if--

    (A) The broker or dealer limits its solicitation of orders,
acceptance of orders, or execution of orders, or placing of orders on
behalf of others involving any contracts of sale of any commodity for
future delivery, on or subject to the rules of any contract market or
registered derivatives transaction execution facility, to security
futures products as defined in section 1a(32) of the Act;
    (B) The registration of the broker or dealer is not suspended
pursuant to an order of the Securities and Exchange Commission; and
    (C) The broker or dealer is a member of a national securities
association registered pursuant to section 15A(a) of the Securities
Exchange Act of 1934.
    (ii) The registration will be effective upon the filing of the
notice prescribed by the National Futures Association in accordance
with the instructions thereto.
* * * * *
    (d) Annual filing. Any person registered as a futures commission
merchant, introducing broker, commodity trading advisor, commodity pool
operator or leverage transaction merchant in accordance with paragraph
(a)(1) and (a)(2) of this section must file with the National Futures
Association a Form 7-R, completed in accordance with the instructions
thereto, annually on a date specified by the National Futures
Association. * * *

PART 170--REGISTERED FUTURES ASSOCIATIONS

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

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

Subpart C--Membership in a Registered Futures Association

    4. Section 170.15 is revised to read as follows:


Sec. 170.15  Futures commission merchants.

    (a) Except as provided in paragraph (b) of this section, each
person required to register as a futures commission merchant must
become and remain a member of at least one futures

[[Page 27480]]

association which is registered under section 17 of the Act and which
provides for the membership therein of such futures commission
merchant, unless no such futures association is so registered.
    (b) The requirements of paragraph (a) of this section shall not
apply to a futures commission merchant registered in accordance with
Sec. 3.10(a)(3) of this chapter.

    Issued in Washington, DC on May 14, 2001 by the Commission.
Edward W. Colbert,
Deputy Secretary of the Commission.
[FR Doc. 01-12489 Filed 5-16-01; 8:45 am]
BILLING CODE 6351-01-P