[Federal Register: July 23, 1999 (Volume 64, Number 141)]
[Rules and Regulations]
[Page 39913-39915]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



17 CFR Part 9

Performance of Certain Functions by the National Futures
Association With Respect to Regulation 9.11

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice and order.


SUMMARY: Consistent with the Commodity Futures Trading Commission's
(``Commission'') efforts toward reducing the burden of regulatory
reporting by exchanges and recognizing advances in electronic media
technology, the Commission is delegating to the National Futures
Association (``NFA'') the duty to receive and to process exchange
disciplinary and access denial action information, in accordance with
procedures established by the Commission. As part of this delegation,
the NFA shall serve as the official custodian of records for exchange
disciplinary filings. The NFA additionally will be responsible for
using the data collected to generate administrative reports for
Commission oversight use.

EFFECTIVE DATE: July 23, 1999.

FOR FURTHER INFORMATION CONTACT: Rachel F. Berdansky, Special Counsel,
or Joshua R. Marlow, Attorney-Advisor, Division of Trading and Markets,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW, Washington, DC 20581, telephone (202) 418-5490.


I. Introduction

    Commission Regulation 9.11 was established in 1978 to carry out
certain mandates of Section 8c of the Commodity Exchange Act
(``Act'').\1\ Among other things, Section 8c of the Act requires
exchanges to discipline members; to notify the disciplined individuals,
the Commission, and the public of disciplinary actions; and grants the
Commission the authority to review exchange disciplinary actions.
Regulation 9.11 sets forth the manner in which an exchange is to
provide that notice.\2\

    \1\ 43 FR 59343 (December 20, 1978). Commission regulations
referred to herein can be found at 17 C.F.R. Sec. 9 (1998).
    \2\ Regulation 9.11(a) requires that whenever an exchange
decision pursuant to which a disciplinary or access denial action is
to be imposed has become final, the exchange must provide written
notice of such action to the person against whom the action was
taken and the Commission within 30 days thereafter. The contents to
be included in the notice are set forth in Regulation 9.11(b).
Regulation 9.11(c) specifies that notice must be delivered either in
person or by mail to both the individual subject to the action and
to the Commission. Notice filed with the Commission also must
include the date on which notice was delivered to the individual and
state whether delivery was in person or by mail. Pursuant to
Regulation 9.11(d), filing by mail becomes complete upon deposit in
the mail. Finally, Regulation 9.11(e) provides that a duly
authorized officer, agent, or employee of the exchange must certify
that the required notice is true and correct.

    In January 1991, the NFA created its Clearinghouse of Disciplinary
Information (``CDI'') database, a central repository for information
regarding disciplinary actions taken by the NFA, the Commission, and
the exchanges. The need for a resource of this kind became evident
following the 1989 joint Commission and Federal Bureau of Investigation
undercover investigation of floor trading practices at the Chicago
Board of Trade and the Chicago Mercantile Exchange. Members of the
media found that they had to contact several different organizations to
obtain disciplinary history and registration information regarding
individuals allegedly involved in illegal trading practices.
    CDI has since been replaced by a more versatile database called the
Background Affiliation Status Information Center (``BASIC''). A primary
reason for the NFA's switch to BASIC was to make information found in
CDI available to the public on the Internet.\3\ Specifically, the
public can access information pertaining to the types of violations
committed, penalties imposed, the effective date of the action, and, in
some cases, text from the exchange's decision.\4\ BASIC, which can be
searched by NFA identification number, individual name or firm name,
essentially replicates what was previously available to the public only
by calling the NFA's toll-free telephone line.

    \3\ The Internet address for the NFA's BASIC system is http://
    \4\ BASIC contains all disciplinary actions taken by the NFA
since its inception in 1982, all Commission disciplinary actions
taken since 1975, and all disciplinary actions taken by exchanges
since at least 1990.

    One result from the creation of CDI and BASIC has been that since
1991, the exchanges have been filing disciplinary and access denial
action notices (``Regulation 9.11 notices'') in duplicate, once with
the Commission pursuant to Regulation 9.11, and again with the NFA.
Pursuant to ongoing discussions between the Joint Compliance Committee
(``JCC''),\5\ the NFA, and the Commission, the exchanges and the NFA
have requested Commission permission to allow the exchanges to file
Regulation 9.11 notices solely with the NFA to reduce the exchanges'
regulatory reporting obligations. Toward that end, the NFA has agreed
to process all exchange Regulation 9.11 notices and to assume complete
responsibility for maintaining a database of all

[[Page 39914]]

exchange, NFA, and Commission disciplinary actions.

    \5\ The JCC was established in May 1989 to aid in the
development of improved compliance systems through joint exchange
efforts and information sharing among self-regulatory organizations.
The JCC is comprised of senior compliance officials from all of the
domestic futures exchanges and the NFA. Commission staff participate
as observers.

    In the past, periodic reviews by the Commission's Division of
Trading and Markets (``Division'') of exchange accuracy and timeliness
in filing notices of disciplinary and access denial actions with the
NFA revealed that the information provided to the NFA often was
incomplete and generally arrived two to six months after the relevant
action. Thus, the Commission was unwilling to relinquish its
responsibility for collecting and maintaining exchange disciplinary
information until satisfied that the exchanges were filing complete and
accurate information with the NFA in a timely manner. The exchanges
were apprised of the Division's concerns and the Division has continued
to monitor the exchanges' progress.\6\ The Commission is now satisfied
that the exchanges are filing accurate and timely disciplinary and
access denial action notices with the NFA.

    \6\ In a June 11, 1998 letter to all JCC representatives,
Stephen Braverman, Associate Director, Division of Trading and
Markets, expressed the Division's view that it was eager to pursue
the goal of allowing exchanges to file Regulation 9.11 notices
electronically with the NFA, but wanted assurances that the
exchanges' filings would be accurate and timely.

    In recognition of the exchanges' progress in filing accurate and
timely notices of disciplinary and access denial actions with the NFA,
and the NFA's success in developing its BASIC system, the Commission
hereby delegates to the NFA the following duties: (1) To process
exchange disciplinary information; (2) to provide the Commission with
access to a Management Report summarizing all recent exchange
disciplinary information; (3) to assist the Commission in enforcing
exchange compliance with Regulation 9.11 filing requirements; and (4)
to serve as the official custodian of a database containing records of
the exchanges' disciplinary and access denial actions.\7\ The
Commission is retaining its oversight authority of the exchanges'
disciplinary programs, including its authority to review and to modify
exchange disciplinary actions and to take enforcement or other remedial
action against exchanges for noncompliance with Regulation 9.11.

    \7\ Section II. infra includes a complete description of these

    This Notice and Order is being issued in conjunction with a
Commission Advisory, published elsewhere today in the Federal Register,
permitting the exchanges to file Regulation 9.11 notices directly with
the NFA, rather than filing these notices with the Commission. Among
other things, the Advisory provides the exchanges with the option of
filing Regulation 9.11 notices with the NFA electronically or in
writing. The Commission believes that the resulting effect of the
Advisory will be to reduce exchanges' compliance costs by lessening the
exchanges' regulatory reporting burden and allowing the exchanges to
take advantage of electronic media technology.\8\

    \8\ The Commission is encouraging all exchanges to file
electronic Regulation 9.11 notices with the NFA due to associated
time and cost savings. See Advisory, note 10.

II. Delegation of Duties to the NFA

A. Processing Regulation 9.11 Filings and Notice of Filing Deficiencies

    The NFA must process exchange Regulation 9.11 notices in a manner
consistent with Regulation 9.11.\9\ For purposes of this Notice and
Order, the term ``process'' generally refers to receipt of filings and
review of filings for compliance with applicable requirements. As
explained in the accompanying Advisory, regulation 9.11 notices filed
with the NFA, either in writing or electronically, must satisfy all of
the content requirements set forth in Regulation 9.11(b) and must be
filed in a timely manner. Toward that end, electronic notices will be
deemed timely if verified by an exchange within 30 days of a final
disciplinary or access denial action. Written notices also must be
promptly verified, and it shall be the NFA's duty to monitor that those
exchanges choosing to file written notices complete the verification
process in a timely manner.\10\

    \9\ The Commission expects that, pursuant to the Advisory, the
exchanges will file all Regulation 9.11 notices with the NFA.
However, if an exchange files a Regulation 9.11 notice with the
Commission rather than the NFA, the Commission will immediately
forward the notice to the NFA for processing.
    \10\ See Advisory, Section IV.C.

B. NFA Reports and BASIC Query Capabilities

    The NFA shall have a duty to provide the Commission with access to
a Management Report so that the Commission can diligently carry out its
legislative mandate. This Management Report must include the following
for each disciplinary or access denial action:
    <bullet> Name of Contributor (i.e., an exchange, the NFA, or the
    <bullet> Name of Respondent.
    <bullet> Contributor Reference Number.
    <bullet> Date of Decision or Order.
    <bullet> Date of Notification of Member.
    <bullet> Date of Notification of NFA.
    <bullet> Date Available to BASIC Users.
    <bullet> Total Number of Days for Data to be Released into BASIC
(i.e. the number of days from the date of an exchange final action
until the date of exchange verification/certification).
    <bullet> Changes Made to Records By Exchanges After the 30-day
Period Prescribed in Regulation 9.11(a) Has Expired.
    <bullet> Name of Staff Person Entering Data (i.e., initials).
    The Commission currently maintains a database of all exchange
disciplinary and access denial actions (``9.11 database'') which it
uses to generate 42 standardized statistical reports and four
standardized summary reports, including a management report.\11\
Generally, the Commission has been generating these reports on a
quarterly basis, except the management report, which is produced
biweekly. As the Commission needs these reports for effective oversight
of the domestic futures industry, the BASIC system must provide the
Commission with the capability to generate these standardized reports,
whenever needed, without having to submit requests to the NFA. The NFA
therefore shall provide the Commission with unlimited local access to
the BASIC system.\12\

    \12\ Although the Commission's 9.11 database only includes
exchange disciplinary and access denial actions, and thus, only
these actions are included in the Commission's management report,
BASIC also includes all NFA and Commission disciplinary and
administrative actions. Therefore, the Commission believes that the
Management Report generated from BASIC will best serve the
Commission and the NFA if it includes the above specified
information, where applicable, about all actions input into the
BASIC system.
    \12\ ``Unlimited local access'' in this context means that the
Commission shall have the capability to access all data in BASIC and
BASIC's query features from its headquarters and regional offices.

    The Commission also requires that BASIC have the capability to
conduct specialized ad hoc queries of the NFA database. For instance,
the Commission often needs data that pertain to a particular rule
violation or exchange. The NFA has assured the Commission that, as part
of BASIC's query capability development, the system will soon have the
capacity to process customized queries and generate resulting reports.
This Notice and Order hereby requires that BASIC's customized ad hoc
query capability be developed in a manner which will allow the NFA to
produce and deliver customized reports to the Commission, on demand, in
approximately three business days from the day of request. All
Commission requests for ad hoc queries and customized reports shall be
made by designated Division staff members.

C. BASIC Maintenance

    The NFA shall maintain, and serve as the official custodian of,
records for

[[Page 39915]]

exchange Regulation 9.11 filings. The NFA shall fulfill this obligation
by continuing to maintain the BASIC system and further developing it as
necessary to comply with the terms of this Notice and Order.

III. Authority

    Pursuant to Section 8a(10) of the Act, the Commission has issued
numerous orders authorizing the NFA to perform various portions of the
Commission's registration functions and responsibilities under the
Act.\13\ In this connection, the Commission previously has issued
orders authorizing the NFA to perform registration processing functions
with respect to floor brokers (``FBs'') and floor traders (``FTs''),
including: (1) Processing and, where appropriate, granting applications
for registration under the Act; (2) issuing and terminating, where
appropriate, temporary licenses; (3) processing the triennial review of
registration information, periodic updates, terminations of trading
privileges, and requests for withdrawal from registration; (4)
establishing and maintaining systems of records regarding FBs and FTs
and serving as official custodian of those records; (5) denying,
conditioning, suspending, modifying, restricting or revoking the
registration of any FB, FT, or applicant for registration in either
category; and (6) granting the registration of any applicant for
registration as an FB or FT, or maintaining the registration of any
registered FB or FT who may be subject to statutory disqualification
from registration without forwarding such cases to the Commission for
review.\14\ Accordingly, the NFA has adopted, and the Commission has
approved, rules to govern the performance of those functions. For
example, NFA Rule 501(b) pertains to the NFA's authority to deny,
condition, suspend, restrict and revoke registration of floor brokers
and floor traders. Additionally, Rule 505 sets forth procedures
governing floor broker applicants, floor trader applicants, and
registrants disqualified from registration under Sections 8a(2), 8a(3)
or 8a(4) of the Act.\15\

    \13\ Section 8a(10) of the Act provides that the Commission may
authorize any person to perform any portion of the registration
functions under the Act, notwithstanding any other provisions of
law, in accordance with rules adopted and submitted by that person
to the Commission and subject to the provisions of the Act
applicable to registrations granted by the Commission. 7 U.S.C.
12(a)(10) (1982).
    \14\ See 51 FR 25929 (July 17, 1986); 51 FR 34490 (September 29,
1986); 58 FR 19657 (April 15, 1993); 59 FR 38957 (August 1, 1994);
and 62 FR 36050 (July 3, 1997). In addition, the Commission
previously has authorized the NFA to perform registration functions,
and to take adverse registration actions, with respect to futures
commission merchants, introducing brokers, commodity pool operators,
commodity trading advisors, leverage transaction merchants,
agricultural trade option merchants, associated persons of any of
the foregoing entities, as well as applicants for registration in
any of the aforementioned categories. See 49 FR 15940 (April 13,
1983); 49 FR 35158 (August 3, 1983); 48 FR 51809 (November 14,
1983); 48 FR 8226 (March 5, 1984); 49 FR 39593 (October 9, 1984),
amended by 49 FR 45418 (November 16, 1984); 50 FR 34885 (August 28,
1985); 54 FR 19594 (May 8, 1989); 54 FR 41133 (October 5, 1989); 63
FR 18821 (April 16, 1998); and 63 FR 63913 (November 17, 1998).
    \15\ The entire set of NFA rules governing registration can be
found in the current ``National Futures Association Manual,'' Vol.
5, No. 3, April 1, 1999. See Registration Rules, Rule 101 through
Rule 801, pp. 8001-8057. After July 1, 1999, the NFA rules will be
available on the NFA's website. See note 3.

    This Notice and Order is in accord with the Commission's previous
delegation to the NFA to perform registration processing functions with
respect to FBs and FTs, in that, an individual's disciplinary history
clearly is a factor that must be considered in any determination of his
or her fitness to execute customer orders and personal trades on an
exchange floor. Deeming the NFA as the custodian of all exchange
Regulation 9.11 filings, and delegating to the NFA the responsibility
for processing these notices and generating statistical and summary
reports with the information amassed, should ensure that the NFA has
the necessary information to continue to make appropriate registration
    Moreover, the Commission anticipates that, when BASIC's customized
ad hoc query capabilities are fully developed and operational, as
discussed above, there will be no need to continue maintaining the
Commission's 9.11 database. Thus, this delegation will facilitate the
Commission performing its regulatory and oversight functions in a more
efficient manner by eliminating a duplicative and time-consuming
administrative duty.

IV. Conclusion and Order

    In light of the NFA's and exchanges' requests for Commission
authorization to allow exchanges to file Regulation 9.11 notices solely
with the NFA, and for the NFA to assume complete responsibility for
processing these notices and maintaining a database of all exchange,
NFA, and Commission actions, the Commission has determined, in
accordance with Section 8(a)(10) of the Act, to delegate to the NFA the
authority to perform the following functions:

    1. To process exchange disciplinary information filed with it by
an exchange or the Commission for inclusion in the BASIC system;
    2. To provide the Commission with access to a Management Report
summarizing all recent exchange disciplinary information; to provide
the Commission with the capability to generate standardized reports
on the BASIC system; and to provide the Commission with ad hoc
queries generated from BASIC;
    3. To assist the Commission in enforcing exchange compliance
with Regulation 9.11 filing requirements; and
    4. To serve as the official custodian of a database containing
records of all exchange disciplinary and access denial actions filed
with the NFA for inclusion in the BASIC system.

    The NFA is authorized to perform all functions specified herein
until such time as the Commission orders otherwise. Nothing in this
Notice and Order shall affect the Commission's oversight authority of
the exchanges' disciplinary programs. The Commission is relating all of
its oversight authority, including its authority to review and to
modify exchange disciplinary actions and to take enforcement or other
remedial action against exchanges for noncompliance with Regulation
9.11. The NFA may submit to the Commission for clarification any
specific matters that have been delegated to it, and Commission staff
will be available to discuss with NFA staff issues relating to
implementation of this Notice and Order.

    Issued in Washington, D.C. on July 19, 1999 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 99-18806 Filed 7-22-99; 8:45 am]

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