COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 3

Temporary Licenses for Associated Persons, Floor Brokers, Floor Traders and Guaranteed Introducing Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) has adopted amendments to its rules governing the granting of a temporary license (TL) by the National Futures Association (NFA) to applicants for registration in the categories of associated person (AP), floor broker (FB), floor trader (FT), and guaranteed introducing broker (IBG). These amendments authorize NFA, in appropriate cases, to grant a TL to an applicant despite a "yes" answer to a Disciplinary History question, which currently makes an applicant ineligible for a TL. The Commission adopted these amendments so that it could approve certain registration rules submitted by NFA without creating any inconsistency between the Commission's rules and those of NFA.

EFFECTIVE DATE: [Insert date 30 days after date of publication in the FEDERAL REGISTER].

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief Counsel, Division of Trading and Markets, Commodity Futures Trading Commission, Three Lafayette Center, 1155 21st Street, N.W., Washington, D.C. 20581. Telephone: (202) 418-5439.

SUPPLEMENTARY INFORMATION:

I. CFTC Rules

A. Proposed Rule Amendments

On September 21, 1998, the Commission issued proposed amendments to its rules governing the granting of a TL by NFA to applicants for registration in the categories of AP, FB, FT and IBG.(1) Among other things, these proposed rule amendments would authorize NFA, in appropriate cases, to grant a TL to an applicant despite a "yes" answer to a Disciplinary History question, which currently makes an applicant ineligible for a TL. The impetus for the Commission's proposals was NFA's submission for Commission approval of amendments to NFA rules 301 and 302, governing TLs for APs and IBGs, as well as new NFA Rule 303 to govern TLs for FBs and FTs. NFA's rule amendments and the new rule would eliminate the no "yes" answer criterion as an absolute bar to the issuance of a TL. The Commission proposed amendments to its own rules so that it could approve the rule amendments and new rule submitted by NFA without creating any inconsistency between the Commission's rules and those of NFA.(2) The Commission also proposed, in response to NFA's submission, to eliminate the "no-new-yes" answer requirement from its rules governing TLs of AP, FB or FT applicants whose registration terminated within the preceding 60 days in order to permit more of these applicants to obtain a TL upon mailing of a new registration application (Form 8-R).

On its own initiative, the Commission proposed to amend two other provisions of its rules where a "yes" answer to a Disciplinary History question now prevents granting of registration, not merely a TL, since these provisions are modeled upon those governing TLs. These circumstances pertain to: (1) a registered FT seeking to become registered as an FB (Commission Rule 3.11(c)(2)(ii)); and (2) an AP whose registration is terminated because of the revocation or withdrawal of the sponsor's registration and who becomes associated with a new sponsor (Commission Rule 3.12(i)).(3)

B. Comments on Proposals

The Commission provided a 30-day comment period on its proposed rule amendments. Three comment letters were received, from NFA, the Chicago Mercantile Exchange and the

Chicago Board of Trade. All three letters supported the Commission's proposals. NFA further suggested that the Commission avoid the necessity for adopting amendments to Commission rules to accommodate NFA rule amendments concerning registration processing by either: (1) interpreting Section 17(j) of the Act not to require identical CFTC and NFA rules but only rules that achieve the same underlying regulatory purpose; (2) amending Commission Rule 3.2(a) to eliminate the consistency requirement; or (3) repealing the Commission's registration processing rules.

C. Adoption of Rule Amendments

The Commission has carefully considered the comments received, but does not believe that it is appropriate to make further amendments to its Part 3 registration rules at this time as suggested by NFA. Accordingly, the Commission has determined to adopt the rule amendments as proposed.(4)

The Commission indicated when it proposed its rule amendments concerning TLs that it would approve amendments to NFA Rules 301 and 302, as well as new NFA Rule 303, when the Commission adopted the proposed amendments to its rules, and the Commission has done so.(5) NFA represents that it will use its authority to grant TLs to applicants with "yes" answers that (1) NFA has previously cleared, or (2) NFA knows that it intends to clear.(6) NFA further represents that, in evaluating whether any applicant should be granted a TL despite a "yes" answer to a Disciplinary History question, it will follow the recent guidance set forth by the Commission concerning the treatment of disciplinary histories of FBs, FTs and applicants for registration in either category.(7)

The Commission also wishes to note that certain of its rules related to TLs are not being amended. Commission rules provide that a TL shall terminate immediately upon notice to an applicant that the applicant failed to disclose relevant disciplinary history or to disclose that, following the submission of the application, an event has occurred leading to an affirmative response. Such a notice must also be provided to the applicant's sponsor (in the case of an AP applicant), the contract market that has granted trading privileges (in the case of an FB or FT applicant) or the guarantor FCM (in the case of an IBG applicant).(8)

The Commission em-phasizes that all applicants must declare derogatory information as required by the registration forms since failure to do so may lead to termination of a TL and, if willful, to denial or conditioning of registration.(9) The Commission further notes that it is not amending the provisions of its rules governing TLs for FB applicants that restrict such persons to operating as an FT while the applicant has a TL prior to being granted registration as an FB.(10)

II. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., requires that agencies, in proposing rules, consider the impact of those rules on small businesses. The rule amendments discussed herein would affect APs, FBs, FTs and IBGs. The Commission has previously determined to evaluate within the context of a particular rule proposal whether all or some FBs, FTs, and IBGs should be considered "small entities" for purposes of the RFA and, if so, to analyze the economic impact on FBs, FTs and IBGs of any such rule at that time.(11) The rule amendments discussed herein will not affect the requirements for filing an application for registration, but will permit certain persons to obtain a TL where it now is not possible and thus permit them to begin lawfully acting as industry professionals sooner. Accordingly, the Chairperson, on behalf of the Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the action taken herein will not have a significant economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq. (Supp. I 1995)) 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. While the rule amendments discussed herein have no burden, the group of rules (3038-0023) of which they are a part has the following burden:

Average Burden hours Per Response 15.76
Number of Respondents 73,435
Frequency of Response Annually and on occasion

Copies of the OMB approved information collection package associated with these rules may be obtained from Desk Officer, CFTC, Office of Management and Budget, Room 10202, NEOB, Washington, D.C. 20503, (202) 395-7340.

List of Subjects in 17 CFR Part 3

Brokers, Registration.

In consideration of the foregoing, and pursuant to the authority contained in the Com-modity Exchange Act and, in particular, Sections 4d, 4e, 4k, 8a and 17 thereof, 7 U.S.C. 6d, 6e, 6k, 12a and 21, the Commission hereby amends Part 3 of 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, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21, and 23.

2. Section 3.11 is amended by revising paragraphs (c)(1)(i)(A) and (c)(1)(i)(B), by removing paragraph (c)(1)(i)(C), by revising paragraphs (c)(1)(ii)(A), (c)(1)(ii)(B) and (c)(1)(ii)(C), by removing paragraph (c)(1)(ii)(D) and redesignating paragraph (c)(1)(ii)(E) as paragraph (c)(1)(ii)(D), and by revising paragraph (c)(2)(ii) to read as follows:

3.11 Registration of floor brokers and floor traders.

* * * * *

(c)* * *

(1)* * *

(i)* * *

(A) The person's registration as a floor broker is not suspended or revoked; and

(B) There is no pending adjudicatory proceeding against the person under sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or 3.55 or 3.60 and, within the preceding twelve months, the Commission has not permitted the withdrawal of an application for registration in any capacity after initiating the procedures provided in 3.51.

(ii)* * *

(A) The person's registration as a floor trader is not suspended or revoked; and

(B) There is no pending adjudicatory proceeding against the person under sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or 3.55 or 3.60 and, within the preceding twelve months, the Commission has not permitted the withdrawal of an application for registration in any capacity after initiating the procedures provided in 3.51.

(C) If such person is seeking registration as a floor broker, the person will be granted a temporary license to act in the capacity of floor trader only if the person's prior registration was not subject to conditions or restrictions.

* * * * *

(2)* * *

(ii) Any person registered as a floor trader whose registration is not subject to conditions or restrictions and who continuously maintains trading privileges at any contract market that has made the certification required under 3.40 will be registered as, and in the capacity of, a floor broker upon mailing to the National Futures Association of a Form 3-R completed and filed in accordance with the instructions thereto indicating the intention to change registration category, accompanied by evidence of the granting of trading privileges at the new contract market, if

applicable.

* * * * *

3. Section 3.12 is amended by revising paragraphs (d)(1)(iv) and (d)(1)(v), by removing paragraph (d)(1)(vi), by revising paragraphs (d)(3) and (i)(1)(v), by removing paragraph (i)(1)(vi) and redesignating paragraph (i)(1)(vii) as paragraph (i)(1)(vi), and by revising paragraph (i)(2) to read as follows:

3.12 Registration of associated persons of futures commission merchants, introducing brokers, commodity trading advisors, commodity pool operators and leverage transaction merchants.

* * * * *

(d)* * *

(1)* * *

(iv) Whether there is a pending adjudicatory proceeding under sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or 3.55, 3.56 or 3.60 or if, within the preceding twelve months, the Com-mission has permitted the withdrawal of an application for registration in any capacity after instituting the procedures provided in 3.51 and, if so, that the sponsor has been given a copy of the notice of the institution of a proceeding in connection therewith; and

(v) That the sponsor has received a copy of the notice of the institution of a proceeding if the applicant has certified, in accordance with paragraph (d)(1)(iv) of this section, that there is a proceeding pending against the applicant as described in that paragraph or that the Commission has permitted the withdrawal of an application for registration as described in that paragraph.

* * * * *

(3) The certifications permitted by paragraphs (d)(1)(i) and (v) of this section must be signed and dated by an officer, if the sponsor is a corporation, a general partner, if a partnership, or the proprietor, if a sole proprietorship. The certifications permitted by paragraphs (d)(1)(ii)--(iv) of this section must be signed and dated by the applicant for registration as an associated person.

* * * * *

(i)* * *

(1)* * *

(v) That the new sponsor has received a copy of the notice of the institution of a pro-ceeding if the applicant for registration has certified, in accordance with paragraph (i)(1)(iv) of this section, that there is a proceeding pending against the applicant as described in that para-graph or that the Commission has permitted the withdrawal of an application for registration as described in that paragraph; and

* * * * *

(2) The certifications required by paragraphs (i)(1)(i), (i)(1)(v), and (i)(1)(vi) of this section must be signed and dated by an officer, if the sponsor is a corporation, a general partner, if a partnership, or the proprietor, if a sole proprietorship. The certifications required by paragraphs (i)(1)(ii)--(iv) of this section must be signed and dated by the applicant for registration as an associated person.

* * * * *

4. Section 3.40 is amended by revising paragraph (a) to read as follows:

3.40 Temporary licensing of applicants for associated person, floor broker or floor trader registration.

* * * * *

(a) A Form 8-R, properly completed in accordance with the instructions thereto;

* * * * *

5. Section 3.44 is amended by revising paragraphs (a)(2) and (a)(3) to read as follows:

3.44 Temporary licensing of applicants for guaranteed introducing broker registration.

* * * * *

(a)* * *

(2) A Form 7-R properly completed in accordance with the instructions thereto;

(3) A Form 8-R for the applicant, if a sole proprietor, and each principal (including each branch office manager) thereof, properly completed in accordance with the instructions thereto, all of whom would be eligible for a temporary license if they had applied as associated persons;

* * * * *


Issued in Washington, D.C. on ___________ 1998, by the Commission.

_________________________

Jean A. Webb
Secretary of the Commission

1. 1 63 FR 51048 (Sept. 24, 1998).

2. 2 Section 17(j) of the Commodity Exchange Act (Act) 7 U.S.C. 21(j)(1994), provides in pertinent part that "A registered futures association shall submit to the Commission any change in or addition to its rules. . . . The Commission shall approve such rules, if such rules are determined by the Commission to be consistent with the requirements of this section and not otherwise in violation of this Act or the regulations issued pursuant to this Act. . . ." See also Commission Rule 3.2(a).

3. 3 The AP situation could arise where, for example, one futures commission merchant (FCM) merges into another, the merged FCM withdraws its registration and the surviving FCM absorbs the APs of the disappearing FCM.

4. 4 A more complete discussion of the Commission's authority concerning TLs and NFA's rules in this area is set forth in the release announcing the Commission's proposed rule amendments, 63 FR 51048.

5. 5 63 FR 51048, 51049 n.15.

6. 6 Examples of matters requiring a "yes" answer where NFA may determine to issue a TL under this new authority would include a petty theft misdemeanor conviction that predates the registration application by more than five years or a single exchange disciplinary action that

involves only financial or minor recordkeeping requirements.

7. 7 See Commission Advisory 61-97 (Dec. 8, 1997), to which is attached a letter to Robert K. Wilmouth, NFA President, from Jean A. Webb, Secretary of the Commission, dated Dec. 4, 1997.

8. 8 The notice concerning failure to disclose or the occurrence of an event leading to an affirmative response also applies to a principal of an IBG. Commission Rules 3.42(a)(8) and 3.46(a)(10).

9. 9 See Section 8a(2)(G) and (3)(G) of the Act; Auster v. CFTC, 687 F.2d 294 (9th Cir. 1982).

10. 10 This restriction to acting only in the capacity of an FT during the pendency of the TL does not apply if the FB applicant was registered as an FB within the preceding 60 days. Com-mission Rule 3.41(a).

11. 11 See 47 FR 18618, 18620 (Apr. 30, 1982) (FBs); 48 FR 35248, 35276-35278 (Aug. 3, 1983) (IBGs); and 58 FR 19575, 19588 (Apr. 15, 1993) (FTs). With respect to APs, the Commission has previously stated that the RFA does not apply to APs because APs must be individuals under Section 4k of the Act and Rule 1.3(aa). See 48 FR 14933, 14954 n.115

(Apr. 6, 1983).