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amendments to correct certain outdated references and to make other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: [email protected] 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: [email protected], 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: [email protected]

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.

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\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).

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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).

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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