2010-456

FR Doc 2010-456[Federal Register: January 20, 2010 (Volume 75, Number 12)]

[Proposed Rules]

[Page 3281-3330]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr20ja10-26]

[[Page 3281]]

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Part II

Commodity Futures Trading Commission

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17 CFR Parts 1, 3, 4, et al.

Regulation of Off-Exchange Retail Foreign Exchange Transactions and

Intermediaries; Proposed Rule

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 3, 4, 5, 10, 140, 145, 147, 160, and 166

RIN 3038-AC61

Regulation of Off-Exchange Retail Foreign Exchange Transactions

and Intermediaries

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

``CFTC'') is proposing to adopt a comprehensive regulatory scheme

(``Proposal'') to implement the CFTC Reauthorization Act of 2008

(``CRA'') \1\ with respect to off-exchange transactions in foreign

currency with members of the retail public (i.e., ``retail forex

transactions''). The Commodity Exchange Act, as amended by the CRA,

generally provides that the Commission's jurisdiction extends to

contracts of sale of a commodity for future delivery (or an option on

such a contract) or an option (other than an option executed or traded

on a national securities exchange), and to certain leveraged or

margined contracts in foreign currency that are offered to or entered

into with retail customers. The Commission is proposing a scheme that

would put in place requirements for, among other things, registration,

disclosure, recordkeeping, financial reporting, minimum capital, and

other operational standards, based on both the CFTC's existing

regulations for commodity interest transactions and commodity interest

intermediaries, as well as rules of the National Futures Association

(``NFA'') that are already existing with respect to retail forex

transactions offered by NFA's members. Additionally, the Proposal would

amend existing regulations as needed to clarify their application to,

and inclusion in, the new regulatory scheme for retail forex.

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\1\ Food, Conservation, and Energy Act of 2008, Pub. L. 110-246,

122 Stat. 1651, 2189-2204 (2008).

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DATES: Comments must be received on or before March 22, 2010.

ADDRESSES: You may submit comments, identified by RIN 3038-AC61, 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 ``Regulation of Retail

Forex'' 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: For information regarding financial

and related reporting requirements, contact: Thomas Smith, Chief

Accountant and Deputy Director, Division of Clearing and Intermediary

Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone

number: 202-418-5495; facsimile number: 202-418-5547; and electronic

mail: [email protected] Jennifer Bauer, Special Counsel, Division of

Clearing and Intermediary Oversight, Division of Clearing and

Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581.

Telephone number: 202-418-5472; facsimile number: 202-418-5547; and

electronic mail: [email protected]

For all other information contact: William Penner, Deputy Director,

Division of Clearing and Intermediary Oversight, 1155 21st Street, NW.,

Washington, DC 20581. Telephone number: 202-418-5450; facsimile number:

202-418-5547; and electronic mail: [email protected] Christopher

Cummings, Special Counsel, Division of Clearing and Intermediary

Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone

number (202) 418-5450; facsimile number: 202-418- 5547; and electronic

mail: [email protected]

Peter Sanchez, Special Counsel, Division of Clearing and

Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581.

Telephone number (202) 418-5450; facsimile number: 202-418-5547; and

electronic mail: [email protected]

SUPPLEMENTARY INFORMATION: The CRA provides the Commission with broad

authority to ``make, promulgate and enforce such rules and regulations

as, in the judgment of the Commission, are reasonably necessary to

effectuate any of the provisions of [the Commodity Exchange] Act'' in

connection with off-exchange foreign currency futures, options, and

options on futures, as well as leveraged off-exchange contracts offered

to or entered into with retail customers.\2\ The Commission is given

similarly broad authority to promulgate and enforce rules regarding

registration of persons who solicit, exercise discretionary trading

authority or operate or solicit funds in connection with any of these

types of transactions.\3\

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\2\ See, 7 U.S.C. 2(c)(2)(B)(v) and 7 U.S.C.

2(c)(2)(C)(ii)(III).

\3\ See, 7 U.S.C. 2(c)(2)(B)(iv)(III) and 7 U.S.C.

2(c)(2)(C)(iii)(III).

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Pursuant to this authority, the Commission is proposing a scheme

that would put in place requirements for, among other things,

registration, disclosure, recordkeeping, financial reporting, minimum

capital, and other operational standards, based on both the CFTC's

existing regulations for commodity interest transactions and commodity

interest intermediaries, as well as rules of the National Futures

Association (``NFA'') that are already existing with respect to retail

forex transactions offered by NFA's members.

Subject to certain exceptions (e.g., for certain regulated

financial intermediaries not under the Commission's jurisdiction as

established in the CRA), the Proposal would require persons offering to

be or acting as counterparties to retail forex transactions but not

primarily or substantially engaged in the exchange traded futures

business, to register as retail foreign exchange dealers (``RFEDs'')

with the CFTC. Registered futures commission merchants (``FCMs'') that

are ``primarily or substantially'' (as defined in the Proposal) engaged

in the activities set forth in the Act's definition of an FCM would be

permitted to engage in retail forex transactions without also

registering as RFEDs.

The Proposal would further require certain entities other than

RFEDs and FCMs that intermediate retail forex transactions to register

with the Commission as introducing brokers (``IBs''), commodity trading

advisors (``CTAs''), commodity pool operators (``CPOs''), or associated

persons (``APs'') of such entities, as appropriate, and to be subject

to the Act and regulations applicable to that registrant category. In

addition, the Proposal would require any IB that introduces retail

forex transactions to an RFED or FCM to be guaranteed by that RFED or

FCM.

The Proposal would also implement the $20 million minimum net

capital standard established in the CRA for registering as an RFED or

offering retail forex transactions as an FCM; propose an additional

volume-based minimum capital threshold calculated on the amount an FCM

or RFED owes as counterparty to retail forex transactions; and require

RFEDs or FCMs engaging in retail forex transactions to collect security

deposits in a minimum amount in order to prudentially limit the

leverage available to their retail

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customers on such transactions at 10 to 1.

I. Background

A. The Commodity Futures Trading Commission Act of 1974

Congress created the Commission in 1974 as an independent agency

with the mandate to regulate commodity futures and option markets in

the United States by the enactment of the Commodity Futures Trading

Commission Act of 1974.\4\ While the bill was being considered, the

Department of the Treasury (``Treasury'') sent a letter to the Senate

Committee with jurisdiction over the bill, expressing concerns that

Treasury had regarding the effect that passage would have on the off-

exchange foreign currency (``forex'') market that existed at the time

between large, institutional customers.\5\ The letter contained

proposed language for the bill which would have maintained the status

quo for institutional off-exchange forex trading, leaving jurisdiction

over on-exchange trading in futures and options contracts on forex with

the newly-created Commission. The bill was subsequently amended to add

the suggested language contained in Treasury's letter, which was

intended to give the Commission jurisdiction over retail forex

transactions and to exclude from the Commission's jurisdiction the off-

exchange, institutional ``interbank'' market in foreign currencies.

This language, which has come to be known as the ``Treasury

Amendment,'' provided that:

\4\ Public Law 93-643, 88 Stat. 1389 (1974).

\5\ See, Letter from Donald L.E. Ritger, Acting General Counsel,

Department of the Treasury, to the Hon. Herman E. Talmadge (July 30,

1974), reprinted at 1974 U.S.C.C.A.N. 5843, 5887-89.

Nothing in this Act shall be deemed to govern or in any way be

applicable to transactions in foreign currency * * * unless such

transactions involve the sale thereof for future delivery conducted

on a board of trade.\6\

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\6\ Id. at 51.

As is discussed below, over time, and on numerous occasions, the

Commission and the courts have opined on the proper boundaries of this

exclusion.

The Commission first addressed the possible scope of the Treasury

Amendment with regard to off-exchange transactions in securities issued

by the Government National Mortgage Association (``GNMA''). In an

interpretive letter issued by the Commission's Office of General

Counsel, Commission staff stated that the remarks by the Senate

Committee were

an expression that regulation by the Commission is unnecessary

where there exists an informal market among institutional

participants in transactions for future delivery in the specified

financial instruments only so long as it is supervised by those

agencies having regulatory responsibility over those participants.

However, where that market is not supervised and where those

transactions are conducted with participation by members of the

general public, we do not understand the Committee to have intended

that a regulatory gap should exist. In these circumstances, we

believe the Commodity Exchange Act should be construed broadly to

assure that the public interest will be protected by Commission

regulation of those transactions.\7\

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\7\ Dealers in GNMA Certificates as a Board of Trade, CFTC Staff

Interpretive Letter No. 77-12, [1977-1980 Transfer Binder] Comm.

Fut. L. Rep. (CCH) ] 20,467 (Aug. 17, 1977).

The scope of the exclusion, again with regard to off-exchange

transactions in GNMA securities, was addressed by the U.S. Court of

Appeals for the Seventh Circuit (``Seventh Circuit'') when it

determined that the Treasury Amendment did not exclude options on

government securities from the Commission's authority.\8\ Specifically,

the court determined that although trading in GNMA securities was

excluded from the Commission's jurisdiction, trading in options on such

instruments was within the Commission's authority. As the court stated:

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\8\ Board of Trade of Chicago v. SEC, 677 F. 2d 1137, 1154 (7th

Cir. 1982), vacated as moot, 459 U.S. 1026 (1982).

From the legislative history, it is quite clear that the

Treasury Amendment was adopted by Congress only to prevent dual

regulation by the CFTC and bank regulatory agencies of the banks and

other sophisticated institutions that ordinarily trade in financial

instruments.\9\

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\9\ Id. at 1154.

Following that discussion, in 1985, the Commission issued a

Statutory Interpretation concerning the Treasury Amendment that

specifically dealt with forex.\10\ Responding to reports that forex

futures contracts were being offered to retail customers on an off-

exchange basis, under the assumption that such transactions were

excluded from the Commission's jurisdiction, the Commission reaffirmed

and republished its views, as follows:

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\10\ Trading in Foreign Currencies for Future Delivery, 50 FR

42983 (Oct. 23, 1985).

[T]he Commission wishes to make very clear that any marketing to

the general public of futures transactions in foreign currencies

conducted outside the facilities of a contract market is strictly

outside the scope of the [Treasury] Amendment. As a result, such an

off-exchange offer or sale of futures contracts involving foreign

currencies is unlawful under section 4(a) of the Act, 7 U.S.C. 6(a)

(1982).\11\

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\11\ Id. at 42985.

The boundaries of the Treasury Amendment were again tested in

Salomon Forex v. Tauber,\12\ where a sophisticated investor sought to

invalidate a multi-million dollar trading debt by claiming that the

Treasury Amendment only excluded spot or forward forex transactions

from the Commission's jurisdiction, and that trading in off-exchange

futures and options were within the Commission's regulatory authority.

If such transactions were deemed to be within the Commission's

authority, then the transactions could only occur legally on an

approved exchange. The Court determined that the Treasury Amendment

excluded off-exchange trading in futures and options as well as

``spot'' and ``forward'' transactions from the Commission's authority,

if it involved ``sophisticated, large-scale foreign currency traders.''

\13\ Although this holding has sometimes been misinterpreted to imply

that off-exchange forex transactions with the general public were

outside the Commission's jurisdiction, this holding concerned only

large-scale traders and banks that made up the informal network of the

foreign currency ``interbank'' market. Indeed, the Court itself noted

that: ``[t]his case does not involve mass marketing to small investors,

which would appear to require trading through an exchange and our

holding in no way implies that such marketing is exempt from the CEA.''

\14\

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\12\ 795 F. Supp. 768 (E.D. Va. 1992), aff'd, 8 F.3d 966 (4th

Cir. 1993).

\13\ Id. at 978.

\14\ Id.

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B. The Futures Trading Practices Act of 1992

The Futures Trading Practices Act of 1992 reorganized certain

sections of the Commodity Exchange Act, 7 U.S.C. 1, et seq. (2000) (the

``Act'') and gave the Commission significant exemptive authority over

the activities of a wide variety of persons, including FCMs, CTAs, and

CPOs.

It was pursuant to this exemptive authority that the Commission

addressed some aspects of the over-the-counter (``OTC'') markets by

adopting Part 35 of its regulations, which provides an exemption from

regulation for certain swap agreements.\15\ However, the Commission did

not use its newly-

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granted exemptive authority in the context of retail forex.\16\

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\15\ See, Exemption for Certain Swap Agreements, 58 FR 5587

(Jan. 22, 1993).

\16\ See, e.g., Sections 4(c) and 4(d) of the Act, 7 U.S.C. 6(c)

and 6(d).

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Rather, the Commission's efforts were directed to combating forex

fraud activities through increased enforcement and public awareness. In

response to increased fraud activity in the forex markets, the CFTC

issued a fraud advisory to the public on March 30, 1998.\17\

Notwithstanding the Commission's guidance and the legislative history,

the ambiguity of the Treasury Amendment continued to present

opportunities for defendants to challenge the Commission's jurisdiction

in the courts, which consumed much of the Commission staff's time and

resources.\18\ Unfortunately, these challenges would persist until the

adoption of the Commodity Futures Modernization Act of 2000

(``CFMA'').\19\

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\17\ Fraud Advisory from the CFTC: Foreign Currency Trading

(Forex) Fraud, available at: http://www.cftc.gov/customerprotection/

fraudawarenessandprevention/fraudadvisories/fraudadv_forex.html.

The Commission also issued brochures to alert customers to the

possible scams involving forex fraud. See CFTC Brochure on Forex

Fraud, available at: http://www.cftc.gov/enf/enf-forex.htm and

http://www.cftc.gov/stellent/groups/public/

@cpfraudawarenessandprotection/documents/file/enfforexbrochure.pdf

(last visited Oct. 15, 2009).

\18\ For instance, in Dunn & Delta Consultants, Inc. v. CFTC,

519 U.S. 465, 469 (1997), the U.S. Supreme Court held that foreign

currency options were ``transactions in foreign currency'' within

the meaning of the Treasury Amendment.

\19\ Consolidated Appropriations Act of 2001, Public Law 106-

554, App. E, 114 Stat. 2763 (2000), available at Commodity Futures

Modernization Act of 2000, [2000-2002 Transfer Binder] Comm. Fut. L.

Rep. (CCH) ] 28,433 (Dec. 21, 2000).

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Under the Treasury Amendment, retail forex transactions were

excluded from the Commission's jurisdiction unless they were conducted

on a ``board of trade.'' This broad phrase caused further confusion

when courts tried to interpret its meaning in order to delineate where

the Commission's jurisdiction ended. The U.S. Court of Appeals for the

Ninth Circuit (``Ninth Circuit'') relied on the language in the Senate

Committee report to interpret the clause and believed that a proper

reading of the Treasury Amendment excluded all off-exchange forex

transactions--even with retail customers--from the Commission's

jurisdiction and that the Commission only had jurisdiction over forex

transactions traded on organized exchanges.\20\ Other courts

interpreting the same clause came to the conclusion that retail off-

exchange forex transactions were within the Commission's jurisdiction

and that the legislative history indicates that only large

institutional trades were intended to be excluded from the Commission's

oversight.\21\

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\20\ CFTC v. Frankwell Bullion Ltd., 99 F. 3d 299 (9th Cir.

1996).

\21\ See, CFTC v. Baragosh, 278 F.3d 319 (4th Cir. 2002), which

relied on the Conference Committee Report, not mentioned in

Frankwell Bullion, to arrive at the opposite conclusion from the

Ninth Circuit; See also, CFTC v. Standard Forex, No. CV-93-0088

(CPS). 1993 WL 809966 (E.D.N.Y. Aug. 9, 1993).

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C. The Commodity Futures Modernization Act of 2000

The CFMA amended the Act to clarify the jurisdiction of the

Commission in the area of forex futures and options trading. For the

first time, off-exchange retail forex transactions were expressly

permitted, provided the counterparty was one of certain enumerated,

regulated entities listed in the Act--e.g., a registered FCM.\22\

Transactions between certain institutional entities (eligible contract

participants, or ``ECPs'' \23\) remained outside the Commission's

jurisdiction altogether, based on several provisions of the Act and the

Commission's regulations.\24\ Shortly after the adoption of the CFMA,

however, the Commission and the National Futures Association (``NFA'')

\25\ noted that firms were registering as FCMs but not engaging in any

exchange-traded activities. Rather, they were limiting their activities

solely to retail forex. Additionally, the Commission noted that firms

were registering as FCMs but conducting retail forex transactions

through unregistered affiliates. Nothing in the Act or CFMA's

amendments to the Act prohibited these ``shell FCMs'' from conducting

business through their unregistered affiliates.

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\22\ See, 7 U.S.C. 2(c)(2)(B). Broadly stated, these entities

included: (1) A financial institution; (2) a registered broker/

dealer (``B-D'') or FCM; (3) an insurance company; (4) a financial

holding company; and (5) an investment bank holding company.

\23\ Section 1(c)(12) of the Act defines the term ``eligible

contract participant.'' Entities classified as ECPs include

financial institutions, insurance companies, certain commodity pools

and individuals who meet certain asset thresholds. Non-ECPs,

generally speaking, are retail customers.

\24\ For example, Section 2(d) provides that most sections of

the Act do not apply to derivative transactions between ECPs;

Section 2(g) provides that most sections of the Act do not apply to

swap transactions between ECPs; and the Part 35 safe harbor for swap

agreements, which pre-dates the CFMA, provides another basis for

excluding jurisdiction.

\25\ NFA is a registered futures association, pursuant to

Section 17(b) of the Act. It is an industry-wide, self-regulatory

organization for the U.S. futures industry.

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Although the CFMA provided some additional clarity for off-exchange

retail forex transactions, it did not provide the Commission with

rulemaking authority, and the Commission was thus required to provide

guidance to allow participants to navigate the statute. For instance,

Advisory 06-01 made clear that the Commission had jurisdiction over

retail forex and only certain financial institutions that are

enumerated in the Act could act as counterparties for retail customers

in that regard. Similarly, Commission staff issued an Advisory in 2002

which sets out parameters for unlicensed intermediaries, such as pool

operators, account managers and introducers, in retail forex

transactions.\26\ Most recently, in August 2007, Commission staff

issued an Advisory that addressed the following areas: registration of

associated persons (``APs'') of FCMs, CPOs and introducing brokers

(``IBs''); permissible unregistered forex affiliates; segregated funds;

guaranteed IBs; combined account statements for forex and exchange-

traded futures; and forex trading platforms.\27\

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\26\ Division of Trading and Markets Advisory Concerning Foreign

Currency Trading by Retail Customers, available at: http://

www.cftc.gov/stellent/groups/public/@cpfraudawarenessandprotection/

documents/file/forex_advisoryretailcustomers.pdf (last visited Oct.

13, 2009).

\27\ Division of Clearing and Intermediary Oversight Advisory

Concerning Retail Off-Exchange Foreign Currency Trading, available

at: http://www.cftc.gov/stellent/groups/public/

@cpfraudawarenessandprotection/documents/file/forex_

advretailcustomers2007.pdf (last updated August 30, 2007).

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Following passage of the CFMA, legal challenges to the Commission's

jurisdiction persisted and certain courts began to analyze the elements

of a futures contract--the basis of the Commission's jurisdiction over

off-exchange retail forex transactions--using new criteria. Some firms

began offering to retail customers transactions that had the elements

of futures contracts, but that were marketed as ``spot'' transactions.

However, unlike true spot transactions where delivery is contemplated,

these transactions were ``rolled over'' at expiration (generally within

a few days) and carried forward indefinitely. These ``rolling spot'' or

``look-alike'' contracts were the basis of many forex fraud cases

brought by the Commission. However, the Commission's ability to pursue

fraud in this area was put in doubt by the decision of the Seventh

Circuit in CFTC v. Zelener.\28\ The Zelener case

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introduced a different framework for analyzing what constitutes a

``spot'' transaction and created confusion about the applicability of

the CFMA to certain retail forex transactions. This departed from a

line of previous non-forex cases that distinguished between futures and

spot or forward contracts based on a multi-factor analysis of the

economic elements in the contract.\29\

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\28\ CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004), reh'g and

reh'g en banc denied, CFTC v. Zelener, 387 F.3d 624 (7th Cir. 2004).

The U.S. Court of Appeals for the Sixth Circuit relied on Zelener

when it issued its opinion in CFTC v. Erskine, 512 F.3d 309 (6th

Cir. 2008), determining that the foreign currency contracts at issue

were not futures contracts and upholding the district court's

summary judgment against the Commission for lack of jurisdiction.

\29\ See, e.g. CFTC v. Co Petro Mktg. Group, Inc. 680 F.2d 573

(9th Cir. 1982).

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The court in Zelener determined that the contracts at issue were

not off-exchange futures contracts, but rather contracts in the

commodity itself, and thus excluded from the Commission's jurisdiction.

The Seventh Circuit declined to rehear the case en banc and a split of

authority among the circuits was created. Some courts continued to

follow the traditional multifactor test while others followed the

Zelener approach and only considered the language within the four

corners of the contract.\30\

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\30\ See, e.g., CFTC v. UForex Consulting, LLC, 551 F.Supp.2d

513 (W.D.La. 2008); CFTC v. Erskine, 512 F. 3d 309 (6th Cir. 2008).

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D. The Commodity Futures Trading Commission Reauthorization Act of 2008

The CRA \31\ was intended, among other things, to further clarify

the Commission's jurisdiction in the area of retail forex, particularly

in light of the proliferation of look-alike forex transactions such as

those in the Zelener and Erskine cases, and to give the Commission

additional authority to regulate retail forex transactions and to

register persons involved in intermediating these products with members

of the public. To remedy the large number of fraud cases where

jurisdiction had been questioned, the CRA gave the Commission

jurisdiction over certain leveraged retail foreign exchange contracts

without regard to whether it could prove the contracts were off-

exchange futures contracts.\32\ The CRA thus grants the Commission

anti-fraud authority in leveraged retail forex transactions even if the

transactions at issue are not futures or options. This allows the

Commission to protect the public from fraud and provides a workable

solution to the split in the decisions in the Federal appellate courts

regarding when a so-called ``spot'' contract is a futures contract.

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\31\ Food, Conservation, and Energy Act of 2008, Public Law 110-

246, 122 Stat. 1651. 2189-2204 (2008).

\32\ See, 7 U.S.C. 2(c)(2)(C)(iv).

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The CRA also created a new category of registrant, the retail

foreign exchange dealer, or ``RFED,'' and gave the Commission

rulemaking authority over, and required registration of, intermediaries

engaging in retail forex.\33\ The CRA provided that RFEDs and these

other intermediaries must be NFA members and must register with the

Commission subject to such terms as the Commission may prescribe.\34\

Among other requirements, the CRA established a $20 million minimum

capital requirement for RFEDs and FCMs that offer retail forex.\35\

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\33\ Previously, firms serving as counterparties to retail forex

typically registered as FCMs (if they were not included in any of

the other permissible categories), even though they did not engage

in exchange-traded futures business, and thus did not meet the

statutory definition of an FCM.

\34\ See, 7 U.S.C. (2)(c)(2)(B)(i)(II)(gg). The Commission plans

on delegating the registration function for RFEDs to NFA, as is the

case with the registration of FCMs, IBs, CTAs, CPOs and APs.

\35\ See, 7 U.S.C. (2)(c)(2)(B)(ii).

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The grant of authority over look-alike forex contracts is very

broad and is intended to encompass transactions that do not result in

actual delivery, or for which no legitimate business purpose exists for

the customer to enter into the transaction. It is not intended to

interfere with the large, sophisticated interbank market or to place

additional requirements on businesses with a need to engage in forex

transactions in connection with their legitimate business activities.

The CRA further provides that look-alike forex contracts are

subject to the CFTC's authority if they are offered on a leveraged or

margined basis, or financed by the offeror, counterparty, or someone

acting with the offeror or counterparty.\36\ The Commission's

authority, however, does not extend to securities, or to contracts that

result in actual delivery within two days or that create an enforceable

obligation to deliver between buyer and seller that have the ability to

deliver or accept delivery in connection with their line of

business.\37\ Thus, the CRA charges the Commission with regulating

speculative forms of retail forex trading, but excludes from the

Commission's purview true spot transactions that have a legitimate

business purpose or that result in actual delivery.

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\36\ See, 7 U.S.C. 2(c)(2)(C)(i)(I)(bb).

\37\ See, 7 U.S.C. 2(c)(2)(C)(i)(II)(bb)(AA); H.R. Rep. No. 110-

627, at 979 (2008) (Conf. Rep.).

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The Commission is proposing these regulations pursuant to separate

authority provisions of the CRA with respect to the participants in the

forex market and with respect to the transactions themselves. Off-

exchange forex futures and options transactions are subject to numerous

provisions of the Act including sections 4(b), 4b, 4c(b), 4o, 6(c) and

6(d),\38\ 6c, 6d, 8(a), 13(a), 13(b), if they are offered or entered

into by an FCM, an RFED, or an affiliate of an FCM that is not one of

the otherwise regulated entities specified in the Act.\39\ The same

provisions apply to look-alike forex transactions.\40\

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\38\ Although the Commission had jurisdiction with regard to

market manipulation in prior versions of the Act, the CRA removed

that authority with regard to sections 6(c) and 6(d). All other

cited sections remain in full effect.

\39\ See, 7 U.S.C. (2)(c)(2)(B)(iii). In addition to the

sections included in the CFMA for forex futures and options

transactions, the CRA adds sections 4(b), 4o, 13(a), and 13(b).

\40\ See, 7 U.S.C. (2)(c)(2)(C)(ii)(II).

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Notwithstanding the grant of authority with regard to certain

sections of the Act specified above, the Commission has full rulemaking

authority over the agreements, contracts or transactions in retail

forex where ``reasonably necessary to effectuate any of the provisions

or to accomplish any of the purposes of [the] Act.'' \41\ The

Commission has full rulemaking authority over the futures and options

transactions where such transactions are offered or entered into by

FCMs, their affiliates or RFEDs; \42\ and retains rulemaking authority

with regard to look-alike transactions only where such transactions are

offered or entered into by RFEDs.\43\

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\41\ See, 7 U.S.C. 2(c)(2)(B)(iv)(III); 2(c)(2)(B)(v);

(2)(c)(2)(C)(ii)(III); (2)(c)(2)(C)(iii)(III).

\42\ See, 7 U.S.C. (2)(c)(2)(B)(v).

\43\ See, 7 U.S.C. (2)(c)(2)(C)(ii)(III).

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E. The Commission's Proposed Rules

In proposing the following rules, the Commission has endeavored,

wherever possible, to apply the principles that have guided it in the

regulation of on-exchange instruments. Thus, many of the concepts in

the proposed rules will be familiar to industry participants and

practitioners. There are, however, essential differences between the

trading of futures contracts on designated contract markets (``DCMs'')

that are cleared through Commission registered derivatives clearing

organizations (``DCOs'') and off-exchange transactions between forex

firms and retail customers. Many of the statutory and regulatory

safeguards that are a critical feature of the trading and clearance of

transactions in futures and options on futures on DCMs and DCOs,

respectively, simply are not present in off-exchange retail forex

transactions.

The Commission's proposed regulations are designed to deal with

those differences, including the principal-to-principal nature of the

transactions and the inherent conflicts of interest between the retail

customer and the marketmaker/counterparty. In

[[Page 3286]]

the nine years since the passage of the CFMA, the Commission has

observed a number of improper practices that have raised concern, among

them solicitation fraud, a lack of transparency in the pricing and

execution of transactions, unresponsiveness to customer complaints, and

the targeting of unsophisticated, elderly, low net worth and other

vulnerable individuals.\44\

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\44\ Between December 2000 and September 2009, the Commission

has filed 114 forex-related enforcement actions on behalf of more

than 26,000 customers. Those efforts have thus far resulted in the

award of approximately $476 million in restitution and disgorgement,

and $576 million in civil monetary penalties. An overwhelming

majority of these cases have involved solicitation fraud.

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In addition to the regulations explicitly mandated by the CRA--

including new registration requirements \45\ and enhanced financial

requirements--the proposed regulations will require forex registrants

to maintain records of customer complaints; require forex

counterparties to guarantee the performance of all persons who

introduce accounts to the counterparty; require counterparties to

disclose, with the Risk Disclosure Statement, the percentage of

profitable nondiscretionary forex customer accounts; and require forex

counterparties to designate a chief compliance officer to be

responsible for development and implementation of customer protection

policies and procedures.

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\45\ The Commission's proposed regulations include registration

requirements for all persons engaged in the solicitation or

acceptance of orders for retail forex transactions involving non-

ECPs, the exercise of discretionary trading authority in such

transactions, or the operation or solicitation of funds for pooled

investment vehicles in connection with such transactions.

Accordingly, the proposed rules include requirements that such

persons become registered as CTAs, CPOs or IBs, as appropriate. The

Commission is aware that the statutory definitions of these entities

do not anticipate persons engaged in off-exchange activities. The

Commission has determined, however, that pursuant to its plenary

power to regulate such off-exchange retail forex transactions in

section 2(c) of the Act, it will entrust such transactions only to

persons registered as CTAs, CPOs and IBs, inasmuch as these are

categories of registrants with which the Commission and the public

are already familiar. This will allow the Commission to regulate

off-exchange retail forex transactions efficiently and effectively.

For example, the proposed regulations would make use of the

established standards for registration and denial of registration

contained in the Act as well as the Commission's previous

interpretations of these standards. See 41 FR 44560 at 44561-62

(Oct. 6, 1976).

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As noted above, the Commission believes that these additional

requirements are militated both by the essential differences between

on-exchange transactions and off-exchange retail forex transactions,

and the history of fraudulent practices in this sector of the forex

market.

II. Section-by-Section Analysis

A. Structure and Approach

The CRA requires the Commission to register and regulate specified

persons who intermediate off-exchange retail forex transactions. In

order to comply with this mandate, the Commission must adopt

regulations providing for the registration of RFEDs and other off-

exchange retail forex intermediaries not excluded from Commission

jurisdiction, and must specify the financial, operational and other

requirements applicable to persons so registered. To the extent

practicable, the Commission has endeavored to assemble the new off-

exchange retail forex provisions in a single new part of the

Commission's regulations, proposed to be designated part 5.\46\ The

goal is to provide a single convenient location for regulations

applicable to off-exchange retail forex transactions and

intermediaries. Unfortunately, developing a completely self-contained

part of the Commission's regulations that would contain all of the off-

exchange retail forex regulations is not practicable because it has

also been necessary to draft amendments to various provisions of

existing regulations maintained in other parts of 17 CFR Chapter 1.

Among the reasons for these proposed additional amendments are the

following: (1) Some regulatory provisions of general application name

the specific registration categories they affect, and do not presently

refer to RFEDs; (2) persons registered under certain existing

registration categories (e.g., FCMs) will be able to engage in off-

exchange retail forex transactions under those existing registrations,

subject to additional requirements, and restating the requirements

pertaining to those registration categories in part 5 would be

unwieldy; \47\ and (3) certain existing regulatory provisions that

should apply to off-exchange retail forex transactions and to the

persons engaging in them are worded in terms of on-exchange futures and

commodity options transactions, and not in a way that would encompass

off-exchange retail forex transactions.

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\46\ Former part 5 (Designation of and Continuing Compliance by

Contract Markets) was removed and reserved. 66 FR 42256 (Aug. 10,

2001).

\47\ For example, essentially replicating the text of part 4

(which concerns CPOs and CTAs) within the new part 5 in order to

cover providers of forex trading advice and operators of pooled

forex trading vehicles would have needlessly increased the volume of

the Commission's regulations, when a simple incorporation of the

same requirements by reference accomplishes the same purpose.

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B. Proposed Amendments to Existing Regulations

Many of the proposed amendments to regulations outside of proposed

part 5 amount to merely adding references to off-exchange retail forex

transactions, off-exchange retail forex customers and/or RFEDs to

existing regulations.\48\ Accordingly, those proposed amendments will

not be separately discussed. Other proposed amendments, however,

involve a substantive change to the existing regulation because the

existing regulation must operate differently in the context of off-

exchange retail forex trading.\49\ These substantive changes are

discussed below.

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\48\ See, proposed amendments to Regulations 1.4, 1.35, 1.36,

1.37, 1.40, 1.52, 1.65, 3.1, 3.4, 3.10, 3.12, 3.21, 3.30, 3.31,

3.33, 3.44, 3.45, 3.50, 3.60, 4.23, 4.25, 4.30, 4.33, 10.1, 160.1,

160.3, 160.4, 160.30 and 166.2.

\49\ See, proposed amendments to Regulations 1.1, 1.3, 1.10,

1.46, 3.1, 4.7, 4.12, 4.13, 4.14, 4.24, 4.34 and 166.5. In several

instances, staff took the opportunity of this review and proposed

rulemaking to propose deletion of obsolete material that either

refers to already deleted regulatory provisions or has become

outdated due to the passage of time. See proposed amendments to

Regulations 1.52, 3.12, 3.31 and 160.18.

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1. Part 1 of the Commission's Regulations--General Regulations

a. Regulation 1.1--Fraud in or in connection with transactions in

foreign currency subject to the Commodity Exchange Act.

This existing provision is specific to off-exchange retail forex

transactions. Consistent with the concept of a self-contained off-

exchange retail forex part of the regulations, existing Regulation 1.1

is proposed to be deleted and its content to be incorporated into

Regulation 5.2 of proposed part 5.

b. Regulation 1.3--Definitions.

The definition of ``guarantee agreement'' is proposed to be amended

to take account of IBs who may be guaranteed by RFEDs.\50\ The

definition of ``commodity interest'' is proposed to be amended to

include off-exchange retail forex transactions over which the

Commission has jurisdiction by virtue of the CRA.\51\ Including off-

exchange retail forex transactions within the ``commodity interest''

definition permits a wide range of provisions, especially within part 4

of the Commission's regulations, to apply to such transactions without

the need to separately revise each provision to expressly address off-

exchange retail forex, as well as futures contracts and commodity

options.\52\

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\50\ Regulation 1.3(nn).

\51\ Regulation 1.3(yy).

\52\ See, e.g., Regulation 4.6 as well as various provisions of

Regulations 4.22 (reporting to pool participants), 4.23 and 4.33

(recordkeeping), and 4.24 and 4.34 (required disclosures).

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[[Page 3287]]

c. Regulation 1.10--Financial reports of futures commission

merchants and introducing brokers.

Proposed new provisions would require all IBs and all applicants

for registration as IBs in connection with retail off-exchange forex

transactions to enter into a guarantee agreement with an RFED or an

FCM.\53\ To date, those persons who have introduced off-exchange retail

forex customers to counterparties have not been required to register as

IBs, and fraudulent solicitation and sales practices have been

commonplace. See supra note 46. The Commission believes that by

requiring guarantee agreements between all off-exchange retail forex

IBs and the FCM/RFED counterparties to which they introduce off-

exchange retail forex customers, the counterparties will be forced to

more carefully vet the persons who solicit business on their behalf and

the practices those persons employ.

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\53\ Regulations 1.10(a)(4), 1.10(j)(3), 1.10(j)(9)(i)(A)(2) and

1.10(j)(9)(i)(B)(2). See also, Proposed Regulation 5.18(h).

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The Commission will be preparing a new Part C guarantee agreement

to the Form 1-FR-IB, modeled on the guarantee agreement existing in

Part B of Form 1-FR-IB, that will provide that FCMs and RFEDs that

guarantee performance by an introducing broker that introduces off-

exchange retail forex transactions will be jointly and severally liable

for all obligations of the introducing broker under the Act and

Commission regulations with respect to the solicitation of, and

transactions involving, all retail forex customer accounts of the

introducing broker entered into on or after the effective date of the

guarantee agreement. The Commission believes that the guarantee

requirement serves the public's interest in a marketplace where

improper practices by IBs are discouraged while still permitting FCMs

and RFEDs to make use of outside salespeople. An IB that is guaranteed

by an FCM or RFED will not be subject to the minimum capital

requirements set forth in Regulation 1.17(a)(1)(iii).

d. Regulation 1.46--Application and closing out of offsetting long

and short positions.

Like FCMs engaging in on-exchange futures and option transactions

under the existing regulation, RFEDs and FCMs engaging in off-exchange

retail forex transactions would be required to close out offsetting

long and short positions in an off-exchange retail forex customer's

account. But unlike existing Regulation 1.46, the requirement on RFEDs

and FCMs engaging in off-exchange retail forex transactions to close

out offsetting positions would apply regardless of whether the off-

exchange retail forex customer has instructed otherwise.\54\ Also,

unlike the existing provision for transactions in on-exchange futures

and option contracts, no exception is proposed for omnibus accounts

because they are not used in off-exchange retail forex trading. An RFED

or FCM could, if permitted by the rules of a self-regulatory

organization (``SRO'') of which the RFED or FCM is a member, offset at

the retail forex customer's request off-exchange retail forex

transactions of the same size, if the retail forex customer holds other

transactions of a different size, but the RFED or FCM would be required

to offset a transaction against the oldest transaction of the same

size.\55\

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\54\ NFA's experience supports the conclusion that keeping open

long and short positions in a retail forex customer's account

removes the opportunity for the customer to profit on the

transactions, increases the fees paid by the customer and invites

abuse.

\55\ Regulation 1.46(a)(2).

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2. Part 4 of the Commission's Regulations--CPOs and CTAs

a. Regulation 4.7--Exemption from certain part 4 requirements for

commodity pool operators with respect to offerings to qualified

eligible persons and for commodity trading advisors with respect to

advising qualified eligible persons.

As proposed, in determining whether a person is a ``qualified

eligible person'' (``QEP'') the NFA-specified minimum security deposit

for off-exchange retail forex transactions would be included in the

calculation of the portfolio requirement.\56\ Such amounts are roughly

equivalent to exchange-specified initial margin and option premium. In

addition, in order to treat RFEDs and FCMs comparably, RFEDs would be

included among the persons that do not have to meet the portfolio

requirement to be QEPs.\57\

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\56\ Regulation 4.7(a)(1)(v)(B).

\57\ Regulation 4.7(a)(2)(i)(B).

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b. Regulation 4.12--Exemption from provisions of part 4.

As proposed, the NFA-specified minimum security deposit for off-

exchange retail forex transactions would be included among the amounts

that cannot exceed 10 percent of the fair market value of a pool's

assets in order for the operator to claim exemption under Regulation

4.12(b). Again, such amounts are roughly equivalent to on-exchange

initial margin and option premiums.\58\

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\58\ Regulation 4.12(b)(i)(C).

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c. Regulation 4.13--Exemption from registration as a commodity pool

operator.

As proposed, the NFA-specified minimum security deposit for off-

exchange retail forex transactions would be included among the amounts

that cannot exceed 5 percent of the liquidation value of the pool's

portfolio in order for the operator to claim exemption from

registration under Regulation 4.13(a)(3). Again, such amounts are

roughly equivalent to initial margin and option premiums.\59\

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\59\ Regulation 4.13(a)(3)(ii).

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d. Regulation 4.14--Exemption from registration as a commodity

trading advisor.

As proposed, an RFED that provided trading advice solely in

connection with its business as an RFED would be exempt from

registration as a CTA. This is consistent with treating FCMs and RFEDs

comparably, where appropriate.\60\

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\60\ Regulation 4.14(a)(7)(ii). As noted in the Conference

Report that accompanied the CRA, ``To the extent their risk profiles

are similar, the managers intend for FCMs and RFEDs to be regulated

substantially equivalently in terms of their off-exchange retail

foreign currency business.'' H.R. Rep. No. 110-627, at 980 (2008)

(Conf. Rep.). The Conference Report is available via the Internet on

the CFTC's website.

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e. Regulations 4.24 and 4.34--General disclosures required for CPO

and CTA Disclosure Documents.

As proposed, the prescribed risk disclosure language for the front

of the Disclosure Document would be required to include language

warning that off-exchange retail forex transactions may not be given

the same preferential treatment as commodity customer claims under the

Bankruptcy Code.\61\ This warning is necessary because definitions for

such terms as ``commodity contract,'' ``customer'' and ``customer

property'' in Subchapter IV of Chapter 7 of the Bankruptcy Code do not

include or refer to off-exchange transactions, generally, or to off-

exchange retail forex transactions or customers engaged in such

transaction, specifically.\62\

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\61\ Regulations 4.24(b) and 4.34(b).

\62\ 11 U.S.C. 761 et seq.

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3. Part 166 of the Commission's Regulations--Customer Protection Rules

a. Section 166.5--Dispute settlement procedures.

As proposed, the section of the Commission's customer protection

regulations dealing with dispute settlement procedures would be amended

to expressly apply where a claim or grievance arises out of a retail

forex transaction and the defined term customer would be amended to

include

[[Page 3288]]

a retail forex customer.\63\ The existing text could be read to exclude

customer claims arising out of retail forex transactions from coverage

under Regulation 166.5.

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\63\ Regulations 166.5(a)(1) and (a)(2).

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C. New Part 5

As noted earlier, the proposed new part 5 to the Commission's

regulations is intended to permit, as much as possible, reference to a

single portion of the regulations for matters concerning off-exchange

retail forex. Although it has been necessary to make changes to

provisions elsewhere in the regulations, the Commission believes that

in most cases, initial reference to part 5 should be sufficient to

resolve questions (or to direct the reader by cross-reference to the

appropriate provision elsewhere).

1. Proposed Regulation 5.1--Definitions

Proposed part 5 begins with a set of definitions of terms specific

to off-exchange retail forex and to the regulatory requirements that

apply to off-exchange retail forex. ``Retail forex transaction'' is

defined by reference to the description in sections 2(c)(2)(B) and

2(c)(2)(C) of the Act. The proposed definition expressly excludes

futures and commodity option contracts traded on a designated contract

market or derivatives transaction execution facility.\64\ ``Retail

foreign exchange dealer'' is defined as anyone who offers to be or who

is a counterparty to a retail forex transaction, except for those

persons excluded from the definition by the CRA.\65\ In order to apply

the IB, CPO, CTA and AP registration and other requirements to

analogous retail forex market participants, notwithstanding that

statutory and regulatory definitions of the identifying terms do not

necessarily comprehend involvement in retail forex trading, the terms

are separately defined for the purposes of part 5.\66\ ``Affiliated

person of a futures commission merchant'' (a term not previously

defined in the Commission's regulations) and an AP of such a person are

defined by reference to section 2(c)(2)(B)(i)(II)(cc)(BB) of the

Act.\67\ ``Primarily or substantially'' is defined for use in

determining whether a registered FCM is primarily or substantially

engaged in FCM activities, such that it need not also register as an

RFED in order to conduct retail forex business.\68\ Certain terms used

in determining the financial and reporting requirements applicable to

persons engaged in retail forex business are also defined in Regulation

5.1 to clarify their use elsewhere in part 5.\69\

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\64\ See, proposed Regulation 5.1(m).

\65\ See, proposed Regulation 5.1(h).

\66\ See, proposed Regulations 5.1(d), (e) and (f).

\67\ See, proposed Regulations 5.1(a) and (c).

\68\ See, proposed Regulation 5.1(g)

\69\ See, proposed Regulations 5.1(b), (i), (j), (k) and (l).

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2. Proposed Regulation 5.2--Prohibited Transactions: Antifraud

As noted above, under the proposal, existing Regulation 1.1

prohibiting fraud in connection with foreign currency transactions

would be removed and replaced with new Regulation 5.2, which, in

addition to prohibiting fraudulent conduct in connection with retail

forex transactions, now prohibits anyone from acting as the

counterparty for a retail forex transaction in an account for which

that person has discretionary trading authority.

3. Proposed Regulation 5.3--Registration

The CRA amends the Act to require that certain intermediaries for

forex futures and options and for look-alike contracts (i.e., those at

issue in Zelener) register in such capacity as the Commission shall

determine and become members of a registered futures association.\70\

The Commission has determined that the appropriate registration

categories for those intermediaries are as follows. Persons who solicit

or accept orders for an RFED, an FCM, or an affiliate of an FCM should

be registered as IBs. Persons who exercise discretionary trading

authority over accounts should be registered as CTAs. Persons who

operate or solicit funds or property for a pooled investment vehicle

should be registered as CPOs. Finally, associated persons of the

foregoing should be registered as APs. The proposed regulations include

provisions to implement this part of the CRA.

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\70\ See, 7 U.S.C. 2(c)(2)(B)(iv) and 2(c)(2)(C)(iii).

---------------------------------------------------------------------------

Prior to the passage of the CRA, many entities registered as FCMs

solely to engage in retail forex transactions. The CRA provides that

registered FCMs who currently trade retail forex may continue to do so

as FCMs, or may be required to register as RFEDs, depending on their

circumstances. A traditional FCM that is primarily or substantially

engaged in exchange-traded futures business may continue to engage in

retail forex as an FCM, and need not register as an RFED.\71\ Currently

registered FCMs who solely trade in retail forex, or FCMs who are not

primarily or substantially dealing in exchange-traded futures, will be

required to register as RFEDs. Because there will be two categories of

registrants competing for these customers, the stated Congressional

intent is that an entity should not be advantaged or disadvantaged as a

result of registering as an RFED instead of an FCM.\72\ The Commission

has therefore endeavored to draft regulations that provide equivalent

treatment of FCMs and RFEDs wherever possible.

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\71\ The Commission is directed to determine, through notice and

comment rulemaking such as this, what ``primarily or substantially''

means in this context. H.R. Rep. No. 110-627, at 980 (2008) (Conf.

Rep.); see also, Proposed Regulation 5.1(g).

\72\ See, H.R. Rep. No. 110-627, at 980 (2008) (Conf. Rep.).

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The enactment of the CFMA permitted registered FCMs and certain of

their unregistered affiliates to act as counterparties to retail forex

transactions, but it did not specifically require that intermediaries

such as introducing brokers, account managers or pool operators be

registered in order to engage in forex transactions with retail

participants. This created problems when unregistered entities began

soliciting retail customers. The lack of vetting by a regulatory agency

or an SRO created a situation where members of the general public were

being solicited by entities and persons regarding whom they were unable

to obtain any background information. In some cases, persons banned

from registering in the futures industry as a result of past misconduct

were operating as unregistered intermediaries in retail forex

transactions because of the lack of minimum requirements to operate in

the forex business. Pursuant to the CRA, certain affiliates of FCMs may

continue to be proper forex counterparties if the affiliated FCM makes

and keeps the risk assessment records required in Section 4f(c)(2)(B)

of the Act and the affiliate has at least $20 million in adjusted net

capital.\73\ However, under the proposed regulations, the affiliates

will have to register in the appropriate capacity in order to serve as

a counterparty.

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\73\ See, 7 U.S.C. 2(c)(2)(B)(i)(II)(cc)(BB).

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Proposed Regulation 5.3 imposes the registration requirements

called for by the CRA upon specified categories of persons

intermediating retail forex transactions. RFEDs are required to

register as such.\74\ FCMs not ``primarily or substantially'' engaged

in FCM business are required to register as RFEDs,\75\ and FCM-

affiliated persons that serve as retail forex counterparties are also

required to register as RFEDs.\76\ Persons introducing forex accounts

are required to register as IBs.\77\ Operators

[[Page 3289]]

of pooled investment vehicles that engage in retail forex transactions

are required to register as CPOs, and persons providing forex trading

advice are required to register as CTAs.\78\ Finally, associated

persons of all of the foregoing are required to register as APs.

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\74\ See, proposed Regulation 5.3(a)(6).

\75\ See, proposed Regulation 5.3(a)(4).

\76\ See, proposed Regulation 5.3(a)(1).

\77\ See, proposed Regulation 5.3(a)(5).

\78\ See, proposed Regulations 5.3(a)(2) and 5.3(a)(3).

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The CRA's registration requirements do not apply to certain

otherwise regulated entities (e.g., broker-dealers), their associated

persons, or persons who would be exempt from registration if they were

engaging in such transactions on or subject to the rules of a contract

market with regard to forex futures or options \79\ or look-alike

contracts.\80\ This is consistent with the original intent of the

Treasury Amendment that entities engaging in forex transactions should

not be subject to regulation by multiple regulators concerning the same

activity. Proposed Regulation 5.3 excludes from the registration

requirement the persons specified in the CRA.

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\79\ See, 7 U.S.C. 2(c)(2)(B)(iv)(II).

\80\ See, 7 U.S.C. 2(c)(2)(C)(iii)(II).

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4. Proposed Regulation 5.4--Operative Requirements for CPOs and CTAs

Proposed Regulation 5.4 applies all of the disclosure,

recordkeeping, reporting and other existing requirements currently

applicable to CPOs and CTAs in the context of on-exchange futures and

commodity option contracts to persons defined as, and required to

register as, CPOs and CTAs because those persons operate pooled

investment vehicles that engage in retail forex transactions or because

they provide retail forex trading advice.

5. Proposed Regulation 5.5--Risk Disclosure by FCMs, RFEDs and IBs

Proposed Regulation 5.5 requires RFEDs, FCMs and IBs to provide

retail forex customers with a risk disclosure statement similar to that

currently required by Regulation 1.55, but tailored to address the

risks, conflicts of interest and unique characteristics of retail forex

trading. For example, the required risk disclosure statement would also

be required to disclose the number of non-discretionary retail forex

accounts maintained by an RFED or FCM, the percentage of such accounts

that were profitable for each of the four most recent quarters, and a

statement that past performance is not necessarily indicative of future

results.\81\

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\81\ See, proposed Regulation 5.5(e).

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Under Section 2(c) of the Act, the Commission's jurisdiction with

regard to off-exchange forex transactions extends to transactions

involving entities that are not eligible contract participants as

defined in Section 1a of the Act (i.e., retail customers). These

transactions serve no broad price discovery function, and the

Commission believes both that the vast majority of retail customers who

enter these transactions do so solely for speculative purposes, and

that relatively few of these participants trade profitably. Whether or

not this is actually the case, the Commission believes that disclosure

of the percentage of profitable accounts maintained by RFEDs and FCMs

engaging in off-exchange retail forex will provide the retail customer

with vital information when deciding whether or not to engage in such

transactions.

6. Proposed Regulations 5.6 and 5.7--Minimum Financial Requirements

Under proposed Regulation 5.7, RFEDs and FCMs engaging in retail

forex trading are required to meet the minimum net capital requirements

prescribed in the CRA.\82\ Proposed Regulation 5.6 sets forth the

``early warning'' notification requirements pursuant to which RFEDs and

FCMs engaging in retail forex trading are required to notify SROs and

the Commission if an RFED or an FCM engaging in retail forex trading

has experienced declines in capital, has discovered a material

inadequacy in internal controls or has become undercapitalized.\83\

Because there is no equivalent to the futures regime of strict

segregation of customer funds in off-exchange retail foreign currency

dealing, the notice requirement for RFEDs with respect to

undersegregation is not included in the proposed regulation. However, a

requirement has been proposed that an RFED or FCM engaging in off-

exchange retail forex transactions give notice if it is holding liquid

assets less than the aggregate retail forex obligation (as defined).

The aggregate retail forex obligation is proposed to be the net

obligation to all off-exchange retail foreign currency customers at all

times (excluding deficit accounts).

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\82\ Analogous to Regulation 1.17 for FCMs trading only futures

and commodity options.

\83\ The proposed requirement is analogous to existing

Regulation 1.12 for FCMs that trade only on-exchange futures and

commodity option contracts.

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The minimum net capital regulation for RFEDs and FCMs offering off-

exchange retail forex is proposed based on the significantly higher

minimum net capital level for RFEDs and FCMs offering retail forex

established in the CRA. The Commission believes that the higher level

of $20 million reflects Congressional intent to ensure that

substantially undercapitalized ``shell'' FCM off-exchange retail forex

dealers and their affiliates, from whom it may be impossible to recover

funds in the event of customer claims, do not engage in off-exchange

retail forex activity. The existing regulation for the calculation of

FCM net capital has been proposed for the calculation of net capital

for RFEDs and FCMs offering off-exchange retail forex, with the intent

that an FCM offering retail forex should only have one calculation of

its adjusted net capital. However, the CRA's higher dollar threshold of

minimum capital required, $20 million, will apply, as well as an

additional early warning requirement of 110%, resulting in a notice

reporting net capital level of $22 million. The proposed early warning

level of 110% is lower than the FCM early warning level of 150% due to

the substantially higher minimum dollar threshold established in the

CRA, which results in an adequate minimum early warning ``buffer'' of

no less than $2 million.

An amount of minimum net capital in addition to the minimum $20

million is proposed to the extent that an FCM or RFED has a total

retail forex obligation in excess of $10,000,000. After that threshold,

as proposed the FCM or RFED must have net capital of no less than

$20,000,000 plus five percent of the total retail forex obligation in

excess of $10,000,000. This proposal is intended to address concerns

that, although the capital level contained in the CRA is believed to be

high at $20,000,000, at particularly high levels of retail customer

obligations there should be commensurate increases in an entity's

minimum required net capital. The NFA has enacted a similar requirement

applicable to all its forex dealer members except those that only

provide ``straight through processing.'' The Commission's proposal has

no exceptions for FCMs engaging in off-exchange retail forex or for

RFEDs.

Under the existing net capital regulation for FCMs contained in

Commission Regulation 1.17, an FCM that becomes undercapitalized must

immediately cease business and transfer its customers' positions to

another FCM, unless the Commission believes that it will be able to

quickly remedy the situation, in which case the Commission may provide

up to an additional 10 business days to return to compliance before

ceasing business. Because the retail forex contracts at issue are not

exchange-traded, and therefore, positions are not fungible among retail

forex FCMs and RFEDs, should an RFED become undercapitalized, the

[[Page 3290]]

Commission proposes that it either liquidate or transfer all off-

exchange retail forex accounts (with a transfer envisioned as a full

novation of the retail forex contracts for such accounts by assignment

and assumption of the contracts by another RFED or FCM) under the

direction and supervision of the Commission or the entity's designated

self-regulatory organization (``DSRO''). The same 10 business day

period has been proposed for the Commission or DSRO to delay such

liquidation or transfer if determined appropriate. The proposal

requires the refund or transfer of all funds associated with off-

exchange retail forex accounts contemporaneous with the liquidation or

transfer. The possibility of an entity needing to refund all customers'

accounts and liquidate all positions in such circumstances makes it

necessary to include a proposal to require such entity to maintain

liquid assets available equal to the amount owed to off-exchange retail

forex customers.

Although not permissible to be counted as a liquid asset for

fulfilling the requirement of Regulation 5.8, under the proposed net

capital regulation, the unsecured receivable resulting from an RFED or

FCM offsetting currency exposure with one of several enumerated parties

(regulated financial intermediaries or foreign equivalents approved by

NFA) will be treated as a current asset. The Commission proposes this,

with the counterparty limitation, to balance an RFED's or FCM's need to

hedge its net position from offering off-exchange retail forex with the

concern that such receivables are collectible for net capital purposes.

Without this proposed addition to the net capital calculation, RFEDs

and FCMs would have to take a 100% capital charge for such unrealized

gains. The Commission understands that NFA, under subparagraph (c) of

its Section 11 Financial Requirements for Forex Dealer Members, has

been permitting existing forex dealer members to not take such a charge

to the extent the counterparty has been considered regulated and

approved by NFA, and is not an affiliate of the Forex Dealer Member.

Thus, the Commission proposes that a DSRO be afforded the continuing

ability to assess the appropriateness of counterparties for this

purpose going forward, while making explicit the ability of an entity

to cover the net exposure without the burden of a 100% net capital

charge being applied. Also, the existing net capital charge with

respect to options has been applied to off-exchange retail forex

transactions that are options. This net capital charge, with respect to

the existing net capital regulation for FCMs, is derived from the SEC's

net capital charges for options that are not options on futures.

Because these retail forex transactions are, by nature, off-exchange

transactions, the resulting charge under the SEC rule would be the

charge for ``unlisted'' options. This charge is based on the notional

transactional size of the option which may result in a very significant

capital implication for retail forex transactions which are options.

However, this result is consistent with the existing requirements for

all off-exchange or unlisted foreign exchange options for existing FCMs

and broker-dealers.

7. Proposed Regulation 5.8--Aggregate Retail Forex Assets

Proposed Regulation 5.8 requires RFEDs and FCMs engaging in retail

forex transactions to compute the net credit balance resulting from

combining all money, securities and property deposited by retail forex

customers into their accounts, adjusted for realized and unrealized net

profit or loss, and not including any accounts that contain net

liquidating balances (the ``retail forex obligation'' of the RFED or

FCM).\84\ Under proposed Regulation 5.8(a) each RFED or FCM engaging in

retail forex transactions is required to hold assets of the type

permitted under Regulation 1.25 equal to the retail forex obligation.

Such assets would have to be maintained at one or more qualifying

institutions in the U.S., or in money center countries (as defined in

Regulation 1.49) where such countries have agreements acceptable to NFA

that authorize sharing account information with NFA.

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\84\ Defined in proposed Regulation 5.1(l).

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The requirement to hold assets equal to the retail forex obligation

is separate from the adjusted net capital requirement. In computing

their adjusted net capital, pursuant to proposed Regulation 5.8(d),

RFEDs and FCMs could not include assets held for purposes of complying

with proposed Regulation 5.8(a) as current assets, or otherwise

recording any property received from retail forex customers as an asset

without recording a corresponding liability to such customers.

The requirement to maintain assets equal to or in excess of the

retail forex obligation is intended to provide some degree of

protection for customers in the absence of the protections afforded by

the segregation of customer funds that is required in the context of

futures and commodity options trading.\85\ The Commission recognizes

that the retail forex obligation is not an equivalent substitute for

the segregated funds regime, which cannot be replicated in the context

of off-exchange retail forex trading. Unlike segregation of customer

funds deposited for futures trading, such amounts would not be provided

any preferential treatment to unsecured creditors in a bankruptcy, and

would not be held in separately titled accounts under the CEA. Because

of the lack of bankruptcy preference with respect to the funds of

retail forex customers held at FCMs or RFEDs, the Commission does not

intend to propose a separation of funds requirement which may be

misconstrued as being similar to the protections that are afforded to

customers engaged in exchange-traded futures and options. As previously

discussed, Regulation 5.8 has been proposed to ensure that RFEDs and

FCMs hold liquid assets in appropriate jurisdictions should they be

required to be refunded to customers or seized to compensate customers.

NFA first established under Section 14 of its Financial Requirements

its version of this requirement, due to its difficulty in ultimately

obtaining any funds for restitution with respect to failures of forex

dealers and cases of fraud. The proposal follows the NFA's rule in this

regard while further requiring that the types of assets held to meet

the requirement must also be of the kind and character permitted for

the investments of futures customer funds under existing Commission

Regulation 1.25. These types of assets are limited to generally liquid

financial instruments, which the Commission believes to be an

appropriate limitation, should it become necessary to liquidate retail

forex accounts, transfer funds, or seize or freeze funds in the event

of fraud.

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\85\ The retail forex obligation is also a factor in one of the

options for computation of the RFED's or FCM's net capital

requirement. See, proposed Regulation 5.7(a)(1)(i)(B).

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8. Proposed Regulation 5.9--Security Deposits for Retail Forex

Transactions

Proposed Regulation 5.9(a) would require each RFED and each FCM

that engages in retail forex transactions, in advance of any such

transaction, to collect from the retail forex customer a security

deposit (in cash or in financial instruments that meet the requirements

of Regulation 1.25) equal to ten percent of the notional value of the

retail forex transaction, ten percent of the notional value of short

retail forex options in addition to the premium received, or the full

premium received for long options,

[[Page 3291]]

as the case may be. Pursuant to proposed Regulation 5.9(b), the RFED or

FCM would be required to collect additional security deposit or to

liquidate the retail forex customer's position if the amount of

security deposit collected fails to meet the requirements of paragraph

(a).

The extreme volatility of the foreign currency markets exposes

retail forex customers to substantial risk. Forex dealers currently

extend leverage to their customers at ratios of between 25:1 to 400:1

or higher, which allows customers to control contracts worth

significantly more than their cash investment. Given these high

leverage ratios, even minor fluctuations in currency rates can

exponentially increase a customer's losses and gains. Even a small move

against a customer's position can result in a significant loss. Under

current practices, customer positions are usually closed out once the

losses in an account exceed the initial investment. However, if, for

any reason, the positions are not closed out at a zero balance, the

customer could be liable for additional losses.

Customers also face counterparty risk, as there is no central

counterparty for forex transactions. Customers may not know that

customer funds held by a forex counterparty do not receive the

bankruptcy protections applicable to funds held by an FCM engaged in

on-exchange trading on the customers behalf.\86\ Given the risks that

inhere in the trading of off-exchange forex contracts by retail

customers, the only funds that should be invested in the off-exchange

retail forex market are those that the investor can afford to lose. The

Commission's proposed regulation regarding security deposits is

intended both to mitigate the risk to which customers are exposed and

to provide some capital to cover customer funds held by a failing firm

(albeit without the bankruptcy preference applicable to funds held in

segregation for exchange-traded contracts). In determining the

appropriate leverage or security deposit level to propose, the

Commission considered current industry practices, as well as NFA's

current leverage restrictions of 100 to 1 on major currencies and 25 to

1 on non-major currencies, and the proposal by the Financial Industry

Regulatory Authority (``FINRA'') to limit the maximum leverage on

certain retail forex transactions offered by broker-dealers to 4 to

1.\87\

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\86\ As discussed above, an FCM holding customer funds for

trading on-exchange futures contracts is required to have, at all

times, in its possession and control, segregated property sufficient

to pay all customers with credit balances, without deduction for

customer debit balances (which must be made up from the FCM's own

capital). In an FCM bankruptcy, customers share the segregated

property pro rata in proportion to their claims, without any support

from a compensation fund. See, generally, Part 190 of the

Commission's Regulations, 17 CFR Part 190 (2009).

\87\ NFA leverage rules are set forth in Section 12, ``Security

Deposits for Forex Transactions with FDMs'', of the NFA rules. On

June 4, 2009, FINRA submitted to the U.S. Securities and Exchange

Commission a proposed rule change to adopt FINRA Rule 2380 to limit

the leverage ratio offered by broker-dealers for certain forex

transactions to be a maximum of 1.5:1. 74 FR 32022 (July 6, 2009).

FINRA subsequently adopted 2 amendments to this proposal, the second

of which revised the maximum leverage ratio from 1.5:1 to 4:1. See

SR-FINRA-2009-40 available on FINRA's website at http://

www.finra.org/Industry/Regulation/RuleFilings/2009/P118864.

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9. Proposed Regulations 5.10 and 5.11--Risk Assessment

Proposed Regulation 5.10 imposes risk assessment recordkeeping

requirements, and Regulation 5.11 establishes risk assessment reporting

requirements, for RFEDs. These sections are patterned on the

corresponding existing requirements for FCMs in existing Regulations

1.14 and 1.15, because the same rationale behind risk assessment

procedures for FCMs applies equally to RFEDs.

10. Proposed Regulation 5.12--Financial Reporting to Regulators

Proposed Regulation 5.12 requires applicants for registration as

RFEDs to submit their applications for registration with a Form 1-FR-

FCM, the same financial reporting form that FCMs are required to file,

certified by an independent public accountant.\88\ Registered RFEDs

would be required to file Form 1-FR-FCM monthly and annually. In

addition, RFEDs, like FCMs, when notified in writing by NFA or the

Commission, would have to file Form 1-FR-FCM or such other financial

information as NFA or the Commission may request at such other times as

may be specified in the notice.\89\ The proposed regulation for RFED

financial reporting is intended to require the substantial equivalent

of independent IB and FCM financial reporting to the Commission and

DSROs, with certified financial reports required from independent

auditors qualified under existing Commission Regulation 1.16 and

similar reports on material inadequacies by such auditors. The existing

reporting requirements as separately proposed to be amended for FCMs,

including methods of receiving reports, determining fiscal year ends

and permitting extensions of time to file, have been proposed for

RFEDs.

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\88\ See, Regulation 1.10.

\89\ See, Regulation 1.10(b)(4).

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11. Proposed Regulation 5.13--Reporting to Customers

RFEDs and FCMs engaging in retail forex transactions are required

by proposed Regulation 5.13 to furnish each retail forex customer with

monthly statements and confirmation statements in a manner comparable

to that required of FCMs under Regulation 1.33. The Commission believes

that proposed Regulation 5.13 has been drafted in such a manner as to

make the required statements meaningful and useful to customers in

light of the distinctive characteristics of retail forex transactions

relative to exchange-traded futures and commodity option transactions.

FCMs could combine their forex monthly and/or confirmation statements

with statements they may otherwise be required by Regulation 1.33 to

furnish, so long as the futures and commodity options information and

the retail forex information are each properly identified as such. The

proposed section also provides that the required statements can be

furnished electronically with the customer's (revocable) consent, and

RFEDs are required to keep copies of monthly and confirmation

statements in accordance with the requirements of Regulation 1.31.

12. Proposed Regulation 5.14--Financial Recordkeeping

Proposed Regulation 5.14(a) requires RFEDs to keep the same ledgers

or similar records as FCMs are required to keep under Regulation 1.18,

showing transactions affecting assets, liabilities, income, expense and

capital accounts, classified in the manner set forth in Form 1-FR-FCM,

or in categories consistent with generally accepted accounting

principles. Proposed Regulation 5.14(b) requires recordkeeping

regarding net capital computations, comparable to existing Regulation

1.18(b) for FCMs.

13. Proposed Regulations 5.15 and 5.16--Unlawful Representations and

Prohibitions of Guarantees Against Loss

As with CPOs and CTAs dealing only in futures and commodity

options, RFEDs, FCMs, IBs, CPOs and CTAs subject to Part 5, as well as

their principals and those who solicit for them, are prohibited by

proposed Regulation 5.15 from representing that the Commission or the

Federal government has sponsored, recommended or approved them in any

[[Page 3292]]

way.\90\ RFEDs, FCMs and IBs are prohibited under proposed Regulation

5.16 from guaranteeing against or limiting customer losses, from

failing to collect margin or security deposits, or from representing

that they will do any of those things.\91\ This prohibition does not

prevent an RFED, FCM or IB from sharing in a loss resulting from error

or mishandling of an order, and guarantees entered into prior to

effectiveness of the prohibition will only be affected if an attempt is

made to extend, modify or renew them.

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\90\ Similar prohibitions already apply to CPOs and CTAs

(section 4o(b) of the Act) and to leverage transaction merchants

(Regulation 31.19). See also NFA Compliance Rule 2-22 which speaks

to all NFA members. The Commission believes that a broad statement

of the prohibition is appropriate here to ensure that customers do

not misapprehend the implications of registration as previously

unregistered off-exchange retail forex market participants come into

compliance with the registration requirements imposed on them by the

CRA.

\91\ See, Regulation 1.56 for the existing prohibition affecting

FCMs and IBs engaged in futures and commodity option transactions.

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14. Proposed Regulation 5.17--Authorization to Trade

Proposed Regulation 5.17 requires RFEDs, FCMs, IBs and their APs to

have specific authorization by the customer before effecting a retail

forex transaction. For the most part, proposed Regulation 5.17 follows

existing Regulation 166.2 for on-exchange futures and commodity option

transactions. The Commission believes that registrants acting as off-

exchange retail forex counterparties should have to obtain

authorization for each transaction like other registrants.

15. Proposed Regulation 5.18--Trading Standards

Proposed Regulation 5.18 contains provisions specific to retail

forex transactions that were developed to prevent some of the deceptive

or unfair practices identified by the Commission and NFA in recent

years. Each retail forex counterparty \92\ would be required to

establish and enforce internal rules, procedures and controls: (1) To

prevent ``front running,'' where transactions in accounts of the retail

forex counterparty or its related persons \93\ are executed before a

like customer order; (2) to establish settlement prices fairly and

objectively; and (3) to record and maintain transaction records and

make them available to customers (including time and price information,

account records, trading platform price changes and volume, and any

algorithm used to determine bid and ask prices). Paragraph (c) of the

proposed Regulation prohibits a retail forex counterparty from

disclosing that it holds another person's order unless disclosure is

necessary for execution. Paragraphs (d) and (e) ensure that related

persons of retail forex counterparties do not open accounts with other

retail forex counterparties without the knowledge and authorization of

the account surveillance personnel of the retail forex counterparties

with which they are related. Paragraph (f) prohibits retail forex

counterparties from: (1) Entering a retail forex transaction to be

executed at a price that is not at or near prices at which other retail

forex customers have executed transactions with the retail forex

counterparty during the same time period unless done pursuant to NFA

rules; (2) changing prices after execution unless pursuant to NFA

rules; (3) providing a customer a new bid price that is higher (or

lower) than previously without providing a new asked price that is

higher (or lower) as well; and (4) establishing a new position for a

customer (except to offset an existing position) if the retail forex

counterparty holds one or more outstanding orders of other retail forex

customers for the same currency pair at a comparable price.

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\92\ ``Retail forex counterparty'' is defined for purposes of

Regulation 5.18 to include RFEDs, FCMs and affiliated persons of

FCMs.

\93\ ``Related person'' of a forex counterparty is defined for

purposes of Regulation 5.18 as a general partner, officer, director,

owner of more than a ten percent interest, associated person,

employee, relative or spouse of the foregoing or relative of a

spouse who shares the same home.

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Additionally, paragraph (g) of proposed Regulation 5.18 would

require each retail forex counterparty and each CPO, CTA and IB subject

to part 5 to maintain records of all communications they receive

concerning possible violations of the Act or Commission regulations

involving their retail forex business. The required records would

include the complainant's identity (if provided), the date of the

transaction or contract at issue, and the name of the person who

received the communication. The retail forex counterparty, CPO, CTA or

IB would be required to provide copies of such records to the

Commission.

The Commission believes that, given the volume of cases it has

prosecuted in recent years involving retail forex fraud, requiring the

maintenance of detailed records of customer complaints will provide

such intermediaries with a comprehensive view of the types and numbers

of problems that exist within their operations, and will provide the

Commission with ready access to information regarding such problems.

Paragraph (h) of proposed Regulation 5.18 would require each person

who applies for registration as an IB in order to solicit or accept

off-exchange retail forex orders, and each person who succeeds to the

business of an IB that solicits or accepts retail forex orders to enter

into a guarantee agreement with an FCM or an RFED. As discussed above

in relation to revisions to Commission Regulation 1.10, the Commission

believes that the requirement that RFEDs and FCMs enter a guarantee

agreement with the IBs that solicit business on their behalf serves the

public's interest by discouraging FCMs and RFEDs from associating with

IBs without regard to the sales practices they employ.

Paragraph (i) of proposed Regulation 5.18 would require retail

forex counterparties to calculate on a quarterly basis the percentage

of non-discretionary accounts that were profitable, and to maintain

records of those calculations together with supporting data for five

years in accordance with Regulation 1.31. As discussed above, Proposed

Regulation 5.5 requires that RFEDs, FCMs and IBs provided retail forex

customers with a risk disclosure statement that includes the percentage

of accounts that were profitable for each of the four most recent

quarters. Proposed Regulation 5.8 buttresses this requirement by

directing retail forex counterparties to make such calculations on a

quarterly basis and maintain records reflecting the calculation.

Finally, paragraph (j) would require each retail forex counterparty

to designate at least one principal to serve as its chief compliance

officer, who would be required to certify annually to the Commission

and to NFA that the retail forex counterparty had in place policies and

procedures reasonably designed to achieve compliance with the Act and

the Commission's regulations. The Commission intends that retail forex

counterparties adhere to the highest professional standards and that

they take their compliance responsibilities seriously. With the

requirement of a high level compliance officer and annual

certification, Commission registrants will be expected to meet these

standards and required to identify the person within the entity

responsible for meeting them.

16. Proposed Regulation 5.19--Pending Legal Proceedings

Proposed Regulation 5.19 requires RFEDs, FCMs CPOs, CTAs and IBs to

disclose pending legal matters and specifies the manner in which such

matters are to be reported to the Commission, as well as the criteria

for determining which proceedings are

[[Page 3293]]

required to be disclosed. As discussed above, given the high incidence

of fraud in connection with retail forex transactions, the Commission

desires to monitor legal actions taken against registrants. Requiring

reporting of such actions is one of the most direct ways of determining

where problems exist and what registrants may have failed to deal

fairly with customers.

17. Proposed Regulation 5.20--Special Calls for Information

Proposed Regulation 5.20 is patterned on existing Regulations 21.00

through 21.03. The purpose of proposed Regulation 5.20 is to ensure

that the Commission has the authority to obtain information regarding

retail forex accounts and transactions when such information is

necessary to enable the Commission to carry out its responsibilities

under the Act, and to set forth the responsibilities and duties of

RFEDs, FCMs, and IBs when a special call is issued.

18. Proposed Regulation 5.21--Supervision of Retail Forex Accounts

Proposed Regulation 5.21 imposes the same supervision requirements

set forth in existing Regulation 166.3 upon Commission registrants

subject to Part 5. A separate provision for retail forex is included in

order to avoid any question whether the same duties apply to persons

with supervisory responsibilities in the context of retail forex

trading activity.

19. Proposed Regulation 5.22--Registered Futures Association Membership

In addition to registering with the Commission, the CRA provides

that RFEDs and persons who provide retail forex trading advice, operate

retail forex pools or solicit retail forex customers or accounts must

also become members of a registered futures association.\94\

Accordingly, proposed Regulation 5.22 requires registered futures

association membership for RFEDs, and for each person (1) required to

register as an IB because the person accepts orders for retail forex

transactions; (2) required to register as a CPO because the person

operates, or solicits funds, securities or property for, a pooled

investment vehicle that engages in retail forex transactions; or (3)

required to register as a CTA because the person exercises

discretionary trading authority, or obtains written authority over, an

account in connection with retail forex transactions.

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\94\ See, 7 U.S.C. 2(c)(2)(B)(i)(II)(gg); 2(c)(2)(B)(iv);

2(c)(2)(C)(i)(II)(aa); and 2(c)(2)(C)(iii).

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20. Proposed Regulation 5.23--Bulk Transfers and Bulk Liquidations

Proposed Regulation 5.23 is patterned generally upon existing

Regulation 1.65, but has been modified to take into account certain

rules of the National Futures Association, that have been approved by

the Commission, that govern the transfer or liquidation of the accounts

of retail forex customers.\95\ Proposed Regulation 5.23 permits

transfers that are requested by the retail forex customer or expressly

consented to by the retail forex customer's prior, specific consent in

writing, or those done in accordance with rules adopted by the DSRO of

the RFED, FCM or IB, as the case may be, and approved by the Commission

that establish notice and other requirements for such assignments and

transfers. The proposed regulation also duplicates, for the most part,

the requirements applicable to bulk transfer notices to the Commission

under Regulation 1.65. However, the draft regulation requires notice

not only of bulk transfers, but also bulk liquidations, and effectively

defines the term ``bulk'' to mean the transfer or liquidation of 50

percent or more of the total retail forex customer accounts carried by

the RFED, FCM or IB.\96\

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\95\ See, proposed Regulation 5.23(a)(1).

\96\ See, proposed Regulation 5.23(a)(2).

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21. Proposed Regulation 5.24--Applicability of Other Parts of the

Commission's Regulations

Proposed Regulation 5.24 states that, insofar as consistent with

the requirements of part 5, the requirements of other parts of the

Commission's regulations that apply to a person shall apply to that

person as though those provisions were expressly set forth in part 5.

For example, Regulation 1.31 sets forth the Commission's generally

applicable recordkeeping requirements and speaks in terms of

``persons.'' Proposed Regulation 5.24 is intended to incorporate such

provisions by reference to the extent that part 5 does not impose

contradictory requirements.

22. Proposed Regulation 5.25--Applicability of Act

Proposed Section 5.25 incorporates various provisions of the Act

which apply generally to registrants, specifying that the provisions of

those sections are to be read to include the categories of forex

registrants identified in proposed Section 5.1, and that the provisions

of those sections are to be read to include off-exchange retail forex

transactions and those that that engage in them. Specifically, the

provisions of Sections 4b, 4c(b), 4f, 4g, 4k, 4m, 4n, 4o, 6(c)-(e), 6b,

6c, 8(a)-(e), 8a, and 12(f) apply to off-exchange retail forex

transactions just as they do to exchange-traded transactions.

III. Related Matters

A. Regulatory Flexibility Act

FCMs and CPOs: The Regulatory Flexibility Act (``RFA'') \97\

requires that agencies, in proposing rules, consider the impact of

those rules on small businesses.\98\ The Commission has already

established certain definitions of ``small entities'' to be used in

evaluating the impact of its rules on such small entities in accordance

with the RFA.\99\ In that statement, the Commission concluded that

neither FCMs nor registered CPOs should be considered to be small

entities for purposes of the RFA. With respect to FCMs, the

Commission's determination was based in part upon their obligation to

meet the capital requirement established by the Commission and the

purposes of protecting financial integrity.\100\

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\97\ 5 U.S.C. et seq.

\98\ By its terms, the RFA does not apply to ``individuals.''

See 48 FR 14933, n. 115 (April 6, 1983). Because associated persons

must be individuals, (see Commission Regulation 1.3(aa) and proposed

Regulations 5.1(c), (d)(2), (e)(2), (g)(2) and (i)(2)), the RFA does

not apply to APs and no analysis of the economic impact of this rule

proposal on such persons is required.

\99\ 47 FR 18618 (April 30, 1982).

\100\ Id. at 18619.

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As for CPOs, the Commission determined that registered CPOs are not

small entities based upon its existing regulatory standard for

exempting certain small CPOs from the requirement to register under the

Act.\101\ (A CPO need not register with the Commission if the gross

capital contributions for all pools under its management do not exceed

$400,000 and there are not more than fifteen participants in any one of

those pools.\102\)

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\101\ Id. at 18619-20.

\102\ 17 CFR 4.13(a)(2) (2009).

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Thus, with respect to FCMs and registered CPOs, the Commission

believes that the Proposal will not have a significant economic impact

on a substantial number of small entities.

CTAs: The Commission has previously decided to evaluate, within the

context of a particular rule proposal, whether all or some CTAs should

be considered to be small entities, and if so, to then analyze the

economic impact on them of any such rule.\103\ CTAs

[[Page 3294]]

wishing to advise retail forex customers may include both currently

registered CTAs and previously unregistered persons who now will be

required to register. As to the first group, there should be no

significant new economic impact. As to the second group, registration

will require the submission of application forms, fingerprinting of

principals, and payment of registration fees. To the extent that CTAs

can be considered to be small entities, the Commission does not

consider either the proposed registration fee or the proposed

fingerprinting requirement for newly registered CTAs to have

significant economic impact.\104\

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\103\ 47 FR at 18620.

\104\ 48 FR 35248 at 35276 (August 3, 1983).

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IBs: In its 1982 policy statement, the Commission proposed that for

purposes of the RFA and future rulemakings, the Commission would not

consider introducing brokers to be ``small entities'' for essentially

the same reasons that FCMs had previously been determined not to be

small entities.\105\ However, this determination was based, in part, on

the fact that IBs, like FCMs, are required to maintain a specified

level of adjusted net capital. Under the proposal, retail forex IBs

would not be subject to a capital requirement; rather, they would have

to operate pursuant to a guarantee agreement. Nevertheless, as

discussed above with regard to CTAs, registration of previously

unregistered entities will require the submission of application forms,

fingerprinting of principals, and payment of registration fees. To the

extent that IBs can be considered to be small entities, the Commission

does not consider either the proposed registration fee or the proposed

fingerprinting requirement for IBs subject to Part 5 to have

significant economic impact.

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\105\ 47 FR at 18619.

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RFEDs: RFEDs are a new category of registrant. Accordingly, the

Commission has not addressed the question of whether such persons are,

in fact, small entities for purposes of the RFA. The Commission does

not believe that there are regulatory alternatives to those being

proposed which would be consistent with the statutory mandate to

provide protection to the public against irresponsible or fraudulent

business practices. For purposes of the RFA and future rulemakings, the

Commission is hereby proposing that RFEDs not be considered to be

``small entities'' for essentially the same reasons that FCMs have

previously been determined not to be small entities.\106\ As with FCMs,

a requirement to maintain a specified level of adjusted net capital

would be imposed upon RFEDs to ensure that they maintain sufficient

capital resources to guarantee their financial accountability and to

promote responsible and reliable business operations. Moreover, the

Commission has sought to fashion its proposed regulatory program for

RFEDs in a manner which is responsive to the function, purposes, and

size of the entity being regulated consistent with the objective of the

RFA. In particular, the minimum capital requirement required by the CRA

effectuates the Congressional purpose that RFEDs maintain sufficient

reserve of capital to remain economically viable. For the reasons

stated above, the Commission hereby proposes not to define RFEDs as

small entities for RFA purposes.

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\106\ Id.

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B. Paperwork Reduction Act

The Proposal contains information collection requirements. The

Paperwork Reduction Act of 1995 (``PRA'') \107\ imposes certain

requirements of federal agencies (including the Commission) in

conducting or sponsoring any collection of information as defined by

the PRA. The Commission has submitted to the Director of the Office of

Management and Budget (``OMB''), pursuant to the provisions of the PRA,

an explanation and details of the information collection and

recordkeeping requirements which would be necessary to implement the

Proposal.

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\107\ 44 U.S.C. 3501, et seq.

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1. Collection of Information

If adopted, the Proposal would require existing and new registrants

in the FCM, RFED, CTA, CPO and IB categories to submit certain filings

to the Commission which had not been previously required; these

collections of information are found primarily in the new part 5 of the

proposed regulations. To the extent industry participants are currently

registered as CTAs, CPOs, IBs or FCMs, and intend to engage in retail

forex transactions, the obligations imposed by the proposed rules would

not be significantly altered, but the existing collections will be

amended to reflect additional, new registrants within these categories,

and the part 5 collection will include any additional information

collections not captured in existing collections. The estimated numbers

of respondents, annual responses by each, average hours per response

and annual reporting burden reflected in section 2 immediately below

represent estimates from the last update of the collection plus new

respondents, responses and a new calculation of associated burdens.

Since several of the proposals contained herein consist of proposed

amendments to rules which have already been assigned OMB control

numbers, the Commission assumes that the amended rules will be assigned

the same OMB control number. Similarly, the Commission is proposing

that the new registrants use amendments to existing forms in order to

comply with registration and financial reporting requirements, those

forms, as amended, will in all likelihood retain the same OMB control

number which they have at present. Finally, as to RFEDs, a new category

of registrant, new OMB control numbers will be assigned to new

collections; to the extent existing regulations have been amended to

include RFEDs, the collections associated with those regulations will

be amended to reflect the new category of registrant. Each effected

collection and the new part 5 collection are discussed separately

below.

2. Existing Collections

a. Collection 3038-0024 (Part 1 of the Regulations)

Generally speaking, collections occurring by operation of part 1

regulations affect FCMs and IBs. Those entities that will be required

to register as RFEDs are currently registered as FCMs, so existing

Collection 3038-0024 has been amended, where appropriate, to reflect

fewer FCM respondents. The collection has also been amended, where

appropriate, to reflect additional IB registrants, who were not

previously required to register to conduct off-exchange retail forex

business and now will be.

Estimated number of respondents: 2,160.

Annual responses by each respondent: 38,894.

Estimated average hours per response: 1.9.

Annual reporting burden: 21,229.

b. Collection 3038-0023 (Part 3 of the Regulations)

Part 3 of the Commission's regulations concern registration

requirements. Existing Collection 3038-0023 has been amended to reflect

the obligations associated with the registration of new entrants, such

as CTAs, CPOs, IBs, and APs, that had not previously been required to

register in order to conduct off-exchange retail forex transactions.

Since the registration requirements are in all respects the same as for

current registrants, the collection has been amended only insofar as it

concerns the increased estimated number of respondents and the

corresponding estimated annual burden.

[[Page 3295]]

Estimated number of respondents: 71,857.

Annual responses by each respondent: 73,694.

Estimated average hours per response: 0.09.

Annual reporting burden: 6,632.

c. Collection 3038-0005 (Part 4 of the Commission's Regulations)

Part 4 of the Commission's regulations concerns the operations of

CTAs and CPOs, and the circumstances under which they may be exempted

from registration. As discussed above, the estimated average time spent

per response has not been altered. However, adjustments have been made

to the collection to account for additional CPOs and CTAs: filing for

exemptions from the Part 4 rules, developing and distributing required

disclosure documents; complying with required reporting requirements.

Estimated number of respondents: 9,486.

Annual responses by each respondent: 37,930.

Estimated average hours per response: 17.

Annual reporting burden: 183,700.\108\

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\108\ Due to a mathematical error in the previous Collection

3038-0005, the current estimated numbers reflect a large increase in

the burden to respondents. The estimated increase in the annual

responses to by each respondent is increased by 721 as a result of

this rulemaking. The estimated annual increase in the hours of

reporting burden is increased by 4,833 as a result of this

rulemaking.

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d. Collection 3038-0055 (Part 160 of the Regulations)

Part 160 requires financial institutions to provide notice to

customers regarding privacy policies and practices. As discussed above,

the estimated average time spent per response has not been amended;

rather, the collection has been amended to reflect new registrants that

will have to comply with the part 160 requirements.

Estimated number of respondents: 4,066.

Annual responses by each respondent: 96.

Estimated average hours per response: 0.24.

Annual reporting burden: 6,186.

3. New Collection 3038--NEW (Proposed Part 5 of the Regulations)

Part 5 of the proposed regulations requires various information

collections by various registrants. The Commission is seeking a new and

separate control number for collections occurring pursuant to part 5.

Among the sections requiring information collections in the new part 5

is Regulation 5.5, which would require the development and distribution

of risk disclosure documents by RFEDs, FCMs and IBs transacting off-

exchange retail forex. Regulation 5.6 would require reporting by RFEDs

that fail to meet minimum financial requirements or are otherwise

required to provide early warning notices. Regulation 5.11 would

require annual risk assessment reporting by RFEDs, and Regulation 5.12

would require financial reports of RFEDs applying for registration.

Regulation 5.13 concerns reporting to customers by RFEDS and FCMs.

Regulation 5.18 generally concerns trading and operational standards

for retail forex counterparties and intermediaries. Among the sections

within Regulation 5.18 requiring collections of information are

5.18(g), which requires all counterparties and intermediaries to

forward to the Commission records of communications received concerning

facts giving rise to possible violations of the Act or Regulations, and

5.18(j), which requires forex counterparties to provide the Commission

with an annual compliance certification. Regulation 5.19 would require

all forex counterparties and intermediaries to provide the Commission

with notice of legal proceedings to which they are parties. Finally,

Regulation 5.23 concerns the notices that must be given in the event of

bulk transfers or liquidations.

OMB Control Number 3038--NEW.

Estimated number of respondents: 1,156.

Annual responses by each respondent: 4,493.

Estimated average hours per response: 1.8.

Annual reporting burden: 4,202.

Copies of the information collection submission to OMB are

available from the CFT Clearance Officer, 1155 21st Street, NW.,

Washington, DC 20581, (202) 418-5160. The Commission considers comments

by the public on this proposed collection of information in--

Evaluating whether the proposed collections of information are

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

submissions 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 Trading Commission. OMB is required to make a

decision concerning the collection of information contained in the

Proposal between 30 and 60 days after publication of his 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 comment

to the Commission on the proposed rules.

C. Cost-Benefit Analysis

Section 15(a) of the Act \109\ requires the Commission to consider

the costs and benefits of its action before issuing new regulations

under the Act. By its terms, section 15(a) does not require the

Commission to quantify the costs and benefits of a new regulation or to

determine whether the benefits of the 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,

enumerated below. Accordingly, the Commission could, in its discretion,

give greater weight to any one of the five enumerated areas and could,

in its discretion, determine that, notwithstanding its costs, a

particular rule was 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.

---------------------------------------------------------------------------

\109\ 7 U.S.C. 19(a).

---------------------------------------------------------------------------

As discussed in more detail above, the Proposal would create a

comprehensive scheme to implement the requirements of the CRA. It would

put in place requirements including registration, disclosure,

recordkeeping, financial reporting, minimum capital and other

operational standards. This would be achieved through both amendments

to existing regulations and the creation of a new, free-standing part

to the Commission's regulations. The Commission is considering the

costs

[[Page 3296]]

and benefits of the Proposal in light of the specific provisions of

section 15(a) as follows:

1. Protection of market participants and the public. The Proposal

should enhance considerably the protection of market participants and

the public because it requires, for the first time, the registration of

several categories of market participants and requires adherence to

operational standards that had not previously applied. The benefits

that inhere in the imposition of these requirements to a sector of the

off-exchange market that has been largely unregulated to this point,

and which is geared towards the retail public, are manifest.

2. Efficiency and competition. In its Conference Report, Congress

indicated that the Commission should avoid creating two different

regulatory regimes for similar business models with respect to FCMs or

RFEDs engaging in off-exchange retail forex transactions.\110\

Accordingly, the Commission has endeavored to ensure that these

entities be treated in comparable fashion relative to one another.

Moreover, the Commission has endeavored, wherever possible, to propose

regulations in the proposed part 5 that are analogous to regulations

imposed upon intermediaries engaged in on-exchange transactions.

Accordingly, the Commission believes that it has provided an evenhanded

regulatory scheme that will be familiar to industry participants.

---------------------------------------------------------------------------

\110\ As noted in the Conference Report that accompanied the

CRA, ``To the extent their risk profiles are similar, the managers

intend for FCMs and RFEDs to be regulated substantially equivalently

in terms of their off-exchange retail foreign currency business.''

H.R. Rep. No. 110-627, at 980 (2008) (Conf. Rep.). The Conference

Report is available via the Internet on the CFTC's Web site.

---------------------------------------------------------------------------

3. Financial integrity of futures markets and price discovery. The

Proposal's regulations concern retail, off-exchange markets. These

markets serve primarily as a vehicle for members of the retail public

to engage in speculative transactions. Accordingly, the Commission does

not perceive a significant intersection between the operations of these

markets and the financial integrity or price discovery functions of the

markets generally.

4. Sound risk management practices. The Proposal includes

requirements regarding capital, financial reporting, risk assessment

recordkeeping, and risk assessment reporting that are comparable to

those required of entities engaged in on-exchange trading. The

Commission believes that the benefits of these risk management

requirements--which strive to ensure the financial soundness of firms--

have been borne out on the exchange-traded side and will be of

significant benefit with regard to its oversight of retail forex

counterparties.

5. Other public interest considerations. The retail, off-exchange

forex market has been largely unregulated until now. The Commission

believes that the Proposal is beneficial in that will provide needed

protections for members of the public engaging in these transactions.

The Proposal will also bring much needed oversight to the forex

counterparties and intermediaries that interact with the public.

After considering these factors, the Commission has determined to

issue the Proposal. 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

17 CFR Part 1

Definitions, Minimum financial and reporting requirements.

Recordkeeping requirements, Prohibited transactions in commodity

options, Miscellaneous.

17 CFR Part 3

Definitions, Customer protection, Licensing, Registration.

17 CFR Part 4

Advertising, Brokers, Commodity futures, Commodity pool operators,

Commodity trading advisors, Consumer protection, Exemption from

registration, Reporting and recordkeeping requirements.

17 CFR Part 5

Bulk transfers, Commodity pool operators, Commodity trading

advisors, Consumer protection, Customer's money, securities and

property, Definitions, Foreign exchange, Minimum financial and

reporting requirements, Prohibited transactions in retail foreign

exchange, Recordkeeping requirements, Retail foreign exchange dealers,

Risk assessment, Special calls, Trading practices.

17 CFR Part 10

Adjudicatory proceedings, Rules of practice.

17 CFR Part 140

Authority delgations (Government agencies, Conflict of interests,

Organization and functions (Government agencies).

17 CFR Part 145

Confidential business information, Freedom of information.

17 CFR Part 147

Sunshine Act.

17 CFR Part 160

Consumer financial information, Definitions, Nonpublic personal

information, Privacy.

17 CFR Part 166

Arbitration, Authorization to trade, Customer protection,

Definitions, Dispute settlement; Litigation; Reparations.

For the reasons presented above, the Commission hereby proposes to

amend Chapter I of Title 17 of the Code of Federal Regulations as

follows:

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, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e,

6f, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12c,

13a, 13a-1, 16, 16a, 19, 21, 23 and 24.

Sec. 1.1 [Removed and Reserved]

2. Section 1.1 is removed and reserved.

3. Section 1.3 is amended by revising paragraphs (nn) and (yy) to

read as follows:

Sec. 1.3 Definitions.

* * * * *

(nn) Guarantee agreement. This term means an agreement of guaranty

in the form set forth in part B or C of Form 1-FR, executed by a

registered futures commission merchant or retail foreign exchange

dealer, as appropriate, and by an introducing broker or applicant for

registration as an introducing broker on behalf of an introducing

broker or applicant for registration as an introducing broker in

satisfaction of the alternative adjusted net capital requirement set

forth in Sec. 1.17(a)(1)(iii).

* * * * *

(yy) Commodity Interest. This term means:

(1) Any contract for the purchase or sale of a commodity for future

delivery;

(2) Any contract, agreement or transaction subject to Commission

regulation under section 4c or 19 of the Act; and

(3) Any contract, agreement or transaction subject to Commission

jurisdiction under section 2(c)(2) of the Act.

4. Section 1.4 is revised to read as follows:

[[Page 3297]]

Sec. 1.4 Use of electronic signatures.

For purposes of complying with any provision in the Commodity

Exchange Act or the rules or regulations in this Chapter I that

requires a document to be signed by a customer of a futures commission

merchant or introducing broker, a retail forex customer of a retail

foreign exchange dealer or futures commission merchant, a pool

participant or a client of a commodity trading advisor, an electronic

signature executed by the customer, participant or client will be

sufficient, if the futures commission merchant, retail foreign exchange

dealer, introducing broker, commodity pool operator or commodity

trading advisor elects generally to accept electronic signatures;

Provided, however, That the electronic signature must comply with

applicable Federal laws and other Commission rules; And, Provided

further, That the futures commission merchant, retail foreign exchange

dealer, introducing broker, commodity pool operator or commodity

trading advisor must adopt and utilize reasonable safeguards regarding

the use of electronic signatures, including at a minimum safeguards

employed to prevent alteration of the electronic record with which the

electronic signature is associated, after such record has been

electronically signed.

5. Section 1.10 is amended by revising paragraph (j) to read as

follows:

Sec. 1.10 Financial reports of futures commission merchants and

introducing brokers.

* * * * *

(j) Requirements for guarantee agreement. (1) A guarantee agreement

filed pursuant to this section must be signed in a manner sufficient to

be a binding guarantee under local law by an appropriate person on

behalf of the futures commission merchant or retail foreign exchange

dealer and the introducing broker, and each signature must be

accompanied by evidence that the signatory is authorized to enter the

agreement on behalf of the futures commission merchant, retail foreign

exchange dealer, or introducing broker and is such an appropriate

person. For purposes of this paragraph (j), an appropriate person shall

be the proprietor, if the firm is a sole proprietorship; a general

partner, if the firm is a partnership; and either the chief executive

officer or the chief financial officer, if the firm is a corporation;

and, if the firm is a limited liability company or limited liability

partnership, either the chief executive officer, the chief financial

officer, the manager, the managing member, or those members vested with

the management authority for the limited liability company or limited

liability partnership.

(2) No futures commission merchant or retail foreign exchange

dealer may enter into a guarantee agreement if:

(i) It knows or should have known that its adjusted net capital is

less than the amount set forth in Sec. 1.12(b) of this part or Sec.

5.6(b) of this chapter, as applicable; or

(ii) There is filed against the futures commission merchant or

retail foreign exchange dealer an adjudicatory proceeding brought by or

before the Commission pursuant to the provisions of sections 6(c),

6(d), 6c, 6d, 8a or 9 of the Act or Sec. Sec. 3.55, 3.56 or 3.60 of

this chapter.

(3) A retail foreign exchange dealer may enter into a guarantee

agreement only with an introducing broker as defined in Sec.

5.1(f)(1). A retail foreign exchange dealer may not enter into a

guarantee agreement with an introducing broker as defined in Sec.

1.3(mm) of this part.

(4) A guarantee agreement filed in connection with an application

for initial registration as an introducing broker in accordance with

the provisions of Sec. 3.10(a) of this chapter shall become effective

upon the granting of registration or, if appropriate, a temporary

license, to the introducing broker. A guarantee agreement filed other

than in connection with an application for initial registration as an

introducing broker shall become effective as of the date agreed to by

the parties.

(5)(i) If the registration of the introducing broker is suspended,

revoked, or withdrawn in accordance with the provisions of this

chapter, the guarantee agreement shall expire as of the date of such

suspension, revocation or withdrawal.

(ii) If the registration of the futures commission merchant or

retail foreign exchange dealer is suspended or revoked, the guarantee

agreement shall expire 30 days after such suspension or revocation, or

at such earlier time as may be approved by the Commission, the

introducing broker, and the introducing broker's designated self-

regulatory organization.

(6) A guarantee agreement may be terminated at any time during the

term thereof:

(i) By mutual written consent of the parties, signed by an

appropriate person on behalf of each party, with prompt written notice

thereof, signed by an appropriate person on behalf of each party, to

the Commission and to the designated self-regulatory organizations of

the futures commission merchant or retail foreign exchange dealer and

the introducing broker;

(ii) For good cause shown, by either party giving written notice of

its intention to terminate the agreement, signed by an appropriate

person, to the other party to the agreement, to the Commission, and to

the designated self-regulatory organizations of the futures commission

merchant or retail foreign exchange dealer and the introducing broker;

or

(iii) By either party giving written notice of its intention to

terminate the agreement, signed by an appropriate person, at least 30

days prior to the proposed termination date, to the other party to the

agreement, to the Commission, and to the designated self-regulatory

organizations of the futures commission merchant or retail foreign

exchange dealer and the introducing broker.

(7) The termination of a guarantee agreement by a futures

commission merchant, retail foreign exchange dealer or an introducing

broker, or the expiration of such an agreement, shall not relieve any

party from any liability or obligation arising from acts or omissions

which occurred during the term of the agreement.

(8) An introducing broker may not simultaneously be a party to more

than one guarantee agreement: Provided, however, That the provisions of

this paragraph (j)(8) shall not be deemed to preclude an introducing

broker from entering into a guarantee agreement with another futures

commission merchant or retail foreign exchange dealer if the

introducing broker, futures commission merchant or retail foreign

exchange dealer which is a party to the existing agreement has provided

notice of termination of the existing agreement in accordance with the

provisions of paragraph (j)(6) of this section, and the new guarantee

agreement does not become effective until the day following the date of

termination of the existing agreement: And, provided further, That the

provisions of this paragraph (j)(8) shall not be deemed to preclude an

introducing broker from entering into a guarantee agreement with

another futures commission merchant or retail foreign exchange dealer

if the futures commission merchant or retail foreign exchange dealer

which is a party to the existing agreement ceases to remain registered

and the existing agreement would therefore expire in accordance with

the provisions of paragraph (j)(6)(ii) of this section.

(9)(i)(A) An introducing broker that is a party to a guarantee

agreement that has been terminated in accordance with the provisions of

paragraph (j)(6) of this

[[Page 3298]]

section, or that is due to expire in accordance with the provisions of

paragraph (j)(5)(ii) of this section, must cease doing business as an

introducing broker on or before the effective date of such termination

or expiration unless, on or before 10 days prior to the effective date

of such termination or expiration or such other period of time as the

Commission or the designated self-regulatory organization may allow for

good cause shown, the introducing broker files with its designated

self-regulatory organization either a new guarantee agreement effective

as of the day following the date of termination of the existing

agreement, or, in the case of a guarantee agreement that is due to

expire in accordance with the provisions of paragraph (j)(4)(ii) of

this section, a new guarantee agreement effective on or before such

expiration, or either:

(1) A Form 1-FR-IB certified by an independent public accountant in

accordance with Sec. 1.16 as of a date not more than 45 days prior to

the date on which the report is filed; or

(2) A Form 1-FR-IB as of a date not more than 17 business days

prior to the date on which the report is filed and a Form 1-FR-IB

certified by an independent public accountant in accordance with Sec.

1.16 as of a date not more than one year prior to the date on which the

report is filed: Provided, however, that an introducing broker as

defined in Sec. 5.1(f)(1) of this chapter that is party to a guarantee

agreement that has been terminated or that has expired must cease doing

business as an introducing broker on or before the effective date of

such termination or expiration unless, on or before 10 days prior to

the effective date of such termination or expiration or such other

period of time as the Commission or the designated self-regulatory

organization may allow for good cause shown, the introducing broker

files with its designated self-regulatory organization a new guarantee

agreement effective on or before the termination or expiration date of

the terminating or expiring guarantee agreement.

(B) Each person filing a Form 1-FR-IB in accordance with this

section must include with the financial report a statement describing

the source of his current assets and representing that his capital has

been contributed for the purpose of operating his business and will

continue to be used for such purpose.

(ii)(A) Notwithstanding the provisions of paragraph (j)(9)(i) of

this section or of Sec. 1.17(a), an introducing broker that is a party

to a guarantee agreement that has been terminated in accordance with

the provisions of paragraph (j)(6)(ii) of this section shall not be

deemed to be in violation of the minimum adjusted net capital

requirement of Sec. 1.17(a)(1)(iii) or (a)(2) for 30 days following

such termination. Such an introducing broker must cease doing business

as an introducing broker on or after the effective date of such

termination, and may not resume doing business as an introducing broker

unless and until it files a new agreement or either:

(1) A Form 1-FR-IB certified by an independent public accountant in

accordance with Sec. 1.16 as of a date not more than 45 days prior to

the date on which the report is filed; or

(2) A Form 1-FR-IB as of a date not more than 17 business days

prior to the date on which the report is filed and a Form 1-FR-IB

certified by an independent public accountant in accordance with Sec.

1.16 as of a date not more than one year prior to the date on which the

report is filed: Provided, however, that an introducing broker as

defined in Sec. 5.1(f)(1) of this chapter that is party to a guarantee

agreement that has been terminated must cease doing business as an

introducing broker from and after the effective date of such

termination, and may not resume doing business as an introducing broker

as defined in Sec. 5.1(f)(1) of this chapter unless and until it files

a new guarantee agreement.

(B) Each person filing a Form 1-FR-IB in accordance with this

section must include with the financial report a statement describing

the source of his current assets and representing that his capital has

been contributed for the purpose of operating his business and will

continue to be used for such purpose.

* * * * *

6. Section 1.35 is amended by revising paragraphs (a), (a-1) and

(b) to read as follows:

Sec. 1.35 Records of cash commodity, futures, and option

transactions.

(a) Futures commission merchants, retail foreign exchange dealers,

introducing brokers, and members of contract markets. Each futures

commission merchant, retail foreign exchange dealer, introducing

broker, and member of a contract market shall keep full, complete, and

systematic records, together with all pertinent data and memoranda, of

all transactions relating to its business of dealing in commodity

futures, retail forex transactions, commodity options, and cash

commodities (including currencies). Each futures commission merchant,

retail foreign exchange dealer, introducing broker, and member of a

contract market shall retain the required records, data, and memoranda

in accordance with the requirements of Sec. 1.31, and produce them for

inspection and furnish true and correct information and reports as to

the contents or the meaning thereof, when and as requested by an

authorized representative of the Commission or the United States

Department of Justice. Included among such records shall be all orders

(filled, unfilled, or canceled), trading cards, signature cards, street

books, journals, ledgers, canceled checks, copies of confirmations,

copies of statements of purchase and sale, and all other records, data

and memoranda, which have been prepared in the course of its business

of dealing in commodity futures, retail forex transactions, commodity

options, and cash commodities. Among such records each member of a

contract market must retain and produce for inspection are all

documents on which trade information is originally recorded, whether or

not such documents must be prepared pursuant to the rules or

regulations of either the Commission or the contract market. For

purposes of this section, such documents are referred to as ``original

source documents.''

(a-1) Futures commission merchants, retail foreign exchange

dealers, introducing brokers, and members of contract markets:

Recording of customers' and option customers' orders. (1) Each futures

commission merchant, each retail foreign exchange dealer and each

introducing broker receiving a customer's, retail forex customer's or

option customer's order, as applicable, shall immediately upon receipt

thereof prepare a written record of the order including the account

identification, except as provided in paragraph (a-1)(5) of this

section, and order number, and shall record thereon, by timestamp or

other timing device, the date and time, to the nearest minute, the

order is received, and in addition, for option customers' orders, the

time, to the nearest minute, the order is transmitted for execution.

(2)(i) Each member of a contract market who on the floor of such

contract market receives a customer's or option customer's order which

is not in the form of a written record including the account

identification, order number, and the date and time, to the nearest

minute, the order was transmitted or received on the floor of such

contract market, shall immediately upon receipt thereof prepare a

written record of the order in nonerasable ink, including the account

identification, except as provided in paragraph (a-1)(5) of this

section or appendix C to this part, and order number and shall record

thereon,

[[Page 3299]]

by timestamp or other timing device, the date and time, to the nearest

minute, the order is received.

(ii) Except as provided in paragraph (a-1)(3) of this section:

(A) Each contract market member who on the floor of such contract

market receives an order from another member present on the floor which

is not in the form of a written record shall, immediately upon receipt

of such order, prepare a written record of the order or obtain from the

member who placed the order a written record of the order, in non-

erasable ink including the account identification and order number and

shall record thereon, by time-stamp or other timing device, the date

and time, to the nearest minute, the order is received; or

(B) When a contract market member present on the floor places an

order, which is not in the form of a written record, for his own

account or an account over which he has control, with another member of

such contract market for execution:

(1) The member placing such order immediately upon placement of the

order shall record the order and time of placement to the nearest

minute on a sequentially-numbered trading card maintained in accordance

with the requirements of paragraph (d) of this section;

(2) The member receiving and executing such order immediately upon

execution of the order shall record the time of execution to the

nearest minute on a trading card or other record maintained pursuant to

the requirements of paragraph (d) of this section; and

(3) The member receiving and executing the order shall return such

trading card or other record to the member placing the order. The

member placing the order then must submit together both of the trading

cards or other records documenting such trade to contract market

personnel or the clearing member, in accordance with contract market

rules adopted pursuant to paragraph (j)(1) of this section.

(iii) Each contract market may adopt rules, which must be submitted

to the Commission pursuant to section 5a(a)(12)(A) of the Act and

Commission Regulation 1.41, that provide alternative requirements to

those contained in paragraph (a-1)(2)(ii) of this section. Such rules

shall, at a minimum, require that the contemporaneous written records:

(A) Contain the terms of the order;

(B) Include reliable timing data for the initiation and execution

of the order which would permit complete and effective reconstruction

of the order placement and execution; and

(C) Be submitted to contract market personnel or clearing members

in accordance with contract market rules adopted pursuant to paragraph

(j)(1) of this section.

(3)(i) The requirements of paragraph (a-1)(2)(ii) of this section

will not apply if a contract market maintains in effect rules which

have been submitted to the Commission pursuant to section 5a(a)(12)(A)

of the Act and Commission Regulation 1.41, which provide for an

exemption where:

(A) A contract market member places with another member of such

contract market an order that is part of a spread transaction;

(B) The member placing the order personally executes one or more

legs of the spread; and

(C) The member receiving and executing such order immediately upon

execution of the order records the time of execution to the nearest

minute on his trading card or other record maintained in accordance

with the requirements of paragraph (d) of this section.

(ii) Each contract market shall, as part of its trade practice

surveillance program, conduct surveillance for compliance with the

recordkeeping and other requirements under paragraphs (a-1) (2) and (3)

of this section, and for trading abuses related to the execution of

orders for members present on the floor of the contract market.

(4) Each member of a contract market reporting the execution from

the floor of the contract market of a customer's or option customer's

order or the order of another member of the contract market received in

accordance with paragraphs (a-1)(2)(i) or (a-1)(2)(ii)(A) of this

section, shall record on a written record of the order, including the

account identification, except as provided in paragraph (a-1)(5) of

this section, and order number, by timestamp or other timing device,

the date and time to the nearest minute such report of execution is

made. Each member of a contract market shall submit the written records

of customer orders or orders from other contract market members to

contract market personnel or to the clearing member responsible for the

collection of orders prepared pursuant to this paragraph as required by

contract market rules adopted in accordance with paragraph (j)(1) of

this section. The execution price and other information reported on the

order tickets must be written in nonerasable ink.

(5) Post-execution allocation of bunched orders. Specific customer

account identifiers for accounts included in bunched orders need not be

recorded at time of order placement or upon report of execution if the

requirements of paragraphs (a-1)(5)(i)-(iv) of this section are met.

(i) Eligible account managers. The person placing and directing the

allocation of an order eligible for post-execution allocation must have

been granted written investment discretion with regard to participating

customer accounts. The following persons shall qualify as eligible

account managers:

(A) A commodity trading advisor registered with the Commission

pursuant to the Act or excluded or exempt from registration under the

Act or the Commission's rules, except for entities exempt under Sec.

4.14(a)(3) or Sec. 4.14(a)(6) of this chapter;

(B) An investment adviser registered with the Securities and

Exchange Commission pursuant to the Investment Advisers Act of 1940 or

with a state pursuant to applicable state law or excluded or exempt

from registration under such Act or applicable state law or rule;

(C) A bank, insurance company, trust company, or savings and loan

association subject to federal or state regulation; or

(D) A foreign adviser that exercises discretionary trading

authority solely over the accounts of non-U.S. persons, as defined in

Sec. 4.7(a)(1)(iv) of this chapter.

(ii) Information. Eligible account managers shall make the

following information available to customers upon request:

(A) The general nature of the allocation methodology the account

manager will use;

(B) Whether accounts in which the account manager may have any

interest may be included with customer accounts in bunched orders

eligible for post-execution allocation; and

(C) Summary or composite data sufficient for that customer to

compare its results with those of other comparable customers and, if

applicable, any account in which the account manager has an interest.

(iii) Allocation. Orders eligible for post-execution allocation

must be allocated by an eligible account manager in accordance with the

following:

(A) Allocations must be made as soon as practicable after the

entire transaction is executed, but in any event account managers must

provide allocation information to futures commission merchants no later

than a time sufficiently before the end of the day the order is

executed to ensure that clearing records identify the ultimate customer

for each trade.

[[Page 3300]]

(B) Allocations must be fair and equitable. No account or group of

accounts may receive consistently favorable or unfavorable treatment.

(C) The allocation methodology must be sufficiently objective and

specific to permit independent verification of the fairness of the

allocations using that methodology by appropriate regulatory and self-

regulatory authorities and by outside auditors.

(iv) Records. (A) Eligible account managers shall keep and must

make available upon request of any representative of the Commission,

the United States Department of Justice, or other appropriate

regulatory agency, the information specified in paragraph (a-1)(5)(ii)

of this section.

(B) Eligible account managers shall keep and must make available

upon request of any representative of the Commission, the United States

Department of Justice, or other appropriate regulatory agency, records

sufficient to demonstrate that all allocations meet the standards of

paragraph (a-1)(5)(iii) of this section and to permit the

reconstruction of the handling of the order from the time of placement

by the account manager to the allocation to individual accounts.

(C) Futures commission merchants that execute orders or that carry

accounts eligible for post-execution allocation, and members of

contract markets that execute such orders, must maintain records that,

as applicable, identify each order subject to post-execution allocation

and the accounts to which contracts executed for such order are

allocated.

(D) In addition to any other remedies that may be available under

the Act or otherwise, if the Commission has reason to believe that an

account manager has failed to provide information requested pursuant to

paragraph (a-1)(5)(iv)(A) or (a-1)(5)(iv)(B) of this section, the

Commission may inform in writing any designated contract market or

derivatives transaction execution facility and that designated contract

market or derivatives transaction execution facility shall prohibit the

account manager from submitting orders for execution except for

liquidation of open positions and no futures commission merchants shall

accept orders for execution on any designated contract market or

derivatives transaction execution facility from the account manager

except for liquidation of open positions.

(E) Any account manager that believes he or she is or may be

adversely affected or aggrieved by action taken by the Commission under

paragraph (a-1)(5)(iv)(D) of this section shall have the opportunity

for a prompt hearing in accordance with the provisions of Sec.

21.03(g) of this chapter.

* * * * *

(b) Futures commission merchants, retail foreign exchange dealers,

introducing brokers, and clearing members of contract markets. Each

futures commission merchant, each retail foreign exchange dealer, and

each clearing member of a contract market and, for purposes of

paragraph (b)(3) of this section, each introducing broker, shall, as a

minimum requirement, prepare regularly and promptly, and keep

systematically and in permanent form, the following:

(1) A financial ledger record which will show separately for each

customer or retail forex customer or option customer all charges

against and credits to such customer's or retail forex customer's or

option customer's account, including but not limited to customer or

retail forex customer funds deposited, withdrawn, or transferred, and

charges or credits resulting from losses or gains on closed

transactions;

(2) A record of transactions which will show separately for each

account (including proprietary accounts):

(i) All commodity futures transactions executed for such account,

including the date, price, quantity, market, commodity and future;

(ii) All retail forex transactions executed for such account,

including the date, price, quantity, and currency; and

(iii) All commodity option transactions executed for such account,

including the date, whether the transaction involved a put or call,

expiration date, quantity, underlying contract for future delivery or

underlying physical, strike price, and details of the purchase price of

the option, including premium, mark-up, commission and fees; and

(3) A record or journal which will separately show for each

business day complete details of:

(i) All commodity futures transactions executed on that day,

including the date, price, quantity, market, commodity, future and the

person for whom such transaction was made;

(ii) All retail forex transactions executed on that day for such

account, including the date, price, quantity, currency and the person

for whom such transaction was made; and

(iii) All commodity option transactions executed on that day,

including the date, whether the transaction involved a put or call, the

expiration date, quantity, underlying contract for future delivery, or

underlying physical, strike price, details of the purchase price of the

option, including premium, mark-up, commission and fees and the person

for whom the transaction was made; and

(iv) In the case of an introducing broker, the record or journal

required by this paragraph (b)(3) shall also include the futures

commission merchant or retail foreign exchange dealer carrying the

account for which each commodity futures, retail forex and commodity

option transaction was executed on that day. Provided, however, that

where reproductions on microfilm, microfiche or optical disk are

substituted for hard copy in accordance with the provisions of Sec.

1.31(b) of this part, the requirements of paragraphs (b)(1) and (b)(2)

of this section will be considered met if the person required to keep

such records is ready at all times to provide, and immediately provides

in the same city as that in which such person's commodity' retail forex

or commodity option books and records are maintained, at the expense of

such person, reproduced copies which show the records as specified in

paragraphs (b)(1) and (b)(2) of this section, on request of any

representatives of the Commission or the U.S. Department of Justice.

* * * * *

7. Section 1.36 is amended by revising paragraph (a) to read as

follows:

Sec. 1.36 Record of securities and property received from customers

and option customers.

(a) Each futures commission merchant and each retail foreign

exchange dealer shall maintain, as provided in Sec. 1.31, a record of

all securities and property received from customers, retail forex

customers or option customers in lieu of money to margin, purchase,

guarantee, or secure the commodity, retail forex or commodity option

transactions of such customers, retail forex customers or option

customers. Such record shall show separately for each customer, retail

forex customer or option customer: a description of the securities or

property received; the name and address of such customer, retail forex

customer or option customer; the dates when the securities or property

were received; the identity of the depositories or other places where

such securities or property are segregated or held; the dates of

deposits and withdrawals from such depositories; and the dates of

return of such securities or property to such customer, retail forex

customer or option customer, or other disposition thereof, together

with the facts and circumstances of such other disposition. In the

event any futures commission

[[Page 3301]]

merchant deposits with the clearing organization of a contract market,

directly or with a bank or trust company acting as custodian for such

clearing organization, securities and/or property which belong to a

particular customer or option customer, such futures commission

merchant shall obtain written acknowledgment from such clearing

organization that it was informed that such securities or property

belong to customers or option customers of the futures commission

merchant making the deposit. Such acknowledgment shall be retained as

provided in Sec. 1.31.

* * * * *

8. Section 1.37 is amended by revising paragraph (a)(1) to read as

follows:

Sec. 1.37 Customer's or option customer's name, address, and

occupation recorded; record of guarantor or controller of account.

(a)(1) Each futures commission merchant, retail foreign exchange

dealer, introducing broker, and member of a contract market shall keep

a record in permanent form which shall show for each commodity futures,

retail forex or option account carried or introduced by it the true

name and address of the person for whom such account is carried or

introduced and the principal occupation or business of such person as

well as the name of any other person guaranteeing such account or

exercising any trading control with respect to such account. For each

such commodity option account, the records kept by such futures

commission merchant, introducing broker, and member of a contract

market must also show the name of the person who has solicited and is

responsible for each option customer's account or assign account

numbers in such a manner to identify that person.

* * * * *

9. Section 1.40 is revised to read as follows:

Sec. 1.40 Crop, market information letters, reports; copies required.

Each futures commission merchant, each retail foreign exchange

dealer, each introducing broker and each member of a contract market

shall, upon request, furnish or cause to be furnished to the Commission

a true copy of any letter, circular, telegram, or report published or

given general circulation by such futures commission merchant, retail

foreign exchange dealer, introducing broker or member which concerns

crop or market information or conditions that affect or tend to affect

the price of any commodity or exchange rate, and the true source of or

authority for the information contained therein.

10. Section 1.46 is amended by revising paragraphs (a) and (b) to

read as follows:

Sec. 1.46 Application and closing out of offsetting long and short

positions.

(a) Application of purchases and sales. (1) Except with respect to

purchases or sales which are for omnibus accounts, or where the

customer or account controller has instructed otherwise, any futures

commission merchant who, on or subject to the rules of a designated

contract market or registered derivatives transaction execution

facility:

(i) Purchases any commodity for future delivery for the account of

any customer when the account of such customer at the time of such

purchase has a short position in the same future of the same commodity

on the same market;

(ii) Sells any commodity for future delivery for the account of any

customer when the account of such customer at the time of such sale has

a long position in the same future of the same commodity on the same

market;

(iii) Purchases a put or call option for the account of any option

customer when the account of such option customer at the time of such

purchase has a short put or call option position with the same

underlying futures contract or same underlying physical, strike price,

expiration date and contract market as that purchased; or

(iv) Sells a put or call option for the account of any option

customer when the account of such option customer at the time of such

sale has a long put or call option position with the same underlying

futures contract or same underlying physical, strike price, expiration

date and contract market as that sold--shall on the same day apply such

purchase or sale against such previously held short or long futures or

option position, as the case may be, and shall, for futures

transactions, promptly furnish such customer a statement showing the

financial result of the transactions involved and, if applicable, that

the account was introduced to the futures commission merchant by an

introducing broker and the names of the futures commission merchant and

introducing broker.

(2) Any futures commission merchant or retail foreign exchange

dealer who:

(i) Engages in a retail forex transaction involving the purchase of

any currency for the account of any retail forex customer when the

account of such retail forex customer at the time of such purchase has

an open retail forex transaction for the sale of the same currency;

(ii) Engages in a retail forex transaction involving the sale of

any currency for the account of any retail forex customer when the

account of such retail forex customer at the time of such sale has an

open retail forex transaction for the purchase of the same currency;

(iii) Purchases a put or call option involving foreign currency for

the account of any option customer when the account of such option

customer at the time of such purchase has a short put or call option

position with the same underlying currency, strike price, and

expiration date as that purchased; or

(iv) Sells a put or call option involving foreign currency for the

account of any option customer when the account of such option customer

at the time of such sale has a long put or call option position with

the same underlying currency, strike price, and expiration date as that

sold--shall immediately apply such purchase or sale against such

previously held opposite transaction, and shall promptly furnish such

retail forex customer a statement showing the financial result of the

transactions involved and, if applicable, that the account was

introduced to the futures commission merchant or retail foreign

exchange dealer by an introducing broker and the names of the futures

commission merchant or retail foreign exchange dealer, and the

introducing broker.

(b) Close-out against oldest open position. In all instances

wherein the short or long futures, retail forex transaction or option

position in such customer's, retail forex customer's or option

customer's account immediately prior to such offsetting purchase or

sale is greater than the quantity purchased or sold, the futures

commission merchant or retail foreign exchange dealer shall apply such

offsetting purchase or sale to the oldest portion of the previously

held short or long position: Provided, That upon specific instructions

from the customer or option customer the offsetting transaction shall

be applied as specified by the customer or option customer without

regard to the date of acquisition of the previously held position; and

Provided, further, that a futures commission merchant or retail foreign

exchange dealer, if permitted by the rules of a registered futures

association, may offset, at the customer's request, retail forex

transactions of the same size, even if the customer holds other

transactions of a different size, but in each case must offset the

transaction against the oldest

[[Page 3302]]

transaction of the same size. Such instructions may also be accepted

from any person who, by power of attorney or otherwise, actually

directs trading in the customer's, retail forex customer's or option

customer's account unless the person directing the trading is the

futures commission merchant or retail foreign exchange dealer

(including any partner thereof), or is an officer, employee, or agent

of the futures commission merchant or retail foreign exchange dealer.

With respect to every such offsetting transaction that, in accordance

with such specific instructions, is not applied to the oldest portion

of the previously held position, the futures commission merchant or

retail foreign exchange dealer shall clearly show on the statement

issued to the customer, retail forex customer or option customer in

connection with the transaction, that because of the specific

instructions given by or on behalf of the customer, retail forex

customer or option customer the transaction was not applied in the

usual manner, i.e., against the oldest portion of the previously held

position. However, no such showing need be made if the futures

commission merchant or retail foreign exchange dealer has received such

specific instructions in writing from the customer, retail forex

customer or option customer for whom such account is carried.

* * * * *

11. Section 1.52 is amended by:

a. Revising paragraphs (a) and (c);

b. Revising paragraphs (g)(3) and (g)(4); and

c. Revising paragraphs (h), (j), and (k) to read as follows:

Sec. 1.52 Self-regulatory organization adoption and surveillance of

minimum financial requirements.

(a) Each self-regulatory organization must adopt, and submit for

Commission approval, rules prescribing minimum financial and related

reporting requirements for all its members who are registered futures

commission merchants or registered retail foreign exchange dealers.

Each self-regulatory organization other than a contract market must

adopt, and submit for Commission approval, rules prescribing minimum

financial and related reporting requirements for all its members who

are registered introducing brokers. Each contract market which elects

to have a category of membership for introducing brokers must adopt,

and submit for Commission approval, rules prescribing minimum financial

and related reporting requirements for all its members who are

registered introducing brokers. Each self-regulatory organization shall

submit for Commission approval any modification or other amendments to

such rules. Such requirements must be the same as, or more stringent

than, those contained in Sec. Sec. 1.10 and 1.17, for futures

commission merchants and introducing brokers, and Sec. 5.7 for retail

foreign exchange dealers. The definition of adjusted net capital must

be the same as that prescribed in Sec. 1.17(c) for futures commission

merchants and introducing brokers, and Sec. 5.7(b)(2) for futures

commission merchants offering or engaging in retail forex transactions

and for retail foreign exchange dealers: Provided, however, A

designated self-regulatory organization may permit its member

registrants which are registered with the Securities and Exchange

Commission as securities brokers or dealers to file (in accordance with

Sec. 1.10(h)) a copy of their Financial and Operational Combined

Uniform Single Report under the Securities Exchange Act of 1934, Part

II, Part IIA, or Part II CSE, in lieu of Form 1-FR: And, provided

further, A designated self-regulatory organization may permit its

member introducing brokers to file a Form 1-FR-IB in lieu of a Form 1-

FR-FCM.

* * * * *

(c) Any two or more self-regulatory organizations may file with the

Commission a plan for delegating to a designated self-regulatory

organization, for any registered futures commission merchant, any

registered retail foreign exchange dealer, or any registered

introducing broker which is a member of more than one such self-

regulatory organization, the responsibility of:

(1) Monitoring and auditing for compliance with the minimum

financial and related reporting requirements adopted by such self-

regulatory organizations in accordance with paragraph (a) of this

section; and

(2) Receiving the financial reports necessitated by such minimum

financial and related reporting requirements.

* * * * *

(g) * * *

(3) Reduces multiple monitoring and auditing for compliance with

the minimum financial rules of the self-regulatory organizations

submitting the plan for any futures commission merchant, retail foreign

exchange dealer, or introducing broker which is a member of more than

one self-regulatory organization;

(4) Reduces multiple reporting of the financial information

necessitated by such minimum financial and related reporting

requirements by any futures commission merchant, retail foreign

exchange dealer, or introducing broker which is a member of more than

one self-regulatory organization; * * *

(h) After the Commission has approved a plan or part of one under

Sec. 1.52(g), a self-regulatory organization relieved of

responsibility must notify each of its members which is subject to such

a plan:

(1) Of the limited nature of its responsibility for such a member's

compliance with its minimum financial and related reporting

requirements; and

(2) Of the identity of the designated self-regulatory organization

which has been delegated responsibility for such a member.

* * * * *

(j) Whenever a registered futures commission merchant, a registered

retail foreign exchange dealer, or a registered introducing broker

holding membership in a self-regulatory organization ceases to be a

member in good standing of that self-regulatory organization, such

self-regulatory organization must, on the same day that event takes

place, give telegraphic notice of that event to the principal office of

the Commission in Washington, DC, and send a copy of that notification

to such futures commission merchant, retail foreign exchange dealer, or

such introducing broker.

(k) Nothing in this section shall preclude the Commission from

examining any futures commission merchant, retail foreign exchange

dealer, or introducing broker for compliance with the minimum financial

and related reporting requirements to which such futures commission

merchant, retail foreign exchange dealer, or introducing broker is

subject.

* * * * *

PART 3--REGISTRATION

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

Authority: 7 U.S.C. 1a, 2, 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.

13. Section 3.1 is amended by revising paragraph (c) to read as

follows:

Sec. 3.1 Definitions.

* * * * *

(c) Sponsor. Sponsor means the futures commission merchant, retail

foreign exchange dealer, introducing broker, commodity trading advisor,

commodity pool operator or leverage transaction merchant which makes

the certification required by Sec. 3.12 of this part for the

registration of an associated person of such sponsor.

* * * * *

14. Section 3.4 is amended by revising paragraph (a) to read as

follows:

[[Page 3303]]

Sec. 3.4 Registration in one capacity not included in registration in

any other capacity.

(a) Except as may be otherwise provided in the Act or in any rule,

regulation, or order of the Commission, each futures commission

merchant, retail foreign exchange dealer, floor broker, floor trader,

associated person, commodity trading advisor, commodity pool operator,

introducing broker, and leverage transaction merchant must register as

such under the Act. Registration in one capacity under the Act shall

not include registration in any other capacity: Provided, however, That

a registered floor broker need not also register as a floor trader in

order to engage in activity as a floor trader.

* * * * *

15. Section 3.10 is amended by:

a. Revising the heading;

b. Revising paragraph (a)(1);

c. Revising paragraph (b); and

d. Revising paragraph (d) to read as follows:

Sec. 3.10 Registration of futures commission merchants, retail

foreign exchange dealers, 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, retail foreign exchange dealers,

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.

(ii) Applicants for registration as a futures commission merchant,

retail foreign exchange dealer or introducing broker must accompany

their Form 7-R with a Form 1-FR-FCM or Form 1-FR-IB, respectively, in

accordance with the provisions of Sec. 1.10 of this chapter: Provided,

however, That an applicant for registration as a futures commission

merchant or introducing broker which is registered with the Securities

and Exchange Commission as a securities broker or dealer may accompany

its Form 7-R with a copy of its Financial and Operational Combined

Uniform Single Report under the Securities Exchange Act of 1934, Part

II or Part II A, in accordance with the provisions of Sec. 1.10(h) of

this chapter.

* * * * *

(b) Duration of registration. (1) A person registered as a futures

commission merchant, retail foreign exchange dealer, introducing

broker, commodity trading advisor, commodity pool operator or leverage

transaction merchant in accordance with paragraph (a) of this section

will continue to be so registered until the effective date of any

revocation or withdrawal of such registration. Such person will be

prohibited from engaging in activities requiring registration under the

Act or from representing himself to be a registrant under the Act or

the representative or agent of any registrant during the pendency of

any suspension of such registration.

(2) A person registered as an introducing broker who was a party to

a guarantee agreement with a futures commission merchant or retail

foreign exchange dealer in accordance with Sec. 1.10(j) of this

chapter will have its registration cease thirty days after the

termination of such guarantee agreement unless the procedures set forth

in Sec. 1.10(j)(8) of this chapter are followed.

* * * * *

(d) On a date to be established by the National Futures

Association, and in accordance with procedures established by the

National Futures Association, each registrant as a futures commission

merchant, retail foreign exchange dealer, introducing broker, commodity

trading advisor, commodity pool operator or leverage transaction

merchant shall, on an annual basis, review and update registration

information maintained with the National Futures Association. The

failure to complete the review and update within thirty days following

the date established by the National Futures Association shall be

deemed to be a request for withdrawal from registration, which shall be

processed in accordance with the provisions of Sec. 3.33(f).

* * * * *

16. Section 3.12 is amended by

a. Revising the heading;

b. Revising paragraph (a);

c. Revising paragraph (f)(1)(iii)(E);

d. Revising paragraph (f)(4);

e. Revising paragraph (h)(1)(i) and paragraph (h)(1)(iii); and

f. Removing paragraph (j)

The revisions read as follows:

Sec. 3.12 Registration of associated persons of futures commission

merchants, retail foreign exchange dealers, introducing brokers,

commodity trading advisors, commodity pool operators and leverage

transaction merchants.

(a) Registration required. It shall be unlawful for any person to

be associated with a futures commission merchant, retail foreign

exchange dealer, introducing broker, commodity trading advisor,

commodity pool operator or leverage transaction merchant as an

associated person unless that person shall have registered under the

Act as an associated person of that sponsoring futures commission

merchant, retail foreign exchange dealer, introducing broker, commodity

trading advisor, commodity pool operator or leverage transaction

merchant in accordance with the procedures in paragraphs (c), (d), (f),

or (i), of this section or is exempt from such registration pursuant to

paragraph (h) of this section.

* * * * *

(f) * * *

(1) * * *

(iii) * * *

(E) Associated person's supervision of any person or persons

engaged in any of the foregoing solicitations or acceptances, with

respect to any customers common to it and any other futures commission

merchant, retail foreign exchange dealer, introducing broker, commodity

trading advisor, commodity pool operator, or leverage transaction

merchant with which the associated person is associated.

* * * * *

(4) If a person is associated with a futures commission merchant,

with a retail foreign exchange dealer, or with an introducing broker

and he directs customers seeking a managed account to use the services

of a commodity trading advisor(s) approved by the futures commission

merchant, retail foreign exchange dealer or introducing broker and all

such customers' accounts solicited or accepted by the associated person

are carried by the futures commission merchant, retail foreign exchange

dealer or introduced by the introducing broker with which the

associated person is associated, such a person shall be deemed to be

associated solely with the futures commission merchant, retail foreign

exchange dealer or introducing broker and may not also register as an

associated person of the commodity trading advisor(s).

* * * * *

(h) * * *

(1) * * *

(i) Registered under the Act as a futures commission merchant,

retail foreign exchange dealer, floor broker, or as an introducing

broker;

* * * * *

(iii) The chief operating officer, general partner or other person

in the supervisory chain-of-command, provided the futures commission

merchant, retail foreign exchange dealer, introducing broker, commodity

trading advisor, commodity pool operator, or leverage transaction

merchant engages in commodity interest related activity for customers

as no more

[[Page 3304]]

than ten percent of its total revenue on an annual basis, the firm is

not subject to a pending proceeding brought by the Commission or a

self-regulatory organization alleging fraud or failure to supervise,

and has not been found in such a proceeding to have committed fraud or

failed to supervise, as required by the Act, the rules promulgated

thereunder or the rules of a self-regulatory organization, the person

for whom exemption is sought and the person designated in accordance

with paragraphs (h)(1)(iii)(C) or (h)(1)(iii)(D) of this section are

listed as principals of the firm, the fitness examination conducted by

the National Futures Association with respect to these persons

discloses no derogatory information that would disqualify any of such

persons as a principal or as an associated person, and the firm files

with the National Futures Association corporate or partnership

resolutions stating that:

(A) Such supervisory person is not authorized to:

(1) Solicit or accept customers', retail forex customers', or

leverage customers' orders,

(2) Solicit a client's or prospective client's discretionary

account,

(3) Solicit funds, securities or property for a participation in a

commodity pool, or

(4) Exercise any line supervisory authority over those persons so

engaged;

(B) Such supervisory person has no authority with respect to

hiring, firing or other personnel matters involving persons engaged in

activities subject to regulation under the Act;

(C) Another person (or persons) designated therein, who is

registered as an associated person(s) or who has applied for

registration as an associated person(s) and is not subject to a pending

proceeding brought by the Commission or a self-regulatory organization

alleging fraud or failure to supervise, and has not been found in such

a proceeding to have committed fraud or failed to supervise, as

required by the Act, the rules promulgated thereunder or the rules of a

self-regulatory organization, holds and exercises full and final

supervisory authority, including authority to hire and fire personnel,

over the customer commodity interest related activities of the firm;

and

(D) If the person (or persons) so designated in accordance with

paragraph (h)(1)(iii)(C) of this section ceases to have the authority

referred to therein, the firm will notify the National Futures

Association within twenty days of such occurrence by means of a

subsequent resolution which resolution must also include the name of

another associated person (or persons) who has been vested with full

supervisory authority, including authority to hire and fire personnel,

over the customer commodity interest related activities of the firm in

the event that all of those previously designated in accordance with

paragraph (h)(1)(iii)(C) of this section have been relieved of such

authority. Subsequent changes in supervisory authority shall be

reported in the same manner; or

* * * * *

17. Section 3.21 is amended by:

a. Revising paragraph (b)(3); and

b. Revising paragraph (c)(1) through (3) and (c)(4)(i) to read as

follows:

Sec. 3.21 Exemption from fingerprinting requirement in certain cases.

* * * * *

(b) * * *

(3) With respect to the fingerprints of a principal. An officer, if

the futures commission merchant, retail foreign exchange dealer,

commodity trading advisor, commodity pool operator, introducing broker,

or leverage transaction merchant with which the principal will be

affiliated is a corporation, a general partner, if a partnership, or

the sole proprietor, if a sole proprietorship.

(c) Outside directors. Any futures commission merchant, retail

foreign exchange dealer, introducing broker, commodity trading advisor,

commodity pool operator or leverage transaction merchant that has a

principal who is a director but is not also an officer or employee of

the firm may, in lieu of submitting a fingerprint card in accordance

with the provisions of Sec. Sec. 3.10(a)(2) and 3.31(a)(2), file a

``Notice Pursuant to Rule 3.21(c)'' with the National Futures

Association. Such notice shall state, if true, that such outside

director:

(1) Is not engaged in:

(i) The solicitation or acceptance of customers' orders or retail

forex customers' orders,

(ii) The solicitation of funds, securities or property for a

participation in a commodity pool,

(iii) The solicitation of a client's or prospective client's

discretionary account,

(iv) The solicitation or acceptance of leverage customers' orders

for leverage transactions;

(2) Does not regularly have access to the keeping, handling or

processing of:

(i) Commodity interest transactions;

(ii) Customer funds, retail forex customer funds, leverage customer

funds, foreign futures or foreign options secured amount, or adjusted

net capital; or

(3) Does not have direct supervisory responsibility over persons

engaged in the activities referred to in paragraphs (c)(1) and (c)(2)

of this section; and

(4) * * *:

(i) The name of the futures commission merchant, retail foreign

exchange dealer, introducing broker, commodity trading advisor,

commodity pool operator, leverage transaction merchant, or applicant

for registration in any of these capacities of which the person is an

outside director;

* * * * *

18. Section 3.30 is amended by revising paragraph (a) to read as

follows:

Sec. 3.30 Current address for purpose of delivery of communications

from the Commission or the National Futures Association.

(a) The address of each registrant, applicant for registration and

principal, as submitted on the application for registration (Form 7-R

or Form 8-R) or as submitted on the biographical supplement (Form 8-R)

shall be deemed to be the address for delivery to the registrant,

applicant or principal for any communications from the Commission or

the National Futures Association, including any summons, complaint,

reparation claim, order, subpoena, special call, request for

information, notice, and other written documents or correspondence,

unless the registrant, applicant or principal specifies another address

for this purpose: Provided, That the Commission or the National Futures

Association may address any correspondence relating to a biographical

supplement submitted for or on behalf of a principal to the futures

commission merchant, retail foreign exchange dealer, commodity trading

advisor, commodity pool operator, introducing broker, or leverage

transaction merchant with which the principal is affiliated and may

address any correspondence relating to the registration of an

associated person to the futures commission merchant, retail foreign

exchange dealer, commodity trading advisor, commodity pool operator,

introducing broker, or leverage transaction merchant with which the

associated person or the applicant for registration is or will be

associated as an associated person.

* * * * *

19. Section 3.31 is amended by revising paragraphs (a)(1), (b),

(c), and (d) to read as follows:

Sec. 3.31 Deficiencies, inaccuracies, and changes, to be reported.

(a)(1) Each applicant or registrant as a futures commission

merchant, retail foreign exchange dealer, commodity

[[Page 3305]]

trading advisor, commodity pool operator, introducing broker, or

leverage transaction merchant shall, in accordance with the

instructions thereto, promptly correct any deficiency or inaccuracy in

Form 7-R or Form 8-R which no longer renders accurate and current the

information contained therein. Each such correction shall be made on

Form 3-R and shall be prepared and filed in accordance with the

instructions thereto. Provided, however, that where a registrant is

reporting a change in the form of organization from or to a sole

proprietorship, the registrant must file a Form 7-W regarding the pre-

existing organization and a Form 7-R regarding the newly formed

organization.

* * * * *

(b) Each applicant or registrant as a floor broker, floor trader or

associated person, and each principal of a futures commission merchant,

retail foreign exchange dealer, commodity trading advisor, commodity

pool operator, introducing broker, or leverage transaction merchant

must, in accordance with the instructions thereto, promptly correct any

deficiency or inaccuracy in the Form 8-R or supplemental statement

thereto which renders no longer accurate and current the information

contained in the Form 8-R or supplemental statement. Each such

correction must be made on Form 3-R and must be prepared and filed in

accordance with the instructions thereto.

(c)(1) After the filing of a Form 8-R or a Form 3-R by or on behalf

of any person for the purpose of permitting that person to be an

associated person of a futures commission merchant, retail foreign

exchange dealer, commodity trading advisor, commodity pool operator,

introducing broker, or a leverage transaction merchant, that futures

commission merchant, retail foreign exchange dealer, commodity trading

advisor, commodity pool operator, introducing broker or leverage

transaction merchant must, within thirty days after the occurrence of

either of the following, file a notice thereof with the National

Futures Association indicating:

(i) The failure of that person to become associated with the

futures commission merchant, retail foreign exchange dealer, commodity

trading advisor, commodity pool operator, introducing broker, or

leverage transaction merchant, and the reasons therefor; or

(ii) The termination of the association of the associated person

with the futures commission merchant, retail foreign exchange dealer,

commodity trading advisor, commodity pool operator, introducing broker,

or leverage transaction merchant, and the reasons therefor.

(2) Each person registered as, or applying for registration as, a

futures commission merchant, retail foreign exchange dealer, commodity

trading advisor, commodity pool operator, introducing broker or

leverage transaction merchant must, within thirty days after the

termination of the affiliation of a principal with the registrant or

applicant, file a notice thereof with the National Futures Association.

(3) Any notice required by paragraph (c) of this section must be

filed on Form 8-T or on a Uniform Termination Notice for Securities

Industry Registration.

(d) Each contract market or derivatives transaction execution

facility that has granted trading privileges to a person who is

registered, has received a temporary license, or has applied for

registration as a floor broker or floor trader, must notify the

National Futures Association within sixty days after such person has

ceased having trading privileges on such contract market or derivatives

transaction execution facility.

(Approved by the Office of Management and Budget under control number

3038-0023)

20. Section 3.33 is amended by revising paragraphs (a) introductory

text, (b) introductory text, (b)(6), and (e) to read as follows:

Sec. 3.33 Withdrawal from registration.

(a) A futures commission merchant, retail foreign exchange dealer,

introducing broker, commodity trading advisor, commodity pool operator,

leverage transaction merchant, floor broker or floor trader may request

that its registration be withdrawn in accordance with the requirements

of this section if:

* * * * *

(b) A request for withdrawal from registration as a futures

commission merchant, retail foreign exchange dealer, introducing

broker, commodity trading advisor, commodity pool operator, or leverage

transaction merchant must be made on Form 7-W, and a request for

withdrawal from registration as a floor broker or floor trader must be

made on Form 8-W, completed and filed with National Futures Association

in accordance with the instructions thereto. The request for withdrawal

must be made by a person duly authorized by the registrant and must

specify:

* * * * *

(6) If a basis for withdrawal from registration under paragraph

(a)(1) of this section is that the registrant has ceased engaging in

activities requiring registration, then, with respect to each capacity

for which the registrant has ceased such activities:

(i) That all customer, retail forex customer or option customer

agreements, if any, have been terminated;

(ii) That all customer, retail forex customer or option customer

positions, if any, have been transferred on behalf of customers or

option customers or closed;

(iii) That all customer, retail forex customer or option customer

cash balances, securities, or other property, if any, have been

transferred on behalf of customers, retail forex customers or option

customers or returned, and that there are no obligations to customers,

retail forex customers or option customers outstanding;

(iv) In the case of a commodity pool operator, that all interests

in, and assets of, any commodity pool have been redeemed, distributed,

or transferred, on behalf of the participants therein, and that there

are no obligations to such participants outstanding;

(v) In the case of a leverage transaction merchant:

(A) Either that all leverage customer agreements, if any, and all

leverage contracts have been terminated, and that all leverage customer

cash balances, securities or other property, if any, have been

returned, or

(B) Alternatively, that pursuant to Commission approval, the

leverage contract obligations of the leverage transaction merchant have

been assumed by another leverage transaction merchant and all leverage

customer cash balances, securities or other property, if any, have been

transferred to such leverage transaction merchant on behalf of leverage

customers or returned, and that there are no obligations to leverage

customers outstanding;

(vi) The nature and extent of any pending customer, retail forex

customer, option customer, leverage customer, or commodity pool

participant claims against the registrant, and, to the best of the

registrant's knowledge and belief, the nature and extent of any

anticipated or threatened customer, option customer, leverage customer,

or commodity pool participant claims against the registrant; and

(vii) In the case of a futures commission merchant or a retail

foreign

[[Page 3306]]

exchange dealer which is a party to a guarantee agreement, that all

such agreements have been or will be terminated in accordance with the

provisions of Sec. 1.10(j) of this chapter not more than thirty days

after the filing of the request for withdrawal from registration.

* * * * *

(e) A request for withdrawal from registration as a futures

commission merchant, retail foreign exchange dealer, introducing

broker, commodity trading advisor, commodity pool operator, leverage

transaction merchant on Form 7-W, and a request for withdrawal from

registration as a floor broker or floor trader on Form 8-W, must be

filed with the National Futures Association and a copy of such request

must be sent by the National Futures Association within three business

days of the receipt of such withdrawal request to the Commodity Futures

Trading Commission, Division of Clearing and Intermediary Oversight,

Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. In

addition, any floor broker or floor trader requesting withdrawal from

registration must file a copy of his Form 8-W with each contract market

that has granted him trading privileges. Within three business days of

any determination by the National Futures Association under Sec.

3.10(d) to treat the failure by a registrant to file an annual Form 7-R

as a request for withdrawal, the National Futures Association shall

send the Commission notice of that determination.

* * * * *

21. Section 3.44 is amended by revising paragraphs (a)(1) through

(5) to read as follows:

Sec. 3.44 Temporary licensing of applicants for guaranteed

introducing broker registration.

(a) * * *

(1) A properly completed guarantee agreement (Form 1-FR part B)

from a futures commission merchant or retail foreign exchange dealer

which is eligible to enter into such an agreement pursuant to Sec.

1.10(j)(2) of this chapter;

(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.

(4) A certification executed by a person duly authorized by the

futures commission merchant or retail foreign exchange dealer that has

executed the guarantee agreement required by paragraph (a)(1) of this

section, stating that:

(i) The futures commission merchant or retail foreign exchange

dealer has verified the information on the Forms 8-R filed pursuant to

paragraph (a)(3) of this section which relate to education and

employment history of the applicant's principals (including each branch

office manager) thereof during the preceding three years; and

(ii) To the best of the futures commission merchant's or retail

foreign exchange dealer's knowledge, information, and belief, all of

the publicly available information supplied by the applicant and its

principals and each branch office manager of the applicant on the Form

7-R and Forms 8-R, as appropriate, is accurate and complete; and

(5) The fingerprints of the applicant, if a sole proprietor, and of

each principal (including each branch office manager) thereof on

fingerprint cards provided by the National Futures Association for that

purpose: Provided, that a principal who has a current Form 8-R on file

with the National Futures Association or the Commission is not required

to submit a fingerprint card.

* * * * *

22. Section 3.45 is amended by revising paragraph (b) to read as

follows:

Sec. 3.45 Restrictions upon activities.

* * * * *

(b) An applicant for registration as an introducing broker who has

received a temporary license may be guaranteed by a futures commission

merchant or retail foreign exchange dealer other than the futures

commission merchant or retail foreign exchange dealer which provided

the initial guarantee agreement described in Sec. 3.44(a)(1) of this

subpart: Provided, That, at least 10 days prior to the effective date

of the termination of the existing guarantee agreement in accordance

with the provisions of Sec. 1.10 (j)(4)(ii) or (j)(5) of this chapter,

or such other period of time as the National Futures Association may

allow for good cause shown, the applicant files with the National

Futures Association--

(1) Written notice of such termination and

(2) A new guarantee agreement with another futures commission

merchant or retail foreign exchange dealer effective the day following

the last effective date of the existing guarantee agreement.

23. Section 3.50 is amended by revising paragraph (b)(2) to read as

follows:

Sec. 3.50 Service.

* * * * *

(b) * * *

(2) Any futures commission merchant or retail foreign exchange

dealer which has entered into a guarantee agreement in accordance with

Sec. 1.10(j) of this chapter, if the applicant or registrant is

registered as or applying for registration as an introducing broker.

* * * * *

24. Section 3.60 is amended by revising paragraph (b)(2)(i)(B) to

read as follows:

Sec. 3.60 Procedure to deny, condition, suspend, revoke or place

restrictions upon registration pursuant to sections 8a(2), 8a(3) and

8a(4) of the Act.

* * * * *

(b) * * *

(2)(i) * * *

(B) In the case of a sponsor which is a futures commission

merchant, a retail foreign exchange dealer or a leverage transaction

merchant, the sponsor is not subject to the reporting requirements of

Sec. 1.12(b), Sec. 5.6(b) or Sec. 31.7(b) of this chapter,

respectively; and

* * * * *

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

25. The authority citation for part 4 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m, 6n, 6o, 12a and

23.

26. Section 4.7 is amended by:

a. Revising paragraph (a)(1)(v)(B); and

b. Revising paragraph (a)(2)(i) to read as follows:

Sec. 4.7 Exemption from certain part 4 requirements for commodity

pool operators with respect to offerings to qualified eligible persons

and for commodity trading advisors with respect to advising qualified

eligible persons.

* * * * *

(a) * * *

(1) * * *

(v) * * *

(B) Has had on deposit with a futures commission merchant, for its

own account at any time during the six-month period preceding either

the date of sale to that person of a pool participation in the exempt

pool or the date that the person opens an exempt account with the

commodity trading advisor, at least $200,000 in exchange-specified

initial margin and option premiums, together with NFA-specified minimum

security deposit for retail forex transactions (as defined in section

5.1(m) of this chapter) for commodity interest transactions; or

* * * * *

[[Page 3307]]

(2) * * *

(i)(A) A futures commission merchant registered pursuant to section

4d of the Act, or a principal thereof;

(B) A retail foreign exchange dealer registered pursuant to section

2(c)(2)(B)(i)(II)(gg) of the Act, or a principal thereof;

* * * * *

27. Section 4.12 is amended by revising paragraph (b)(1)(i)(C) to

read as follows:

Sec. 4.12 Exemption from provisions of part 4.

* * * * *

(b) * * *

(1) * * *

(i) * * *

(C) Will not enter into commodity interest transactions for which

the aggregate initial margin and premiums, and NFA-specified minimum

security deposit for retail forex transactions (as defined in Sec.

5.1(m) of this chapter) exceed 10 percent of the fair market value of

the pool's assets, after taking into account unrealized profits and

unrealized losses on any such contracts it has entered into; Provided,

however, That in the case of an option that is in-the-money at the time

of purchase, the in-the-money amount as defined in Sec. 190.01(x) may

be excluded in computing such 10 percent; and

* * * * *

28. Section 4.13 is amended by:

a. Revising paragraph (a)(3)(ii)(A): and

b. Revising paragraph (a)(3)(ii)(B)(1) to read as follows:

Sec. 4.13 Exemption from registration as a commodity pool operator.

* * * * *

(a) * * *

(3) * * *

(ii) * * *

(A) The aggregate initial margin, premiums, and NFA-specified

minimum security deposit for retail forex transactions (as defined in

section 5.1(m) of this chapter) required to establish such positions,

determined at the time the most recent position was established, will

not exceed 5 percent of the liquidation value of the pool's portfolio,

after taking into account unrealized profits and unrealized losses on

any such positions it has entered into; Provided, That in the case of

an option that is in-the-money at the time of purchase, the in-the-

money amount as defined in Sec. 190.01(x) of this chapter may be

excluded in computing such 5 percent; or

(B) * * *

(1) The term ``notional value'' shall be calculated for each such

futures position by multiplying the number of contracts by the size of

the contract, in contract units (taking into account any multiplier

specified in the contract), by the current market price per unit, and

for each such option position by multiplying the number of contracts by

the size of the contract, adjusted by its delta, in contract units

(taking into account any multiplier specified in the contract), by the

strike price per unit, and for each such retail forex transaction, by

calculating the value in U.S. Dollars of such transaction, at the time

the transaction was established, excluding for this purpose the value

in U.S. Dollars of offsetting long and short transactions, if any; and

* * * * *

29. Section 4.14 is amended by revising paragraph (a)(7) to read as

follows:

Sec. 4.14 Exemption from registration as a commodity trading advisor.

* * * * *

(a) * * *

(7)(i) It is registered under the Act as a leverage transaction

merchant and the person's trading advice is solely in connection with

its business as a leverage transaction merchant;

(ii) It is registered under the Act as a retail foreign exchange

dealer and the person's trading advice is solely in connection with its

business as a retail foreign exchange dealer.

* * * * *

30. Section 4.23 is amended by:

a. Revising paragraph (a)(1);

b. Revising paragraph (a)(7); and

c. Revising paragraph (b)(1) and (2) to read as follows:

Sec. 4.23 Recordkeeping.

(a) Concerning the commodity pool: (1) An itemized daily record of

each commodity interest transaction of the pool, showing the

transaction date, quantity, commodity interest, and, as applicable,

price or premium, delivery month or expiration date, whether a put or a

call, strike price, underlying contract for future delivery or

underlying physical, the futures commission merchant and/or retail

foreign exchange dealer carrying the account and the introducing

broker, if any, whether the commodity interest was purchased, sold

(including, in the case of a retail forex transaction, offset),

exercised, expired (including, in the case of a retail forex

transaction, whether it was rolled forward), and the gain or loss

realized.

* * * * *

(7) Copies of each confirmation of a commodity interest transaction

of the pool, each purchase and sale statement and each monthly

statement for the pool received from a futures commission merchant or

retail foreign exchange dealer.

* * * * *

(b) Concerning the commodity pool operator: (1) An itemized daily

record of each commodity interest transaction of the commodity pool

operator and each principal thereof, showing the transaction date,

quantity, commodity interest, and, as applicable, price or premium,

delivery month or expiration date, whether a put or a call, strike

price, underlying contract for future delivery or underlying physical,

the futures commission merchant or retail foreign exchange dealer

carrying the account and the introducing broker, if any whether the

commodity interest was purchased, sold, exercised, or expired, and the

gain or loss realized.

(2) Each confirmation of a commodity interest transaction, each

purchase and sale statement and each monthly statement furnished by a

futures commission merchant or retail foreign exchange dealer to:

(i) The commodity pool operator relating to a personal account of

the pool operator; and

(ii) Each principal of the pool operator relating to a personal

account of such principal.

* * * * *

31. Section 4.24 is amended by:

a. Revising paragraph (b)(1) introductory text and the first three

sentences of the Risk Disclosure Statement in paragraph (b)(1);

b. Adding paragraph (b)(4);

c. Revising paragraph (e)(6);

d. Revising paragraph (g);

e. Revising paragraphs (h)(2) and (h)(4)(iii);

f. Revising paragraph (i)(2)(ii);

g. Redesignating paragraph (i)(2)(xii) as paragraph (i)(2)(xiii)

and adding new paragraph (i)(2)(xii);

h. Revising paragraphs (j)(1)(vi) and (j)(3); and

i. Revising paragraphs (l)(1)(iii), (l)(2) introductory text and

(l)(2)(i).

The addition and revisions to read as follows:

Sec. 4.24 General disclosures required.

* * * * *

(b) Risk Disclosure Statement. (1) The following Risk Disclosure

Statement must be prominently displayed immediately following any

disclosures required to appear on the cover page of the Disclosure

Document as provided by the Commission, by any applicable federal or

state securities laws and regulations or by any applicable laws of non-

United States jurisdictions.

[[Page 3308]]

RISK DISCLOSURE STATEMENT

YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION

PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD

BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE

LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET

ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN

THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR

ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. * * *

* * * * *

(4) If the pool may engage in retail Forex transactions, the Risk

Disclosure Statement must further state:

YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY ENGAGE IN

OFF-EXCHANGE FOREIGN CURRENCY TRADING. SUCH TRADING IS NOT CONDUCTED IN

THE INTERBANK MARKET. THE FUNDS THAT THE POOL USES FOR OFF-EXCHANGE

FOREIGN CURRENCY TRADING WILL NOT RECEIVE THE SAME PROTECTIONS AS FUNDS

USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED FUTURES AND OPTION

CONTRACTS. IF THE POOL DEPOSITS SUCH FUNDS WITH A COUNTERPARTY AND THAT

COUNTERPARTY BECOMES INSOLVENT, THE POOL'S CLAIM FOR AMOUNTS DEPOSITED

OR PROFITS EARNED ON TRANSACTIONS WITH THE COUNTERPARTY MAY NOT BE

TREATED AS A COMMODITY CUSTOMER CLAIM FOR PURPOSES OF SUBCHAPTER IV OF

CHAPTER 7 OF THE BANKRUPTCY CODE AND THE REGULATIONS THEREUNDER. THE

POOL MAY BE A GENERAL CREDITOR AND ITS CLAIM MAY BE PAID, ALONG WITH

THE CLAIMS OF OTHER GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE

AFTER PRIORITY CLAIMS ARE PAID. EVEN POOL FUNDS THAT THE COUNTERPARTY

KEEPS SEPARATE FROM ITS OWN FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF

PRIORITY AND OTHER GENERAL CREDITORS.

* * * * *

(e) * * *

(6) If known, the futures commission merchant and/or retail foreign

exchange dealer through which the pool will execute its trades, and, if

applicable, the introducing broker through which the pool will

introduce its trades to the futures commission merchant and/or retail

foreign exchange dealer.

* * * * *

(g) Principal risk factors. A discussion of the principal risk

factors of participation in the offered pool. This discussion must

include, without limitation, risks relating to volatility, leverage,

liquidity, counterparty creditworthiness, as applicable to the types of

trading programs to be followed, trading structures to be employed and

investment activity (including retail forex transactions) expected to

be engaged in by the offered pool.

(h) * * *

(2) A description of the trading and investment programs and

policies that will be followed by the offered pool, including the

method chosen by the pool operator concerning how futures commission

merchants and/or retail foreign exchange dealers carrying the pool's

accounts shall treat offsetting positions pursuant to Sec. 1.46 of

this chapter, if the method is other than to close out all offsetting

positions or to close out offsetting positions on other than a first-

in, first-out basis, and any material restrictions or limitations on

trading required by the pool's organizational documents or otherwise.

This description must include, if applicable, an explanation of the

systems used to select commodity trading advisors, investee pools and

types of investment activity to which pool assets will be committed;

* * * * *

(4) * * *

(iii) If assets deposited by the pool as margin or as security

deposit generate income, to whom that income will be paid.

(i) * * *

(2) * * *

(ii) Brokerage fees and commissions, including interest income paid

to futures commission merchants, and any fees incurred to maintain an

open position in retail forex transactions;

* * * * *

(xii) Any costs or fees included in the spread between bid and

asked prices for retail forex transactions; and

* * * * *

(j) * * *

(1) * * *

(vi) Any other person providing services to the pool or soliciting

participants for the pool, or acting as a counterparty to the pool's

retail forex transactions (as defined in section 5.1(m) of this

chapter).

* * * * *

(3) Included in the description of such conflicts must be any

arrangement whereby a person may benefit, directly or indirectly, from

the maintenance of the pool's account with the futures commission

merchant and/or retail foreign exchange dealer, or from the

introduction of the pool's account to a futures commission merchant

and/or retail foreign exchange dealer by an introducing broker (such as

payment for order flow or soft dollar arrangements) or from an

investment of pool assets in investee pools or funds or other

investments.

* * * * *

(l) * * *

(1) * * *

(iii) The pool's futures commission merchants and/or retail foreign

exchange dealers and its introducing brokers, if any.

(2) With respect to a futures commission merchant and/or retail

foreign exchange dealer or an introducing broker, an action will be

considered material if:

(i) The action would be required to be disclosed in the notes to

the futures commission merchant's, retail foreign exchange dealer's or

introducing broker's financial statements prepared pursuant to

generally accepted accounting principles;

* * * * *

32. Section 4.25 is amended by revising paragraph (c)(3)(ii) to

read as follows:

Sec. 4.25 Performance disclosures.

* * * * *

(c) * * *

(3) * * *

(ii) If a major commodity trading advisor has not previously traded

accounts, the pool operator must prominently display the following

statement:

(Name of the major commodity trading advisor), A COMMODITY TRADING

ADVISOR THAT HAS DISCRETIONARY TRADING AUTHORITY OVER (percentage of

the pool's funds available for commodity interest trading allocated to

that trading advisor) PERCENT OF THE POOL'S COMMODITY INTEREST TRADING

HAS NOT PREVIOUSLY DIRECTED ANY ACCOUNTS.

* * * * *

Subpart C--Commodity Trading Advisors

33. Section 4.30 is revised to read as follows:

Sec. 4.30 Prohibited activities.

No commodity trading advisor may solicit, accept or receive from an

existing or prospective client funds,

[[Page 3309]]

securities or other property in the trading advisor's name (or extend

credit in lieu thereof) to purchase, margin, guarantee or secure any

commodity interest of the client; Provided, however, That this section

shall not apply to a future commission merchant that is registered as

such under the Act or to a leverage transaction merchant that is

registered as a commodity trading advisor under the Act or to a retail

foreign exchange dealer that is registered as such under the Act.

34. Section 4.33 is amended by:

a. Revising paragraph (a)(6); and

b. Revising paragraphs (b)(1) and (2) to read as follows:

Sec. 4.33 Recordkeeping.

* * * * *

(a) * * *

(6) Copies of each confirmation of a commodity interest

transaction, each purchase and sale statement and each monthly

statement received from a futures commission merchant or a retail

foreign exchange dealer.

* * * * *

(b) Concerning the commodity trading advisor:

(1) An itemized daily record of each commodity interest transaction

of the commodity trading advisor, showing the transaction date,

quantity, commodity interest, and, as applicable, price or premium,

delivery month or expiration date, whether a put or a call, strike

price, underlying contract for future delivery or underlying physical,

the futures commission merchant and/or retail foreign exchange dealer

carrying the account and the introducing broker, if any, whether the

commodity interest was purchased, sold (including, in the case of a

retail forex transaction, offset), exercised, expired (including, in

the case of a retail forex transaction, whether it was rolled forward),

and the gain or loss realized.

(2) Each confirmation of a commodity interest transaction, each

purchase and sale statement and each monthly statement furnished by a

futures commission merchant or retail foreign exchange dealer to:

(i) The commodity trading advisor relating to a personal account of

the trading advisor; and

(ii) Each principal of the trading advisor relating to a personal

account of such principal.

* * * * *

35. Section 4.34 is amended by:

a. Revising paragraph (b);

b. Revising paragraph (e)(2);

c. Revising paragraphs (g) and (h);

d. Revising paragraph (i)(2);

e. Revising paragraphs (j)(1) and (j)(3);

f. Revising paragraphs (k)(1)(ii), (k)(1)(iii), (k)(2) introductory

text, and (k)(2)(i) to read as follows:

Sec. 4.34 General disclosures required.

* * * * *

(b) Risk Disclosure Statement. (1) The following Risk Disclosure

Statement must be prominently displayed immediately following any

disclosures required to appear on the cover page of the Disclosure

Document as provided by the Commission, by any applicable federal or

state securities laws and regulations or by any applicable laws of non-

United States jurisdictions:

RISK DISCLOSURE STATEMENT

THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL.

YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS

SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING

WHETHER TO TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU

SHOULD BE AWARE OF THE FOLLOWING:

IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF

THE PREMIUM AND OF ALL TRANSACTION COSTS.

IF YOU PURCHASE OR SELL A COMMODITY FUTURES CONTRACT OR SELL A

COMMODITY OPTION OR ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING YOU

MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS OR SECURITY

DEPOSIT AND ANY ADDITIONAL FUNDS THAT YOU DEPOSIT WITH YOUR BROKER TO

ESTABLISH OR MAINTAIN YOUR POSITION. IF THE MARKET MOVES AGAINST YOUR

POSITION, YOU MAY BE CALLED UPON BY YOUR BROKER TO DEPOSIT A

SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN

ORDER TO MAINTAIN YOUR POSITION. IF YOU DO NOT PROVIDE THE REQUESTED

FUNDS WITHIN THE PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT A

LOSS, AND YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR ACCOUNT.

UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR

IMPOSSIBLE TO LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE, WHEN

THE MARKET MAKES A ``LIMIT MOVE.''

THE PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING ADVISOR,

SUCH AS A ``STOP-LOSS'' OR ``STOP-LIMIT'' ORDER, WILL NOT NECESSARILY

LIMIT YOUR LOSSES TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY

MAKE IT IMPOSSIBLE TO EXECUTE SUCH ORDERS.

A ``SPREAD'' POSITION MAY NOT BE LESS RISKY THAN A SIMPLE ``LONG''

OR ``SHORT'' POSITION.

THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY

INTEREST TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF

LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.

IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO

SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE

NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE

SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR

ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS, AT PAGE (insert page

number), A COMPLETE DESCRIPTION OF EACH FEE TO BE CHARGED TO YOUR

ACCOUNT BY THE COMMODITY TRADING ADVISOR.

THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER

SIGNIFICANT ASPECTS OF THE COMMODITY INTEREST MARKETS. YOU SHOULD

THEREFORE CAREFULLY STUDY THIS DISCLOSURE DOCUMENT AND COMMODITY

INTEREST TRADING BEFORE YOU TRADE, INCLUDING THE DESCRIPTION OF THE

PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE (insert page

number).

(2)(i) If the commodity trading advisor may trade foreign futures

or options contracts pursuant to the offered trading program, the Risk

Disclosure Statement must further state the following:

YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY

ENGAGE IN TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON

MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY

LINKED TO A UNITED STATES MARKET MAY BE SUBJECT TO REGULATIONS WHICH

OFFER DIFFERENT OR DIMINISHED PROTECTION. FURTHER, UNITED STATES

REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE

RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES

JURISDICTIONS WHERE YOUR TRANSACTIONS MAY BE EFFECTED. BEFORE YOU TRADE

YOU SHOULD

[[Page 3310]]

INQUIRE ABOUT ANY RULES RELEVANT TO YOUR PARTICULAR CONTEMPLATED

TRANSACTIONS AND ASK THE FIRM WITH WHICH YOU INTEND TO TRADE FOR

DETAILS ABOUT THE TYPES OF REDRESS AVAILABLE IN BOTH YOUR LOCAL AND

OTHER RELEVANT JURISDICTIONS.

(ii) If the commodity trading advisor may engage in retail forex

transactions pursuant to the offered trading program, the Risk

Disclosure Statement must further state the following:

YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY

ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING. SUCH TRADING IS NOT

CONDUCTED IN THE INTERBANK MARKET. THE FUNDS DEPOSITED WITH A

COUNTERPARTY FOR SUCH TRANSACTIONS WILL NOT RECEIVE THE SAME

PROTECTIONS AS FUNDS USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED

FUTURES AND OPTION CONTRACTS. IF THE COUNTERPARTY BECOMES INSOLVENT AND

YOU HAVE A CLAIM FOR AMOUNTS DEPOSITED OR PROFITS EARNED ON

TRANSACTIONS WITH THE COUNTERPARTY, YOUR CLAIM MAY NOT BE TREATED AS A

COMMODITY CUSTOMER CLAIM FOR PURPOSES OF SUBCHAPTER IV OF CHAPTER 7 OF

THE BANKRUPTCY CODE AND REGULATIONS THEREUNDER. YOU MAY BE A GENERAL

CREDITOR AND YOUR CLAIM MAY BE PAID, ALONG WITH THE CLAIMS OF OTHER

GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE AFTER PRIORITY

CLAIMS ARE PAID. EVEN FUNDS THAT THE COUNTERPARTY KEEPS SEPARATE FROM

ITS OWN FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF PRIORITY AND OTHER

GENERAL CREDITORS.

FURTHER, YOU SHOULD CAREFULLY REVIEW THE INFORMATION CONTAINED IN

THE RISK DISCLOSURE STATEMENT OF THE FUTURES COMMISSION MERCHANT OR

RETAIL FOREIGN EXCHANGE DEALER THAT YOU SELECT TO CARRY YOUR ACCOUNT.

(3) If the commodity trading advisor is not also a registered

futures commission merchant or a registered retail foreign exchange

dealer, the trading advisor must make the additional following

statement in the Risk Disclosure Statement, to be included as the last

paragraph thereof:

THIS COMMODITY TRADING ADVISOR IS PROHIBITED BY LAW FROM ACCEPTING

FUNDS IN THE TRADING ADVISOR'S NAME FROM A CLIENT FOR TRADING COMMODITY

INTERESTS. YOU MUST PLACE ALL FUNDS FOR TRADING IN THIS TRADING PROGRAM

DIRECTLY WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE

DEALER, AS APPLICABLE.

* * * * *

(e) * * *

(2) The futures commission merchant and/or retail foreign exchange

dealer with which the commodity trading advisor will require the client

to maintain its account or, if the client is free to choose the futures

commission merchant or retail foreign exchange dealer with which it

will maintain its account, the trading advisor must make a statement to

that effect; and

* * * * *

(g) Principal risk factors. A discussion of the principal risk

factors of this trading program. This discussion must include, without

limitation, risks due to volatility, leverage, liquidity, and

counterparty creditworthiness, as applicable to the trading program and

the types of transactions and investment activity expected to be

engaged in pursuant to such program (including retail forex

transactions, if any).

(h) Trading program. A description of the trading program, which

must include the method chosen by the commodity trading advisor

concerning how futures commission merchants and/or retail foreign

exchange dealers carrying accounts it manages shall treat offsetting

positions pursuant to Sec. 1.46 of this chapter, if the method is

other than to close out all offsetting positions or to close out

offsetting positions on other than a first-in, first-out basis, and the

types of commodity interests and other interests the commodity trading

advisor intends to trade, with a description of any restrictions or

limitations on such trading established by the trading advisor or

otherwise.

(i) * * *

(2) Where any fee is determined by reference to a base amount

including, but not limited to, ``net assets,'' ``gross profits,'' ``net

profits,'' ``net gains,'' ``pips'' or ``bid-asked spread,'' the trading

advisor must explain how such base amount will be calculated. Where any

fee is based on the difference between bid and asked prices on retail

forex transactions (as defined in Sec. 5.1 of this chapter), the

trading advisor must explain how such fee will be calculated;

* * * * *

(j) Conflicts of interest. (1) A full description of any actual or

potential conflicts of interest regarding any aspect of the trading

program on the part of:

(i) The commodity trading advisor;

(ii) Any futures commission merchant and/or retail foreign exchange

dealer with which the client will be required to maintain its commodity

interest account;

(iii) Any introducing broker through which the client will be

required to introduce its account to a futures commission merchant and/

or retail foreign exchange dealer; and

(iv) Any principal of the foregoing.

* * * * *

(3) Included in the description of any such conflict must be any

arrangement whereby the trading advisor or any principal thereof may

benefit, directly or indirectly, from the maintenance of the client's

commodity interest account with a futures commission merchant and/or

retail foreign exchange dealer, or the introduction of such account

through an introducing broker (such as payment for order flow or soft

dollar arrangements).

(k) * * *

(1) * * *

(ii) Any futures commission merchant or retail foreign exchange

dealer with which the client will be required to maintain its commodity

interest account; and

(iii) Any introducing broker through which the client will be

required to introduce its account to the futures commission merchant

and/or retail foreign exchange dealer.

(2) With respect to a futures commission merchant, retail foreign

exchange dealer or introducing broker, an action will be considered

material if:

(i) The action would be required to be disclosed in the notes to

the futures commission merchant's, retail foreign exchange dealer's or

introducing broker's financial statements prepared pursuant to

generally accepted accounting principles;

* * * * *

36. Part 5 is added to read as follows:

PART 5--OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS

Sec.

5.1 Definitions.

5.2 Prohibited transactions.

5.3 Registration of persons engaged in retail forex transactions.

5.4 Applicability of part 4 of this chapter to commodity pool

operators and commodity trading advisors.

5.5 Distribution of ``Risk Disclosure Statement'' by retail foreign

exchange dealers, futures commission merchants and introducing

brokers regarding retail forex transactions.

5.6 Maintenance of minimum financial requirements by retail foreign

exchange dealers and futures commission

[[Page 3311]]

merchants offering or engaging in retail forex transactions.

5.7 Minimum financial requirements for retail foreign exchange

dealers and futures commission merchants offering or engaging in

retail forex transactions.

5.8 Aggregate retail forex assets.

5.9 Security deposits for retail forex transactions.

5.10 Risk assessment recordkeeping requirements for retail foreign

exchange dealers.

5.11 Risk assessment reporting requirements for retail foreign

exchange dealers.

5.12 Financial reports of retail foreign exchange dealers.

5.13 Reporting to customers of retail foreign exchange dealers and

futures commission merchants; monthly and confirmation statements.

5.14 Records to be kept by retail foreign exchange dealers and

futures commission Merchants.

5.15 Unlawful representations.

5.16 Prohibition of guarantees against loss.

5.17 Authorization to trade.

5.18 Trading and operational standards.

5.19 Pending legal proceedings.

5.20 Special calls for account and transaction information.

5.21 Supervision.

5.22 Registered futures association membership.

5.23 Notice of bulk transfers and bulk liquidations.

5.24 Applicability of other parts of this chapter.

5.25 Applicability of the Act.

Authority: 7 U.S.C. 1a, 2, 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, 23.

Sec. 5.1 Definitions.

(a) Affiliated person of a futures commission merchant means a

person described in section 2(c)(2)(B)(i)(II)(cc)(BB) of the Act;

(b) Aggregate retail forex assets means an amount of liquid assets

held in accordance with section 5.8 of this part;

(c) Associated person of an affiliated person of a futures

commission merchant means any natural person associated with an

affiliated person of a futures commission merchant as a partner,

officer or employee (or any natural person occupying a similar status

or performing similar functions), in any capacity which involves:

(1) The solicitation or acceptance of retail forex customers'

orders (other than in a clerical capacity); or

(2) The supervision of any person or persons so engaged;

(d)(1) Commodity pool operator, for purposes of this part, means

any person who operates or solicits funds, securities, or property for

a pooled investment vehicle that is not an eligible contract

participant as defined in section 1a(12) of the Act, and that engages

in retail forex transactions;

(2) Associated person of a commodity pool operator, for purposes of

this part, means any natural person associated with a commodity pool

operator as defined in paragraph (d)(1) of this section as a partner,

officer, employee, consultant or agent (or any natural person occupying

a similar status or performing similar functions), in any capacity

which involves:

(i) The solicitation of funds, securities, or property for a

participation in a pooled investment vehicle; or

(ii) The supervision of any person or persons so engaged;

(e)(1) Commodity trading advisor, for purposes of this part, means

any person who exercises discretionary trading authority or obtains

written authorization to exercise discretionary trading authority over

any account for or on behalf of any person that is not an eligible

contract participant as defined in section 1a(12) of the Act, in

connection with retail forex transactions;

(2) Associated person of a commodity trading advisor, for purposes

of this part, means any natural person associated with a commodity

trading advisor as defined in paragraph (e)(1) of this section as a

partner, officer, employee, consultant or agent (or any natural person

occupying a similar status or performing similar functions), in any

capacity which involves:

(i) The solicitation of a client's or prospective client's

discretionary account; or

(ii) The supervision of any person or persons so engaged;

(f)(1) Introducing broker, for purposes of this part, means any

person who solicits or accepts orders from a customer that is not an

eligible contract participant as defined in section 1a(12) of the Act,

in connection with retail forex transactions;

(2) Associated person of an introducing broker, for purposes of

this part, means any natural person associated with an introducing

broker as defined in paragraph (g)(1) of this section as a partner,

officer, employee, or agent (or any natural person occupying a similar

status or performing similar functions), in any capacity which

involves:

(i) The solicitation or acceptance of retail forex customers'

orders (other than in a clerical capacity); or

(ii) The supervision of any person or persons so engaged;

(g) Primarily or substantially means, when used to describe the

extent of a futures commission merchant's engagement in the activities

described in section 1a(20) of the Act, that:

(1) Such activities account for more than fifty percent of the

futures commission merchant's gross revenues, computed in accordance

with generally accepted accounting principles, on an annual basis;

(2) The futures commission merchant receives gross revenues,

computed in accordance with generally accepted accounting principles,

from such activities in excess of $500,000 in any twelve month period;

or

(3) The futures commission merchant is a clearing member of a

registered derivatives clearing organization.

(h)(1) Retail foreign exchange dealer means any person that is, or

that offers to be, the counterparty to a retail forex transaction,

except for a person described in sub-paragraph (aa), (bb), (cc)(AA),

(dd), (ee) or (ff) of section 2(c)(2)(B)(i)(II) of the Act;

(2) Associated person of a retail foreign exchange dealer means any

natural person associated with a retail foreign exchange dealer as

defined in paragraph (i)(1) of this section as a partner, officer or

employee (or any natural person occupying a similar status or

performing similar functions), in any capacity which involves:

(i) The solicitation or acceptance of retail forex customers'

orders (other than in a clerical capacity); or

(ii) The supervision of any person or persons so engaged;

(i) Retail forex account means the account of a person who is not

an eligible contract participant as defined in section 1a(12) of the

Act, established with a retail foreign exchange dealer or a futures

commission merchant, in which account retail forex transactions

(including options on contracts for the purchase or sale of foreign

currency) with such retail foreign exchange dealer or futures

commission merchant as counterparty are undertaken, or which account is

established in order to enter into such transactions.

(j) Retail forex account agreement means the contractual agreement

between a futures commission merchant or retail foreign exchange dealer

and any person who is not an eligible contract participant as defined

in section 1a(12) of the Act, which agreement contains the terms

governing the person's retail forex account with such futures

commission merchant or retail foreign exchange dealer.

(k) Retail forex customer means a person, other than an eligible

contract participant as defined in section 1a(12) of the Act, acting on

its own behalf and trading in any account, agreement, contract or

transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.

[[Page 3312]]

(l) Retail forex obligation means the net credit balance at a

retail foreign exchange dealer or futures commission merchant that

would be obtained by combining all money, securities and property

deposited by a retail forex customer into a retail forex account or

accounts, adjusted for the realized and unrealized net profit or loss,

if any, accruing on the open trades, contracts or transactions in the

retail forex account or accounts, without including any retail forex

customers' accounts that contain negative net liquidating balances.

(m) Retail forex transaction means any account, agreement, contract

or transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the

Act. A retail forex transaction does not include an account, agreement,

contract or transaction in foreign currency that is a contract of sale

of a commodity for future delivery (or an option thereon) that is

executed, traded on or otherwise subject to the rules of a contract

market designated pursuant to section 5(a) of the Act or a derivatives

transaction execution facility registered pursuant to section 5a(c) of

the Act.

Sec. 5.2 Prohibited transactions.

(a) Scope. The provisions of this section shall be applicable to

any retail forex transaction.

(b) Fraudulent conduct prohibited. It shall be unlawful for any

person, by use of the mails or by any means or instrumentality of

interstate commerce, directly or indirectly, in or in connection with

any retail forex transaction:

(1) To cheat or defraud or attempt to cheat or defraud any person;

(2) Willfully to make or cause to be made to any person any false

report or statement or cause to be entered for any person any false

record; or

(3) Willfully to deceive or attempt to deceive any person by any

means whatsoever.

(c) Acting as counterparty and exercising discretion prohibited.

(1) No person who acts as the counterparty for any retail forex

transaction may do so for an account for which the person or any

affiliate of the person is authorized (by contract, power of attorney

or otherwise) to cause transactions to be effected without the client's

specific authorization.

(2) For purposes of this paragraph (c), an ``affiliate'' of a

person means a person controlling, controlled by or under common

control with, the first person.

Sec. 5.3 Registration of persons engaged in retail forex

transactions.

(a) Subject to paragraph (b) of this section, each of the following

is subject to the registration provisions under the Act and to part 3

of this chapter:

(1)(i) Any affiliated person of a futures commission merchant, as

defined in section 5.1(a) of this part, which affiliated person:

(A) Solicits or accepts orders from any person that is not an

eligible contract participant in connection with any retail forex

transaction; or

(B) Accepts money, securities, or property (or extends credit in

lieu thereof) in connection with such solicitation or acceptance of

orders in order to engage in any retail forex transaction, is required

to register as a retail foreign exchange dealer; and

(ii) Any associated person of an affiliated person of a futures

commission merchant, as defined in Sec. 5.1(c) of this part, is

required to register as an associated person of an affiliated person of

a futures commission merchant.

(2)(i) Any commodity pool operator, as defined in Sec. 5.1(d)(1)

of this part, is required to register as a commodity pool operator;

(ii) Any associated person of a commodity pool operator, as defined

in Sec. 5.1(d)(2) of this part, is required to register as an

associated person of a commodity pool operator;

(3)(i) Any commodity trading advisor, as defined in Sec. 5.1(e)(1)

of this part, is required to register as a commodity trading advisor;

(ii) Any associated person of a commodity trading advisor, as

defined in Sec. 5.1(e)(2) of this part, is required to register as an

associated person of a commodity trading advisor;

(4)(i) Any person registered as a futures commission merchant:

(A) That is not primarily or substantially engaged in the business

activities described in section 1a(20) of the Act;

(B) That solicits or accepts orders from any person that is not an

eligible contract participant in connection with any retail forex

transaction; and

(C) That accepts money, securities, or property (or extends credit

in lieu thereof) in connection with such solicitation or acceptance of

orders in order to engage in retail forex transactions, is required to

register as a retail foreign exchange dealer;

(ii) Any associated person of a futures commission merchant

described in paragraph (a)(4)(i) of this section is required to

register as an associated person of a futures commission merchant;

(5)(i) Any introducing broker, as defined in Sec. 5.1(f)(1) of

this part, is required to register as an introducing broker;

(ii) Any associated person of an introducing broker, as defined in

Sec. 5.1(f)(2) of this part, is required to register as an associated

person of an introducing broker;

(6)(i) Any retail foreign exchange dealer, as defined in Sec.

5.1(h)(1) of this part is required to register as a retail foreign

exchange dealer;

(ii) Any associated person of a retail foreign exchange dealer, as

defined in Sec. 5.1(h)(2) of this part, is required to register as an

associated person of a retail foreign exchange dealer;

(b) Any person described in paragraph (a) of this section that is

already registered in the required capacity specified in paragraph (a)

is not required under this section to register twice in the same

capacity; Provided, however, that a person already registered as an

associated person of one class of registrant may also be required to

register as an associated person of another class of registrant in

order to comply with this section.

Sec. 5.4 Applicability of part 4 of this chapter to commodity pool

operators and commodity trading advisors.

Part 4 of this chapter applies to any person required pursuant to

the provisions of this part 5 to register as a commodity pool operator

or as a commodity trading advisor. Failure by any such person to comply

with the requirements of part 4 will constitute a violation of this

section and the relevant section of part 4.

Sec. 5.5 Distribution of ``Risk Disclosure Statement'' by retail

foreign exchange dealers, futures commission merchants and introducing

brokers regarding retail forex transactions.

(a) Except as provided in Sec. 5.23 of this part, no retail

foreign exchange dealer, futures commission merchant, or in the case of

an introduced account no introducing broker, may open an account that

will engage in retail forex transactions for a retail forex customer,

unless the retail foreign exchange dealer, futures commission merchant

or introducing broker first:

(1)(i) In the case of a retail foreign exchange dealer or a person

required to register as an introducing broker solely by reason of this

part, furnishes the retail forex customer with a separate written

disclosure statement containing only the language set forth in

paragraph (b) of this section and the disclosure required by paragraph

(e) of this section;

(ii) In the case of a futures commission merchant or a person

required to register as an introducing broker because it engages in the

activities described in Sec. 1.3(mm) of this chapter, furnishes the

retail forex

[[Page 3313]]

customer with a separate written disclosure statement containing only

the language set forth in paragraph (b) of this section and the

disclosure required by paragraph (e) of this section; Provided,

however, that the disclosure statement may be attached to other

documents as the initial page(s) of such documents and as the only

material on such page(s); and

(2) Receives from the retail forex customer an acknowledgment

signed and dated by the retail forex customer that he received and

understood the disclosure statement.

(b) The language set forth in the written disclosure statement

required by paragraph (a) of this section shall be as follows:

Risk Disclosure Statement

OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVE THE LEVERAGED

TRADING OF CONTRACTS DENOMINATED IN FOREIGN CURRENCY CONDUCTED WITH A

FUTURES COMMISSION MERCHANT OR A RETAIL FOREIGN EXCHANGE DEALER AS YOUR

COUNTERPARTY.

BECAUSE OF THE LEVERAGE AND THE OTHER RISKS DISCLOSED HERE, YOU CAN

RAPIDLY LOSE ALL OF THE FUNDS YOU DEPOSIT FOR SUCH TRADING AND YOU MAY

LOSE MORE THAN YOU DEPOSIT.

YOU SHOULD BE AWARE OF AND CAREFULLY CONSIDER THE FOLLOWING POINTS

BEFORE DETERMINING WHETHER SUCH TRADING IS APPROPRIATE FOR YOU.

(1) TRADING IS NOT ON A REGULATED MARKET OR EXCHANGE--YOUR DEALER

IS YOUR TRADING PARTNER WHICH IS A DIRECT CONFLICT OF INTEREST. BEFORE

YOU ENGAGE IN ANY RETAIL FOREIGN EXCHANGE TRADING, YOU SHOULD CONFIRM

THE REGISTRATION STATUS OF YOUR COUNTERPARTY.

The off-exchange foreign currency trading you are entering into is

not conducted on an interbank market, nor is it conducted on a futures

exchange subject to regulation as a designated contract market by the

Commodity Futures Trading Commission. The foreign currency trades you

transact are trades with the futures commission merchant or retail

foreign exchange dealer as your counterparty. WHEN YOU SELL, THE DEALER

IS THE BUYER. WHEN YOU BUY, THE DEALER IS THE SELLER. As a result, when

you lose money trading, your dealer is making money on such trades, in

addition to any fees, commissions, or spreads the dealer may charge.

(2) AN ELECTRONIC TRADING PLATFORM FOR RETAIL FOREIGN CURRENCY

TRANSACTIONS IS NOT AN EXCHANGE. IT IS AN ELECTRONIC CONNECTION FOR

ACCESSING YOUR DEALER. THE TERMS OF AVAILABILITY OF SUCH A PLATFORM ARE

GOVERNED ONLY BY YOUR CONTRACT WITH YOUR DEALER.

Any trading platform that you may use to enter off-exchange foreign

currency transactions is only connected to your futures commission

merchant or retail foreign exchange dealer. You are accessing that

trading platform only to transact with your dealer. You are not trading

with any other entities or customers of the dealer by accessing such

platform. The availability and operation of any such platform,

including the consequences of the unavailability of the trading

platform for any reason, is governed only by the terms of your account

agreement with the dealer.

(3) YOUR DEPOSITS WITH THE DEALER HAVE NO REGULATORY PROTECTIONS.

All of your rights associated with your retail forex trading,

including the manner and denomination of any payments made to you, are

governed by the contract terms established in your account agreement

with the futures commission merchant or retail foreign exchange dealer.

Funds deposited by you with a futures commission merchant or retail

foreign exchange dealer for trading off-exchange foreign currency

transactions are not subject to the customer funds protections provided

to customers trading on a contract market that is designated by the

Commodity Futures Trading Commission. Your dealer may commingle your

funds with its own operating funds or use them for other purposes. In

the event your dealer becomes bankrupt, any funds the dealer is holding

for you in addition to any amounts owed to you resulting from trading,

whether or not any assets are maintained in separate deposit accounts

by the dealer, may be treated as an unsecured creditor's claim.

(4) YOU ARE LIMITED TO YOUR DEALER TO OFFSET OR LIQUIDATE ANY

TRADING POSITIONS SINCE THE TRANSACTIONS ARE NOT MADE ON AN EXCHANGE OR

MARKET, AND YOUR DEALER MAY SET ITS OWN PRICES.

Your ability to close your transactions or offset positions is

limited to what your dealer will offer to you, as there is no other

market for these transactions. Your dealer may offer any prices it

wishes, and it may offer prices derived from outside sources or not in

its discretion. Your dealer may establish its prices by offering

spreads from third party prices, but it is under no obligation to do so

or to continue to do so. Your dealer may offer different prices to

different customers at any point in time on its own terms. The terms of

your account agreement alone govern the obligations your dealer has to

you to offer prices and offer offset or liquidating transactions in

your account and make any payments to you. The prices offered by your

dealer may or may not reflect prices available elsewhere at any

exchange, interbank, or other market for foreign currency.

(5) PAID SOLICITORS MAY HAVE UNDISCLOSED CONFLICTS

The futures commission merchant or retail foreign exchange dealer

may compensate introducing brokers for introducing your account in ways

which are not disclosed to you. Such paid solicitors are not required

to have, and may not have, any special expertise in trading, and may

have conflicts of interest based on the method by which they are

compensated. Solicitors working on behalf of futures commission

merchants and retail foreign exchange dealers are required to register.

You should confirm that they are, in fact registered. You should

thoroughly investigate the manner in which all such solicitors are

compensated and be very cautious in granting any person or entity

authority to trade on your behalf. You should always consider obtaining

dated written confirmation of any information you are relying on from

your dealer or a solicitor in making any trading or account decisions.

FINALLY, YOU SHOULD THOROUGHLY INVESTIGATE ANY STATEMENTS BY ANY

DEALERS OR SALES REPRESENTATIVES WHICH MINIMIZE THE IMPORTANCE OF, OR

CONTRADICT, ANY OF THE TERMS OF THIS RISK DISCLOSURE. SUCH STATEMENTS

MAY INDICATE POTENTIAL SALES FRAUD.

THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND

OTHER ASPECTS OF TRADING OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS

WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE DEALER.

I hereby acknowledge that I have received and understood this risk

disclosure statement.

-----------------------------------------------------------------------

Date

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Signature of Customer

[[Page 3314]]

(c) The acknowledgment required by paragraph (a) of this section

must be retained by the retail foreign exchange dealer, futures

commission merchant or introducing broker in accordance with Sec. 1.31

of this chapter.

(d) This section does not relieve a retail foreign exchange dealer,

futures commission merchant or introducing broker from any other

disclosure obligation it may have under applicable law.

(e)(1) Immediately following the language set forth in paragraph

(b) of this section, the statement required by paragraph (a) of this

section shall include, for each of the most recent four quarters during

which the counterparty maintained retail forex accounts:

(i) The total number of non discretionary retail forex accounts

maintained by the retail foreign exchange dealer or futures commission

merchant;

(ii) The percentage of such accounts that were profitable; and

(iii) the percentage of such accounts that were not profitable.

(2) Identification of retail forex accounts for purposes of this

disclosure and calculation of each such account's profit or loss must

be made in accordance with Sec. 5.18(i) of this part. Such statement

of profitable trades shall include the following legend: PAST

PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Each

retail foreign exchange dealer or futures commission merchant shall

provide, upon request, to any retail forex customer or prospective

retail forex customer the total number of non discretionary retail

forex accounts maintained by such retail foreign exchange dealer or

futures commission merchant, the percentage of such accounts that were

profitable, and the percentage of such accounts that were unprofitable,

calculated in accordance with Sec. 5.18(i) of this part, for each

quarter during the most recent five year period during which such

retail foreign exchange dealer or futures commission merchant

maintained non discretionary retail forex accounts.

Sec. 5.6 Maintenance of minimum financial requirements by retail

foreign exchange dealers and futures commission merchants offering or

engaging in retail forex transactions.

(a) Each futures commission merchant offering or engaging in retail

forex transactions or who files an application for registration as a

futures commission merchant that will offer or engage in retail forex

transactions and each person registered as a retail foreign exchange

dealer or who files an application for registration as a retail foreign

exchange dealer, who knows or should have known that its adjusted net

capital at any time is less than the minimum required by Sec. 5. 7 of

this part or by the capital rule of a registered futures association of

which it is a member, must:

(1) Give telephonic notice, to be confirmed in writing by facsimile

notice, that the applicant's or registrant's adjusted net capital is

less than that required by Sec. 5.7 of this part. The notice must be

given immediately after the applicant or registrant knows or should

know that its adjusted net capital is less than that required by any of

the aforesaid rules to which the applicant or registrant is subject;

and

(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.

(b) Each applicant or registrant, who knows or should have known

that its adjusted net capital at any time is less than the greatest of:

(1) $22,000,000;

(2) 110 percent of the amount required by Sec. 5.7(a)(1)(i)(B) of

this part; or

(3) 110 percent of the amount of adjusted net capital required by a

registered futures association of which the futures commission merchant

or retail foreign exchange dealer is a member, must file written notice

to that effect within 24 hours of such event.

(c) If an applicant or registrant at any time fails to make or keep

current the books and records required by these regulations, such

applicant or registrant must, on the same day such event occurs,

provide facsimile notice of such fact, specifying the books and records

which have not been made or which are not current, and within 48 hours

after giving such notice file a written report stating what steps have

been and are being taken to correct the situation.

(d) Whenever any applicant or registrant discovers or is notified

by an independent public accountant, pursuant to Sec. 1.16(e)(2) of

this chapter, of the existence of any material inadequacy, as specified

in Sec. 1.16(d)(2) of this chapter, such applicant or registrant must

give facsimile notice of such material inadequacy within 24 hours, and

within 48 hours after giving such notice file a written report stating

what steps have been and are being taken to correct the material

inadequacy.

(e) Whenever any self-regulatory organization learns that a member

registrant has failed to file a notice or written report as required by

Sec. 5.6 of this part, that self-regulatory organization must

immediately report this failure by telephone, confirmed in writing

immediately by facsimile notice, as provided in paragraph (h) of this

section.

(f) A retail foreign exchange dealer or a futures commission

merchant offering or engaging in retail forex transactions shall

provide written notice of a substantial reduction in capital as

compared to that last reported in a financial report filed with the

Commission pursuant to Sec. 5.12 of this part. This notice shall be

provided as follows:

(1) If any event or series of events, including any withdrawal,

advance, loan or loss cause, on a net basis, a reduction in net capital

of 20 percent or more, notice must be provided within two business days

of the event or series of events causing the reduction; and

(2) If the equity capital of the retail foreign exchange dealer or

futures commission merchant offering or engaging in retail forex

transactions or the equity capital of a subsidiary or affiliate of the

retail foreign exchange dealer or futures commission merchant offering

or engaging in retail forex transactions consolidated pursuant to Sec.

1.17(f) of this chapter would be withdrawn by action of a stockholder

or a partner or a limited liability company member or by redemption or

repurchase of shares of stock by any of the consolidated entities or

through the payment of dividends or any similar distribution, or an

unsecured advance or loan would be made to a stockholder, partner, sole

proprietor, limited liability company member, employee or affiliate,

such that the withdrawal, advance or loan would cause, on a net basis,

a reduction in excess adjusted net capital of 30 percent or more,

notice must be provided at least two business days prior to the

withdrawal, advance or loan that would cause the reduction: Provided,

however, That the provisions of paragraphs (f)(1) and (f)(2) of this

section do not apply to any retail foreign exchange transaction in the

ordinary course of business between a retail foreign exchange dealer

and any affiliate where the retail foreign exchange dealer makes

payment to or on behalf of such affiliate for such transaction and then

receives payment from such affiliate for such transaction within two

business days from the date of the transaction.

[[Page 3315]]

(3) Upon receipt of such notice from a futures commission merchant

offering or engaging in retail forex transactions or a retail foreign

exchange dealer, the Director of the Division of Clearing and

Intermediary Oversight or the Director's designee may require that the

futures commission merchant offering or engaging in retail forex

transactions or retail foreign exchange dealer provide or cause a

Material Affiliated Person (as that term is defined in Sec. 5.10(a)(2)

of this part) to provide, within three business days from the date of

the request or such shorter period as the Director or designee may

specify, such other information as the Director or designee determines

to be necessary based upon market conditions, reports provided by the

retail foreign exchange dealer or futures commission merchant offering

or engaging in retail forex transactions, or other available

information.

(g) Whenever a person registered as a futures commission merchant

offering or engaging in retail forex transactions or a retail foreign

exchange dealer knows or should know that the total amount of its

retail forex obligation exceeds the amount of the aggregate retail

forex assets the registrant maintains in accordance with the provisions

of Sec. 5.8 of this chapter, the registrant must report such

deficiency immediately by telephone notice, confirmed immediately in

writing by facsimile notice.

(h) Every notice and written report required to be given or filed

with the Commission by this section by an applicant must be filed with

the regional office of the Commission with jurisdiction over the state

in which the applicant's principal place of business is located, and

with the National Futures Association. Every notice and written report

required to be given or filed with the Commission by this section by a

registrant or 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, and with

the registrant's designated self-regulatory organization. In addition,

every notice and written report required to be given by this section

must also be filed with the Chief Accountant of the Division of

Clearing and Intermediary Oversight at the Commission's principal

office in Washington, DC.

(i) In lieu of filing paper copies with the Commission, all filings

or other notices prepared by a futures commission merchant or retail

foreign exchange dealer 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,

retail foreign exchange dealer 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. 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.

Sec. 5.7 Minimum financial requirements for retail foreign exchange

dealers and futures commission merchants offering or engaging in retail

forex transactions.

(a)(1)(i) Each futures commission merchant offering or engaging in

retail forex transactions and each retail foreign exchange dealer must

maintain adjusted net capital equal to or in excess of the greatest of:

(A) $20,000,000;

(B) $20,000,000 plus five percent of the futures commission

merchant's or retail foreign exchange dealer's total retail forex

obligation in excess of $10,000,000;

(C) any amount required under Sec. 1.17 of this chapter, as

applicable; or

(D) the amount of adjusted net capital required by a registered

futures association of which the futures commission merchant or retail

foreign exchange dealer is a member.

(ii) Section 1.17 of this chapter shall apply to retail foreign

exchange dealers as if such retail foreign exchange dealers were

futures commission merchants, or as applicable, applicants or

registrants, as stated in Sec. 1.17 for the purpose of determining the

adjusted net capital under this section. For the purpose of applying

this section, ``applicant'' or ``registrant'' shall include retail

foreign exchange dealers and futures commission merchants offering or

engaging in retail forex transactions and applicants therefore.

(2) No person applying for registration as a retail foreign

exchange dealer or a futures commission merchant that will engage in

retail forex transactions shall be so registered unless such person

affirmatively demonstrates to the satisfaction of a registered futures

association that it complies with the financial requirements of this

section.

(3) Each registrant must be in compliance with this section at all

times and must be able to demonstrate such compliance to the

satisfaction of the Commission or the registrant's designated self-

regulatory organization.

(4) A registrant who is not in compliance with this section, or is

unable to demonstrate such compliance as required by paragraph (a)(3)

of this section, shall, as directed by and under the supervision of the

Commission or the registrant's designated self-regulatory organization,

either liquidate or transfer all retail forex accounts (including the

novation of retail forex contracts) and refund or transfer all funds

associated with such retail forex accounts and immediately cease

offering or engaging in retail forex transactions until such time as

the firm is able to demonstrate to the Commission or the registrant's

designated self-regulatory organization such compliance: Provided,

however, That if such registrant immediately demonstrates to the

satisfaction of the Commission or the registrant's designated self-

regulatory organization the ability to achieve compliance, the

Commission or the registrant's designated self-regulatory organization

may in its discretion allow such registrant up to a maximum of 10

business days, or such additional time as determined by the Commission,

in which to achieve compliance without having to liquidate positions or

transfer accounts and cease doing business as required above. Nothing

in this paragraph (a)(4) shall be construed as preventing the

Commission or the registrant's designated self-regulatory organization

from taking action against a registrant for non-compliance with any of

the provisions of this section.

(b) For the purposes of this section:

(1) Where the applicant or registrant has an asset or liability

which is defined in Securities Exchange Act Rule 15c3-1 (Sec.

240.15c3-1 of this title) the inclusion or exclusion of all or part of

such asset or liability for the computation of adjusted net capital

shall be in accordance with Sec. 240.15c3-1 of this title, unless

specifically stated otherwise in this section or in Sec. 1.17 of this

chapter.

(2) The adjusted net capital of an applicant or registrant for the

purpose of this section shall be determined by the application of Sec.

1.17 pursuant to paragraph (a)(1)(ii) of this section, with the

following additions:

(i) All positions in retail forex accounts and other financial

positions and instruments of the applicant or registrant must be marked

to market and adjusted daily by referencing to current market prices or

rates of exchange.

[[Page 3316]]

(ii) Current assets must exclude any retail forex account which

liquidates to a deficit or contains a debit ledger balance only and is

not secured in accordance with Sec. 1.17(c)(3).

(iii) Current assets must exclude any unsecured receivable accrued

from any over-the-counter transaction in foreign currency, options on

foreign currency or options on contracts for the purchase or sale of

foreign currency, or arising from the deposit of collateral or

compensating balances with respect to such transactions, unless such

unsecured receivable is from a person who is an eligible contract

participant that also is:

(A) A bank or trust company regulated by a United States banking

regulator;

(B) A broker-dealer registered with the Securities and Exchange

Commission and a member of the Financial Industry Regulatory Authority;

(C) A futures commission merchant registered with the Commission

and a member of the National Futures Association;

(D) A retail foreign exchange dealer registered with the Commission

and a member of the National Futures Association;

(E) An entity regulated as a foreign equivalent of any of the

persons listed in paragraphs (b)(2)(iii)(A) through (D) of this

section, if such person is regulated in a money center country as

defined in Sec. 1.49 of this chapter and recognized by the futures

commission merchant's or retail foreign exchange dealer's designated

self-regulatory organization as a foreign equivalent;

(F) Any other entity approved by the futures commission merchant's

or retail foreign exchange dealer's designated self-regulatory

organization.

(iv) The value attributed to any retail forex transaction that is

an option shall be the difference between the option's exercise value

or striking value and the market value of the underlying. In the case

of a call, if the market value of the underlying is less than the

exercise value or striking value of such call, it shall be given no

value; and, in the case of a put, if the market value of the underlying

is more than the exercise value or striking value of the put, it shall

be given no value.

(v)(A) In computing adjusted net capital, the capital deductions

set forth in Sec. 1.17(c)(5)(ii) of this chapter shall apply to retail

forex transactions other than options. The capital deductions which

apply are six percent for net positions in Euros, British pounds,

Canadian dollars, Japanese yen, or Swiss francs and 20 percent for net

positions in all other foreign currencies, Provided, however, That

there shall be no capital deductions for retail forex transactions

covered (as defined in Sec. 1.17(j) of this chapter) by the applicant

or registrant by open futures contracts to the extent such futures

contracts are not otherwise designated as cover for any other net

capital purposes. For purposes of this paragraph (b)(2)(v)(A), such

retail forex transactions shall be treated as if they were inventory

and cover were therefore applicable. A retail foreign exchange dealer

or futures commission merchant may not use an affiliate (unless

approved by the firm's designated self-regulatory organization) or any

person that is considered unregulated under the rules of the firm's

designated self-regulatory organization to cover its currency positions

for purposes of this section.

(B) In computing adjusted net capital, the capital deductions set

forth in Sec. 1.17(c)(5)(vi) of this chapter shall apply to all retail

forex transactions that are options.

(C) For the purpose of applying capital deductions on open

proprietary futures positions under Sec. 1.17(c)(5)(x) of this

chapter, net or individual positions in retail forex transactions shall

not constitute cover under Sec. 1.17(j) for the purpose of applying

such charges.

(c) An applicant or registrant must prepare, and keep current,

ledgers or other similar records which show or summarize, with

appropriate references to supporting documents, each transaction

affecting the applicant's or registrant's asset, liability, income,

expense and capital accounts, and in which (except as otherwise

permitted in writing by the Commission) all the applicant's or

registrant's asset, liability and capital accounts are classified into

the account classification subdivisions specified on Form 1-FR-FCM.

Each applicant or registrant shall prepare and keep current such

records.

(d) An applicant or registrant must make and keep as a record in

accordance with Sec. 5.14 of this part formal computations of its

adjusted net capital and of its minimum financial requirements pursuant

to this section as of the close of business each month and on other

such dates called for by the Commission, the National Futures

Association, or another self-regulatory organization of which the firm

is a member. Such computations must be completed and made available for

inspection by any representative of the Commission, the National

Futures Association, a self-regulatory organization of which the firm

is a member, or the United States Department of Justice commencing the

first month-end after the date the application for registration is

filed.

Sec. 5.8 Aggregate retail forex assets.

(a) Each retail foreign exchange dealer and futures commission

merchant offering or engaging in retail forex transactions shall

calculate its total retail forex obligation and shall at all times hold

assets solely of the type permissible under Sec. 1.25 of this chapter

equal to or in excess of the total retail forex obligation at one or

more qualifying institutions in the United States or money center

countries as defined in Sec. 1.49 of this chapter.

(b) For assets held in the United States, a qualifying institution

is:

(1) A bank or trust company regulated by a United States banking

regulator;

(2) A broker-dealer registered with the Securities and Exchange

Commission and a member of the Financial Industry Regulatory Authority;

or

(3) A futures commission merchant registered with the Commission

and a member of the National Futures Association.

(c) For assets held in a money center country, a qualifying

institution is:

(1) A bank or trust company regulated in a money center country,

Provided that the bank or trust company has regulatory capital in

excess of $1 billion;

(2) An entity regulated in a money center country as an equivalent

of a broker-dealer or futures commission merchant as determined by the

retail foreign exchange dealer's or futures commission merchant's

designated self-regulatory organization, Provided that the entity

maintains regulatory capital in excess of $100 million; or

(3) A futures commission merchant registered with the Commission

and a member of the National Futures Association.

(d) Assets held in a money center country are not eligible to meet

the requirements of paragraph (a) of this section unless the retail

foreign exchange dealer or futures commission merchant has entered into

an agreement that is acceptable to the firm's designated self-

regulatory organization and that authorizes the qualifying institution

to provide account information to the Commission and the firm's

designated self-regulatory organization.

(e) In computing its adjusted net capital pursuant to Sec. 5.7 of

this part, a retail foreign exchange dealer or futures commission

merchant may not include aggregate retail forex assets as current

assets or otherwise record any property received from retail forex

customers as an asset without recording a corresponding liability to

the retail forex customers.

[[Page 3317]]

Sec. 5.9 Security deposits for retail forex transactions.

(a) Each futures commission merchant engaging, or offering to

engage, in retail forex transactions and each retail foreign exchange

dealer must collect from each retail forex customer a minimum security

deposit in the form of cash or other financial instruments that comply

with the requirements specified in Sec. 1.25 of this chapter for each

retail forex transaction equal to:

(1) Ten percent of the notional value of the retail forex

transaction;

(2) For short options, ten percent of the notional value of the

retail forex transaction, plus the premium received by the futures

commission merchant or retail foreign exchange dealer; or

(3) For long options, the full premium charged and received by the

futures commission merchant or retail foreign exchange dealer.

(b) A futures commission merchant or retail foreign exchange dealer

is required to collect additional security deposits from a retail forex

customer or liquidate the retail forex customer's positions if the

amount of the retail forex customer's security deposits maintained with

the futures commission merchant or retail foreign exchange dealer are

not sufficient to meet the requirements in paragraph (a) of this

section.

Sec. 5.10 Risk assessment recordkeeping requirements for retail

foreign exchange dealers.

(a) Requirement to maintain and preserve information. (1) Each

retail foreign exchange dealer registered with the Commission pursuant

to section 2(c)(2)(B)(i)(II)(gg) of the Act shall prepare, maintain and

preserve the following information:

(i) An organizational chart which includes the retail foreign

exchange dealer and each of its affiliated persons. Included in the

organizational chart shall be a designation of which affiliated persons

are ``Material Affiliated Persons'' as that term is used in paragraph

(a)(2) of this section, which Material Affiliated Persons file routine

financial or risk exposure reports with the Securities and Exchange

Commission, a federal banking agency, an insurance commissioner or

other similar official or agency of a state, or a foreign regulatory

authority, and which Material Affiliated Persons are dealers in

financial instruments with off-balance sheet risk and, if a Material

Affiliated Person is such a dealer, whether it is also an end-user of

such instruments;

(ii) Written policies, procedures, or systems concerning the retail

foreign exchange dealer's:

(A) Method(s) for monitoring and controlling financial and

operational risks to it resulting from the activities of any of its

affiliated persons;

(B) Financing and capital adequacy, including information regarding

sources of funding, together with a narrative discussion by management

of the liquidity of the material assets of the retail foreign exchange

dealer, the structure of debt capital, and sources of alternative

funding;

(C) Establishing and maintaining internal controls with respect to

market risk, credit risk, and other risks created by the retail foreign

exchange dealer's trading activities, including systems and policies

for supervising, monitoring, reporting and reviewing trading activities

in forex transactions, securities, futures contracts, commodity

options, forward contracts and financial instruments; policies for

hedging or managing risks created by trading activities or supervising

accounts carried for affiliates, including a description of the types

of reviews conducted to monitor positions; and policies relating to

restrictions or limitations on trading activities: Provided, however,

that if the retail foreign exchange dealer has no such written

policies, procedures or systems, it must so state in writing;

(iii) Fiscal year-end consolidated and consolidating balance sheets

for the highest level Material Affiliated Person within the retail

foreign exchange dealer's organizational structure, which shall include

the retail foreign exchange dealer and its other Material Affiliated

Persons, prepared in accordance with generally accepted accounting

principles, which consolidated balance sheets shall be audited by an

independent certified public accountant if an annual audit is performed

in the ordinary course of business, but which otherwise may be

unaudited, and which shall include appropriate explanatory notes. The

consolidating balance sheets may be those prepared by the retail

foreign exchange dealer's highest level Material Affiliated Person as

part of its internal financial reporting process. Any additional

information required to be filed under Sec. 5.11(a)(2)(iii) of this

part shall also be maintained and preserved; and

(iv) Fiscal year-end consolidated and consolidating income

statements and consolidated cash flow statements for the highest level

Material Affiliated Person within the retail foreign exchange dealer's

organizational structure, which shall include the retail foreign

exchange dealer and its other Material Affiliated Persons, prepared in

accordance with generally accepted accounting principles, which

consolidated statements shall be audited by an independent certified

public accountant if an annual audit is performed in the ordinary

course of business, but which otherwise may be unaudited, and which

shall include appropriate explanatory notes. The consolidating

statements may be those prepared by the retail foreign exchange

dealer's highest level Material Affiliated Person as part of its

internal financial reporting process. Any additional information

required to be filed under Sec. 5.11(a)(2)(iii) shall also be

maintained and preserved.

(2) The determination of whether an affiliated person of a retail

foreign exchange dealer is a Material Affiliated Person shall involve

consideration of all aspects of the activities of, and the relationship

between, both entities, including without limitation, the following

factors:

(i) The legal relationship between the retail foreign exchange

dealer and the affiliated person;

(ii) The overall financing requirements of the retail foreign

exchange dealer and the affiliated person, and the degree, if any, to

which the retail foreign exchange dealer and the affiliated person are

financially dependent on each other;

(iii) The degree to which the retail foreign exchange dealer and

the affiliated person directly or indirectly engage in over-the-counter

transactions with each other;

(iv) The degree, if any, to which the retail foreign exchange

dealer or its customers rely on the affiliated person for operational

support or services in connection with the retail foreign exchange

dealer's business;

(v) The level of market, credit or other risk present in the

activities of the affiliated person; and

(vi) The extent to which the affiliated person has the authority or

the ability to cause a withdrawal of capital from the retail foreign

exchange dealer.

(3) For purposes of this section and Sec. 5.11 of this part, the

term Material Affiliated Person does not include a natural person.

(4) The information, reports and records required by this section

shall be maintained and preserved, and made readily available for

inspection, in accordance with the provisions of Sec. 1.31 of this

chapter.

(b) Special provisions with respect to Material Affiliated Persons

subject to the supervision of certain domestic regulators. A retail

foreign exchange dealer shall be deemed to be in compliance with the

recordkeeping requirements of paragraphs (a)(1)(i), (iii)

[[Page 3318]]

and (iv) of this section with respect to a Material Affiliated Person

if:

(1) The Material Affiliated Person is required to maintain and

preserve information pursuant to Sec. 240.17h-1T of this title, or

such other risk assessment regulations as the Securities and Exchange

Commission may adopt, and the retail foreign exchange dealer maintains

and makes available for inspection by the Commission in accordance with

the provisions of this section copies of the records and reports

maintained and filed on Form 17-H (or such other forms or reports as

may be required) by the Material Affiliated Person with the Securities

and Exchange Commission pursuant to Sec. Sec. 240.17h-1T and 240.17h-

2T of this title, or such other risk assessment regulations as the

Securities and Exchange Commission may adopt;

(2) In the case of a Material Affiliated Person (including a

foreign banking organization) that is subject to examination by, or the

reporting requirements of, a Federal banking agency, the retail foreign

exchange dealer or such Material Affiliated Person maintains and makes

available for inspection by the Commission in accordance with the

provisions of this section copies of all reports submitted by such

Material Associated Person to the Federal banking agency pursuant to

section 5211 of the Revised Statutes, section 9 of the Federal Reserve

Act, section 7(a) of the Federal Deposit Insurance Act, section 10(b)

of the Home Owners' Loan Act, or section 5 of the Bank Holding Company

Act of 1956; or

(3) In the case of a Material Affiliated Person that is subject to

the supervision of an insurance commissioner or other similar official

or agency of a state, the retail foreign exchange dealer or such

Material Affiliated Person maintains and makes available for inspection

by the Commission in accordance with the provisions of this section

copies of the annual statements with schedules and exhibits prepared by

the Material Affiliated Person on forms prescribed by the National

Association of Insurance Commissioners or by a state insurance

commissioner.

(c)(1) Special provisions with respect to Material Affiliated

Persons subject to the supervision of a Foreign Regulatory Authority. A

retail foreign exchange dealer shall be deemed to be in compliance with

the recordkeeping requirements of paragraphs (a)(1)(iii) and (iv) of

this section with respect to a Material Affiliated Person if such

retail foreign exchange dealer maintains and makes available, or causes

such Material Affiliated Person to make available, for inspection by

the Commission in accordance with the provisions of this section copies

of any financial or risk exposure reports filed by such Material

Affiliated Person with a foreign futures authority or other foreign

regulatory authority, provided that:

(i) The retail foreign exchange dealer agrees to use its best

efforts to obtain from the Material Affiliated Person and to cause the

Material Affiliated Person to provide, directly or through its foreign

futures authority or other foreign regulatory authority, any

supplemental information the Commission may request and there is no

statute or other bar in the foreign jurisdiction that would preclude

the retail foreign exchange dealer, the Material Affiliated Person, the

foreign futures authority or other foreign regulatory authority from

providing such information to the Commission; or

(ii) The foreign futures authority or other foreign regulatory

authority with whom the Material Affiliated Person files such reports

has entered into an information-sharing agreement with the Commission

which is in effect as of the retail foreign exchange dealer's fiscal

year-end and which will allow the Commission to obtain the type of

information required herein.

(2) The retail foreign exchange dealer shall maintain a copy of the

original report and a copy translated into the English language. For

the purposes of this section, the term ``Foreign Futures Authority''

shall have the meaning set forth in section 1a(10) of the Act.

(d) Exemptions. The Commission may exempt any retail foreign

exchange dealer from any provision of this section if it finds that the

exemption is not contrary to the public interest and the purposes of

the provisions from which the exemption is sought. The Commission may

grant the exemption subject to such terms and conditions as it may find

appropriate.

(e) Location of records. A retail foreign exchange dealer required

to maintain records concerning Material Affiliated Persons pursuant to

this section may maintain those records either at the principal office

of the Material Affiliated Person or at a records storage facility,

provided that, except as set forth in paragraph (c) of this section,

the records are located within the boundaries of the United States and

the records are kept and available for inspection in accordance with

Sec. 1.31 of this chapter. If such records are maintained at a place

other than the retail foreign exchange dealer's principal place of

business, the Material Affiliated Person or other entity maintaining

the records shall file with the Commission a written undertaking, in a

form acceptable to the Commission, signed by a duly authorized person,

to the effect that the records will be treated as if the retail foreign

exchange dealer were maintaining the records pursuant to this section

and that the entity maintaining the records will permit examination of

such records at any time, or from time to time during business hours,

by representatives or designees of the Commission and promptly furnish

the Commission representative or its designee true, correct, complete

and current hard copy of all or any part of such records. The election

to maintain records at the principal place of business of the Material

Affiliated Person or at a records storage facility pursuant to the

provisions of this paragraph shall not relieve the retail foreign

exchange dealer required to maintain and preserve such records from any

of its responsibilities under this section or Sec. 5.11 of this part.

(f) Confidentiality. All information obtained by the Commission

pursuant to the provisions of this section from a retail foreign

exchange dealer concerning a Material Affiliated Person shall be deemed

confidential information for the purposes of section 8 of the Act.

(g) Implementation schedule. Each retail foreign exchange dealer

who is subject to the requirements of this section shall maintain and

preserve the information required by paragraphs (a)(1)(i) and (ii) of

this section commencing 60 calendar days after registration becomes

effective and the information required by paragraphs (a)(1)(iii) and

(iv) of this section commencing 105 calendar days following the first

fiscal year-end occurring after registration becomes effective.

Sec. 5.11 Risk assessment reporting requirements for retail foreign

exchange dealers.

(a) Reporting requirements with respect to information required to

be maintained by section 5.10 of this part. (1) Each retail foreign

exchange dealer registered with the Commission pursuant to Section

2(c)(2)(B)(i)(II)(gg) of the Act shall file the following with the

regional office of the Commission with which it files periodic

financial reports within 60 calendar days after the effective date of

such registration:

(i) A copy of the organizational chart maintained by the retail

foreign exchange dealer pursuant to Sec. 5.10(a)(l)(i) of this part.

Where there is a material change in information provided, an updated

organizational

[[Page 3319]]

chart shall be filed within sixty calendar days after the end of the

fiscal quarter in which the change has occurred; and

(ii) Copies of the financial, operational, and risk management

policies, procedures and systems maintained by the retail foreign

exchange dealer pursuant to Sec. 5.10(a)(l)(ii) of this part. If the

retail foreign exchange dealer has no such written policies, procedures

or systems, it must file a statement so indicating. Where there is a

material change in information provided, such change shall be reported

within sixty calendar days after the end of the fiscal quarter in which

the change has occurred.

(2) Each retail foreign exchange dealer registered with the

Commission pursuant to section 2(c)(2)(B)(i)(II)(gg) of the Act shall

file the following with the regional office with which it files

periodic financial reports within 105 calendar days after the end of

each fiscal year or, if a filing is made pursuant to a written notice

issued under paragraph (a)(2)(iii) of this section, within the time

period specified in the written notice:

(i) Fiscal year-end consolidated and consolidating balance sheets

for the highest level Material Affiliated Person within the retail

foreign exchange dealer's organizational structure, which shall include

the retail foreign exchange dealer and its other Material Affiliated

Persons, prepared in accordance with generally accepted accounting

principles, which consolidated balance sheets shall be audited by an

independent certified public accountant if an annual audit is performed

in the ordinary course of business, but which otherwise may be

unaudited, and which consolidated balance sheets shall include

appropriate explanatory notes. The consolidating balance sheets may be

those prepared by the retail foreign exchange dealer's highest level

Material Affiliated Person as part of its internal financial reporting

process;

(ii) Fiscal year-end annual consolidated and consolidating income

statements and consolidated cash flow statements for the highest level

Material Affiliated Person within the retail foreign exchange dealer's

organizational structure, which shall include the retail foreign

exchange dealer and its other Material Affiliated Persons, prepared in

accordance with generally accepted accounting principles, which

consolidated statements shall be audited by an independent certified

public accountant if an annual audit is performed in the ordinary

course of business, but which otherwise may be unaudited, and which

consolidated statements shall include appropriate explanatory notes.

The consolidating statements may be those prepared by the retail

foreign exchange dealer's highest level Material Affiliated Person as

part of its internal financial reporting process; and

(iii) Upon receiving written notice from any representative of the

Commission and within the time period specified in the written notice,

such additional information which the Commission determines is

necessary for a complete understanding of a particular affiliate's

financial impact on the retail foreign exchange dealer's organizational

structure.

(3) For the purposes of this section, the term Material Affiliated

Person shall have the meaning used in Sec. 5.10 of this part.

(4) The reports required to be filed pursuant to paragraphs (a)(1)

and (2) of this section shall be considered filed when received by the

regional office of the Commission with whom the retail foreign exchange

dealer files financial reports pursuant to Sec. 5.12 of this part.

(b) Exemptions. The Commission may exempt any retail foreign

exchange dealer from any provision of this section if it finds that the

exemption is not contrary to the public interest and the purposes of

the provisions from which the exemption is sought. The Commission may

grant the exemption subject to such terms and conditions as it may find

appropriate.

(c) Special provisions with respect to Material Affiliated Persons

subject to the supervision of certain domestic regulators. (1) In the

case of a Material Affiliated Person that is required to maintain and

preserve information pursuant to section 240.17h-1T of this title, or

such other risk assessment regulations as the Securities and Exchange

Commission may adopt, the retail foreign exchange dealer shall be

deemed to be in compliance with the reporting requirements of paragraph

(a)(2) of this section with respect to such Material Affiliated Person

if the retail foreign exchange dealer maintains and makes available for

inspection by the Commission in accordance with the provisions of this

section copies of the records and reports maintained and filed on Form

17-H (or such other forms or reports as may be required) by the

Material Affiliated Person with the Securities and Exchange Commission

pursuant to Sec. Sec. 240.17h-1T and 240.17h-2T of this title, or such

other risk assessment regulations as the Securities and Exchange

Commission may adopt;

(2) In the case of a Material Affiliated Person (including a

foreign banking organization) that is subject to examination by, or the

reporting requirements of, a Federal banking agency, the retail foreign

exchange dealer shall be deemed to be in compliance with the reporting

requirements of paragraph (a)(2) of this section with respect to such

Material Affiliated Person if the retail foreign exchange dealer or

such Material Affiliated Person maintains in accordance with Sec. 5.10

of this part copies of all reports filed by the Material Affiliated

Person with the Federal banking agency pursuant to section 5211 of the

Revised Statutes, section 9 of the Federal Reserve Act, section 7(a) of

the Federal Deposit Insurance Act, section 10(b) of the Home Owners'

Loan Act, or section 5 of the Bank Holding Company Act of 1956.

(3) In the case of a retail foreign exchange dealer that has a

Material Affiliated Person that is subject to the supervision of an

insurance commissioner or other similar official or agency of a state,

such retail foreign exchange dealer shall be deemed to be in compliance

with the reporting requirements of paragraph (a)(2) of this section

with respect to the Material Affiliated Person if:

(i) With respect to a Material Affiliated Person organized as a

mutual insurance company or a non-public stock company, the retail

foreign exchange dealer or such Material Affiliated Person maintains in

accordance with Sec. 5.14 of this part copies of the annual statements

with schedules and exhibits prepared by the Material Affiliated Person

on forms prescribed by the National Association of Insurance

Commissioners or by a state insurance commissioner; and

(ii) With respect to a Material Affiliated Person organized as a

public stock company, the retail foreign exchange dealer or such

Material Affiliated Person maintains, in addition to the annual

statements with schedules and exhibits required to be maintained

pursuant to Sec. 1.14 of this chapter, copies of the filings made by

the Material Affiliated Person pursuant to sections 13 or 15 of the

Securities Exchange Act of 1934 and the Investment Company Act of 1940.

(4) No retail foreign exchange dealer shall be required to furnish

to the Commission any examination report of any Federal banking agency

or any supervisory recommendations or analyses contained therein with

respect to a Material Affiliated Person that is subject to the

regulation of a Federal banking agency. All information received by the

Commission pursuant to this section concerning a Material Affiliated

Person that is subject to examination by or the reporting

[[Page 3320]]

requirements of a Federal banking agency shall be deemed confidential

for the purposes of section 8 of the Act.

(5) The furnishing of any information or documents by a retail

foreign exchange dealer pursuant to this section shall not constitute

an admission for any purpose that a Material Affiliated Person is

otherwise subject to the Act.

(d) Special provisions with respect to Material Affiliated Persons

subject to the supervision of a Foreign Regulatory Authority. A retail

foreign exchange dealer shall be deemed to be in compliance with the

reporting requirements of paragraph (a)(2) of this section with respect

to a Material Affiliated Person if such retail foreign exchange dealer

furnishes, or causes such Material Affiliated Person to make available,

in accordance with the provisions of this section, copies of any

financial or risk exposure reports filed by such Material Affiliated

Person with a foreign futures authority or other foreign regulatory

authority, provided that:

(1) The retail foreign exchange dealer agrees to use its best

efforts to obtain from the Material Affiliated Person and to cause the

Material Affiliated Person to provide, directly or through its foreign

futures authority or other foreign regulatory authority, any

supplemental information the Commission may request and there is no

statute or other bar in the foreign jurisdiction that would preclude

the retail foreign exchange dealer, the Material Affiliated Person, the

foreign futures authority or other foreign regulatory authority from

providing such information to the Commission; or

(2) The foreign futures authority or other foreign regulatory

authority with whom the Material Affiliated Person files such reports

has entered into an information sharing agreement with the Commission

which is in effect as of the retail foreign exchange dealer's fiscal

year-end and which will allow the Commission to obtain the type of

information required herein. The retail foreign exchange dealer shall

file a copy of the original report and a copy translated into the

English language. For the purposes of this section, the term ``Foreign

Futures Authority'' shall have the meaning set forth in section 1a(10)

of the Act.

(e) Confidentiality. All information obtained by the Commission

pursuant to the provisions of this section from a retail foreign

exchange dealer concerning a Material Associated Person shall be deemed

confidential information for the purposes of section 8 of the Act.

(f) Implementation schedule. Each retail foreign exchange dealer

who is subject to the requirements of this section shall file the

information required by paragraph (a)(1) of this section within 60

calendar days after registration is granted, and the information

required by paragraph (a)(2) of this section within 105 calendar days

after registration is granted.

Sec. 5.12 Financial reports of retail foreign exchange dealers.

(a)(1) Each person who files an application for registration as a

retail foreign exchange dealer with the National Futures Association

shall submit, concurrently with the filing of such application, either:

(i) A Form 1-FR-FCM certified by an independent public accountant

as of a date not more than 45 days prior to the date on which such

report is filed; or

(ii) A Form 1-FR-FCM as of a date not more than 17 business days

prior to the date on which such report is filed and a Form 1-FR-FCM

certified by an independent public accountant as of a date not more

than one year prior to the date on which such report is filed.

(2) Each such person must include with such financial report a

statement describing the source of his current assets and representing

that his capital has been contributed for the purpose of operating his

business and will continue to be used for such purpose.

(3) The provisions of paragraph (a)(1) of this section do not apply

to any person succeeding to and continuing the business of another

retail foreign exchange dealer.

(b)(1) Each person registered as a retail foreign exchange dealer

must file a Form 1-FR-FCM as of the close of business each month. Each

Form 1-FR must be filed no later than 17 business days after the date

for which the report is made.

(2) In addition to the monthly financial reports required by

paragraph (b)(1) of this section, each person registered as a retail

foreign exchange dealer must file a Form 1-FR-FCM as of the close of

its fiscal year, which must be certified by an independent public

accountant and must be filed no later than 90 days after the close of

the retail foreign exchange dealer's fiscal year.

(3) A Form 1-FR-FCM required to be certified by an independent

public accountant which is filed by a retail foreign exchange dealer

must be filed in paper form and may not be filed electronically with

the Commission. A Form 1-FR-FCM required to be certified by an

independent public accountant which is filed by an applicant for

registration as a retail foreign exchange dealer with the National

Futures Association must be filed electronically in accordance with

electronic filing procedures established by the National Futures

Association, however a paper copy of any such filing with the original

manually signed certification must be maintained by the applicant for

registration as a retail foreign exchange dealer in accordance with

Sec. 1.31.

(c) Each Form 1-FR-FCM required by the provisions of paragraphs

(a)(1) and (b)(2) of this section to be certified by an independent

public accountant must be certified in accordance with Sec. 1.16 of

this chapter, and must be accompanied by the accountant's report on

material inadequacies in accordance with the provisions of Sec.

1.16(c)(5) of this chapter. In all other respects, the independent

public accountant shall act in accordance with the provisions of Sec.

1.16 (except paragraph (f)) of this chapter: Provided, however, that

the term ``Sec. 5.7'' shall be substituted for the term ``Sec.

1.17,'' and the term ``retail foreign exchange dealer'' shall be

substituted for the term ``futures commission merchant.''

(d) Upon receiving written notice from any representative of the

Commission, National Futures Association, or any self-regulatory

organization of which the firm is a member, a retail foreign exchange

dealer or applicant for such registration, must, monthly or at such

times as specified, furnish the Commission, National Futures

Association, or self-regulatory organization a Form 1-FR-FCM or such

other financial information requested in the written notice. Each such

Form 1-FR-FCM or such other information must be furnished within the

time period specified in the written notice, and in accordance with the

provisions of paragraph (i) of this section.

(e)(1) Each Form 1-FR-FCM filed pursuant to this Sec. 5.12 which

is not required to be certified by an independent public accountant

must be completed in accordance with the instructions to the form and

contain:

(i) A statement of financial condition as of the date for which the

report is made;

(ii) A statement of income (loss) 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;

(iii) 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;

(iv) A statement of changes in liabilities subordinated to claims

of general creditors for the period between

[[Page 3321]]

the date of the most recent statement of financial condition filed with

the Commission and the date for which the report is made;

(v) A statement of the computation of the minimum capital

requirements pursuant to Sec. 5.7 of this part as of the date for

which the report is made; and

(vi) In addition to the information expressly required, such

further material information as may be necessary to make the required

statements and schedules not misleading.

(2) Each Form 1-FR-FCM filed pursuant to this Sec. 5.12 which is

required to be certified by an independent public accountant must be

completed in accordance with the instructions to the form and contain:

(i) A statement of financial condition as of the date for which the

report is made;

(ii) Statements of income (loss), cash flows, changes in ownership

equity, and changes in liabilities subordinated to claims of general

creditors, for the period between the date of the most recent certified

statement of financial condition filed with the Commission and the date

for which the report is made: Provided, That for an applicant filing

pursuant to paragraph (a) of this section the period must be the year

ending as of the date of the statement of financial condition;

(iii) A statement of the computation of the minimum capital

requirements pursuant to Sec. 5.7 of this part as of the date for

which the report is made;

(iv) Appropriate footnote disclosures;

(v) A reconciliation, including appropriate explanations, of the

statement of the computation of the minimum capital requirements

pursuant to Sec. 5.7 of this part, in the certified Form 1-FR-FCM with

the applicant's or registrant's corresponding uncertified most recent

Form 1-FR-FCM filing when material differences exist or, if no material

differences exist, a statement so indicating; and

(vi) In addition to the information expressly required, such

further material information as may be necessary to make the required

statements not misleading.

(3) The statements required by paragraphs (e)(2)(i) and (ii) of

this section may be presented in accordance with generally accepted

accounting principles in the certified reports filed as of the close of

the registrant's fiscal year pursuant to paragraph (b)(2) of this

section or accompanying the application for registration pursuant to

paragraph (a)(1) of this section, rather than in the format

specifically prescribed by these regulations: Provided, the statement

of financial condition is presented in a format as consistent as

possible with the Form 1-FR-FCM and a reconciliation is provided

reconciling such statement of financial condition to the statement of

the computation of the minimum capital requirements pursuant to Sec.

5.7 of this part. Such reconciliation must be certified by an

independent public accountant in accordance with Sec. 1.16 of this

chapter.

(4) Attached to each Form 1-FR-FCM filed pursuant to this section

must be an oath or affirmation that to the best knowledge and belief of

the individual making such oath or affirmation the information

contained in the Form 1-FR-FCM is true and correct. The individual

making such oath or affirmation must be: If the registrant or applicant

is a sole proprietorship, the proprietor; if a partnership, any general

partner; if a corporation, the chief executive officer or chief

financial officer; and, if a limited liability company or limited

liability partnership, the chief executive officer, the chief financial

officer, the manager, the managing member, or those members vested with

the management authority for the limited liability company or limited

liability partnership.

(f) Election of fiscal year. (1) An applicant wishing to establish

a fiscal year other than the calendar year may do so by notifying the

National Futures Association of its election of such fiscal year, in

writing, concurrently with the filing of the Form 1-FR-FCM pursuant to

paragraph (a)(1) of this section, but in no event may such fiscal year

end more than one year from the date of the Form 1-FR-FCM filed

pursuant to paragraph (a)(1) of this section. An applicant that does

not so notify the National Futures Association will be deemed to have

elected the calendar year as its fiscal year.

(2)(i) A registrant must continue to use its elected fiscal year,

calendar or otherwise, unless a change in such fiscal year has been

approved pursuant to this paragraph (f)(2).

(ii) A registrant may file with its designated self-regulatory

organization an application to change its fiscal year, a copy of which

the registrant must file with the Commission. The application shall be

approved or denied in writing by the registrant's designated self-

regulatory organization. The registrant must file immediately with the

Commission a copy of any notice it receives from its designated self-

regulatory organization to approve or deny the registrant's application

to change its fiscal year. A written notice of approval shall become

effective upon the filing by the registrant of a copy with the

Commission, and a written notice of denial shall be effective as of the

date of the notice.

(g) In the event a retail foreign exchange dealer or applicant for

registration as a retail foreign exchange dealer finds that it cannot

file its Form 1-FR-FCM for any period within the time specified in

paragraph (b)(1) or (2) of this section without substantial undue

hardship, it may request approval for an extension of time by filing an

application for an extension of time with, in the case of a registrant,

its designated self-regulatory organization, or, in the case of an

applicant, the National Futures Association. The registrant or

applicant also must file a copy of its application for an extension of

time with the Commission. The application shall be approved or denied

in writing by the National Futures Association or designated self-

regulatory organization, as applicable. The registrant or applicant

must file immediately with the Commission a copy of any notice it

receives approving or denying the request for extension of time. A

written notice of approval shall become effective upon the filing by

the registrant or applicant of a copy with the Commission, and a

written notice of denial shall be effective as of the date of the

notice.

(h) Public availability of reports. (1) Forms 1-FR-FCM filed

pursuant to this section will be treated as exempt from mandatory

public disclosure for purposes of the Freedom of Information Act and

the Government in the Sunshine Act and parts 145 and 147 of this

chapter, except for the information described in paragraph (i)(2) of

this section.

(2) The following information in Forms 1-FR-FCM will be publicly

available:

(i) The amount of the applicant's or registrant's adjusted net

capital; the amount of its minimum net capital requirement under Sec.

5.7 of this chapter; the amount of its adjusted net capital in excess

of its minimum net capital requirement; and the amount of the retail

forex obligation owed to its retail forex customers; and

(ii) The Statement of Financial Condition and the opinion of the

independent public accountant in the certified annual financial reports

of retail foreign exchange dealers.

(3) All information that is exempt from mandatory public disclosure

under paragraph (h)(1) of this section will, however, be available for

official use by any official or employee of the United States or any

State, by the National Futures Association or any other self-

[[Page 3322]]

regulatory organization of which the person filing such report is a

member, and by any other person to whom the Commission believes

disclosure of such information is in the public interest. Nothing in

this paragraph (h) will limit the authority of any self-regulatory

organization to request or receive any information relative to its

members' financial condition.

(i)(1) In the case of an applicant, all filings or other notices

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 applicant's principal place of business is located and by

the National Futures Association. In the case of a registrant, all

filings or other notices 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 registrant's designated self-

regulatory organization. Any copy that under paragraph (f)(2) or (g) is

required to be filed with the Commission shall 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.

(2) All filings or other notices filed pursuant to this section

which need not be certified in accordance with Sec. 1.16 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 retail

foreign exchange dealer 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. 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. 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 paragraph (e)(4) of this section.

Sec. 5.13 Reporting to customers of retail foreign exchange

dealers and futures commission merchants; monthly and confirmation

statements.

(a) Monthly statements. Each retail foreign exchange dealer or

futures commission merchant must promptly furnish in writing to each

retail forex customer, as of the close of the last business day of each

month or as of any regular monthly date selected, except for accounts

in which there are neither open positions at the end of the statement

period nor any changes to the account balance since the prior statement

period, but in any event not less frequently than once every three

months, a statement which clearly shows:

(1) For each retail forex customer:

(i) The open retail forex transactions with prices at which

acquired;

(ii) The net unrealized profits or losses in all open retail forex

transactions marked to the market; and

(iii) Any money, securities or other property carried with the

retail foreign exchange dealer or futures commission merchant; and

(iv) A detailed accounting of all financial charges and credits to

such retail forex accounts during the monthly reporting period,

including money, securities or property received from or disbursed to

such customer and realized profits and losses; and

(2) For each retail forex customer engaging in forex option

transactions:

(i) All forex options purchased, sold, exercised, or expired during

the monthly reporting period, identified by underlying retail forex

transaction or underlying currency, strike price, transaction date, and

expiration date;

(ii) The open forex option positions carried for such customer as

of the end of the monthly reporting period, identified by underlying

retail forex transaction or underlying currency, strike price,

transaction date, and expiration date;

(iii) All open forex option positions marked to the market and the

amount each position is in the money, if any;

(iv) Any money, securities or other property carried with the

retail foreign exchange dealer or futures commission merchant; and

(v) A detailed accounting of all financial charges and credits to

such retail forex account(s) during the monthly reporting period,

including money, securities and property received from or disbursed to

such customer, premiums charged and received, and realized profits and

losses.

(b) Confirmation statement. Each retail foreign exchange dealer or

futures commission merchant must, not later than the next business day

after any retail forex or forex option transaction, furnish:

(1) To each retail forex customer, a written confirmation of each

retail forex transaction caused to be executed by it for the customer,

including offsetting transactions executed during the same business day

and the rollover of an open retail forex transaction to the next

business day.

(2) To each retail forex customer engaging in forex option

transactions, a written confirmation of each forex option transaction,

containing at least the following information:

(i) The retail forex customer's account identification number;

(ii) A separate listing of the actual amount of the premium, as

well as each mark-up thereon, if applicable, and all other commissions,

costs, fees and other charges incurred in connection with the forex

option transaction;

(iii) The strike price;

(iv) The underlying retail forex transaction or underlying

currency;

(v) The final exercise date of the forex option purchased or sold;

and

(vi) The date the forex option transaction was executed.

(3) To each retail forex customer engaging in forex option

transactions, upon the expiration or exercise of any forex option, a

written confirmation statement thereof, which statement shall include

the date of such occurrence, a description of the forex option

involved, and, in the case of exercise, the details of the retail forex

or physical currency position which resulted therefrom including, if

applicable, the final trading date of the retail forex transaction

underlying the option.

(4) Notwithstanding the provisions of paragraphs (b)(1) through (3)

of this section, a retail forex transaction or forex option transaction

that is caused to be executed for a pooled investment vehicle that

engages in retail forex transactions need be confirmed only to the

operator of such pooled investment vehicle.

(c) Controlled accounts. With respect to any account controlled by

any person other than the retail forex customer or forex option

customer for whom such account is carried, each retail foreign exchange

dealer or futures commission merchant shall promptly furnish in writing

to such other person the information required by paragraphs (a) and (b)

of this section.

(d) Recordkeeping. Each retail foreign exchange dealer or futures

commission merchant shall retain, in accordance

[[Page 3323]]

with Sec. 1.31 of this chapter, a copy of each monthly statement and

confirmation required by this section.

(e) Introduced accounts. Each statement provided pursuant to the

provisions of this section must, if applicable, show that the account

for which the retail foreign exchange dealer or futures commission

merchant is providing the statement was introduced by an introducing

broker and the names of the retail foreign exchange dealer or futures

commission merchant and introducing broker.

(g) Electronic transmission of statements. (1) The statements

required by this section may be furnished to a retail forex customer by

means of electronic media if the retail forex customer so consents,

Provided, however, that a retail foreign exchange dealer or futures

commission merchant must, prior to the transmission of any statement by

means of electronic media, disclose the electronic medium or source

through which statements will be delivered, the duration, whether

indefinite or not, of the period during which consent will be

effective, any charges for such service, the information that will be

delivered by such means, and that consent to electronic delivery may be

revoked at any time, and provided, further, that a retail foreign

exchange dealer or futures commission merchant must obtain the retail

forex customer's signed consent acknowledging such disclosure prior to

the transmission of any statement by means of electronic media.

(2) Any statement required to be furnished to a person other than a

retail forex customer in accordance with paragraph (g) of this section

may be furnished by electronic media.

(3) A retail foreign exchange dealer or futures commission merchant

who furnishes statements to a retail forex customer by means of

electronic media must retain a daily confirmation statement for such

retail forex customer as of the end of the trading session, reflecting

all transactions made during that session for the customer, in

accordance with Sec. 1.31 of this chapter.

(h) Combination with other statements. Any futures commission

merchant required to deliver statements to retail forex customers in

accordance with Sec. 1.33 of this chapter may combine into one monthly

statement or confirmation statement, as the case may be, the

information required by this section and the information required by

Sec. 1.33, provided that retail forex account information is

separately identified from any other trading or account activity of the

retail forex customer.

Sec. 5.14 Records to be kept by retail foreign exchange dealers and

futures commission merchants.

(a) No person shall be registered as a retail foreign exchange

dealer under the Act unless, commencing on the date his application for

such registration is filed, he prepares and keeps current ledgers or

other similar records which show or summarize, with appropriate

references to supporting documents, each transaction affecting his

asset, liability, income, expense and capital accounts, and in which

(except as otherwise permitted in writing by the Commission) all his

asset, liability and capital accounts are classified into either the

account classification subdivisions specified on Form 1-FR-FCM or

categories that are in accord with generally accepted accounting

principles as applicable. Each person so registered shall prepare and

keep current such records.

(b) Each applicant or registrant must make and keep as a record in

accordance with Sec. 1.31 of this chapter formal computations of its

adjusted net capital and of its minimum financial requirements pursuant

to Sec. 1.17 or Sec. 5.7 of this chapter, or the requirements of the

designated self-regulatory organization to which it is subject, as

applicable, as of the close of business each month. Such computations

must be completed and made available for inspection by any

representative of the National Futures Association, in the case of an

applicant, or of the Commission or designated self-regulatory

organization, if any, in the case of a registrant, within 17 business

days after the date for which the computations are made, commencing the

first month end after the date the application for registration is

filed.

Sec. 5.15 Unlawful representations.

It shall be unlawful for any person registered pursuant to the

requirements of this part to represent or imply in any manner

whatsoever that such person has been sponsored, recommended or

approved, or that its abilities or qualifications have been reviewed or

evaluated, by the Commission, the Federal government or any agency

thereof.

Sec. 5.16 Prohibition of guarantees against loss.

(a) No retail foreign exchange dealer, futures commission merchant

or introducing broker may in any way represent that it will, with

respect to any retail foreign exchange transaction in any account

carried by a retail foreign exchange dealer or futures commission

merchant for or on behalf of any person:

(1) Guarantee such person against loss;

(2) Limit the loss of such person; or

(3) Not call for or attempt to collect security deposits, margin,

or other deposits as established for retail forex customers.

(b) No person may in any way represent that a retail foreign

exchange dealer, futures commission merchant or introducing broker will

engage in any of the acts or practices described in paragraph (a) of

this section.

(c) This section shall not be construed to prevent a retail foreign

exchange dealer, futures commission merchant or introducing broker from

assuming or sharing in the losses resulting from an error or

mishandling of an order.

(d) This section shall not affect any guarantee entered into prior

to [effective date of final rule], but this section shall apply to any

extension, modification or renewal thereof entered into after such

date.

Sec. 5.17 Authorization to trade.

No retail foreign exchange dealer, futures commission merchant,

introducing broker or any of their associated persons may directly or

indirectly effect a retail forex transaction for the account of any

customer unless before the transaction the customer, or person

designated by the customer to control the account specifically

authorized the retail foreign exchange dealer, futures commission

merchant, introducing broker or any of their associated persons to

effect the transaction. A transaction is ``specifically authorized'' if

the customer or person designated by the customer to control the

account specifies:

(a) The precise retail forex transaction to be effected;

(b) The exact amount of the foreign currency to be purchased or

sold; and

(c) In the case of an option, the identity of the foreign currency

or contract that underlies the option.

Sec. 5.18 Trading and operational standards.

(a) For purposes of this section:

(1) The term retail forex counterparty includes, as appropriate:

(i) A retail foreign exchange dealer as defined in Sec. 5.1 of

this part;

(ii) A futures commission merchant as defined in section 1a(20) of

the Act; and

(iii) An affiliated person of a futures commission merchant as

defined in Sec. 5.1 of this part.

(2) The term related person when used in reference to a retail

forex counterparty means any general partner, officer, director, owner

of more than ten percent of the equity interest, associated person or

employee of the retail forex

[[Page 3324]]

counterparty, and any relative or spouse of any of the foregoing

persons, or any relative of such spouse, who shares the same home as

any of the foregoing persons.

(b) Prior to engaging in a retail forex transaction, each retail

forex counterparty shall, at a minimum, establish and enforce internal

rules, procedures and controls to:

(1) Ensure, to the extent possible, that each order received from a

retail forex customer which order is executable at or near the price

that the retail forex counterparty has quoted to the customer is

entered for execution before any order in any retail forex transaction

for any proprietary account, any other account in which a related

person of the retail forex counterparty has an interest, or any account

for which such a related person may originate orders without the prior

specific consent of the account owner (if such related person has

gained knowledge of the retail forex customer's order prior to the

transmission of an order for a proprietary account), an account in

which such a related person has an interest, or an account in which

such a related person may originate orders without the prior specific

consent of the account owner; and

(2) Prevent related persons of forex counterparties from placing

orders, directly or indirectly, with another person in a manner

designed to circumvent the provisions of paragraph (b)(1) of this

section;

(3) Fairly and objectively establish settlement prices for retail

forex transactions; and

(4) Record and maintain essential information regarding customer

orders and account activity, and to provide such information to

customers upon request. Such information shall include:

(i) Transaction records for the customer's account, including:

(A) The date and time each order is received by the retail forex

counterparty;

(B) The price at which each order is placed, or, in the case of an

option, the premium paid;

(C) If the transaction was entered into by means of a trading

platform, the price quoted on the trading platform when the order was

placed, or, in the case of an option, the premium quoted;

(D) The customer account identification information;

(E) The currency pair;

(F) The size of the transaction;

(G) Whether the order was a buy or sell order;

(H) The type of order, if the order was not a market order;

(I) If a trading platform is used, the date and time the order is

transmitted to the trading platform;

(J) If a trading platform is used, the date and time the order is

executed;

(K) The size and price at which the order is executed, or in the

case of an option, the amount of the premium paid for each option

purchased, or the amount credited for each option sold; and

(L) For options, whether the option is a put or call, the strike

price, and expiration date.

(ii) Account records that contain the following information:

(A) The funds in the account, net of any commissions and fees;

(B) The net profits and losses on open trades; and

(C) The funds in the account plus or minus the net profits and

losses on open trades. (In the case of open option positions, the

account balance should be adjusted for the net option value);

(iii) If a trading platform is used, daily logs showing each price

change on the platform, the time of the change to the nearest second,

and the trading volume at that time and price; and

(iv) Any method or algorithm used to determine the bid or asked

price for any retail forex transaction or the prices at which customer

orders are executed, including, but not limited to, any markups, fees,

commissions or other items which affect the profitability or risk of

loss of a retail forex customer's transaction.

(c) No retail forex counterparty shall disclose that an order of

another person is being held by the retail forex counterparty, unless

such disclosure is necessary to the effective execution of such order

or is made at the request of an authorized representative of the

Commission, or a futures association registered with the Commission

pursuant to section 17 of the Act.

(d) No retail forex counterparty shall knowingly handle the account

of any related person of another retail forex counterparty unless it:

(1) Receives written authorization from a person designated by such

other retail forex counterparty with responsibility for the

surveillance over such account pursuant to paragraph (b)(2) of this

section;

(2) Prepares immediately upon receipt of an order for such account

a written record of such order, including the account identification

and order number, and records thereon to the nearest minute, by time-

stamp or other timing device, the date and time the order is received;

and

(3) Transmits on a regular basis to such other retail forex

counterparty copies of all statements for such account and of all

written records prepared upon the receipt of orders for such account

pursuant to paragraph (b)(2) of this section.

(e) No related person of a retail forex counterparty shall have an

account, directly or indirectly, with another retail forex counterparty

unless:

(1) It receives written authorization to maintain such an account

from a person designated by the retail forex counterparty of which it

is a related person with responsibility for the surveillance over such

account pursuant to paragraph (b)(2) of this section; and

(2) Copies of all statements for such account and of all written

records prepared by such other retail forex counterparty upon receipt

of orders for such account pursuant to paragraph (d)(2) of this section

are transmitted on a regular basis to the retail forex counterparty of

which it is a related person.

(f) No retail forex counterparty shall:

(1) Enter into a retail forex transaction, to be executed pursuant

to a market or limit order at a price that is not at or near the price

at which other retail forex customers, during that same time period,

have executed retail forex transactions with the retail forex

counterparty; Provided, however, that this paragraph (f)(1) shall not

prohibit such practice if done in accordance with the rules of a

registered futures association, and of which such retail foreign

exchange dealer, futures commission merchant or affiliated person of a

futures commission merchant is a member;

(2) Adjust or alter prices for a retail forex transaction after the

transaction has been confirmed to the retail forex customer; Provided,

however, that this paragraph (f)(2) shall not prohibit such practice if

in accordance with the rules of a registered futures association, and

of which such retail foreign exchange dealer, futures commission

merchant or affiliated person of a futures commission merchant is a

member;

(3)(i) Provide a retail forex customer a new bid price for a retail

forex transaction that is higher than its previous bid without

providing a new asked price that is also higher than its previous asked

price by a similar amount;

(ii) Provide a retail forex customer a new bid price for a retail

forex transaction that is lower than its previous bid without providing

a new asked price that is also lower than its previous asked price by a

similar amount; or

(4) Establish a new position for a retail forex customer (except

one that

[[Page 3325]]

offsets an existing position for that retail forex customer) where the

retail forex counterparty holds outstanding orders of other retail

forex customers for the same currency pair at a comparable price.

(g)(1) Each retail forex counterparty and each CPO, CTA and IB

subject to this Part 5 shall maintain a record of all communications

received by such person concerning facts giving rise to possible

violations of the Act, rules, regulations or orders thereunder, related

to their retail forex business. The record shall contain the name of

the complainant, if provided, the date of the communication, the

agreement, contract or transaction, the substance of the communication,

and the name of the person who received the communication.

(2) Each retail forex counterparty and each CPO, CTA and IB subject

to this Part 5 shall provide to the Division of Enforcement of the

Commission, electronically, a copy of the record of each communication

received pursuant to paragraph (g)(1) of this section. Such copy shall

be provided to the Division of Enforcement of the Commission no later

than 30 calendar days after the communication is received: Provided,

however, that in the case of a communication concerning facts giving

rise to possible fraud under the Act or Commission regulations, such

copy shall be provided to the Division of Enforcement of the Commission

within three business days after the communication is received.

(h) An introducing broker as defined in Sec. 5.11(a)(1) of this

part, or an applicant for registration as an introducing broker as

defined in Sec. 5.1(f)(1) of this part, or any person succeeding to

and continuing the business of another introducing broker as defined in

Sec. 5.1(f)(1) of this part, must enter into a guarantee agreement

with a retail foreign exchange dealer or futures commission merchant.

(i) Each retail forex counterparty shall prepare and maintain on a

quarterly basis a calculation of the percentage of non discretionary

retail forex accounts open for any period of time during the quarter

that earned a profit, and the percentage of such accounts that

experienced a loss. The calculation of profit or loss for each retail

forex account must be net of fees, commissions, any other expenses,

trading losses, customer funds deposited, and customer funds withdrawn.

Retail forex counterparties shall maintain such calculations along with

all data supporting such calculations for five years in accordance with

Sec. 1.31.

(j) Each retail forex counterparty shall designate one or more

principals to serve as a chief compliance officer(s). The chief

compliance officer(s) shall certify to the Commission and a registered

national futures association annually that the retail forex

counterparty has in place processes to establish, maintain, review,

modify and test policies and procedures reasonably designed to achieve

compliance with the Act, rules, regulations and orders thereunder. The

certification shall include a statement that the counterparty has in

place compliance processes, and that the chief compliance officer(s)

has apprised the chief executive officer of the compliance efforts to

date and identify and address significant compliance problems and plans

to address those problems.

Sec. 5.19 Pending legal proceedings.

(a) Every retail foreign exchange dealer or futures commission

merchant and each CPO, CTA or IB subject to this Part 5 shall submit to

the Commission copies of any dispositive or partially dispositive

decision for which a notice of appeal has been filed, the notice of

appeal and such further documents as the Commission may thereafter

request filed in any material legal proceeding to which the retail

foreign exchange dealer, futures commission merchant, CPO, CTA or IB is

a party or to which its property or assets is subject with respect to

retail forex transactions.

(b) Every retail foreign exchange dealer or futures commission

merchant and each CPO, CTA or IB subject to this Part 5 shall submit to

the Commission copies of any dispositive or partially dispositive

decision concerning which a notice of appeal has been filed, the notice

of appeal, and such further documents as the Commission may thereafter

request filed in any material legal proceeding instituted against any

person who is a principal of the retail foreign exchange dealer,

futures commission merchant, CPO, CTA or IB (as the term ``principal''

is defined in Sec. 3.1(a) of this chapter) arising from conduct in

such person's capacity as a principal of the retail foreign exchange

dealer, futures commission merchant, CPO, CTA or IB and alleging

violations, with regard to retail forex transactions, of:

(1) The Act or any rule, regulation, or order thereunder; or

(2) Provisions of state law relating to a duty or obligation owed

by such a principal.

(c) All documents required by this section to be submitted to the

Commission shall be mailed via first-class or submitted by other more

expeditious means to the Commission's headquarters office in

Washington, DC, Attention: Director, Division of Enforcement. All

documents required by this section to be submitted to the Commission as

to matters pending on [effective date of final rule] shall be mailed to

the Commission within 45 days of that effective date. Thereafter, all

decisions and notices of appeal required to be submitted by retail

foreign exchange dealers, futures commission merchants, CPOs, CTAs or

IBs shall be mailed within 10 days of the filing or receipt by the

retail foreign exchange dealer or futures commission merchant of the

relevant notice of appeal. For purposes of paragraph (a) and (b) of

this section, a ``material legal proceeding'' includes but is not

limited to actions involving alleged violations of the Commodity

Exchange Act or the Commission's regulations. However, a legal

proceeding is not ``material'' for the purposes of this rule if the

proceeding is not in a federal or state court or if the Commission is a

party.

Sec. 5.20 Special calls for account and transaction information.

(a) Preparation and transmission of information upon special call.

All information required upon special call shall be prepared in such

form and manner and in accordance with such instructions, and shall be

transmitted at such time and to such office of the Commission, as may

be specified in the call.

(b) Special calls for information on controlled accounts from

retail foreign exchange dealers, futures commission merchants and

introducing brokers. Upon call by the Commission, each retail foreign

exchange dealer, futures commission merchant and introducing broker

shall file with the Commission the names and addresses of all persons

who, by power of attorney or otherwise, exercise trading control over

any customer's account in retail forex transactions.

(c) Special calls for information on open transactions in accounts

carried or introduced by retail foreign exchange dealers, futures

commission merchants, and introducing brokers. Upon special call by the

Commission for information relating to retail forex transactions held

or introduced on the dates specified in the call, each retail foreign

exchange dealer, futures commission merchant, or introducing broker

shall furnish to the Commission the following information concerning

accounts of traders owning or controlling such retail forex transaction

positions, as may be specified in the call:

[[Page 3326]]

(1) The name, address, and telephone number of the person for whom

each account is carried;

(2) The principal business or occupation of the person for whom

each account is introduced or carried, as specified in the call;

(3) The name, address and principal business or occupation of any

person who controls the trading of each account;

(4) The name and address of any person having a financial interest

of ten percent or more in each account;

(5) The number of open retail forex transaction positions

introduced or carried in each account, as specified in the call; and

(6) The total number of retail forex transactions against which

delivery has been made.

(d) Delegation of authority to the Director of the Division of

Clearing and Intermediary Oversight and the Director of the Division of

Market Oversight. The Commission hereby delegates, until the Commission

orders otherwise, to the Director of the Division of Clearing and

Intermediary Oversight and the Director of the Division of Market

Oversight, or to the respective Director's designees, the authority set

forth in this section to make special calls for information on

controlled accounts from retail foreign exchange dealers, futures

commission merchants and from introducing brokers, and to make special

calls for information on open contracts in accounts carried or

introduced by futures commission merchants, introducing brokers, and

foreign brokers. Either Director may submit to the Commission for its

consideration any matter that has been delegated pursuant to this

section. Nothing in this section shall be deemed to prohibit the

Commission, at its election, from exercising the authority delegated in

this section to the Directors.

Sec. 5.21 Supervision.

Each Commission registrant subject to this Part 5, except an

associated person who has no supervisory duties, must diligently

supervise the handling by its partners, officers, employees and agents

(or persons occupying a similar status or performing a similar

function) of all retail forex accounts carried, operated, advised or

introduced by the registrant and all other activities of its partners,

officers, employees and agents (or persons occupying a similar status

or performing a similar function) relating to its business as a

Commission registrant.

Sec. 5.22 Registered futures association membership.

(a) Each person registered as a retail foreign exchange dealer must

become and remain a member of at least one futures association that is

registered under section 17 of the Act and that provides for the

membership therein of such retail foreign exchange dealer.

(b) Each person required to register as:

(1) An introducing broker, because the person solicits or accepts

orders for retail forex transactions;

(2) A commodity pool operator because the person operates, or

solicits funds, securities, or property for, a pooled investment

vehicle that engages in retail forex transactions; or

(3) A commodity trading advisor because the person exercises

discretionary trading authority, or obtains written authorization to

exercise discretionary trading authority over, an account in connection

with retail forex transactions, must become and remain a member of at

least one futures association that is registered under section 17 of

the Act and that provides for the membership therein of such person.

Sec. 5.23 Notice of bulk transfers and bulk liquidations.

(a) Notice and Disclosure to Retail Forex Customers of a Bulk

Transfer. (1) A retail foreign exchange dealer, futures commission

merchant or introducing broker must obtain the written prior and

specific consent of its retail forex customer to the assignment of any

position or transfer of any account of the retail forex customer to

another retail foreign exchange dealer, futures commission merchant or

introducing broker, unless made at the retail forex customer's request.

(2) Absent a request of the retail forex customer or the consent

described in paragraph (a)(1) of this section, assignments of positions

and transfers of accounts of retail forex customers may be permitted

under rules of the retail forex dealer's, futures commission

merchant's, or introducing broker's designated self-regulatory

organization that establish notice and other requirements with respect

to the assignment of positions and transfers of accounts of retail

forex customers. If such rules permit implied consent as a result of

the failure of the retail forex customer to object after having

received notice of the proposed assignment or transfer, such rules must

provide that the notice must include a statement that the retail forex

customer is not required to accept the proposed assignment or transfer

and may direct the transferor firm to liquidate the positions of the

retail forex customer or transfer the account to a firm of the retail

forex customer's selection.

(3) For assignments and transfers made under this section, other

than at the retail forex customer's request, the transferee retail

foreign exchange dealer, futures commission merchant or introducing

broker must provide to the retail forex customer the risk disclosure

statements and forms of acknowledgment required by Part 5 of this

chapter and receive the required signed acknowledgments within sixty

days of such assignments or transfers. This requirement shall not

apply:

(i) If the transferee retail foreign exchange dealer, futures

commission merchant or introducing broker has clear written evidence

that the retail forex customer has received and acknowledged receipt of

the required disclosure statements; or

(ii) If the transfer of accounts is made from one introducing

broker to another introducing broker guaranteed by the same retail

foreign exchange dealer or futures commission merchant pursuant to a

guarantee agreement in accordance with the requirements of Sec.

1.10(j) of this chapter and such retail foreign exchange dealer or

futures commission merchant maintains the relevant acknowledgments

required by Part 5 of this chapter.

(b) Notice to the Commission. Each retail foreign exchange dealer,

futures commission merchant or introducing broker shall file with the

Commission prior notice of any transfer of accounts of any retail forex

customer that is not initiated at the request of the customer, where

the transfer involves 50 percent or more of the transferor's total

number of retail forex customer accounts.

(c) Contents of Notice to the Commission. The notice required by

paragraph (b) of this section shall include:

(1) The name, principal business address and telephone number of

the transferor futures retail foreign exchange dealer, futures

commission merchant or introducing broker;

(2) The name, principal business address and telephone number of

each transferee retail foreign exchange dealer, futures commission

merchant or introducing broker;

(3) The designated self-regulatory organization for the transferor

and transferee firms;

(4) A brief statement as to the reasons for the transfer;

(5) A copy of any notices to customers regarding the transfers; and

(6) A statement of the number of accounts to be transferred.

[[Page 3327]]

(d) Notice of the Bulk Liquidation of Retail Forex Transactions. A

retail foreign exchange dealer or futures commission merchant may not

initiate the bulk liquidation of properly margined retail forex

transactions unless such liquidation complies with the rules and

procedures of the retail forex dealer's or futures commission

merchant's designated self-regulatory organization and the retail forex

dealer or futures commission merchant provides the Commission with

prior written notice of the liquidation.

(e) Contents of Notice of Bulk Liquidation. The notice required by

paragraph (d) of this section shall include:

(1) The name, principal business address and telephone number of

the initiating retail foreign exchange dealer or futures commission

merchant;

(2) A brief statement of the reasons for the liquidation;

(3) A copy of any notices to customers regarding the liquidation;

and

(4) A statement of the number of accounts to be liquidated.

(f) Filing of Notices. The notice required by paragraph (b) and (d)

of this section shall be filed five business days prior to the transfer

or liquidation of the retail forex transaction with the Deputy

Director, Compliance and Registration Section, Division of Clearing and

Intermediary Oversight, Commodity Futures Trading Commission, Three

Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581; the

National Futures Association Attn: Vice President-Compliance; and the

designated self-regulatory organization for the transferor firm.

(g) No effect on other obligations. The requirements of this

section shall not affect the obligations of a retail foreign exchange

dealer, futures commission merchant or introducing broker under the

rules of a self-regulatory organization or applicable customer account

agreement with respect to assignments of positions or transfers of

accounts or liquidation of positions.

(h) Corrective notice. If a proposed transfer is not completed in

accordance with the notice required to be filed by paragraph (b) of

this section, a corrective notice shall be filed within five business

days of the date such proposed transfer was to occur explaining why the

proposed transfer was not completed.

Sec. 5.24 Applicability of other parts of this chapter.

Insofar as it is consistent with the requirements of this part, all

other provisions of this chapter that apply to a person shall apply to

such person as though such provisions were expressly set forth in this

part.

Sec. 5.25 Applicability of the Act.

Except as otherwise specified in this part and unless the context

otherwise requires, the provisions of Sections 4b, 4c(b), 4f, 4g, 4k,

4m, 4n, 4o, 6(c)-(e), 6b, 6c, 8(a)-(e), 8a and 12(f) of the Act shall

apply to retail forex transactions that are subject to the requirements

of this part as though such provisions were set forth herein and

included specific references to retail forex transactions and the

persons defined in Sec. 5.1 of this part.

PART 10--RULES OF PRACTICE

37. The authority citation for part 10 continues to read as

follows:

Authority: Pub. L. 93-463, sec. 101(a)(11), 88 Stat. 1391; 7

U.S.C. 2a(12).

38. Section 10.1 is amended by revising paragraph (a) to read as

follows:

Sec. 10.1 Scope and applicability of rules of practice.

* * * * *

(a) Denial, suspension, revocation, conditioning, restricting or

modifying of registration as a futures commission merchant, retail

foreign exchange dealer, introducing broker, or associated person,

floor broker, floor trader, commodity pool operator, commodity trading

advisor or leverage transaction merchant pursuant to sections 6(c),

8a(2), 8a(3), 8a(4) and 8a(11) of the Act, 7 U.S.C. 9 and 15, 12a(2),

12a(3), 12a(4) and 12(a)(11), or denial, suspension, or revocation of

designation as a contract market pursuant to sections 6(a) and 6(b) of

the Act, 7 U.S.C. 8;

* * * * *

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEEDINGS OF THE

COMMISSION

39. The authority citation for part 140 continues to read as

follows:

Authority: 7 U.S.C. 2 and 12a.

40. Section 140.94 is amended by adding to read as follows:

Sec. 140.94 Delegation of authority to the Director of the Division

of Clearing and Intermediary Oversight.

(a) The Commission hereby delegates, until such time as the

Commission orders otherwise, the following functions to the Director of

the Division of Clearing and Intermediary Oversight and to such members

of the Commission's staff acting under his direction as he may

designate from time to time:

(1) All functions reserved to the Commission in Sec. 5.7 of this

chapter;

(2) All functions reserved to the Commission in Sec. 5.10 of this

chapter;

(3) All functions reserved to the Commission in Sec. 5.11 of this

chapter;

(4) All functions reserved to the Commission in Sec. 5.12 of this

chapter, except for those relating to nonpublic treatment of reports

set forth in Sec. 5.12(i) of this chapter; and

(5) All functions reserved to the Commission in Sec. 5.14 of this

chapter.

(b) The Director of the Division of Clearing and Intermediary

Oversight may submit any matter which has been delegated to him under

paragraph (a) of this section to the Commission for its consideration.

(c) Nothing in this section may prohibit the Commission, at its

election, from exercising the authority delegated to the Director of

the Division of Clearing and Intermediary Oversight under paragraph (a)

of this section.

PART 145--COMMISSION RECORDS AND INFORMATION

41. The authority citation for part 145 continues to read as

follows:

Authority: Pub. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80

Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat.

1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389

(5 U.S.C. 4a(j)); unless otherwise noted.

42. Section 145.5 is amended by revising paragraphs (d)(1)(viii)

and (h) to read as follows:

Sec. 145.5 Disclosure of nonpublic records.

* * * * *

(d) * * *

(1) * * *

(viii) The following reports and statements that are also set forth

in paragraph (h) of this section, except as specified in 17 CFR

1.10(g)(2), 17 CFR 31.13(m), or 17 CFR 5.12(h): Forms 1-FR required to

be filed pursuant to 17 CFR 1.10 or 17 CFR 5.12; FOCUS reports that are

filed in lieu of Forms 1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR

required to be filed pursuant to 17 CFR 31.13; the accountant's report

on material inadequacies filed in accordance with 17 CFR 1.16(c)(5);

and all reports and statements required to be filed pursuant to 17 CFR

1.17(c)(6);

* * * * *

(h) Contained in or related to examinations, operating, or

condition reports prepared by, on behalf of, or for the use of the

Commission or any other agency responsible for the regulation or

supervision of financial institutions, including, but not limited to

the following reports and statements that are also set forth in

paragraph (d)(1)(viii) of this section, except as specified in 17

[[Page 3328]]

CFR 1.10(g)(2), 17 CFR 5.12(h) or 17 CFR 31.13(m): Forms 1-FR required

to be filed pursuant to 17 CFR 1.10 or 17 CFR 5.12; FOCUS reports that

are filed in lieu of Forms 1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR

required to be filed pursuant to 17 CFR 31.13; the accountant's report

on material inadequacies filed in accordance with 17 CFR 1.16(c)(5);

and all reports and statements required to be filed pursuant to 17 CFR

1.17(c)(6); and

* * * * *

PART 147--OPEN COMMISSION MEETINGS

43. The authority citation for part 147 continues to read as

follows:

Authority: Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C.

552b); sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C.

4a(j) (Supp. V, 1975)), unless otherwise noted.

44. Section 147.3 is amended by revising paragraphs (b)(4)(i)(H)

and (b)(8) to read as follows:

Sec. 147.3 General requirement of open meetings; grounds upon which

meetings may be closed.

* * * * *

(b) * * *

(4) * * *

(i) * * *

(H) The following reports and statements that are also set forth in

paragraph (b)(8) of this section, except as specified in 17 CFR

1.10(g)(2), 17 CFR 5.12, or 17 CFR 31.13(m): Forms 1-FR required to be

filed pursuant to 17 CFR 1.10, 17 CFR 5.12(h)(2), or 17 CFR 31.13(m);

FOCUS reports that are filed in lieu of Forms 1-FR pursuant to 17 CFR

1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR 31.13; the

accountant's report on material inadequacies filed in accordance with

17 CFR 1.16(c)(5); and all reports and statements required to be filed

pursuant to 17 CFR 1.17(c)(6);

* * * * *

(8) Disclose information contained in or related to examination,

operating, or condition reports prepared by, on behalf of, or for the

use of the Commission or any other agency responsible for the

regulation or supervision of financial institutions, including, but not

limited to the following reports and statements that are also set forth

in paragraph (b)(4)(i)(H) of this section, except as specified in 17

CFR 1.10(g)(2), 17 CFR 5.12, or 17 CFR 31.13(m): Forms 1-FR required to

be filed pursuant to 17 CFR 1.10, 17 CFR 5.12(h)(2), or 17 CFR

31.12(m); FOCUS reports that are filed in lieu of Forms 1-FR pursuant

to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR

31.13; the accountant's report on material inadequacies filed in

accordance with 17 CFR 1.16(c)(5); and all reports and statements

required to be filed pursuant to 17 CFR 1.17(c)(6);

* * * * *

PART 160--PRIVACY OF CONSUMER FINANCIAL INFORMATION

45. The authority citation for part 160 continues to read as

follows:

Authority: 7 U.S.C. 7b-2 and 12a(5); 15 U.S.C. 6801, et seq.

46. Section 160.1 is amended by revising paragraph (b) to read as

follows:

Sec. 160.1 Purpose and scope.

* * * * *

(b) Scope. This part applies only to nonpublic personal information

about individuals who obtain financial products or services primarily

for personal, family, or household purposes from the institutions

listed below. This part does not apply to information about companies

or about individuals who obtain financial products or services

primarily for business, commercial, or agricultural purposes. This part

applies to all futures commission merchants, retail foreign exchange

dealers, commodity trading advisors, commodity pool operators and

introducing brokers that are subject to the jurisdiction of the

Commission, regardless whether they are required to register with the

Commission. These entities are hereinafter referred to in this part as

``you.'' This part does not apply to foreign (non-resident) futures

commission merchants, retail foreign exchange dealers, commodity

trading advisors, commodity pool operators and introducing brokers that

are not registered with the Commission. Nothing in this part modifies,

limits or supersedes the standards governing individually identifiable

health information promulgated by the Secretary of Health and Human

Services under the authority of sections 262 and 264 of the Health

Insurance Portability and Accountability Act of 1996, 42 U.S.C. 1320d-

1320d-8.

47. Section 160.3 is amended by:

a. Revising paragraph (a) introductory text and paragraph (a)(2);

b. Redesignating paragraphs (k)(2)(i)(B) through (F) as paragraphs

(k)(2)(i)(C) through (G) and republishing them, and adding new

paragraph (k)(2)(i)(B);

c. Revising paragraphs (n)(1)(i) and (n)(2)(i);

d. Revising paragraph (o)(1)(i);

e. Revising paragraph (u)(2)(i)(A);

f. Redesignating paragraphs (w)(2) through (4) as paragraphs (w)(3)

through (5) and adding new paragraph (w)(2); and

g. Adding new paragraph (x) to read as follows:

Sec. 160.3 Definitions.

* * * * *

(a) Affiliate of a futures commission merchant, retail foreign

exchange dealer, commodity trading advisor, commodity pool operator or

introducing broker means any company that controls, is controlled by,

or is under common control with a futures commission merchant, retail

foreign exchange dealer, commodity trading advisor, commodity pool

operator or introducing broker that is subject to the jurisdiction of

the Commission. In addition, a futures commission merchant, retail

foreign exchange dealer, commodity trading advisor, commodity pool

operator or introducing broker subject to the jurisdiction of the

Commission will be deemed an affiliate of a company for purposes of

this part if:

* * * * *

(2) Rules adopted by the Federal Trade Commission or another

federal functional regulator under Title V of the GLB Act treat the

futures commission merchant, retail foreign exchange dealer, commodity

trading advisor, commodity pool operator or introducing broker as an

affiliate of that company.

* * * * *

(k) * * *

(2) * * *

(i) * * *

(B) You are a retail foreign exchange dealer with whom a consumer

has opened an account, or that effects or engages in retail forex

transactions with or for a consumer, even if you do not hold any assets

of the consumer.

(C) You are an introducing broker that solicits or accepts specific

orders for trades;

(D) You are a commodity trading advisor with whom a consumer has a

contract or subscription, either written or oral, regardless of whether

the advice is standardized, or is based on, or tailored to, the

commodity interest or cash market positions or other circumstances or

characteristics of the particular consumer;

(E) You are a commodity pool operator, and you accept or receive

from the consumer, funds, securities, or property for the purpose of

purchasing an interest in a commodity pool;

(F) You hold securities or other assets as collateral for a loan

made to the consumer, even if you did not make the loan or do not

effect any transactions on behalf of the consumer; or

[[Page 3329]]

(G) You regularly effect or engage in commodity interest

transactions with or for a consumer even if you do not hold any assets

of the consumer.

* * * * *

(n)(1) * * *

(i) Any futures commission merchant, retail foreign exchange

dealer, commodity trading advisor, commodity pool operator or

introducing broker that is registered with the Commission as such or is

otherwise subject to the Commission's jurisdiction; and

* * * * *

(2) * * *

(i) Any person or entity, other than a futures commission merchant,

retail foreign exchange dealer, commodity trading advisor, commodity

pool operator or introducing broker that, with respect to any financial

activity, is subject to the jurisdiction of the Commission under the

Act.

* * * * *

(o)(1) * * *

(i) Any product or service that a futures commission merchant,

retail foreign exchange dealer, commodity trading advisor, commodity

pool operator, or introducing broker could offer that is subject to the

Commission's jurisdiction; and

* * * * *

(u) * * *

(2) * * *

(i) * * *

(A) Information a consumer provides to you on an application to

open a commodity interest trading account, to invest in a commodity

pool, or to obtain another financial product or service;

* * * * *

(w) * * *

(2) Any retail foreign exchange dealer;

* * * * *

(x) Retail foreign exchange dealer has the same meaning as in Sec.

5.3(i)(1) of this chapter.

48. Section 160.4 is amended by:

a. Revising paragraph (c)(2)(ii); and

b. Revising paragraph (e)(1)(iv) to read as follows:

Sec. 160.4 Initial privacy notice to consumers required.

* * * * *

(c) * * *

(2) * * *

(ii) Opens a retail forex account, or opens a commodity interest

account through an introducing broker or with a futures commission

merchant that clears transactions for its customers through you on a

fully-disclosed basis;

* * * * *

(e) * * *

(1) * * *

(iv) You have established a customer relationship with a customer

in a bulk transfer in accordance with Sec. 1.65, if you are a

transferee futures commission merchant, retail foreign exchange dealer

or introducing broker.

* * * * *

49. Section 160.30 is amended by revising the introductory text to

read as follows:

Sec. 160.30 Procedures to safeguard customer records and information.

Every futures commission merchant, retail foreign exchange dealer,

commodity trading advisor, commodity pool operator and introducing

broker subject to the jurisdiction of the Commission must adopt

policies and procedures that address administrative, technical and

physical safeguards for the protection of customer records and

information. These policies and procedures must be reasonably designed

to:

* * * * *

PART 166--CUSTOMER PROTECTION RULES

50. The authority citation for part 166 remains as follows:

Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, 6h, 6k, 6l, 6o, 7,

12a and 23, as amended by the Commodity Futures Modernization Act of

2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).

51. Section 166.2 is revised as follows:

Sec. 166.2 Authorization to trade.

No futures commission merchant, retail foreign exchange dealer,

introducing broker or any of their associated persons may directly or

indirectly effect a transaction in a commodity interest for the account

of any customer unless before the transaction the customer, or person

designated by the customer to control the account:

(a) With respect to any commodity interest as defined in Sec.

1.3(yy)(1) through (3) of this chapter, specifically authorized the

futures commission merchant, retail foreign exchange dealer,

introducing broker or any of their associated persons to effect the

transaction (a transaction is ``specifically authorized'' if the

customer or person designated by the customer to control the account

specifies--

(1) The precise commodity interest to be purchased or sold and

(2) The exact amount of the commodity interest to be purchased or

sold); or

(b) With respect to any commodity interest as defined in Sec.

1.3(yy)(1) or (2) of this chapter, authorized in writing the futures

commission merchant, introducing broker or any of their associated

persons to effect transactions in commodity interests for the account

without the customer's specific authorization; Provided, however, That

if any such futures commission merchant, introducing broker or any of

their associated persons is also authorized to effect transactions in

foreign futures or foreign options without the customer's specific

authorization, such authorization must be expressly documented.

52. Section 166.5 is amended by:

a. Removing paragraph (a)(1)(iv), redesignating paragraphs

(a)(1)(i) through (a)(1)(iii) as paragraphs (a)(1)(i)(A) through

(a)(1)(i)(C), and adding new paragraph (a)(1)(ii);

b. Revising paragraphs (a)(2) and (a)(3);

c. Revising paragraphs (c)(5)(i)(A) and (c)(5)(i)(C) to read as

follows:

Sec. 166.5 Dispute settlement procedures.

(a) * * *

(ii) Arises out of any retail forex transaction (as defined in

Sec. 5.1(m) of this chapter).

(2) The term customer as used in this section includes an option

customer (as defined in Sec. 1.3(jj) of this chapter), a retail forex

customer (as defined in Sec. 5.1(k) of this chapter) and any person

for or on behalf of whom a member of a designated contract market, or a

participant transacting on or through such designated contract market,

effects a transaction on such contract market, except another member of

or participant in such designated contract market; Provided, however, a

person who is an ``eligible contract participant'' as defined in

section 1a(12) of the Act shall not be deemed to be a customer within

the meaning of this section.

(3) The term Commission registrant as used in this section means a

person registered under the Act as a futures commission merchant,

retail foreign exchange dealer, introducing broker, floor broker,

commodity pool operator, commodity trading advisor, or associated

person.

* * * * *

(c) * * *

(5) * * *

(i) * * *

(A) The designated contract market, if applicable and if available,

upon which the transaction giving rise to the dispute was executed or

could have been executed;

* * * * *

(C) At least one other organization that will provide the customer

with the opportunity to select the location of the arbitration

proceeding from among

[[Page 3330]]

several major cities in diverse geographic regions and that will

provide the customer with the choice of a panel or other decision-maker

composed of at least one or more persons, of which at least a majority

are not members or associated with a member of the designated contract

market, if applicable, or employee thereof, and that are not otherwise

associated with the designated contract market (mixed panel), if

applicable: Provided, however, that the list of qualified organizations

provided by a Commission registrant that is a floor broker need not

include a registered futures association unless a registered futures

association has been authorized to act as a decision-maker in such

matters.

* * * * *

Issued in Washington, DC, on January 7, 2010, by the Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. 2010-456 Filed 1-19-10; 8:45 am]

BILLING CODE P

Last Updated: April 2, 2010