Commodity Futures Trading Commission 17 CFR Part 3 Registration of Intermediaries[Federal Register: April 26, 2007 (Volume 72, Number 80)]

[Proposed Rules]

[Page 20788-20791]

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





17 CFR Part 3

RIN 3038-AC37

Registration of Intermediaries

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.


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

``CFTC'') is proposing to amend Commission Regulation 3.10 to require

certain registered intermediaries, i.e., futures commission merchants

(``FCMs''), introducing brokers (``IBs''), commodity pool operators

(``CPOs''), commodity trading advisors (``CTAs'') and leverage

transaction merchants (``LTMs''), to complete an online annual review

of their registration information maintained with the National Futures

Association (``NFA''). The proposed amendment (``Proposed Amendment'')

would ensure that NFA will have accurate and current information about

such registrants. The Commission's proposal (``Proposal'') also

includes a technical and conforming amendment to Commission Regulation

3.33(f), which regulation is cross-referenced in the Proposed


DATES: Comments must be received on or before May 29, 2007.

ADDRESSES: Comments on the Proposal should be sent to Eileen Donovan,

Acting Secretary, Commodity Futures Trading Commission, Three Lafayette

Centre, 1155 21st Street, NW., Washington, DC 20581. Comments may be

sent by facsimile transmission to (202) 418-5521, or by e-mail to

[email protected] Reference should be made to ``Proposal Regarding

the Registration of Intermediaries.'' Comments also may be submitted by

connecting to the Federal eRulemaking Portal at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov

and following the comment submission instructions.

FOR FURTHER INFORMATION CONTACT: Helene D. Schroeder, Special Counsel,

Compliance and Registration Section, Division of Clearing and

Intermediary Oversight, Commodity Futures Trading Commission, Three

Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581,

telephone number: (202) 418-5450; facsimile number: (202) 418-5528; and

electronic mail: [email protected]


I. Background

A. The Regulatory Framework

Sections 4d, 4f(a)(1), 4m and 4n(1) of the Commodity Exchange Act

(``Act'') \1\ require the registration of firms seeking to act as

intermediaries for exchange-traded futures.\2\ The statutory framework

for registration procedures is

[[Page 20789]]

set forth in Section 4f(a)(1) of the Act for FCMs and IBs,\3\ and in

Section 4n(a)(1) for CPOs and CTAs.\4\ Additionally, Section 19 of the

Act grants the Commission plenary authority over leverage



\1\ 7 U.S.C. 1 et seq. (2000). The Act can be accessed at http://www.access.gpo.gov/uscode/title7/chapter1_.html


\2\ Section 4c of the Act provides the Commission with plenary

authority over commodity options.

\3\ 7 U.S.C. 6f(a)(1).

\4\ 7 U.S.C. 6n(1).

\5\ 7 U.S.C. 23. Commission Regulation 31.5, 17 CFR 31.5 (2006),

was promulgated under this provision and along with Regulation 3.10,

17 CFR 3.10, governs the registration of LTMs. The Commission's

regulations can be accessed at http://www.access.gpo.gov/nara/cfr/waisidx_06/17cfrv1_06.html



Pursuant to these statutory and other regulatory provisions, a

person seeking to register as an intermediary must file an application

that contains the information and facts that are deemed necessary by

the Commission.\6\ Sections 4f and 4n further provide that, unless

renewed, the person's registration will expire automatically each year,

or at such other time (not less than one year from the date of

issuance) as the Commission by rule, regulation or order may



\6\ In the case of FCMs and IBs, the application must provide

the ``names and addresses of the managers of all branch offices, and

the names of such officers and partners, if a partnership, and the

names of such officers, directors, and stockholders, if a

corporation, as the Commission may direct.'' With regard to CPOs and

CTAs, the application must contain identifying information,

education and business affiliations of controlling persons thereof,

the manner of giving advice and rendering of analyses or reports,

the basis upon which the applicant is or will be compensated and

such other information as the Commission may require to determine

whether the applicant is qualified for registration.

\7\ In this regard, Section 4f(a)(1) provides in pertinent part

as follows: ``Each registration shall expire on December 31 of the

year for which issued or at such other time, not less than one year

from the date of issuance, as the Commission may by rule,

regulation, or order prescribe, and shall be renewed upon

application therefor unless the registration has been suspended (and

the period of such suspension has not expired) or revoked pursuant

to the provisions of this Act.''

Section 4n(2) additionally provides: ``Each registration under

this section shall expire on the 30th day of June of each year, or

at such other time, not less than one year from the effective date

thereof, as the Commission may by rule regulation, or order

prescribe, and shall be renewed upon application therefor subject to

the same requirements as in the case of an original application.''


Section 17(o)(1) of the Act authorizes the Commission to require

any registered futures association to perform any portion of its

registration functions under the Act with respect to each member of the

association,\8\ and Section 8a(10) permits the Commission to authorize

any person to perform any registration functions under the Act, in

accordance with rules adopted by such person and submitted to the

Commission for approval.\9\ The Commission has exercised this authority

by delegating to NFA, the sole registered futures association, its

authority to process applications for registration of



\8\ 7 U.S.C. 21(o)(1).

\9\ 7 U.S.C. 12a(10).

\10\ 54 FR 19556 (May 8, 1989) (LTMs); 49 FR 39593 (Oct. 9,

1984) (FCMs, CPOs and CTAs); and 48 FR 35158 (Aug. 3, 1983) (IBs).


Part 3 of the Commission's Regulations \11\ contains the

regulations relating to the registration of intermediaries and other

futures industry professionals. Commission Regulation 3.10(a) specifies

that an application for registration as an FCM, IB, CPO, CTA or LTM

must be on a Form 7-R, completed and filed with NFA in accordance with

the instructions thereto.\12\ Commission Regulation 3.31(a)(1) imposes

a continuing obligation on registrants to update their registration

information.\13\ Specifically, Commission Regulation 3.31(a)(1)

requires each FCM, IB, CTA, CPO or LTM to promptly correct any

deficiency or inaccuracy that is contained in the person's Form 7-R or

any Form 8-R filed on behalf of a principal or an associated person

that no longer renders accurate and current the information contained

therein. It further specifies that each such correction must be made on

a Form 3-R and must be prepared and filed with NFA in accordance with

the instructions thereto.


\11\ 17 CFR part 3.

\12\ 17 CFR 3.10(a).

\13\ 17 CFR 3.31(a)(1).


To further ensure that registration information remained accurate

and current, Commission Regulation 3.10(d), which was revoked in 2002,

required FCMs, IBs, CPOs, CTAs and LTMs to file the Form 7-R with NFA

annually on a date specified by NFA. In accordance with that

regulation, NFA sent each FCM, IB, CPO, CTA and LTM a pre-printed paper

copy of the registrant's Form 7-R to review. If the information in the

printout was inaccurate, the registrant was required to correct the

information and return the printout with the corrections to NFA.\14\


\14\ Regulation 3.10(d) also provided that the failure to file

the Form 7-R within 30 days following the date specified by NFA

would be deemed to be a request for withdrawal from registration.


B. Implementation of NFA's Online Registration System

In light of technological advancements and improvements, NFA

altered its registration procedures in 2002 by shifting from paper-

based registration to an online or electronic registration system.

Pursuant to the updated procedures, NFA requires, with limited

exception,\15\ that all registration (and membership) forms, including

the completed Form 7-R and 3-R, must be filed with NFA electronically

through NFA's online registration system.


\15\ For example, NFA requires that any securities broker or

dealer that is registered with the Securities and Exchange

Commission that becomes a notice-registered FCM or IB must submit a

hardcopy version of its Form 7-R.


In June 2002, the Commission deleted the requirement for firms to

review annually registration information as specified by Commission

Regulation 3.10(d).\16\ The Commission determined that, because such

persons were already under an ongoing obligation pursuant to Commission

Regulation 3.31(a) to update their registration information to correct

deficiencies and inaccuracies, the continuation of the annual paper

updating process was redundant and resulted in unnecessary costs to

both NFA and the registrant.\17\ Further, because NFA was implementing

an online system for the intake of registration documents, the

Commission believed it made little sense for NFA to continue receiving

annual paper updates of such registration forms.


\16\ 67 FR 38869 (June 6, 2002).

\17\ Id. at 38871.


In the period since the elimination of Regulation 3.10(d), NFA has

experienced some problems with the registration information provided by

certain intermediaries. Further, the Commission and NFA recently have

arranged for firms to designate an enforcement contact to be the

recipient of communications from the Commission relating to enforcement

issues. It is important to maintain an up-to-date list of such

contacts. In addition, although the Commission has seen no evidence of

security breaches of registration information, an annual review of

information in the registration database should enhance the overall

safety of such data.

NFA has devoted significant resources toward developing an online

registration update protocol for firms to review and update their

registration records. The protocol is designed to provide a

straightforward process by which registrants can review and modify

their existing registration information.\18\ In addition to providing

an updated list of users, the protocol will require registrants to

provide updated disciplinary, branch office and firm contact

information. The Proposed Amendment is intended to facilitate NFA's

efforts in implementing this new

[[Page 20790]]

protocol and ensure that NFA is in possession of current and accurate

information regarding intermediaries. All firms remain subject to their

obligations under Regulation 3.31(a)(1) to promptly correct any

deficiency or inaccuracy in a Form 7-R or Form 8-R filed by the firm.


\18\ For example, a firm could modify the title given for a

particular principal of a firm, but it could not identify a new

principal, as this would require separate application.


II. Proposal

The Proposed Amendment, which would set forth an annual review

requirement, would be added as new paragraph (d).\19\ As proposed, the

new paragraph would provide that each FCM, IB, CPO, CTA and LTM, in

accordance with procedures established by NFA, must complete an online

annual review of the registration information maintained by NFA.

Pursuant to procedures established by NFA, registrants would be

expected to correct any deficiencies or inaccuracies contained therein.


\19\ Paragraph (d) of Regulation 3.10 had been reserved.


The Proposed Amendment also would provide that the failure to

complete the review and update within 30 days of the date established

by NFA for completion would be deemed to be a request for withdrawal

from registration. As further provided therein, NFA would be required

to process the request in accordance with the existing procedures for

withdrawal of registration set forth in Commission Regulation 3.33(f).

Commission Regulation 3.33(f) establishes the date on which a

request for withdrawal of registration will become effective unless the

Commission or NFA take certain actions as specified therein.\20\ When

the Commission deleted the requirement for registrants to conduct an

annual paper updating process by revoking Commission Regulation 3.10(d)

in 2002, the Commission did not make a conforming change to Commission

Regulation 3.33(f). Specifically, the Commission did not remove

unnecessary language that cross-referenced the revoked provision. That

language, which appears as the introductory phrase of Commission

Regulation 3.33(f) provides as follows: ``Except as otherwise provided

in Regulation 3.10(d).'' This introductory phrase will continue to be

unnecessary if the Proposed Amendment is adopted. Accordingly, the

Commission's Proposal also includes a technical and conforming

amendment to Commission Regulation 3.33(f) to remove the introductory

language. As proposed, the text would begin with the language following

the introductory phrase: ``A request for withdrawing of registration.''

The residual text in Commission Regulation 3.33(f) would remain intact.


\20\ Commission Regulation can be accessed at the Web site

provided in footnote 5. See also NFA Registration Rule 601(c).


III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA'') \21\ requires that

agencies, in proposing regulations, consider the impact of those

regulations on small businesses. The Proposed Amendment would affect

persons that are registered as FCMs, IBs, CPOs, CTAs and LTMs. The

Commission has previously established certain definitions of ``small

entities'' to be used by the Commission in evaluating the impact of its

regulations on such entities in accordance with the RFA.\22\ The

Commission previously determined that registered FCMs, CPOs and LTMs

are not small entities for the purpose of the RFA.\23\ With respect to

the remaining persons, CTAs and IBs, the Commission does not believe

that the economic impact of the Proposed Amendment will be significant.

First, the information that would be required under the Proposed

Amendment already is required to be collected under the existing

registration framework. Second, the Proposed Amendment and NFA's new

protocol will focus each registrant on the specific areas that must be

reviewed and, if needed, updated. Third, the Proposed Amendment will

permit review and updating via electronic means in keeping with the

current registration procedures. Accordingly, in accordance with

Section 3(a) of the RFA,\24\ the Chairman, on behalf of the Commission,

certifies that the proposed rules will not have a significant economic

impact on a substantial number of small entities. However, the

Commission invites the public to comment on this finding.


\21\ 5 U.S.C. 601 et seq.

\22\ 47 FR 18618 (Apr. 30, 1982).

\23\ 47 FR 18618, 18619.

\24\ 5 U.S.C. 605(b).


B. Cost-Benefit Analysis

Section 15(a) of the Act \25\ requires the Commission to consider

the costs and benefits of its action before issuing a new regulation

under the Act. By its terms, Section 15(a) does not require the

Commission to quantify the costs and benefits of a new regulation or to

determine whether the benefits of the proposed regulation outweigh its

costs. Rather, Section 15(a) simply requires the Commission to

``consider the costs and benefits'' of its action.


\25\ 7 U.S.C. 19(a).


Section 15(a) further specifies that costs and benefits shall be

evaluated in light of five broad areas of market and public concern:

(1) Protection of market participants and the public; (2) efficiency,

competitiveness, and financial integrity of futures markets; (3) price

discovery; (4) sound risk management practices; and (5) other public

interest considerations. The Commission, in its discretion, may choose

to give greater weight to any one of the five enumerated areas and

determine that, notwithstanding its costs, a particular regulation is

necessary or appropriate to protect the public interest or to

effectuate any of the provisions or to accomplish any of the purposes

of the Act.

The Proposed Amendment concerns the registration of certain

intermediaries, in particular, FCMs, IBs, CPOs, CTAs and LTMs.

Specifically, the Proposed Amendment will require these intermediaries

to complete an online annual review of their registration information,

including disciplinary information, firm contacts and lists of

authorized users. By ensuring that NFA, the self-regulatory

organization that oversees the activities of these registrants, will

have accurate and current information regarding registrants, the

Proposed Amendment will maximize the protection of market participants

and the public.

Such intermediaries already are under an ongoing obligation to

provide updated information to NFA pursuant to Commission Regulation

3.31(a)(1). The Proposed Amendment would require these registrants to

comply with an online review protocol established by NFA. This protocol

would provide a straightforward process for registrants to

electronically update their registration information. It would focus

and guide registrants on the particular areas that need updating. By

facilitating NFA's efforts to adopt this protocol, the Proposed

Amendment also should result in efficiency enhancements for registrants

and NFA.

The Proposed Amendment should have no effect on the following three

enumerated areas: (1) Efficiency, competitiveness or the financial

integrity of futures markets; (2) price discovery; and (3) sound risk

management practices.

After considering these factors, the Commission has determined to

issue the Proposed Amendment discussed above. The Commission invites

public comment on its application of the cost-benefit provision.

Commenters also are invited to submit any data that they may have

quantifying the costs and benefits

[[Page 20791]]

of the Proposed Amendment with their comment letters.

C. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (``PRA'') imposes certain

obligations on federal agencies, including the Commission, in

connection with their conducting or sponsoring any collection of

information as defined by the PRA.\26\ The Proposed Amendment would

require intermediaries to conduct an annual review of their

registration information maintained with NFA. The information that

would be reviewed in accordance with the Proposed Amendment is part of

an approved collection of information. Moreover, the Proposed Amendment

would not result in any material modifications to this approved

collection. Accordingly, for purposes of the PRA, the Commission

certifies that the requirements of the PRA are inapplicable to the

Proposed Amendment.


\26\ 26 44 U.S.C. 3501 et seq.


List of Subjects in 17 CFR Part 3

Administrative practice and procedure, Brokers, Commodity Futures,

Reporting and recordkeeping requirements.

For the reasons discussed in the preamble, the Commission proposes

to amend 17 CFR part 3 as follows:


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

Authority: 5 U.S.C. 522, 522b; 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.

2. Section 3.10 is amended by adding paragraph (d) to read as


Sec. 3.10 Registration of futures commission merchants, introducing

brokers, commodity trading advisors, commodity pool operators and

leverage transaction merchants.

* * * * *

(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, 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).

3. Section 3.33 is amended by revising paragraph (f) introductory

text to read as follows:

Sec. 3.33 Withdrawal from registration.

* * * * *

(f) A request for withdrawal from registration will become

effective on the thirtieth day after receipt of such request by the

National Futures Association, or earlier upon written notice from the

National Futures Association (with the written concurrence of the

Commission) of the granting of such request, unless prior to the

effective date:

* * * * *

Issued in Washington, DC, on April 23, 2007, by the Commission.

Eileen Donovan,

Acting Secretary of the Commission.

[FR Doc. E7-8025 Filed 4-25-07; 8:45 am]


Updated April 26, 2007

Last Updated: June 26, 2007