[Federal Register: November 9, 2004 (Volume 69, Number 216)]
[Proposed Rules]
[Page 64873-64875]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



17 CFR Part 1

RIN 3038-AC16

Distribution of ``Risk Disclosure Statement'' by Futures
Commission Merchants and Introducing Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.


SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is proposing to amend Rule 1.55 to provide that non-
institutional customers may indicate with a single signature, in
addition to the acknowledgment of receipt of various disclosures and
the making of certain elections, the consent referenced in Rules
155.3(b)(2) and 155.4(b)(2) concerning customer permission for futures
commission merchants (``FCMs'') and introducing brokers (``IBs'') to
take the opposite side of an order.

DATES: Comments must be received by December 9, 2004.

ADDRESSES: You may submit comments, identified by RIN 3038-AC16, by any
of the following methods:
    • Federal eRulemaking Portal:  href="http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov" shape="rect">http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov.

Follow the instructions for submitting comments.
    • E-mail: [email protected]. Include ``Proposed Amendments
to Rule 1.55'' in the subject line of the message.
    • Fax: (202) 418-5521.
    • Mail: Send to Jean A. Webb, Secretary of the Commission,
Commodity Futures Trading Commission, 1155 21st Street, NW., Washington
DC 20581.
    • Courier: See above.
    Instructions: All comments received will be posted without change
to http://www.cftc.gov, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Deputy Director,
or Susan A. Elliott, 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

[[Page 64874]]

20581. Telephone: (202) 418-5439 or (202) 418-5464, or electronic mail:
[email protected] or [email protected].


I. Background

    The Commission is proposing to amend Rule 1.55 to provide that the
single signature by which non-institutional customers acknowledge
receipt of basic risk disclosures of futures and option trading, and
elect how hedging positions shall be handled in the event of a
commodity broker bankruptcy, may also reflect the consent referenced in
Rules 155.3(b)(2) and 155.4(b)(2) concerning customer permission for
FCMs and IBs to take the opposite side of an order. The Commission
adopted a similar rule amendment in November 2000,\1\ but withdrew it
the following month upon passage of the Commodity Futures Modernization
Act of 2000.\2\ Most of the rules adopted and withdrawn in 2000 were
reproposed and re-adopted in 2001,\3\ but this one was not. Recently,
Commission staff received an inquiry about this issue and the
Commission has determined to repropose the rule amendment.

    \1\ 65 FR 77993 at 78013 (December 13, 2000).
    \2\ 65 FR 82272
    \3\ 66 FR 45221 at 45226 (August 28, 2001) (proposed rules) and
66 FR 53510 at 53513 (October 23, 2001) (final rules).

    The Commission first adopted the so-called single signature
acknowledgment format in 1993.\4\ It had proposed that use of the
single signature format be limited to certain sophisticated
customers.\5\ However, the Commission stated in the final rule that
three of four commenters noted ``that since when an account is opened
customers generally receive and must acknowledge all prescribed
disclosures at the same time, it is reasonable to permit the customer
to acknowledge all such statements by means of a single signature. Such
commenters contended that separate signatures do not convey the
required disclosures more clearly and compellingly.'' \6\ In that rule,
the Commission extended the single signature acknowledgment format to
all customers, but excluded the acknowledgments required by Rules
155.3(d) and 155.4(d) on the grounds that a separate signature would
reflect more ``meaningful confirmation of the customer's review of the
relevant disclosures.'' \7\

    \4\ 58 FR 17495, 17498 (April 5, 1993).
    \5\ See 57 FR 34853 (August 7, 1992).
    \6\ 58 FR at 17498.
    \7\ Id. at 17498-99 & nn. 17-18.

    In 2000, the Commission adopted rule amendments that included the
Rule 155.3(d) and 155.4(d) acknowledgments, and all other
acknowledgments,\8\ within the single signature acknowledgment format,
concluding that the requirement of multiple signatures, which may or
may not reflect enhanced review of the documents, is not practical in
light of the need to further streamline the account opening process.
The Commission noted: ``All of the commenters who addressed the
proposed amendments to Rule 1.55(d) responded favorably to the
expansion of disclosures and consents that could be acknowledged and
made by a single signature, and the Commission is adopting the
amendments as proposed. * * * The Commission agrees that the FCM may
open the customer account simultaneously with receiving the
acknowledgment of receipt and understanding of the risk disclosure
statement, along with margin funds and any other required account
opening documents, from the customer. However, the FCM will remain
responsible for ensuring that the risk disclosure document is furnished
to the customer in such a way that the customer can review and
understand the document before committing funds to the FCM.'' \9\

    \8\ This included the amendment of Rule 1.55(d)(1) and (2) to
permit within the ``single signature'' format the consents: (2) to
allow electronic transmission of statements under new rule 1.33(g),
and (2) to transfer funds out of segregated accounts to another
account (such as a money market account).
    \9\ 65 FR at 77993 (December 13, 2000).

II. Proposed Rule Amendment

    Rule 1.55 ensures the important customer protection of requiring
intermediaries to disclose the basic risks of futures and options
trading to their non-institutional customers. Over the years, it has
been recognized that the relative sophistication of the customer should
determine the degree of disclosure obligation, with non-institutional
and retail (and presumably less sophisticated) customers the
beneficiaries of the most detailed disclosure.
    One aspect of risk disclosure is intended to ensure that the
customer understands and consents to the trading practices of FCMs and
IBs that are permitted by Commission regulations. Rules 155.3(b)(2) and
155.4(b)(2) permit FCMs and IBs, respectively, to take the other side
of any order of a customer, subject to contract market rules, if that
customer has given prior consent. These rules implement the specific
provisions of Section 4b(a)(2)(C)(iv) of the Act that prohibit
knowingly taking, directly or indirectly, the other side of a customer
order without the customer's consent.
    The Commission recognizes the important customer protection
interests served by Section 4b(a)(2)(C)(iv) of the Act and Rules
155.3(b)(2) and 155.4(b)(2) to address the inherent conflict of
interest that arises when an FCM or IB is the opposite party to a
transaction with its own customer. The Commission also recognizes that
simplifying and streamlining the account opening process, which was
begun in 1993 as described above, is also an important goal in today's
financial markets. The Commission believes that the content of
disclosure and that the manner of acknowledging receipt of such
disclosure by non-institutional customers is appropriate to the single
signature acknowledgment format. The Commission further believes that,
as it determined in 2000, the acknowledgements required by Rules
155.3(b) and 155.4(b) may appropriately be included within the single

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611,
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The Commission has previously
established certain definitions of ``small entities'' to be used by the
Commission in evaluating the impact of its rules on such entities in
accordance with the RFA.\10\ The Commission previously has determined
that, based upon the fiduciary nature of the FCM/customer
relationships, as well as the requirement that FCMs meet minimum
financial requirements, FCMs should be excluded from the definition of
small entities. With respect to IBs, the CFTC has stated that it is
appropriate to evaluate within the context of a particular rule
proposal whether some or all of the affected entities should be
considered small entities and, if so, to analyze the economic impact on
them of any rule.\11\ In this regard, the rule being proposed would not
require any IB to change its current method of doing business, and in
fact eases a regulatory burden by permitting a single signature of the
customer to represent an additional consent required by Commission
regulations. Therefore, the Acting Chairman, on behalf of the
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that this
proposed regulation will not have a significant

[[Page 64875]]

economic impact on a substantial number of small entities.

    \10\ 47 FR 18618-18621 (April 30, 1982).
    \11\ Id.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 \12\ imposes certain
requirements on federal agencies (including the Commission) in
connection with their conducting or sponsoring any collection of
information as defined by the Paperwork Reduction Act (``PRA''). The
amendment to Rule 1.55(d) that is the subject of this proposed
rulemaking does not alter the paperwork burden associated with the OMB
Collection of Information submission, OMB Control Number 3038-0022,
Rules Pertaining to Contract Markets and Their Members, where the
Commission most recently described the paperwork burden associated with
the 2001 rulemaking amendments.\13\ Thus, there is no need for an
additional submission pursuant to the PRA.

    \12\ Pub. L. 104-13 (May 13, 1995).
    \13\ See 66 FR 45221, 45228 (August 28, 2001).

List of Subjects in 17 CFR Part 1

    Brokers, Commodity Futures, Consumer protection, Disclosure,
Reporting and recordkeeping requirements.

    In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, Sections
4b, 4c(b), and 8a(5) thereof, 7 U.S.C. 6b, 6c(b), and 12a(5) (2000),
and pursuant to the authority contained in 5 U.S.C. 552 and 552b
(2003), the Commission hereby proposes to amend Chapter I of Title 17
of the Code of Federal Regulations as follows:


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

    Authority: 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a,
13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity
Futures Modernization Act of 2000, appendix E of Pub. L. 106-554,
114 Stat. 2763 (2000).

    2. Section 1.55 is proposed to be amended by revising paragraph
(d)(1) to read as follows:

Sec.  1.55  Distribution of ``Risk Disclosure Statement'' by futures
commission merchants and introducing brokers.

* * * * *
    (d) * * *
    (1) Prior to the opening of such account, the futures commission
merchant or introducing broker obtains an acknowledgment from the
customer, which may consist of a single signature at the end of the
futures commission merchant's or introducing broker's customer account
agreement, or on a separate page, of the disclosure statements,
consents and elections specified in this section and Sec.  1.33(g), and
in Sec.  33.7, Sec.  155.3(b)(2), Sec.  155.4(b)(2), and Sec.  190.06
of this chapter, and which may include authorization for the transfer
of funds from a segregated customer account to another account of such
customer, as listed directly above the signature line, provided the
customer has acknowledged by check or other indication next to a
description of each specified disclosure statement, consent or election
that the customer has received and understood such disclosure statement
or made such consent or election; and
* * * * *

    Dated: November 4, 2004.

    By the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 04-24949 Filed 11-8-04; 8:45 am]