[Federal Register: February 4, 2005 (Volume 70, Number 23)]
[Rules and Regulations]
[Page 5923-5925]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04fe05-4]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 155

RIN 3038-AC16


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission ("Commission" or
"CFTC") is amending 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) 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. The Commission is also amending
Rule 1.55(f) to specify that the acknowledgments required by Rules
155.3(b)(2) and 155.4(b)(2) are not required of institutional customers
when they open an account.

DATES: Effective March 7, 2005.

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


SUPPLEMENTARY INFORMATION:

I. Background

    On November 9, 2004 (69 FR 64873), the commission published a
proposed amendment to 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of 2000.\2\ Most of the rules adopted and withdrawn in 2000 were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. Because
Commission staff received an inquiry about this issue, the Commission
reproposed the rule amendment and sought comments.
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    \1\ 65 FR 77993 at 78013 (December 13, 2000).
    \2\ 65 FR 82272 (December 28, 2000).
    \3\ 66 FR 45221 at 45226 (August 28, 2001) (proposed rules) and
66 FR 53510 at 53513 (October 23, 2001) (final rules).
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II. Rule Amendments

    Three comments were received, from the National Futures Association
("NFA"), the Futures Industry Association ("FIA") and an FCM,
Goldman Sachs & Co. All comments supported adoption of the proposed
amendment to Rule 1.55(d)(1). In addition, the three commenters were
unanimous in their recommendation that the Commission adopt another
rule amendment that clarifies, in Rule 1.55(f), that acknowledgment to
consent for an FCM or IB to take the opposite side of an order is not
required of institutional customers when they open an account.
    The commenters requested that Rule 1.55(f) also be amended to add
the consent required under Commission Rules 115.3(b)(2) and 155.4(b)(2)
to the prescribed disclosures, consents and elections that
institutional customers are not required to acknowledge in opening an
account with an FCM. The Commission believes that such a further
amendment is consistent with the proposal and with the general
structure of Rule 1.55 and that it is appropriate to clarify Rule
1.55(f) as the commenters suggest. The Commission emphasizes the point
by cross-referencing Rule 1.55 in Rules 1.55.3 and 155.4.\4\
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    \4\ The Commission took a similar approach when it amended Rule
1.55 as well as Rule 1.33 concerning electronic transmission of
customer account statements. See 66 FR 53517 (Oct. 23, 2001).
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    As the Commission emphasized in its proposal, the single signature
acknowledgment format was first adopted in 1993 based on a rationale of
customer sophistication. If, with the Commission's proposed rule
amendment, non-institutional customers are now deemed sufficiently
sophisticated to have their consents acknowledged with a single
signature, it is certainly appropriate to assume that more
sophisticated institutional customers understand that they are
consenting to the trade practices described in Rule 155.3(b)(2) and
155.4(b)(2) without a separate acknowledgment when an account is
opened.
    Section 4b of the Act \5\ nonetheless requires intermediaries to
have the prior consent of the customer before knowingly taking,
directly or indirectly, the opposite side of a customer's order. Thus,
as one of the commenters pointed out, it is still the responsibility of
the entity opening the account to ensure that prospective customers
give "the consent required under this rule," even when the customer
is an institutional customer.\6\ The amendment of Rule 1.55(f) permits
an entity to choose the most appropriate means to accomplish that
objective. Finally, Rules 155.3(b)(2) and 155.4(b)(2) are amended to
cross-reference Rule 1.55(d)(1).
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    \5\ Commodity Exchange Act Sec.  4b(a)(2)(iv) ("unlawful * * *
to fill such order by offset against the order or orders of any
other person, or willfully and knowingly and without the prior
consent of such person to become the buyer in respect to any selling
order of such person, or become the seller in respect to any buying
order of such person"), 7 U.S.C. 4b(2)(C)(iv) (2003).
    \6\ Comment letter of Goldman Sachs & Co., December 9, 2004 at
p. 2.

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[[Page 5924]]

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 business. 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.\7\ 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.\8\ In the regard, the amendment to Rule 1.55(d)(1)
adopted herein does 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. The amendments to Rules 1.55(f) and
155.3(b)(2) and 155.4(b)(2) clarify existing rules. No comments were
received on this issue.
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    \7\ 47 FR 18618-18621 (April 30, 1982).
    \8\ Id.
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 \9\ 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
amendments to Rules 1.55(d) and 155(f) that are the subject of this
rulemaking do 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.\10\ Thus, there is no need for an
additional submission pursuant to the PRA.
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    \9\ Pub. L. 104-13 (May 13, 1995).
    \10\ See 66 FR 45221, 45228 (August 28, 2001).
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List of Subjects

17 CFR Part 1

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

17 CFR Part 155

    Brokers, Commodity futures, Reporting and recordkeeping
requirements.

0
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 amends Chapter I of Title 17 of the Code
of Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
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).


0
2. Section 1.55 is amended by revising paragraphs (d)(1) and (f) 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 acknowledgement 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. 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
    * * *
    (f) A futures commission merchant or, in the case of an introduced
account, an introducing broker, may open a commodity futures account
for an "institutional customer" as defined in Sec.  1.3(b) without
furnishing such institutional customer the disclosure statements or
obtaining the acknowledgments required under paragraph (a) of this
section, Sec. Sec.  1.33(g) and 1.65(a)(3), and Sec. Sec.  30.6(a),
33.7(a), 155.3(b)(2), 155.4(b)(2) and 190.10(c) of this chapter.
* * * * *

PART 155--TRADING STANDARDS

0
3. The authority citation for part 155 continues to read as follows:

    Authority: U.S.C. 6b, 6c, 6g, 6j and 12a, unless otherwise
noted.


0
4. Section 155.3 is amended by revising paragraph (b)(2) as follows:


Sec.  155.3  Trading standards for futures commission merchants.

* * * * *
    (b) * * *
    (2)(i) Knowingly take, directly or indirectly, the other side of
any order of another person revealed to the futures commission merchant
or any of its affiliated persons by reason of their relationship to
such other person, except with such other person's prior consent and in
conformity with contract market rules approved by or certified to the
Commission.
    (ii) In the case of a customer who does not qualify as an
"institutional customer" as defined in Sec.  1.3(g) of this chapter,
a futures commission merchant must obtain the customer's prior consent
through a signed acknowledgment, which may be accomplished in
accordance with Sec.  1.55(d) of this chapter.
* * * * *

0
5. Section 155.4 is amended by revising paragraph (b)(2) as follows:


Sec.  155.4  Trading standards for introducing brokers.

* * * * *
    (b) * * *
    (2)(i) Knowingly take, directly or indirectly, the other side of
any order of another person revealed to the introducing broker or any
of its affiliated persons by reason of their relationship to such other
person, except with such other persons's prior consent and in
conformity with contract market rules approved by or certified to the
Commission.

[[Page 5925]]

    (ii) In the case of a customer who does not qualify as an
"institutional customer" as defined in Sec.  1.3(g) of this chapter,
an introducing broker must obtain the customer's prior consent through
a signed acknowledgment, which may be accomplished in accordance with
Sec.  1.55(d) of this chapter.
* * * * *

    Dated: January 27, 2005.

    By the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 05-1906 Filed 2-3-05; 8:45 am]

BILLING CODE 6351-01-M