[Federal Register: November 1, 2006 (Volume 71, Number 211)]
[Proposed Rules]
[Page 64171-64173]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[[Page 64171]]



17 CFR Part 170

RIN 3038-AC29

Membership in a Registered Futures Association

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.


SUMMARY: The Commodity Futures Trading Commission ("Commission" or
"CFTC") is proposing to amend its regulations in order to require,
subject to the existing exception for certain notice registered
securities brokers or dealers ("BDs"), that all persons registered
with the Commission as futures commission merchants ("FCMs") must
become and remain members of at least one registered futures
association ("RFA"). This action ("Proposed Amendment") is
consistent with the regulatory philosophy underlying the Commodity
Futures Modernization Act of 2000 ("CFMA").

DATES: Comments must be received on or before December 1, 2006.

ADDRESSES: Comments on the Proposed Amendment 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 "Proposed
Regulation Regarding Membership in a Registered Futures Association."
Comments also may be submitted by connecting to the Federal eRulemaking
Portal at 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. Commission Regulation 170.15

    Commission Regulation 170.15 \1\ ("Regulation") provides in
general that all persons who are required to register as FCMs must
become and remain members of at least one RFA. The Regulation was
adopted in 1983 pursuant to the Commission's general rulemaking
authority in Section 8a(5) of the Commodity Exchange Act ("Act" or
"CEA"),\2\ as well as the authority in Sections 17(m), (p) and (q) of
the Act,\3\ which govern the registration of futures associations.
Currently, the National Futures Association ("NFA") is the sole RFA
under Section 17(a) of the Act, and it is also a self-regulatory
organization ("SRO").

    \1\ 17 CFR 170.15. The Commission's regulations can be accessed
at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.[fxsp0]access.gpo.[fxsp0]gov/nara/cfr/waisidx--06/17cfrv1--06.html.

    \2\ 7 U.S.C. 12a(5). The Act can be accessed at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.access.

    \3\ 7 U.S.C. 21(m), (p) and (q).

    Section 8a(5) of the Act authorizes the Commission to promulgate
such regulations as, in the judgment of the Commission, are reasonably
necessary to effectuate any of the provisions or to accomplish any of
the purposes of the Act. Section 17(m) of the Act permits the CFTC to
require membership in an RFA if the CFTC determines that mandatory
membership is "necessary or appropriate" to the purposes and
objectives of the Act. Section 17(p) of the Act requires each RFA to
have a comprehensive program to audit the financial and sales practices
of its members and their associated persons. Section 17(q) of the Act
requires each RFA to establish such programs "as soon as practicable
but not later than September 30, 1985."
    When it proposed Regulation 170.15, the Commission received 50
comment letters, from a wide range of futures professionals and
industry representatives. In adopting the Regulation, the Commission
addressed concerns raised by two commenters \4\ and determined, in
accordance with Section 8a(5) of the Act, that adoption of the
Regulation was reasonably necessary to effectuate the purposes of the
Act and, in particular, to provide a means for assuring that the
purposes of Sections 17(m), (p) and (q) of the Act would be
achieved.\5\ Specifically, the Commission found that comprehensive and
effective self-regulation, and the avoidance of duplicative regulation,
which are the underlying goals of Sections 17(m), (p) and (q) of the
Act, would be enhanced by adoption of a Regulation mandating membership
in an RFA by each person required to be registered as an FCM.

    \4\ Only two commenters opposed adoption of the Regulation, the
Antitrust Division of the United States Department of Justice
("Antitrust Division"), and an individual engaged in the business
of financial consulting, whose views were somewhat similar to those
of the Antitrust Division. The Antitrust Division set forth three
basic objections to the Regulation: (1) that the proposed regulation
was of questionable constitutionality; (2) that the Commission
lacked authority under the Act to adopt the proposed regulation; and
(3) that the Commission was compelled to employ other less
anticompetitive regulatory alternatives pursuant to Section 15 of
the Act, because, in the view of the Antitrust Division, the
proposed regulation would have serious anticompetitive consequences.
    \5\ See 48 FR 26304 (Jun. 7, 1983), which contains a detailed
discussion of the Commission's response to the commenters' concerns.

    The Commission further noted that, in the absence of a mandatory
membership requirement, the Commission would be required under relevant
provisions of the Act to maintain costly and extensive direct
regulation over those Commission registrants that would not be subject
to any self-regulatory jurisdiction.\6\ In particular, the Commission
would have had to continue to conduct financial, compliance and sales
practice examinations of those FCMs, commodity pool operators
("CPOs"), commodity trading advisors ("CTAs") and introducing
brokers ("IBs") that did not join NFA.\7\ Further, the Commission
found that the need to maintain these extensive programs for the
comparatively small number of persons likely to remain subject solely
to the Commission's direct regulation would be inefficient and
duplicative of the self-regulatory functions for which NFA would be

    \6\ See, e.g., 7 U.S.C. 21(e), which specifies that any person
registered under the Act, who is not a member of an RFA, "shall be
subject to such other rules and regulations as the Commission may
find necessary to protect the public interest and promote just and
equitable principles of trade."
    \7\ In this regard, the Commission found that the Regulation,
which would operate in conjunction with NFA's Bylaw 1101, would
assure essentially complete NFA membership from the universe of
commodity professionals: FCMs, CPOs, CTAs and IBs. This is because
Bylaw 1101 prohibits members from carrying an account, accepting an
order or handling a transaction in commodity futures contracts for
or on behalf of any non-NFA member that is required to be registered
with the CFTC as an FCM, IB, CPO or CTA.
    \8\ It should be noted that, since the adoption of the
Regulation, the Commission has been reauthorized four times,
specifically, in 1986, 1992, 1995 and 2000. The Act also was amended
by the Telemarketing and Consumer Fraud and Abuse Prevention Act,
Pub. L. No. 103-297, 108 Stat. 1545 (1994). At no time during
reauthorization of the Commission or in connection with amending the
CEA was the viability of the Regulation challenged or questioned.

    In proposing the Regulation, the Commission requested comment on
whether the Regulation should be expanded to apply to all registered
FCMs, regardless of whether such persons are required to be

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Ultimately, the Commission found that expansion was not necessary to
ensure the effectiveness of NFA's self-regulatory program. The
Commission noted, however, that it might consider expanding the
Regulation in the future in light of new circumstances or experiences
with the Regulation.\10\ As discussed below, in light of the new
oversight philosophy advanced by the CFMA, the Commission believes that
the Regulation now should be expanded.

    \9\ 47 FR 53031, 53031-32 (Nov. 24, 1982). Pursuant to Sections
1a(20) and 4d(a)(1) of the Act, a person must register with the
Commission as an FCM if it solicits or accepts orders from customers
for the purchase or sale of commodity futures contracts on or
subject to the rules of a contract market or derivatives transaction
execution facility and accepts customer funds related thereto. Some
persons register with the Commission as FCMs even though they are
not required to be registered. For example, a person may not
currently handle exchange-traded customer business but may
nonetheless register as an FCM or maintain its registration as an
FCM if it anticipates handling exchange-traded futures business at a
later date. Additionally, a person may be or become fully registered
as a BD and wish to act as counterparty to off-exchange foreign
currency futures or option transactions with retail customers. See 7
U.S.C. 2(c)(2)(B). The person may fully register as an FCM, although
it engages in no other futures or options business and is not
required to register as an FCM or become a member of NFA to act as a
counterparty in these types of off-exchange foreign currency
    \10\ 48 FR 26304, 26310.

B. The Commodity Futures Modernization Act of 2000

    In December 2000, the CFMA was enacted into law. The CFMA
extensively revised the Act and the regulatory landscape by adding a
more flexible regulatory structure based on core principles for
registered entities (designated contract markets, derivatives
transaction execution facilities and derivatives clearing
    Another relevant change made by the CFMA relates to the supervisory
function of the Commission. Specifically, the CFMA transformed the role
of the CFTC from a front-line regulator, with responsibility for direct
supervision of the commodity futures markets and their participants and
professionals, to an oversight agency.\11\ In light of this new
oversight role and the policies and purposes of the Act, including the
goals of effective self-regulation and the avoidance of duplicative
regulation, the Commission is of the view that all registered FCMs,
regardless of whether any such FCM is required to be registered as
such, must become and remain members of an RFA.

    \11\ See 7 U.S.C. 5(b).

II. Proposed Amendment

    Paragraph (a) of the Regulation currently provides that, except as
specified in paragraph (b) of the Regulation, each person required to
register as an FCM must become and remain a member of at least one RFA.
As proposed to be revised, the Regulation would require that each
person registered as an FCM--regardless of whether any such person is
required to be so registered--would need to become and remain a member
of at least one RFA. This would ensure that all FCMs come under direct
supervision of at least one SRO.
    Paragraph (b) of the Regulation currently provides an exception for
persons registered as FCMs pursuant to the notice registration
provisions set forth in Regulation 3.10(a)(3). The Commission is not
proposing to amend paragraph (b) of the Regulation, which was added
following enactment of the CFMA. The CFMA established a joint
regulatory framework for persons trading security futures products that
included a notice registration procedure for FCMs and BDs that are
fully registered, respectively, with the CFTC or the Securities and
Exchange Commission. In this regard, the CFMA amended the CEA to
specify that any BD that is notice registered with the Commission as an
FCM is not required to become a member of an RFA.\12\ Paragraph (b) was
added in recognition of this joint regulatory framework and the need to
avoid duplicative regulation and, further, to make clear that BDs who
notice register as FCMs (in contrast to persons fully registered as
FCMs) are not subject to the mandatory provisions and thus need not
become members of an RFA.\13\

    \12\ See 7 U.S.C. 6f(a)(4)(C)(i).
    \13\ See 66 FR 43080 (Aug. 17, 2001).

    As members of NFA, persons registered as FCMs will be subject to
the minimum financial requirements of NFA. NFA recently raised its
minimum dollar amount of adjusted net capital for member FCMs to
$500,000. FCM members acting as counterparties of retail off-exchange
foreign currency futures or option transactions are subject to even
higher requirements (at least $1 million, $5 million if engaged in
option transactions and $7.5 million if seeking to qualify certain
affiliates as counterparties).\14\

    \14\ See NFA Financial Requirements Sections 1(a) and 11(a),
which can be accessed at: http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.[fxsp0]nfa.[fxsp0]futures.org/nfaManual/financialRequirements.asp.

    The Commission also notes that RFAs, like the other SROs, function
as frontline regulators of their members subject to Commission
oversight. Adverse registration or disciplinary actions of an RFA are
subject to Commission review in accordance with Sections 17(h) and (i)
of the Act and Part 171 of the regulations promulgated thereunder. RFA
rules must be submitted to the Commission in accordance with Section
17(j) of the Act, and Sections 17(b)(8) and (9) outline the procedures
an RFA must follow in proceeding against members and applicants for

    \15\ Members of an RFA should not be concerned that they will
have no right of appeal from an adverse action or that mandatory
membership in an RFA will somehow deprive them of their due process
rights under the Fifth Amendment to the United States Constitution.
This issue was raised by the Antitrust Division in connection with
the adoption of the Regulation, and the Commission addressed this
concern when it announced adoption of the Regulation. See 48 FR
26304, 26307-08.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act \16\ 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, even if they are not required to be so registered.
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
Regulatory Flexibility Act.\17\ The Commission previously determined
that registered FCMs are not small entities for the purpose of the
Regulatory Flexibility Act.\18\

    \16\ 5 U.S.C. 601 et seq.
    \17\ 47 FR 18618 (Apr. 30, 1982).
    \18\ 47 FR 18618, 18619.

B. Cost-Benefit Analysis

    Section 15(a) of the Act \19\ 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.

    \19\ 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, can

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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 will result in efficiency enhancements for
the Commission and 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. Specifically, the Proposed Amendment, if adopted,
will require all fully-registered FCMs, even those that are not
required to be registered as FCMs, to become members of an RFA. This
will make such FCMs subject to the self-regulatory jurisdiction and
oversight programs of NFA.
    After considering these factors, the Commission has determined to
propose the amendment to Regulation 170.15 discussed above. The
Commission invites public comment on its application of the cost-
benefit provision. Commenters also are invited to submit any data that
they may have quantifying the costs and benefits of the Proposed
Amendment with their comment letters.

List of Subjects in 17 CFR Part 170

    Authority delegations (Government agencies), commodity futures,
reporting and recordkeeping requirements.

    For the reasons discussed in the preamble, the Commission proposes
to amend 17 CFR part 170 as follows:


    1. The authority citation for part 170 continues to read as

    Authority: 7 U.S.C. 6p, 12a and 21, as amended by the Commodity
Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554,
114 Stat. 2763 (2000).

Subpart C--Membership in a Registered Futures Association

    2. Section 170.15 is amended by revising paragraph (a) to read as

Sec.  170.15  Futures commission merchants.

    (a) Except as provided in paragraph (b) of this section, each
person registered as a futures commission merchant 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 futures commission merchant, unless no such futures
association is so registered.
* * * * *

    Issued in Washington, DC, on October 25, 2006, by the
Catherine D. Daniels,
Assistant Secretary of the Commission.
[FR Doc. E6-18270 Filed 10-31-06; 8:45 am]