[Federal Register: July 23, 1999 (Volume 64, Number 141)]
[Rules and Regulations]
[Page 39915-39918]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



17 CFR Part 9

Alternative Methods of Compliance With Requirements for
Disclosure of Exchange Disciplinary Information and Access Denial

AGENCY: Commodity Futures Trading Commission.

ACTION: Advisory.


SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
issuing guidance concerning alternative methods of compliance with the
requirements of Regulation 9.11(a) for the disclosure of information to
the Commission by exchanges regarding disciplinary actions and access

[[Page 39916]]

actions.\1\ Rather than filing notices of these actions with the
Commission, an exchange may now electronically transmit the required
notice to the National Futures Association (``NFA'') through the NFA's
Background Affiliation Status Information Center (``BASIC'') system, or
deliver written notice to the NFA to be input into BASIC. Because of
the relative convenience, and since BASIC's ultimate success depends
upon direct filing of exchange Regulation 9.11 notices with the NFA,
the Commission anticipates that the exchanges will comply with
Regulation 9.11(a) by one of these two alternative methods rather than
filing these notices with the Commission. This Advisory does not affect
the manner in which an exchange must provide written notice to the
person against whom the relevant action was taken. The Commission also
is clarifying its view that Regulation 9.11(b)(2) requires that all
notices of disciplinary and access denial actions indicate whether
financial harm to a customer was involved in the rule violation
resulting in imposition of the action.

    \1\ Commission regulations referred to herein are found at 17
CFR 9 (1998).

EFFECTIVE DATE: July 23, 1999.

Rachel F. Berdansky, Special Counsel, or Joshua R. Marlow, Attorney-
Advisor, Division of Trading and Markets, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington,
DC 20581. Telephone: (202) 418-5490.


I. Introduction

    The Commission is advising exchanges concerning two alternative
methods of compliance with Regulation 9.11(a) pertaining to the
disclosure of disciplinary actions and access denial actions. As
explained below, Regulation 9.11(a) requires, among other things, that
an exchange file written notice with the Commission of actions which
result in discipline or denial of access to its members. Pursuant to
this Advisory, rather than filing the required notice with the
Commission, an exchange has the option of filing the notice with the
NFA either electronically or in writing.\2\ As discussed below, based
on current practice, the Commission expects that all exchanges will
adopt one of these two alternative notification methods for Regulation
9.112(a) compliance.\3\

    \2\ The exchange is still required to provide notice to the
individual subject to the action in the manner prescribed by
Regulation 9.11.
    \3\ This Advisory does not eliminate the permissibility of an
exchange filing a Regulation 9.11 notice with the Commission to
satisfy its Regulation 9.11(a) obligations. However, the Commission
believes that the industry and the public are better served by the
exchanges filing Regulation 9.11 notices with the NFA in the manner
prescribed by this Advisory.

II. Regulation 9.11 Requirements

    Regulation 9.11(a) requires that whenever an exchange decision
pursuant to which a disciplinary or access denial action is to be
imposed has become final, the exchange must provide written notice of
such action to the person against whom the action was taken and the
Commission within 30 days thereafter.\4\ The content to be included are
set forth in Regulation 9.11(b), which requires that notice include the
name of the individual against whom the action was taken; a statement
of the reasons for the action; a list of any rules which the individual
was charged with having violated or which otherwise serve as the basis
of the action; a statement of the exchange's conclusions and findings
regarding each violation charged or, in the event of a settlement, a
statement specifying those rule violations which the exchange believes
were committed; the terms of the action; the date the action was taken;
the date the action will become effective; and a statement informing
the party subject to the action of the availability of Commission
review pursuant to Section 8c of the Commodity Exchange Act. Regulation
9.11(c) specifies that notice must be delivered either in person or by
mail to both the individual subject to the action and to the
Commission. Notice filed with the Commission also must include the date
on which notice was delivered to the individual and state whether
delivery was in person or by mail. Pursuant to Regulation 9.11(d),
filing by mail becomes complete upon deposit in the mail. Finally,
Regulation 9.11(e) provides that a duly authorized officer, agent, or
employee of the exchange must certify that the required notice is true
and correct.

    \4\ As authorized by Regulation 8.27, an exchange is not
required to notify the Commission of any summary action resulting in
the imposition of minor penalties for the violation of exchange
rules relating to decorum or attire.

III. Alternative Methods of Compliance

    In response to requests from the NFA and the Joint Compliance
Committee (``JCC''),\5\ the Commission is issuing this Advisory to
reduce exchanges' regulatory reporting burden and to facilitate the use
of electronic media by exchanges for delivery of notice of disciplinary
and access denial actions to the NFA's BASIC system.\6\ Earlier this
year, BASIC replaced its predecessor, the Clearinghouse of Disciplinary
Information (``CDI''), as the central repository for disciplinary
actions imposed by the NFA, the Commission, and the exchanges. BASIC
contains information regarding all disciplinary actions taken by the
NFA since its inception in 1982, all Commission disciplinary actions
taken since its inception in 1975, and all disciplinary actions taken
by domestic exchange since at least 1990.\7\ A primary reason for the
NFA's move from CDI to BASIC was to create a more versatile database
capable of providing the public with information regarding the
disciplinary history of brokers. Accordingly, the NFA has made BASIC
accessible to the public via the World Wide Web.\8\

    \5\ The JCC was established in May 1989 to aid in the
development of improved compliance systems through joint exchange
efforts and information-sharing among self-regulatory organizations.
The JCC is comprised of senior compliance officials from all of the
domestic futures exchanges and the NFA. Commission staff participate
as observers.
    Exchange requests to file notices of disciplinary and access
denial actions with the NFA, in lieu of filing paper notices with
the Commission pursuant to Commission Regulation 9.11(a), were the
product of ongoing discussions among the JCC, the NFA and Commission
staff. The most recent meeting concerning this issue took place at
the Commission's headquarters in Washington, DC on February 24,
1999. Present were representatives of the NFA and staff from the
Commission's Division of Trading and Markets.
    \6\ This Advisory constitutes the latest in a series of measures
the Commission has taken to recognize advances in electronic media
technology and to facilitate the use of such technology where
adequate measures exist to safeguard customer interests. See, e.g.,
62 FR 7675 (February 20, 1997) (permitting the use of electronic
recordkeeping of customer orders generated by electronic order-
routing systems); 62 FR 18265 (April 15, 1997) (adopting a program
for commodity pool operators and commodity trading advisers to file
disclosure documents with the Commission electronically on a
voluntary basis); and 62 FR 31507 (June 10, 1997) (offering
alternative, electronic methods of compliance to futures commission
merchants (``FCM'') regarding order confirmation, purchase-and-sale
and monthly statements, and recordkeeping requirements).
    \7\ BASIC makes available information pertaining to the types of
violations a registrant has committed, penalties imposed, the
effective date of the action(s), and, in some cases, additional
information in the form of case text from an exchange decision.
Information may be accessed by NFA identification number, registrant
name, or firm name.
    \8\ BASIC can be accessed on the World Wide Web at http://

    To assist the NFA is maintaining a complete database of
disciplinary and access denial actions, all of the domestic exchanges
have been voluntarily filing Regulation 9.11 information with the NFA
since 1990, either electronically or in written form, in addition to
filing required Regulation 9.11 notice with the Commission.\9\ Thus, to

[[Page 39917]]

duplication and to diminish the burden of regulatory reporting, the
Commission is allowing the exchanges to file Regulation 9.11 notices
directly with the NFA, either in writing or by electronic entry of the
required data into BASIC, rather than filing the required notice with
the Commission. Although exchanges are permitted to file the required
notice with the NFA in writing, the Commission believes that electronic
filing is a faster and more cost-effective means of transmission for
both the exchanges and the NFA.\10\ Therefore, the Commission strongly
encourages exchanges to file Regulation 9.11 notices electronically
with the NFA.

    \9\ According to the NFA, the Chicago Board of Trade (including
the MidAmerica Commodity Exchange) and the Chicago Mercantile
Exchange currently file notices of all disciplinary and access
denial actions electronically through BASIC. The New York Mercantile
Exchange (including Commodity Exchange, Inc.) electronically files
notices of all actions relating to trade practice violations only;
its recordkeeping violations are input by NFA. The NFA inputs all
exchange disciplinary action information for the Coffee, Sugar and
Cocoa Exchange, Inc.; the Kansas City Board of Trade; the
Minneapolis Grain Exchange; and the New York Cotton Exchange &
    \10\ As explained below, if an exchange files in writing, the
NFA must input the data into BASIC. The NFA then will take the
additional step of providing the exchange with the information as it
will appear on BASIC. The exchange then must proofread the
information to verify its accuracy. Whereas, if an exchange files
electronically, the exchange can accomplish the input and
verification of the data in a single log-in session.

    This Advisory is being issued in conjunction with a Notice and
Order delegating to the NFA the responsibility of processing all
Regulation 9.11 filings into BASIC.\11\ Pursuant to the Notice and
Order, the NFA will furnish the Commission with local access to BASIC
and will facilitate the Commission's access to regular management
reports and oversight reports regarding exchange disciplinary and
access denial actions. Thus, the Commission's ability to perform its
regulatory and oversight duties will not be diminished.

    \11\ The Commission has chosen to issue an Advisory, in lieu of
amending Regulation 9.11, in order to expedite the delegation of
certain Regulation 9.11 responsibilities to the NFA. The timing of
the issuance of this Advisory is intended to coincide with the NFA's
recent introduction of its BASIC system. Among other features, the
BASIC system will make electronic filing faster and easier. Because
this Advisory simply facilitates exchange compliance with the
existing substantive requirements of Regulation 9.11, the Commission
considers an amendment unnecessary. However, the Commission will
continue to monitor exchange compliance with regulation 9.11 and
reserves the right to amend Regulation 9.11 if it deems necessary.

IV. Content and Delivery of Notice

A. Content of Notice

    With respect to the content of Regulation 9.11 notices, the
Commission is clarifying that Regulation 9.11(b)(2) requires that an
exchange indicate in its notification of disciplinary or access denial
actions whether the violation that resulted in the action also resulted
in financial harm to any customers. Regulation 9.11(b)(2) mandates that
an exchange include in its notification ``[a] statement of the reasons
for the disciplinary action or access denial action.'' Clearly,
customer harm should be a critical fact considered by an exchange in
determining whether to discipline or to deny access to a member.
Inclusion of a customer harm determination in Regulation 9.11 notices
should not impose any additional burden on the exchanges. Currently,
exchanges have a similar obligation under Commission Regulation 1.67 to
notify an FCM of any disciplinary action involving a customer
transaction cleared by the FCM if the exchange determines that the
member conducting the transaction committed a rule violation that
resulted in financial harm to the customer.\12\ Thus, those cases
involving a notification to an FCM under Regulation 1.67 should be
reported under Regulation 9.11(b)(2). This clarification should result
in more uniformity among the exchanges regarding the content of
Regulation 9.11 notices, given that several exchanges already commonly
indicate in their notifications if a member was ordered to or agreed to
pay restitution.\13\

    \12\ Regulation 1.67 was promulgated pursuant to Section 206 of
the Futures Trading Practices Act of 1992, Pub. L. No. 102-546,
Sec. 206, 106 Stat. 3590 (1992). 58 FR 37644 (July 13, 1993).
    \13\ See, e.g., ``New York Mercantile Exchange Notice of Final
disciplinary Action Pursuant to CFTC Regulation 9.11,'' March 8,
1996; ``96-INV-13,'' amended notice of disciplinary action (Chicago
Board of Trade), June 27, 1997; ``Report of Disciplinary Action,''
(Chicago Mercantile Exchange), January 16, 1998; ``Notice of
Disciplinary Action,'' (Coffee, sugar & Cocoa Exchange, Inc.), March
26, 1998; ``Notice of Disciplinary Action.'' (Coffee, Sugar & Cocoa
Exchange, Inc.), May 4, 1998.

    The Commission believes that inclusion of customer harm is
essential because it cannot effectively perform its regulatory and
oversight functions without knowledge of those instances in which
brokers violate their fiduciary duty to customers by taking advantage
of customer orders and engaging in fraudulent activity. This Advisory
does not affect any other exchange obligations set forth under
Regulation 9.11, though for purposes of compliance with Regulation
9.11(e), it does provide for electronic certification that electronic
filings are true and correct.

B. Verification and Timeliness of Electronic Notice

    Although this Advisory permits an exchange to fulfill its
Commission notification obligations by electronically transmitting
Regulation 9.11 notices directly to the NFA, exchanges must take
precautions to ensure the accuracy of information entered into BASIC,
as the NFA makes most of this information publicly available on its
World Wide Web site.\14\ Thus, those exchange electronically filing
with the NFA must verify the accuracy of their information as input
into BASIC within the 30-day deadline imposed by Regulation 9.11(a).
Verification must be accomplished by an authorized exchange employee,
after data entry into the appropriate fields, by marking a field
labeled ``complete.'' If the ``incomplete'' field is marked, the system
will save the data already entered and an exchange employee must return
to edit or complete the data and mark the ``complete'' field. Checking
``complete'' will result in the information being uploaded onto BASIC
for public access.\15\

    \14\ Commission Advisory 4027-97 (62 FR 31507) defines the term
``electronic media'' as ``facsimiles, electronic mail, Internet
World Wide Web sites and computer networks (e.g., local area
networks and commercial on-line services).'' However, for purposes
of this release, the term ``electronic media'' only encompasses
local access to BASIC. An exchange may not transmit a Regulation
9.11 notice by mailing it electronically over the internet or via
any other electronic media.
    \15\ These are current NFA procedures respecting input of 9.11
information into BASIC. These procedures are likely to subject to
change when BASIC is upgraded later this year.

    Accordingly, exchanges have a duty to supervise the transmission
process to ensure accuracy of data, to proofread the information once
entered into the appropriate fields, and to correct any data which is
incomplete or inaccurate. Marking the ``complete'' field shall be
deemed verification and the information will be released to the public.
Furthermore, the date of exchange verification will be considered the
date of notification to the NFA.\16\ In sum, to comply with Regulation
9.11(a), all electronic filings must be complete, accurate, and
verified no later than 30 days after an exchange decision to impose a
disciplinary or access denial action has become final.\17\ For
regulatory purposes, exchange verification of an electronic filing in
the manner described above will satisfy the

[[Page 39918]]

certification procedure set forth in Commission Regulation 9.11(e).\18\

    \16\ An incomplete electronic filing will not constitute notice
compliant with Regulation 9.11(a), even if an exchange verifies that
the information is complete. Because the Commission will have local
access to BASIC, information entered in a complete manner and
electronically verified shall be deemed notice to the Commission.
    \17\ The Commission will review the timeliness of exchange
Regulation 9.11 filings pursuant to its oversight activities,
including rule enforcement reviews conducted by the Commission's
Division of Trading and Markets.
    \18\ Commission Regulation 9.11(e) provides that certification
must be completed by an authorized exchange employee. Because
verification of an electronically filed Regulation 9.11 notice shall
satisfy the certification provision of Regulation 9.11(e), the
Commission believes it is appropriate to require that exchange
verification be completed by an authorized exchange employee.

C. Verification and Timeliness of Written Notice

    Alternatively, exchanges filing written Regulation 9.11 notices
with the NFA, in lieu of filing with the Commission, shall be deemed in
compliance with the 30-day period prescribed in Regulation 9.11(a) when
notice to the NFA is filed in person with the NFA during normal
business hours or placed in the mail within 30 days of the date of
final action.\19\ All other Regulation 9.11 requirements must be
satisfied by these exchanges, including certification. Consistent with
current practice employed by the NFA for processing written notices,
the NFA will continue to enter the information into BASIC on behalf of
the exchange, mark the ``incomplete'' field, and provide a copy of the
information as entered into BASIC to the exchange. The exchange is
responsible for ensuring the accuracy of information posted on
BASIC.\20\ Toward that end, an authorized exchange employee must, after
proofreading for completeness and accuracy, log-in to BASIC and change
the ``incomplete'' marking to ``complete'' or otherwise notify the NFA
that the data has been verified and that the NFA is authorized to
change the marking to ``complete.'' The Commission expects that the
exchanges will promptly complete the verification process after
receiving a copy of the data from the NFA.

    \19\ Filings may be mailed to the National Futures Association,
Attn: General Counsel's Office, 200 West Madison Street, Chicago, IL
    \20\ When CDI was created in 1990, each exchange signed a
contract shielding the NFA from any liability arising out of
inaccurate information posted on CDI. All of the exchanges executed
addenda in December 1998 and January 1999 extending the terms of
those contracts to BASIC.

V. Conclusion

    This Advisory permits an exchange to comply with the Commission
notification provision of Regulation 9.11(a) by filing with the NFA
electronic or written notices of disciplinary or access denial actions.
Because all exchanges have been voluntarily providing the NFA with
these notices, in addition to filing with the Commission, the exchanges
should realize a reduction in their regulatory reporting duty. Although
each exchange has the choice of filing electronic or written Regulation
9.11 notices, the Commission believes that electronic filing will prove
more cost-effective for the exchanges and the NFA. Again, the
Commission urges exchanges to file with NFA by this alternative
electronic means.
    This Advisory, in conjunction with the accompanying Notice & Order,
gives the NFA the responsibility of maintaining BASIC, an electronic
clearinghouse of all exchange, NFA, and Commission disciplinary
actions. The Commission is relying on the exchanges to work with the
NFA to keep BASIC current. This not only will assist the Commission in
performing its oversight functions, but will provide the public with
up-to-date information regarding the disciplinary history of anyone
against whom a futures-related action has been taken. Commission staff
will closely monitor the manner in which this new process operates to
assure that it fully satisfies the relevant regulatory requirements.

    Issued in Washington, DC on July 19, 1999 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 99-18804 Filed 7-22-99; 8:45 am]

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