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]
[DOCID:fr26ap07-31]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 3
RIN 3038-AC37
Registration of Intermediaries
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rule.
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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
Amendment.
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].
SUPPLEMENTARY INFORMATION:
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
transactions.\5\
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\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
.
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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
prescribe.\7\
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\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.''
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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
intermediaries.\10\
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\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).
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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.
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\11\ 17 CFR part 3.
\12\ 17 CFR 3.10(a).
\13\ 17 CFR 3.31(a)(1).
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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\
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\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.
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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.
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\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.
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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.
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\16\ 67 FR 38869 (June 6, 2002).
\17\ Id. at 38871.
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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.
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\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.
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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.
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\19\ Paragraph (d) of Regulation 3.10 had been reserved.
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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.
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\20\ Commission Regulation can be accessed at the Web site
provided in footnote 5. See also NFA Registration Rule 601(c).
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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.
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\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).
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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.
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\25\ 7 U.S.C. 19(a).
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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.
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\26\ 26 44 U.S.C. 3501 et seq.
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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:
PART 3--REGISTRATION
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
follows:
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]
BILLING CODE 6351-01-P
Updated April 26, 2007
Last Updated: June 26, 2007