2015-23046
Federal Register, Volume 80 Issue 177 (Monday, September 14, 2015)
[Federal Register Volume 80, Number 177 (Monday, September 14, 2015)]
[Rules and Regulations]
[Pages 55022-55029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-23046]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 170
RIN 3038-AE09
Membership in a Registered Futures Association
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is adopting a new rule (``Final Rule'') to require that all
persons registered with the Commission as introducing brokers (``IB''),
commodity pool operators (``CPO''), or commodity trading advisors
(``CTA''), subject to an exception for those persons who are exempt
from registration as a CTA pursuant to a particular provision of the
Commission's regulations, must, in each case, become and remain a
member of at least one registered futures association (``RFA'').
DATES: The Final Rule will become effective November 13, 2015. All
persons subject to the Final Rule must comply with the Final Rule by
not later than December 31, 2015.
FOR FURTHER INFORMATION CONTACT: Katherine Driscoll, Associate Chief
[[Page 55023]]
Counsel, 202-418-5544, [email protected]; or Jacob Chachkin, Special
Counsel, 202-418-5496, [email protected], Division of Swap Dealer and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
Part 170 of the Commission's regulations relates to RFAs. An RFA is
an association of persons registered with the Commission as such
pursuant to Section 17 of the Commodity Exchange Act (``CEA'' or
``Act'').\1\ Subject to Commission oversight, RFAs serve a vital self-
regulatory role by functioning as frontline regulators of their members
(which members also remain subject to Commission oversight).
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\1\ 7 U.S.C. 21.
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An RFA cannot enforce its rules over Commission registrants who are
not members of the RFA.\2\ As such, the Commission promulgated
regulations 170.15 and 170.16 to require each registered futures
commission merchant (``FCM''), and each registered swap dealer (``SD'')
and major swap participant (``MSP''), respectively, to be an RFA
member, subject to an exception for certain notice registered
securities brokers or dealers.\3\ Because the National Futures
Association (``NFA'') was the only RFA under Section 17(a) of the CEA
\4\ at the time Sec. 170.15 and Sec. 170.16, respectively, were
promulgated, these registered FCMs, SDs, and MSPs were required to be
NFA members and, thus, were subject to NFA's rules. The Commission did
not promulgate regulations requiring other Commission registrants,
including IBs,\5\ CPOs,\6\ and CTAs,\7\ to be members of an RFA. One of
the NFA rules to which NFA members are subject, however, is NFA's Bylaw
1101. NFA Bylaw 1101 requires that, generally, no NFA member may
``carry an account, accept an order or handle a transaction in
commodity futures contracts'' for, or on behalf of, any non-member of
NFA that is required to be registered with the Commission as, among
other things, an IB, CPO, or CTA.\8\ Accordingly, any IB, CPO, or CTA
required to be registered with the Commission that desires to conduct
business with respect to commodity futures contracts directly with an
FCM that is an NFA member must also become an NFA member, and
derivatively, must ensure that it only conducts such business with
those IBs, CPOs, or CTAs that also are NFA members. Therefore, Sec.
170.15, at the time it was promulgated, operated in conjunction with
NFA Bylaw 1101 ``to assure essentially complete NFA membership from the
universe of commodity professionals: [FCMs, CPOs, CTAs, and IBs].'' \9\
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\2\ Those Commission registrants that are not RFA members are
nevertheless subject to the rules and regulations of the Commission.
See 7 U.S.C. 21(e), which specifies that any person registered under
the CEA, who is not an RFA member, ``in addition to the other
requirements and obligations of [the CEA] and the regulations
thereunder 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.''
\3\ 17 CFR 170.15 and 170.16. See also Registration of Swap
Dealers and Major Swap Participants, 77 FR 2613 (Jan. 19, 2012).
\4\ 7 U.S.C. 21(a). NFA remains the only RFA under Section 17(a)
of the CEA and is also a self-regulatory organization (``SRO''). Per
Commission regulation 1.3(ee), SROs are designated contract markets,
swap execution facilities, and registered futures associations. 17
CFR 1.3(ee). Certain SROs maintain and update, among other things, a
standardized audit program and coordinate audit and financial
statement surveillance activities over certain types of firms that
are members of more than one SRO. See 17 CFR 1.52.
\5\ IB is defined, subject to certain exclusions and additions,
in CEA Section 1a(31) as any person (except an individual who elects
to be and is registered as an associated person of a futures
commission merchant) (i) who (I) is engaged in soliciting or in
accepting orders for (aa) the purchase or sale of any commodity for
future delivery, security futures product, or swap; (bb) any
agreement, contract, or transaction described in Section
2(c)(2)(C)(i) or Section 2(c)(2)(D)(i); (cc) any commodity option
authorized under Section 4c; or (dd) any leverage transaction
authorized under Section 19; and (II) does not accept any money,
securities, or property (or extend credit in lieu thereof) to
margin, guarantee, or secure any trades or contracts that result or
may result therefrom; or (ii) who is registered with the Commission
as an IB. 7 U.S.C. 1a(31).
IB is further defined, subject to certain exclusions and
additions, in Commission regulation 1.3(mm) as (1) Any person who,
for compensation or profit, whether direct or indirect: (i) Is
engaged in soliciting or in accepting orders (other than in a
clerical capacity) for the purchase or sale of any commodity for
future delivery, security futures product, or swap; any agreement,
contract or transaction described in Section 2(c)(2)(C)(i) or
Section 2(c)(2)(D)(i) of the Act; any commodity option transaction
authorized under Section 4c; or any leverage transaction authorized
under Section 19; or who is registered with the Commission as an IB;
and (ii) Does not accept any money, securities, or property (or
extend credit in lieu thereof) to margin, guarantee, or secure any
trades or contracts that result or may result therefrom. 17 CFR
1.3(mm).
IBs are subject to registration with the Commission under CEA
Section 4d(g) and Commission regulation 3.4(a). 7 U.S.C. 6d(g) and
17 CFR 3.4(a).
\6\ CPO is defined, subject to certain exclusions and additions,
in CEA Section 1a(11) as any person (i) engaged in a business that
is of the nature of a commodity pool, investment trust, syndicate,
or similar form of enterprise, and who, in connection therewith,
solicits, accepts, or receives from others, funds, securities, or
property, either directly or through capital contributions, the sale
of stock or other forms of securities, or otherwise, for the purpose
of trading in commodity interests, including any (I) commodity for
future delivery, security futures product, or swap; (II) agreement,
contract, or transaction described in Section 2(c)(2)(C)(i) or
Section 2(c)(2)(D)(i); (III) commodity option authorized under
Section 4c; or (IV) leverage transaction authorized under Section
19; or (ii) who is registered with the Commission as a CPO. 7 U.S.C.
1a(11).
CPO is further defined, subject to certain exclusions and
additions, in Commission regulation 1.3(cc) as any person engaged in
a business which is of the nature of a commodity pool, investment
trust, syndicate, or similar form of enterprise, and who, in
connection therewith, solicits, accepts, or receives from others,
funds, securities, or property, either directly or through capital
contributions, the sale of stock or other forms of securities, or
otherwise, for the purpose of trading in commodity interests,
including any commodity for future delivery, security futures
product, or swap; any agreement, contract or transaction described
in Section 2(c)(2)(C)(i) or Section 2(c)(2)(D)(i) of the Act; any
commodity option authorized under Section 4c of the Act; any
leverage transaction authorized under Section 19 of the Act; or any
person who is registered with the Commission as a CPO, but does not
include such persons not within the intent of the definition as the
Commission may specify by rule or regulation or by order. 17 CFR
1.3(cc).
CPOs are subject to registration with the Commission under CEA
Section 4m and Commission regulation 3.4(a). 7 U.S.C. 6m and 17 CFR
3.4(a).
\7\ CTA is defined, subject to certain exclusions and additions,
in CEA Section 1(a)(12) as any person who (i) for compensation or
profit, engages in the business of advising others, either directly
or through publications, writings, or electronic media, as to the
value of or the advisability of trading in (I) any contract of sale
of a commodity for future delivery, security futures product, or
swap; (II) any agreement, contract, or transaction described in
Section 2(c)(2)(C)(i) or Section 2(c)(2)(D)(i); (III) any commodity
option authorized under Section 4c; or (IV) any leverage transaction
authorized under Section 19; (ii) for compensation or profit, and as
part of a regular business, issues or promulgates analyses or
reports concerning any of the activities referred to in clause (i);
(iii) is registered with the Commission as a CTA; or (iv) the
Commission, by rule or regulation, may include if the Commission
determines that the rule or regulation will effectuate the purposes
of the Act. 7 U.S.C. 1a(12).
CTA is further defined, subject to certain exclusions and
additions, in Commission regulation 1.3(bb) as any person who, for
compensation or profit, engages in the business of advising others,
either directly or through publications, writings or electronic
media, as to the value of or the advisability of trading in any
contract of sale of a commodity for future delivery, security
futures product, or swap; any agreement, contract or transaction
described in Section 2(c)(2)(C)(i) or Section 2(c)(2)(D)(i) of the
Act; any commodity option authorized under Section 4c of the Act;
any leverage transaction authorized under Section 19 of the Act; any
person registered with the Commission as a CTA; or any person, who,
for compensation or profit, and as part of a regular business,
issues or promulgates analyses or reports concerning any of the
foregoing. 17 CFR 1.3(bb).
CTAs are subject to registration with the Commission under CEA
Section 4m and Commission regulation 3.4(a). 7 U.S.C. 6m and 17 CFR
3.4(a).
\8\ NFA Bylaw 1101 is available at: http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=BYLAW%201101&Section=3.
\9\ Futures Associations: Futures Commission Merchants:
Mandatory Membership, 48 FR 26304, 26306 and n.22 (June 7, 1983).
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Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act'') amended the
[[Page 55024]]
CEA to establish a comprehensive new regulatory framework for swaps and
security-based swaps.\10\ The new regulatory framework provides that,
among other things, persons that engage in regulated activity with
respect to swaps will be required to register with the Commission as
IBs, CPOs, or CTAs, as appropriate. Because of these definitional
amendments, the intersection of Sec. 170.15 and NFA Bylaw 1101 no
longer assures NFA membership for IBs, CPOs, or CTAs that are required
to register with the Commission because, as noted above, NFA Bylaw 1101
relates only to commodity futures contracts.\11\
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\10\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. 111-203, 124 Stat. 1376 (2010).
\11\ For example, as noted in the Proposal, currently
Commission-registered CTAs, CPOs, and IBs engaging solely in swap-
related activities are not captured by the intersection of Sec.
170.15 and NFA Bylaw 1101 and, thus, are not required to be NFA
members. As such, these registrants, to the extent that they have
not voluntarily become NFA members, are not being supervised in the
same manner as Commission registrants engaging in similar activities
relating to commodity futures contracts, which registrants are
effectively required to be NFA members.
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II. Proposed Rule
On November 8, 2013, the Commission proposed to amend part 170 by
adding Sec. 170.17, which would, if adopted, have required each IB,
CPO, and CTA registered with the Commission to become and remain a
member of at least one RFA (``Proposal'').\12\
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\12\ See Membership in a Registered Futures Association, 78 FR
67078 (Nov. 8, 2013).
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In the Proposal, the Commission specifically solicited comments
regarding, among other things, the impact of the Proposal on CTAs that
are registered with the Commission despite being eligible to rely on
the exemption from registration set forth in Commission regulation
4.14(a)(9) (``Sec. 4.14(a)(9) Exempted CTAs'').\13\ Regulation
4.14(a)(9) provides that a person is not required to register with the
Commission as a CTA if it does not: (i) Direct any client accounts; or
(ii) provide commodity trading advice based on, or tailored to, the
commodity interest or cash market positions or other circumstances or
characteristics of particular clients.\14\ When the Commission
promulgated regulation 4.14(a)(9), it stated that ``[a] CTA exempt
under rule 4.14(a)(9) that wishes to apply for registration or retain
its current registration may do so.'' \15\ Therefore, CTAs that may
avail themselves of the exemption from registration in regulation
4.14(a)(9) may be currently registered with the Commission and may so
register in the future.
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\13\ 78 FR 67080 (Nov. 8, 2013).
\14\ 17 CFR 4.14(a)(9). This exemption from CTA registration
generally pertains to persons only providing advice to the general
public, such as in a newsletter, and not to specific clients.
\15\ See Exemption from Registration as a Commodity Trading
Advisor, 65 FR 12938, 12941 (March 10, 2000).
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The comment period for the Proposal ended on January 7, 2014.\16\
The Commission received two substantive comments in response to the
Proposal \17\ and, in consideration of those comments, is adopting the
Proposal subject to certain changes, as noted below.
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\16\ The Proposal inaccurately stated the comment period ended
on January 17, 2014. To reflect the accurate date, the Federal
Register published a correction that the comment period ended on
January 7, 2014. See 78 FR 67985 (Nov. 13, 2013). Nonetheless, the
Commission considered all comments received by January 17, 2014.
\17\ See http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1424.
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III. Summary of Comments
In response to the Proposal, the Commission received two
substantive comments, one from NFA and one from James W. Lovely, Esq.
(``Lovely'').\18\ Both comments related to the impact of the Proposal
on CTAs. No comments were received in response to the CPO and IB
aspects of the Proposal.
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\18\ NFA Comment Letter and James Lovely, Esq. Comment Letter.
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A. NFA Comment
NFA supported the Proposal as an appropriate and effective way to
require IBs, CPOs, and CTAs engaging in swaps activities that otherwise
are not captured by the intersection of NFA Bylaw 1101 or NFA
Compliance Rule 2-36 \19\ to become and remain NFA members, and comply
with the applicable NFA requirements. However, NFA recommended that the
Commission exclude Sec. 4.14(a)(9) Exempted CTAs from the Proposal. In
support of its position, NFA stated that its existing rules focus
primarily on an intermediary's conduct with respect to clients and thus
have little applicability to CTAs that do not direct client accounts or
otherwise exercise discretion (i.e., Sec. 4.14(a)(9) Exempted CTAs).
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\19\ Clause (d) of NFA Compliance Rule 2-36 applies to forex
transactions and requires that no NFA member carry a forex account
for, accept a forex order or account from, handle a forex
transaction for or on behalf of, receive compensation (directly or
indirectly) for forex transactions from, or pay compensation
(directly or indirectly) for forex transactions to any non-member of
NFA, or suspended member, that is required to be registered with the
Commission as, among other things, an FCM, IB, CPO, or CTA in
connection with its forex activities. NFA Compliance Rule 2-36 is
available at: http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=RULE%202-36&Section=4.
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B. Lovely Comment
Conversely, Lovely generally stated that the Proposal ``while well-
intentioned, is ill-founded in many respects'' and argued that the
costs associated with further requiring registered CTAs to become and
remain RFA members would be disproportionate to any regulatory benefit.
Lovely discussed those CTAs that register with the Commission even
though they may not be required to so register (e.g., because they may
avail themselves of a registration exception or exclusion provided
under Commission regulation 4.14(a) or Sections 1a(12)(B) or 4m(1) of
the CEA, respectively). According to Lovely, these CTAs register for
legal comfort in light of the ``practical ambiguities around concepts
[related to CTA registration requirements] such as `solely incidental',
`principal business or profession', `holding out' and `tailored
advice''' but do not have to become NFA members, so long as such CTAs
do not manage or exercise discretion over customer accounts or
funds.\20\ He argues that these CTAs' voluntary registration benefits
the CFTC and that such persons will likely deregister if the Commission
adopts the Proposal.\21\
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\20\ Presumably Lovely means that such CTAs would not be
captured by the intersection of Sec. 170.15 and NFA Bylaw 1101.
\21\ In this regard, Lovely also asserted that if the Commission
adopts the Proposal, the First Amendment rights of these CTAs could
be jeopardized, and, in some cases, such CTAs may drop their CFTC
registration entirely ``in reliance on . . . [their] commercial free
speech rights under the U.S. Constitution.''
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Lovely further stated that the CFTC ``significantly underestimates
the cost of NFA [membership]'' for these CTAs who are not currently
required to become NFA members. He noted that most of such CTAs ``have
only incidental involvement with commodity interests'' and, if required
to become NFA members, ``would need to retain external legal counsel or
compliance consultants to try to ascertain [which NFA rules] apply to
their activities and, if so, how to comply with the same.''
Notwithstanding that Lovely argues that many NFA rules are not
applicable to such CTAs,\22\ he estimates that ``external
[[Page 55025]]
legal and compliance assistance . . . could easily cost [such a CTA]
$15,000.00 to $20,000.00 per year.''
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\22\ Lovely provided a non-exhaustive list of what he believes
to be inapposite NFA member rules including rules regarding: (1)
Account opening, risk disclosure and trading authority; (2) bunched
orders and order allocation; (3) suitability or churning security
futures products; (4) CTA program and performance disclosure for
managed accounts or pools; (5) solicitation and execution of
customer orders; (6) disaster recovery protocols (other than in
connection with CFTC mandated record retention); (7) trading
programs, performance and related promotional materials; (8) anti-
money laundering; and (9) quarterly reporting of assets under
management, trading programs, performance, carrying brokers and the
like.
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IV. Final Rule
The Commission, in consideration of the comments received by it on
the Proposal, is adopting the Proposal but excluding Sec. 4.14(a)(9)
Exempted CTAs from the Final Rule.\23\ The Final Rule will help ensure
the integrity of the swaps and futures market and its participants by
subjecting all registered IBs, CPOs, and CTAs, except for Sec.
4.14(a)(9) Exempted CTAs, to NFA's developed set of rules and oversight
capabilities.\24\ As such, the Commission believes that the markets are
better served, and the public better protected, by having persons
subject to the requirements of the Final Rule become RFA members.\25\
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\23\ Notwithstanding this exclusion, if a person is a Sec.
4.14(a)(9) Exempted CTA and registered as an IB or CPO, then such
person shall still be subject to the requirements of the Final Rule
in its capacity as a registered IB or CPO, as the case may be.
\24\ The Commission notes that, as a result of the Final Rule,
any person not required to register, and not registered, with the
CFTC would not subsequently become subject to any NFA-imposed
requirement unless such person voluntarily elects to become so
registered. Any adverse financial, commercial, or other impact,
including the potential chilling effect on free speech, which could
result from the Final Rule for such CTAs, could be avoided simply by
relying on the proper regulatory exclusion or exemption without
having to even incur the cost of filing a notice with the CFTC or
NFA.
\25\ This is consistent with the Commission's rationale for
Sec. 170.15; that there should be essentially complete NFA
membership from the universe of commodity professionals. See supra
at n.10.
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After considering the comments, the Commission is persuaded by
Lovely and NFA that NFA's rules have little applicability to Sec.
4.14(a)(9) Exempted CTAs and, thus, there would be little benefit from
requiring Sec. 4.14(a)(9) Exempted CTAs to become and remain RFA
members.
The Commission, however, is not persuaded that other registered
CTAs, regardless of whether such CTAs are required to register with the
Commission, should be excluded from the requirements of the Final Rule.
Any registered CTA that does not meet the requirements of Sec.
4.14(a)(9) would, by definition, be engaged in either (i) directing
client accounts, or (ii) providing commodity trading advice based on,
or tailored to, the commodity interest or cash market positions or
other circumstances or characteristics of particular clients. As noted
above, and consistent with Sec. 170.15, the Commission believes that
RFA supervision of registered CTAs engaging in these activities is
beneficial to the markets and the clients of such CTAs.
In addition, the Commission believes that Lovely's cost estimates
are very high for retaining advisors in relation to NFA's rules.
Assuming a CTA was to contact an attorney familiar with Commission
regulations and NFA rules applicable to CTAs, the Commission believes
that determining which NFA rules are applicable to such a CTA would be
a routine task that would not take a substantial amount of time.\26\
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\26\ As noted above, Lovely himself refers to many of these
rules as ``inapposite.'' Such a description belies Lovely's argument
that any substantial legal review would be required to determine
whether NFA rules would apply to one of the CTAs about which Lovely
comments.
Moreover, the Commission believes the costs of compliance review
in subsequent years would be significantly less than the initial
review costs, because it is likely that only the changes to NFA
rules that took place during the prior year would need to be
considered.
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Furthermore, with respect to those CTAs that opt into CFTC
registration to avoid making determinations as to their activities in
relation to their eligibility for the exceptions or exclusions from the
CTA registration requirements noted in Lovely's comments, such persons
should review available guidance from the Commission and consult with
their advisors and Commission staff, as necessary, to determine if
registration is required.\27\
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\27\ The Commission notes that it is not of the view that making
such a definitive determination is impossible or exceedingly
difficult, as Lovely's comment suggests. However, the Commission
does recognize that, once this determination has been made, and
depending on the determination, a Commission registrant may need
time to review and possibly reorganize its business in order to
ensure its compliance with NFA's rules or undertake the
deregistration process, as the case may be. Therefore, the
Commission is providing the extended compliance period described in
the DATES section above.
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In support of the Final Rule, Section 4p of the CEA authorizes the
Commission to ``specify by rules and regulations appropriate standards
with respect to training, experience, and such other qualifications as
the Commission finds necessary or desirable to insure the fitness of
persons required to be registered with the Commission.'' \28\
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\28\ 7 U.S.C. 6p. Also, Section 8a(5) of the CEA authorizes the
Commission ``to make and promulgate such rules and 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 CEA.
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The Final Rule also provides a means for assuring that the purpose
of Section 17(m) of the CEA,\29\ allowing for compulsory RFA
membership, is achieved.\30\ The Commission believes that the Final
Rule is reasonably necessary and desirable to effectuate comprehensive
and effective market oversight by NFA in its capacity as an SRO. As the
only RFA, NFA serves as the frontline regulator of its members, subject
to Commission oversight. Without such mandatory membership in NFA or
another RFA, effective implementation of the programs required by
Section 17 of the CEA and NFA's self-regulatory programs could be
impeded.\31\
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\29\ 7 U.S.C. 21(m).
\30\ See Futures Associations: Futures Commission Merchants:
Mandatory Membership, 48 FR 26304 (June 7, 1983).
\31\ The Commission notes that in addition to the authority
discussed herein, as noted previously, CPOs and CTAs are subject to
registration with the Commission under Section 4m of the CEA, and
IBs are subject to such registration under Section 4d(g) of the CEA.
7 U.S.C. 6m and 6d(g).
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In summary, by mandating RFA membership by each registered IB, CPO,
and CTA, except Sec. 4.14(a)(9) Exempted CTAs, the Final Rule enables
the Commission to further ensure the fitness, and provide for direct
NFA oversight, of these Commission registrants.
V. Administrative Compliance
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \32\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. An agency may not conduct or
sponsor, and a registered entity is not required to respond to, a
collection of information unless it displays a currently valid control
number by the Office of Management and Budget (``OMB'').
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\32\ 44 U.S.C. 3501 et seq.
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In connection with the Proposal, the Commission anticipated that,
if adopted, the Final Rule would simply require an amendment to the
number of respondents included in OMB Collection 3038-0023.\33\ The
basis for this preliminary finding was that, at the time of the
Proposal, NFA had indicated that certain CPOs, CTAs, and IBs were
registered with the Commission, but not NFA members. Therefore, because
registration and membership require the filing of Form 7-R, the
Commission initially believed these respondents' paperwork burden would
have been affected by the Proposal.
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\33\ See OMB Control No. 3038-0023, http://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0023.
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As discussed above, the Final Rule does not require IBs, CPOs, or
CTAs to
[[Page 55026]]
register with the Commission. Rather, the Final Rule only requires that
certain of such persons that register with the Commission become and
remain an NFA member. To indicate NFA membership an applicant needs to
``check a box'' on Form 7-R.\34\ Current OMB Collection 3038-0023
captures the burdens associated with the registration process for these
persons, including the filing of and updating of Form 7-R for
registration purposes. Therefore, to comply with the Final Rule, such
registrants that are not NFA members, would be required to ``check-the-
box'' on Form 7-R indicating their status as an NFA member.
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\34\ The Commission has designated NFA to receive Form 7-R
submissions on its behalf. The Commission notes that application for
NFA membership is incorporated in Form 7-R.
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Accordingly, because the burden associated with updating Form 7-R
is currently captured in OMB Collection 3038-0023, and those persons
who are directly impacted by the Final Rule are either currently
registered with the Commission (i.e., have already filed a Form 7-R) or
will be required to file a Form 7-R in connection with their
registration with the Commission, no adjustment is necessary to take
into account the number of Commission registrants who will have to
become NFA members as a result of the Final Rule. Further, the
Commission believes the additional burden of ``checking the box'' on
Form 7-R to be non-substantive. Therefore, upon further review and for
the reasons stated above, the Final Rule does not require amending
existing OMB Collection 3038-0023.\35\
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\35\ The Commission further believes that many Commission
registrants' recordkeeping obligations associated with preparing for
an NFA audit are already covered by other OMB control numbers. For
example, Sec. Sec. 4.23 and 4.33 of the Commission's regulations
are recordkeeping requirements associated with registered CPOs and
CTAs, respectively, which are covered by OMB control number 3038-
0005.
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B. Regulatory Flexibility Act
The Regulatory Flexibility Act \36\ requires federal agencies, in
promulgating regulations, to consider the impact of those regulations
on small entities. In the Proposal, the Commission certified that the
Proposal would not have a significant economic impact on a substantial
number of small entities.
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\36\ 5 U.S.C. 601 et seq.
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1. CPOs
The Commission has previously determined that CPOs are not small
entities for purposes of the Regulatory Flexibility Act.\37\
Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that the Final Rule will not have
a significant economic impact on a substantial number of small entities
with respect to CPOs.
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\37\ Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, 18619 (Apr. 30, 1982).
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2. IBs and CTAs
The Commission has previously determined to evaluate within the
context of a particular rule proposal whether all or some IBs or CTAs
should be considered to be small entities and, if so, to analyze the
economic impact on them of any such rule.\38\
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\38\ See, with respect to CTAs, 47 FR at 18620 (Apr. 30, 1982);
and see, with respect to IBs, Introducing Brokers and Associated
Persons of Introducing Brokers, Commodity Trading Advisors and
Commodity Pool Operators; Registration and Other Regulatory
Requirements, 48 FR 35276 (Aug. 3, 1983).
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Since there may be some small entities that are IBs or CTAs and
would be required to become NFA members, the Commission has considered
whether this rulemaking would have a significant economic impact on
these entities.
The Final Rule requires all IBs and CTAs, except Sec. 4.14(a)(9)
Exempt CTAs, who register with the Commission to become RFA members.
This would require such IBs and CTAs to pay membership dues, ``check a
box'' on Form 7-R, and ensure that they are prepared for an NFA
audit.\39\ As noted in the Proposal, the Commission is of the view that
any costs associated with preparing for an audit by the NFA should not
be substantially different from, or significantly exceed, the costs
associated with preparing for an audit by the Commission, which every
registered person would already be responsible to do.\40\ Moreover,
because the Final Rule only pertains to Commission Registrants, any
audit related costs incident to NFA membership would be negligible, and
should not have a significant economic impact on IBs or CTAs that may
be small entities. The Commission also stated its preliminary belief
that NFA membership would impose few additional compliance costs on
affected entities, because these entities are already subject to the
majority of regulations that NFA enforces, whether or not they are NFA
members. The Commission specifically requested comment on any
additional compliance costs beyond those an entity would face as a
result of it being registered with the Commission.
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\39\ See 78 FR 67083 (Nov. 8, 2013). As stated in the booklet
titled ``NFA Regulatory Requirements: For FCMs, IBs, CPOs, and
CTAs,'' NFA audits have two major objectives: (1) To determine
whether the firm is maintaining records in accordance with NFA rules
and applicable CFTC regulations; and (2) to ensure that the firm is
being operated in a professional manner and that customers are
protected against unscrupulous activities and fraudulent or high-
pressure sales practices.
\40\ As noted above, the Commission believes that many of the
recordkeeping obligations associated with preparing for an NFA audit
are already required for Commission registrants. Moreover, given the
average periodicity for NFA audits, the magnitude of annual audit-
related costs is limited.
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a. Comments on Costs to CTAs
In response to the Proposal, a comment from Lovely stated that most
CTAs that opt into CFTC registration and do not manage or exercise
discretion over customer accounts or funds are ``small or one-person
operations or may have only incidental involvement with commodity
interests.'' Further, Lovely asserts that, although many of NFA's rules
are not relevant to such CTAs, the Commission understates the cost of
required NFA membership, including that the costs to these CTAs of
reviewing and complying with such rules would be approximately $15,000
to $20,000 annually.
As discussed above, the Commission believes that Lovely's
compliance cost estimates are very high. Rather, the Commission
believes that the costs faced by a CTA would, at most, be approximately
$2,950 in the first year and $1,476 in subsequent years.\41\ The
Commission does not believe that these amounts plus the $750 membership
dues required of all NFA members that are CTAs, results in an
unreasonable burden on any CTAs (including those that may be small
entities under the Regulatory Flexibility Act).\42\ Further, as
[[Page 55027]]
discussed above, Sec. 4.14(a)(9) Exempted CTAs (i.e., those CTAs that
neither manage nor exercise discretion over customer accounts or funds
and that do provide clients advice described in Sec. 4.14(a)(9)(ii))
will not be required to become or remain RFA members pursuant to the
Final Rule and, thus, will not face any compliance costs from the Final
Rule.
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\41\ This estimate is based on the following labor estimates for
this determination: for the first year, 6 hours of an attorney; in
subsequent years, 3 hours of an attorney, in each case at
approximately $492.21/hour. The estimate of the hourly cost is from
the Securities Industry and Financial Markets Association's Report
on Management and Professional Earnings in the Securities Industry--
2013, modified by CFTC staff to account for an 1800-hour work-year
and multiplied by 5.35 to account for firm size, employee benefits,
and overhead. The Commission believes that the use of this
multiplier is appropriate here because the Commission is assuming
that persons retain outside advisors to assist in complying with NFA
rules. The Commission rounds to two significant digits.
\42\ Assuming that IBs would face similar compliance costs as
CTAs, the Commission does not believe that these costs result in an
unreasonable burden on any IBs (including those that may be small
entities under the Regulatory Flexibility Act). Further, as of June
30, 2015, all registered IBs that are not members of NFA are pending
withdrawal of their Commission registration. Accordingly, the
Commission believes that no currently registered IBs will be
impacted by this rule.
The Commission also notes that, pursuant to Section 17(d) of the
Act, each CTA or IB that is registered with the Commission, but not
an RFA member is required to ``. . . pay to the Commission such
reasonable fees and charges [established by the Commission] as may
be necessary to defray the costs of additional regulatory duties
required to be performed by the Commission because such person is
not a member of an [RFA].'' 7 U.S.C. 21(d). The Commission has not
yet established any such fees or charges, but noted in the release
for Sec. 170.15 that these charges are likely to be greater than
the costs attendant to RFA membership. See 48 FR at 26311.
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b. Commission Determination
Accordingly, for the reasons stated above, the Commission believes
that the Final Rule will not have a significant economic impact on a
substantial number of small entities. Therefore, the Chairman, on
behalf of the Commission, hereby certifies, pursuant to 5 U.S.C.
605(b), that the Final Rule being published today by this Federal
Register release will not have a significant economic impact on a
substantial number of small entities.
C. Considerations of Costs and Benefits
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing an order. Section 15(a) further specifies that
the costs and benefits shall be evaluated in light of the following
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 considers the costs and benefits
resulting from its discretionary determinations with respect to the
section 15(a) factors.
1. Background
As discussed above, the Dodd-Frank Act amended the CEA to establish
a comprehensive new regulatory framework for swaps markets and, in
doing so, required IBs, CPOs, and CTAs acting in relation to swaps to
register with the Commission. These newly registered persons, however,
are not currently required to become NFA members because, as discussed
above, they are not captured by the intersection of Sec. 170.15 and
NFA Bylaw 1101.
NFA cannot enforce its rules over Commission registrants who do not
become NFA members, including IBs, CPOs, and CTAs active solely in
relation to swap transactions, which are not currently required to
become NFA members. Thus, the Final Rule requires registered IBs, CPOs,
and CTAs, except Sec. 4.14(a)(9) Exempted CTAs, to become NFA members
similarly to how Sec. 170.15 presently requires FCMs to become NFA
members and how Sec. 170.16 requires the same of SDs and MSPs. In
conjunction with Sec. Sec. 170.15 and 170.16, the Commission is
intending to create an oversight regime that ensures more consistent
treatment of its registered intermediaries. The Commission believes
that the Final Rule is reasonably necessary to ensure the fitness and
comprehensive regulation and appropriate oversight of such persons.
In assessing the costs and benefits of the Final Rule, the
Commission employs a status quo baseline. The Commission analyzes the
cost and benefit to those registered persons that, but for the Final
Rule, would not have to become RFA members. As of June 30, 2015, the
following numbers of Commission registered IBs, CPOs, and CTAs
(registered in the below categories) were not NFA members (``Non-member
Registrants''): \43\
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\43\ See NFA's daily directory of CFTC Registrants and Members
available at: http://www.nfa.futures.org/NFA-registration/NFA-directories.HTML.
------------------------------------------------------------------------
Non-member
Registration category registrants
------------------------------------------------------------------------
IB only................................................. 21
CPO only................................................ 61
CTA only................................................ 573
IB & CPO................................................ 1
IB & CTA................................................ 2
CTA & CPO............................................... 41
FCM & CPO............................................... 1
---------------
Total............................................... 700
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Of these Non-member Registrants, however, approximately 138 are pending
withdrawal of their Commission registration. The Commission is assuming
that these Non-member Registrants will withdraw their registration and,
thus, will not be impacted by the Final Rule. In addition, only
approximately one percent of the Non-member Registrants registered
solely as CTAs reported to the Commission in the most recent reporting
cycle that they had directed client accounts.\44\ As such, the
Commission believes that many of the Non-member Registrants registered
solely as CTAs will be Sec. 4.14(a)(9) Exempted CTAs and, thus, will
not be required to comply with the Final Rule.\45\ Accordingly, the
Commission estimates that 296 \46\ persons registered with the CFTC as
a CPO, CTA, or IB will be required to become and remain NFA members as
a result of the Final Rule.\47\
\44\ The Commission is assuming that all Non-member Registrants
registered solely as CTAs have reported to the Commission the amount
of assets they have directed, if any.
\45\ For purposes of its analysis, the Commission is assuming
that approximately half of the 573 Non-member Registrants registered
solely as CTAs (286 Non-member Registrants) will be Sec. 4.14(a)(9)
Exempted CTAs and will not be required to comply with the Final
Rule, and 20 of these 286 Non-member Registrants will be pending
withdrawal of their Commission registration.
\46\ To arrive at the estimate, the 700 figure was reduced by
the sum of (i) 138 (the Non-member Registrants whose withdrawal from
Commission registration is pending) and (ii) 266 (the Non-member
Registrants that the Commission assumes will be Sec. 4.14(a)(9)
Exempted CTAs net of those pending withdrawal, as described above).
\47\ For purposes of assessing the costs of this rule, the
Commission is assuming that no Non-member Registrant is, absent the
Final Rule, required to be an NFA member.
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Because at this time the Commission cannot reasonably estimate the
number of Non-member Registrants that may deregister with the
Commission as a result of the Final Rule, the Commission is assuming
that no Non-member Registrants will deregister as a result of the Final
Rule. The Commission believes that this will lead to an overstatement
of the compliance costs relating to the Final Rule.
2. Costs
a. Costs to IBs, CPOs, and CTAs
As discussed above, the process for a Non-member Registrant to
become an NFA member amounts to checking a box on the CFTC registration
form and updating some contact information. Thus, the Commission
believes the cost of filing for membership to be non-substantive.\48\
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\48\ See Form 7-R, http://www.nfa.futures.org/NFA-registration/templates-and-forms/form7-r.HTML. Applications forms for NFA
membership and Associate membership are incorporated in Forms 7-R
and 8-R. See NFA Membership and Dues, http://www.nfa.futures.org/NFA-registration/NFA-membership-and-dues.HTML.
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Affected persons are also subject to certain membership fees. NFA
imposes initial membership dues and annual membership dues for IBs,
CPOs, and CTAs. Currently, such initial membership dues are $750 for
the first year, and the annual dues to maintain membership are $750 per
year
[[Page 55028]]
thereafter.\49\ Thus, the 296 affected Non-member Registrants, in the
aggregate, will incur an initial and ongoing annual registration/
membership cost of approximately $222,000.\50\
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\49\ See NFA Membership and Dues, http://www.nfa.futures.org/NFA-registration/NFA-membership-and-dues.HTML.
\50\ To arrive at the monetary estimate, the 296 figure was
multiplied by the $750.00 per-person annual membership dues.
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The Commission agrees with Lovely that the Final Rule will also
impose certain compliance costs on affected Non-member Registrants.
However, as noted above, the Commission believes that, given the
existing requirements imposed on such registrants, the compliance costs
of becoming an NFA member and complying with NFA's rules (including
preparing for an audit by NFA) will be partially offset by the costs
already incurred by these registrants (i.e., the costs associated with
complying with Commission regulations and preparing for examinations by
the Commission). In that regard, as discussed above, the Commission
disagrees with Lovely's cost estimates and estimates that an affected
registrant may, at most, face additional compliance costs of
approximately $2,950 initially and $1,476 in subsequent years, equating
to an industry total of $873,200 in the first year and $436,896 in
subsequent years,\51\ plus the indirect costs of the periodic audits.
The Commission cannot reasonably provide an exact estimate of these
costs due to the idiosyncratic nature of the indirect costs
incurred.\52\
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\51\ To arrive at the monetary estimate, the 296 figure was
multiplied by the estimated per-person compliance costs.
\52\ The Commission also considered that, in addition to the
Non-member Registrants discussed above, the Final Rule will cause
future persons registering with the Commission as IBs, CPOs, and
CTAs because of their activities in relation to swaps to incur
additional costs similar to those described above. The Commission
expects that many persons will apply for registration under the
Commission's swaps market regime in such capacities, but the
Commission is not able to accurately estimate the exact number of
new Commission registrants that will do so and, thus, be affected by
the Final Rule.
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b. Other Market Costs
In addition to the direct costs to Commission Registrants, the
Commission considered other costs to the markets of the Final Rule. In
particular, the Commission considered the impact the Final Rule will
have on IBs, CPOs, and CTAs (i) election to not register with the
Commission and (ii) optional deregistration, in each case, where such
persons are not required to be registered with the Commission. Further,
the Commission considered that the requirements of the Final Rule may
cause fewer persons to elect to become IBs, CPOs, and CTAs because of
the added burden of being an RFA member. The Commission is unable to
estimate accurately how many IBs, CPOs, and CTAs will deregister with
the Commission or elect not to so register in the future, or how many
persons will choose to not become such an intermediary, in each case,
as a result of the Final Rule. Further, the Commission believes that if
a market participant has chosen not to register with the Commission,
the costs incurred by that participant for not registering would be
less than the costs that would have been incurred to register.
Otherwise, the market participant would likely have chosen to register
instead. However, the Commission cannot make a more accurate
determination of costs beyond this overestimate without knowing more
specifics about a particular market participant.
c. Consideration of the Proposal as an Alternative to the Final Rule
The Commission believes the costs in a. and b. above, respectively,
are reduced from those that would have resulted had the Proposal been
adopted without modification (the Proposal would have required each
registered IB, CPO, and CTA, without exception, to become and remain a
member of an RFA), because the Commission has excepted Sec. 4.14(a)(9)
Exempted CTAs from the requirements of the Final Rule. This exclusion
limits the Commission's ability to oversee these persons through
delegation to an RFA; however, the Commission has determined that this
reduction in the Commission's oversight abilities is reasonable in
light of the burden that the Proposal would otherwise impose on Sec.
4.14(a)(9) Exempted CTAs and the markets. The Commission further notes
that, as discussed above, Sec. 4.14(a)(9) Exempted CTAs that are not
RFA members are still subject to the Commission's rules and
regulations.
3. Benefits
The Final Rule enables the Commission to (i) carry out its
obligations pursuant to Section 17 of the CEA to delegate certain
oversight responsibility for intermediaries, including IBs, CPOs, and
CTAs, to an RFA, and (ii) ensure the fitness of its registrants as
described under Section 4p of the CEA. The Commission believes that by
requiring RFA membership, the Final Rule results in a more efficient
deployment of agency resources which would otherwise have to be used to
oversee these registrants who would, without the Final Rule, not be
overseen by an RFA. Further, the Commission believes that the Final
Rule enables NFA to apply its experience as a SRO to oversee and ensure
the fitness of all registered IBs, CPOs, and CTAs, except Sec.
4.14(a)(9) Exempt CTAs. The markets and the public will benefit from
NFA's developed set of rules and oversight capabilities to ensure the
integrity of the swaps market and its participants.
4. Section 15(a) Factors
The Commission requested comment on all aspects of the Section
15(a) factors. Except as discussed above, the Commission did not
receive any comments relating to costs and benefits of the Final Rule.
Section 15(a) of the CEA requires the Commission to consider the
effects of its actions in light of the following five factors:
a. Protection of Market Participants and the Public
The Final Rule will protect the public by ensuring that registered
IBs, CPOs, and CTAs, except Sec. 4.14(a)(9) Exempt CTAs, are subject
to the same level of comprehensive NFA oversight.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
The Final Rule ensures that all registered IBs, CPOs, and CTAs,
except Sec. 4.14(a)(9) Exempt CTAs, are subject to a similar level of
oversight and regulatory responsibility. In so doing, the Commission
believes the integrity of markets is enhanced. Furthermore, the
Commission also believes that the Final Rule will promote public
confidence in the integrity of derivatives markets by ensuring
consistent and adequate regulation and oversight of registered IBs,
CPOs, and CTAs, except Sec. 4.14(a)(9) Exempt CTAs.
c. Price Discovery
The Commission has not identified an impact on price discovery as a
result of the Final Rule.
d. Sound Risk Management
The Commission has not identified an impact on the risk management
decisions of market participants as a result of the Final Rule.
e. Other Public Interest Considerations
The Commission has not identified an impact on other public
interest considerations as a result of the Final Rule.
List of Subjects in 17 CFR Part 170
Authority delegations (Government agencies), Commodity futures,
Membership in a Registered Futures
[[Page 55029]]
Association, Reporting and recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 170 as set forth below:
PART 170--REGISTERED FUTURES ASSOCIATIONS
0
1. The authority citation for part 170 is revised to read as follows:
Authority: 7 U.S.C. 6d, 6m, 6p, 6s, 12a, and 21.
0
2. Add Sec. 170.17 to read as follows:
Sec. 170.17 Introducing brokers, commodity pool operators, and
commodity trading advisors.
Each person registered as an introducing broker, commodity pool
operator, or commodity trading advisor 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 introducing
brokers, commodity pool operators, or commodity trading advisors, as
the case may be, unless no such futures association is so registered;
provided, however that a person registered as a commodity trading
advisor shall not be required to become or remain a member of such a
futures association, solely in respect of its registration as a
commodity trading advisor, if such person is eligible for the exemption
from registration as such pursuant to Sec. 4.14(a)(9) of this chapter.
Issued in Washington, DC, on September 9, 2015, by the
Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix to Membership in a Registered Futures Association--Commission
Voting Summary
On this matter, Chairman Massad and Commissioners Bowen and
Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
[FR Doc. 2015-23046 Filed 9-11-15; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: September 14, 2015