[Federal Register: June 6, 2002 (Volume 67, Number 109)]
[Rules and Regulations]
[Page 38869-38877]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06jn02-7]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 3
RIN 3038-AB89
Registration of Intermediaries
AGENCY: Commodity Futures Trading Commission.
[[Page 38870]]
ACTION: Final rules.
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SUMMARY: The Commodity Futures Trading Commission (the ``Commission''
or ``CFTC'') is adopting amendments to its rules, which governs
registration of intermediaries in the futures industry. These
amendments are necessary to facilitate the change from the current
paper-based registration system to online registration. It is expected
that the online registration system will provide applicants with a more
streamlined process for registering, resulting in less redundancy and
quicker processing of applications by the National Futures Association.
The amendments will permit a floor broker that receives a temporary
license to act in the capacity of a fully registered floor broker, and
an applicant for registration as an associated person to be granted a
temporary license upon filing the Form 8-R and a sponsor's
certification, but prior to submission of fingerprints. Several other
amendments are technical in nature to accommodate the transfer from a
paper-based to an electronic system and to recognize derivatives
transaction execution facilities.
EFFECTIVE DATE: June 6, 2002.
FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief
Counsel, or Michael A. Piracci, Attorney-Advisor, Division of Trading
and Markets, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: (202)
418-5430.
SUPPLEMENTARY INFORMATION:
I. Background
The Commission has previously delegated the authority to process
applications for registration of intermediaries and floor traders under
the Commodity Exchange Act (the ``Act'')\1\ to the National Futures
Association (``NFA'').\2\ NFA submitted to the Commission, for its
approval, pursuant to section 17(j) of the Act, amendments to NFA
registration rules that would require applicants seeking registration
under the Act as futures commission merchants (``FCMs''), introducing
brokers (``IBs''), commodity pool operators (``CPOs''), commodity
trading advisors (``CTAs''), leverage transaction merchants (``LTMs''),
associated persons (``APs''), floor brokers (``FBs''), and floor
traders (``FT'') to file applications electronically through an online
registration system.\3\ On May 30, 2002, the Commission approved these
proposed amendments to the NFA registration rules.
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\1\ 7 U.S.C. 1 et seq. (2000).
\2\ See, e.g., 58 FR 19657 (Apr. 15, 1993) (floor traders); 51
FR 34490 (Sep. 29, 1986) (floor brokers); 49 FR 39593 (Oct. 9, 1984)
(futures commission merchants, commodity pool operators, commodity
trading advisors, and associated persons thereof); 48 FR 35158 (Aug.
3, 1983) (introducing brokers and associated persons thereof).
\3\ Agricultural trade option merchants as well as applicants
for registration as FCMs and IBs pursuant to section 4f(a)(2) of the
Act (notice-registration of securities broker-dealers whose only
futures-related activity involves security futures products) will
still file paper applications.
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Technological advancements have resulted in fundamental changes in
the futures industry, as is the case in almost every other industry.
The Commission has encouraged and attempted to facilitate the use of
electronic technology in the futures industry.\4\ The Commission also
believes that it must constantly look at ways that technology can
better assist the Commission in fulfilling its regulatory mission.\5\
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\4\ For example, the Commission has created a Technology
Advisory Committee, see 66 FR 57427 (Nov. 15, 2001); see also 65 FR
12466 (Mar. 9, 2000) (adopting new Rule 1.4, which permits the use
of electronic signatures in lieu of handwritten signatures where the
Act or Commission rules require a customer's signature).
Additionally, the Commission had previously authorized NFA to
implement a pilot program that allowed certain registrants to enter
registration data electronically for APs and branch office managers
of these registrants. 55 FR 35925 (Sep. 4, 1990).
\5\ For example, the National Association of Securities Dealers,
the registered national securities association responsible for
processing the registration filings of certain persons required to
register with the Securities and Exchange Commission, has required
all registration filings to be submitted via the World Wide Web to
its Central Registration Depository system since 1999.
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NFA's new online registration system should streamline the
registration process and result in a system that is easier to use for
applicants, registrants, and regulators. The new system should make it
quicker and easier for persons to provide NFA with the required
information and enable NFA to process more efficiently this information
in determining whether to grant an application for registration, while
maintaining most of the features of the current system. Additionally,
information on registrants should be more readily accessible by the
public, NFA, and the Commission.
On April 12, 2002, in order to facilitate the change to an online
registration system, the Commission proposed the rule amendments being
adopted herein.\6\ The Commission did not receive any comment letters
on the proposed amendments.
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\6\ 67 FR 19358 (Apr. 19, 2002).
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II. The Rule Amendments
A. Additional Categories and Sponsors
As part of the new online registration system, applicants that have
a current active status, either as a registrant or as a listed
principal, and who seek to add an additional registration category will
be required to file a ``short path'' version of the form required for a
new applicant.\7\ This ``short path'' form will require the applicant
to supply only necessary information that is not already in the
registration database. For example, if an entity registered as an IB
applies to become registered also as a CTA, the entity will complete
the ``short path'' Form 7-R, which requires the applicant to select the
appropriate categories for which it would be registered and to indicate
the category in which it intends to vote on NFA membership matters.
Likewise, natural persons currently registered as APs, FBs, FTs, or
listed as branch managers or principals that seek to add an additional
category will complete a ``short path'' Form 8-R.
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\7\ Currently, such applicants are required to file a Form 3-R
(which is akin to the new ``short path'' form) or Form 8-R,
depending upon their current status and the additional category
requested.
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The Form 7-R will no longer require an applicant to list principals
that are natural persons because when a Form 8-R is filed indicating a
principal category, the system will require the appropriate
information, including information regarding the sponsor firm.
Currently, under Commission Rule 3.10(a)(2)(i),\8\ each Form 7-R must
be accompanied with a Form 8-R and fingerprints for each natural person
who is a principal of the applicant. The rule does not apply to a
principal that has a current Form 8-R on file. However, because the
necessary information about the firm for whom a natural person is a
principal is gathered through the Form 8-R, if a natural person with a
current active status seeks to add a principal category or to become a
principal of another firm, then it will be necessary for a ``short
path'' Form 8-R to be filed.\9\ Accordingly, the Commission is amending
Rule 3.10(a)(2)(i) to reflect this change.
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\8\ Commission rules referred to herein may be found at 17 CFR
Chap. I (2001).
\9\ Fingerprints will still not be required.
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Currently, a person who is unconditionally registered as an AP may
become associated as an AP with another sponsor if the new sponsor
files a Form 3-R with NFA. The Form 3-R must contain a certification
signed by each sponsor acknowledging that each sponsor, in addition to
being responsible for supervising the AP, is jointly and severally
liable for the conduct of the AP. As noted above, under the new online
registration system, APs with a current status seeking to add another
sponsor will file
[[Page 38871]]
a ``short path'' Form 8-R, which, similar to the current paper Form 3-
R, will require the submission of only that information not already in
the database required for adding the applicable sponsor. Accordingly,
the Commission is amending Rule 3.12 to reflect the fact that the
sponsor must file a Form 8-R instead of the Form 3-R.
Maintaining the requirement that all of the sponsors of the AP sign
and file the acknowledgment mandated under the current rule in an
electronic environment would require sending the filing via traditional
delivery or via a complicated and costly electronic signature system,
both resulting in a delay in adding the sponsor. Additionally, the
Commission believes it is unnecessary to require the signed
acknowledgment where the rule makes clear that a sponsor is responsible
for supervising its APs and is liable for their conduct.\10\
Accordingly, the Commission is removing the requirement that a signed
certification be submitted to add an additional sponsor. Instead, the
NFA, upon receipt of the Form 8-R for an AP seeking to add a sponsor,
shall notify the existing sponsors of the AP of the application. The
amended rule will continue to hold each sponsor responsible for the
supervision of the AP and make each sponsor jointly and severally
liable for the conduct of the AP with respect to customers common to
that sponsor and another sponsor.\11\ Requiring a signed
acknowledgement of this fact would present an added burden for
registrants that the Commission does not believe is necessary.
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\10\ Existing Commission rules also make clear the sponsor's
responsibility and liability to supervise its APs. See, e.g., Rule
166.3.
\11\ NFA Registration Rule 207, as amended, holds sponsors to
the same standards.
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NFA's amended Registration Rule 207(a) will permit a person whose
application for registration as an AP is pending, or who is temporarily
licensed as an AP, to apply to become registered as an AP of another
sponsor. Pursuant to amended Registration Rule 207(b), the AP will
become registered as an AP of the new sponsor only if he or she is
already registered as an AP with another sponsor. The Commission
believes that NFA's amended Registration Rule 207 is consistent with
Commission Rule 3.12(f) as amended herein.
B. Updates
1. Annual and Triennial Updates
Pursuant to Commission Rule 3.31, any applicant or registrant must
promptly correct any inaccuracy in its Form 7-R or Form 8-R.
Accordingly, registrants are under an ongoing duty to ensure that their
registration filings are accurate. Currently, pursuant to Rule 3.10(d),
a firm is required to file annually with NFA a Form 7-R. For this
purpose, NFA sends to each firm a pre-printed paper copy of the firm's
Form 7-R that the firm must then update and file with NFA. Similarly,
pursuant to Rule 3.11(d), every three years the NFA provides each
registered FB and FT with a paper printout of the information contained
in NFA's registration database concerning the registrant. If the
information in the printout is inaccurate, the registrant must correct
the information and return the printout to NFA. Otherwise, the
registrant is not required to return the printout and is deemed to have
recertified the registration information contained in the printout.
As noted above, these persons are already under an ongoing
obligation to update the applicable registration information when
necessary. The continuation of the annual and triennial update process
is redundant and results in unnecessary costs to both NFA and the
registrant. Accordingly, the Commission is amending the rules to delete
these requirements.
2. Changes in Form of Organization
Pursuant to Rule 3.31, a change in the form of organization of a
registrant requires that the registrant correct its Form 7-R.
Currently, when a firm files a Form 3-R to report a change in the form
of the organization, it must be accompanied by a certification ``signed
in a manner sufficient to be binding under local law'' that the
registrant will be liable for all obligations of the pre-existing
organization. Similar to the acknowledgment currently required when an
AP adds a sponsor, the Commission believes it is an unnecessary burden
on registrants to require a signed certification by the registrant
acknowledging its liability for the obligations of the pre-existing
organization when Commission rules, and NFA rules, can make clear the
registrants' responsibilities. Accordingly, the Commission is amending
Rule 3.31 to make clear that, when a registrant reports a change in the
form of its organization by filing a Form 3-R under Rule 3.31, it
remains liable for all obligations of the pre-existing organization.
Notwithstanding the above, under the amendments being adopted
herein, where a registrant is ceasing to be or is becoming a sole
proprietorship, the registrant will have to file a Form 7-W,
withdrawing the registration of the pre-existing organization, and file
a Form 7-R regarding the new organization. A change to or from a sole
proprietorship to another form of business entity, such as a
corporation, is not a mere change in the form of organization. There is
a fundamental difference between a natural person and a corporation. A
corporation undertaking business that was being conducted by a sole
proprietor is not a continuation of an existing organization, but is
the creation of a completely new and separate legal entity, thus
requiring the filing of a Form 7-W regarding the pre-existing
organization and a Form 7-R on behalf of the new organization.
C. Temporary Licenses
1. Initial Filing
Pursuant to Commission Rule 3.40, an applicant for registration as
an AP, FB, or FT, may be granted a temporary license upon the filing of
a completed Form 8-R, the applicant's fingerprints, and, (a) if the
applicant is applying for registration as an AP, the required sponsor's
certification, or (b) if the applicant is applying for registration as
an FB or FT, the required proof of having been granted trading
privileges by a contract market. Under the online registration system,
there will be a delay between the filing of the Form 8-R, which will
occur instantaneously via the Internet, and the filing of the
applicant's fingerprints, which must still be physically provided on a
fingerprint card. Accordingly, the Commission is amending Rule 3.40 to
provide that NFA may grant a temporary license to an applicant for
registration as an AP upon filing of the completed Form 8-R and the
sponsor's certification, but before the applicant's fingerprints are
filed. The fingerprints must be filed with NFA within 20 days. This
will not result in any change of the policies that NFA uses in
determining to grant a temporary license to an AP.
FBs and FTs will have to continue to file the current documents
required under the rule, including fingerprints, to receive a temporary
license. Temporary licenses for FBs and FTs will not be granted online
because, to be eligible for a temporary license, FB and FT applicants
must have been granted trading privileges on a contract market or DTF.
It has been the experience of the Commission and NFA that FB and FT
applicants, especially new applicants, almost never receive trading
privileges before applying for registration. In fact, the applicant's
fingerprint cards and registration fees are almost always received
before an exchange grants them trading privileges. Moreover, if NFA
were to grant an FB or FT applicant a
[[Page 38872]]
temporary license and later withdraw it, such action could have larger
financial implications for the individual than would be the case for an
AP applicant. For example, an FB or FT applicant must make sizeable
investments to obtain trading privileges on the floor of an exchange.
2. Restrictions on Activities
Currently, an applicant for registration as an FB who is granted a
temporary license, and has not been registered as an FB during the
preceding 60 days, is only permitted to act as an FT. The Commission
does not believe that this difference is required. The fitness
standards for becoming registered as an FB or an FT are the same.
Likewise, the fitness standards for becoming temporarily licensed as an
FB or an FT should be the same. When the Commission adopted rules that
limited FBs granted temporary licenses to acting as FTs, it noted that,
after gaining further experience in the area, it might revisit the
issue.\12\ In the nine years since applicants for registration as FBs
have been permitted to receive a temporary license, the Commission and
NFA have found that it is very rare that a temporary license granted to
an applicant for registration as an FB has had to be terminated as a
result of the ensuing fitness check. This is attributable to the fact
that, in order to be granted a temporary license as an FB, an applicant
must have been granted trading privileges by a contract market and a
contract market conducts its own fitness check before granting a person
trading privileges. Generally, information that would prevent an
applicant from becoming registered with the Commission as an FB would
also prevent the person from obtaining trading privileges on a contract
market. Accordingly, the Commission is amending its rules to permit an
applicant for registration as an FB who has been granted a temporary
license to act in the capacity of an FB for the duration of the
temporary license.
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\12\ 58 FR 19575, 19583 (Apr. 15, 1993).
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3. Special Temporary Licenses
Currently, pursuant to Commission Rule 3.11(c)(1), an FB or FT,
whose registration has terminated within the preceding sixty days, and
who has been granted trading privileges at a new contract market that
has filed with NFA the certification required under Rule 3.40(c),
regarding the applicant, will be granted a temporary license to act as
an FB or FT upon mailing a Form 8-R, a fingerprint card, and if
applicable, a supplemental sponsor certification. These are the same
submissions necessary to be granted a temporary license under
Commission Rule 3.40. However, pursuant to Rule 3.11(c)(1), once the
applicant has mailed the Form 8-R and the fingerprint card to NFA the
applicant's temporary license will be granted, as opposed to the
requirement under Rule 3.40 that the documents be filed with NFA.
However, the applicant must have been granted trading privileges by a
new contract market and the contract market must have made the required
certification before the applicant could be granted the temporary
license. The Commission does not believe that it is necessary to
maintain both rules for granting temporary licenses to FBs and FTs when
the practical result under either rule is the same. Accordingly, the
Commission is removing Rule 3.11(c)(1). All temporary licenses for FBs
and FTs will be granted pursuant to Rule 3.40.
The Commission is also removing Rule 3.11(c)(2). Currently,
pursuant to Commission Rule 3.11(c)(2), any FB or FT who continuously
maintains trading privileges at a contract market may change their
registration category from an FB to an FT or vice versa upon mailing to
NFA a completed Form 3-R indicating an intention to change categories.
As noted above, under NFA's online registration system, applicants for
adding additional registration categories will file a ``short path''
Form 8-R. Additionally, under Commission Rule 3.11(a), an applicant for
registration as an FB or FT is not required to file a fingerprint card
if the applicant has a current Form 8-R on file with NFA.\13\
Accordingly, removing Rule 3.11(c)(2) should not negatively affect
those already registered as FBs or FTs seeking to switch registration
categories.
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\13\ Amended NFA Registration Rule 205(b) similarly provides
that an applicant for FB or FT registration need not file a
fingerprint card or pay the registration fee if the applicant has a
current Form 8-R on file.
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Similar to the granting of a temporary license as a new applicant
for AP registration, as discussed above, the Commission is also
amending Rule 3.12(d) to permit the granting of a special temporary
license to an AP whose registration terminated within the preceding 60
days upon the filing of a completed Form 8-R, but prior to the
applicant's fingerprints being filed with NFA. The fingerprints must be
filed with NFA within 20 days.
D. FCM and IB Withdrawal From Registration
Currently, pursuant to Commission Rule 3.33(c)(1), when an FCM or
an independent IB is requesting withdrawal from registration because it
has ceased engaging in activities that require registration, their
request for withdrawal must be accompanied by Form 1-FR-FCM or 1-FR-IB
\14\ completed within a month of the date of the request for
withdrawal. Pursuant to NFA Financial Requirement section 1(b), each
FCM for which NFA is the designated self-regulatory organization must
file a Form 1-FR-FCM for each month end. Accordingly, for such FCMs, a
Form 1-FR-FCM for the previous month will have already been filed.
Additionally, an IB is not permitted to hold customer funds. Therefore,
requiring an IB seeking withdrawal to file Form 1-FR-IB in every
instance is unnecessary. Moreover, if there was a reason for the
Commission to be concerned about the financial state of a particular IB
requesting withdrawal, the Commission may, pursuant to Rule 3.33(f)(4),
require that the IB provide the appropriate financial statements,
including a Form 1-FR-IB, before it is permitted to withdraw its
registration. Accordingly, the Commission is removing Rule 3.33(c)(1).
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\14\ The Forms 1-FR-FCM and 1-FR-IB are statements of the
financial condition of an FCM or IB respectively, used, in part, to
ensure compliance with applicable Commission minimum financial
requirements.
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E. Certification Signatories
Commission Rules 3.12(c)(1), 3.12(d)(3) (sponsor certifications
regarding an applicant for AP registration), 3.33(b) (Form 7-W for a
firm's withdrawal of registration), 3.44(a)(4) (FCM certification
regarding a temporary license for an IB) require that only certain
persons may sign the pertinent documents on behalf of the
registrant.\15\ Under the online registration system, where the
pertinent documents will be filed electronically, it would be
difficult, if not impossible, to ensure that only one of the enumerated
persons was actually submitting the document.
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\15\ For example, Rule 3.12(c)(1) requires that the sponsor's
certification be signed by an officer if the sponsor is a
corporation, a general partner, if a partnership, or the sole
proprietor, if a sole proprietorship.
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NFA, in its amended Registration Rule 802, provides that the
electronic filing of required documents constitutes, among other
things, the applicant's, registrant's, or sponsor's certification that
the person who electronically files the document is authorized by the
entity to make the required certifications, representations, requests,
acknowledgements, authorizations, and agreements contained therein.
[[Page 38873]]
Moreover, amended NFA Registration Rule 801(b) provides that any
registration filing made on behalf of a registrant or applicant by a
person authorized by the applicant or registrant shall be deemed to be
a filing of such registrant or applicant.\16\
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\16\ Under the amended NFA rules, FBs and FTs may not authorize
any other person to file a Form 8-R on their behalf. Additionally,
persons for whom a sponsor has filed a Form 8-R must verify the
information themselves and may not authorize any other person to do
so on their behalf.
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Therefore, the entity filing the pertinent certification or form
under Commission Rules 3.12(c)(1), 3.33(b), 3.44(a)(4) will be held
accountable for any representations in the applicable document.
Accordingly, the Commission is amending these rules to make clear that
a person duly authorized by the registrant or sponsor must file the
relevant certification or form.
F. Other Amendments
The Commission is also making certain technical amendments. For
example, the Commission is amending Rules 3.11 and 3.31 so as to
reference both contract markets and derivatives transaction execution
facilities. Additionally, the Commission is removing references in part
3 to part 180, which has been removed and reserved.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'')\17\ requires that
agencies, in proposing rules, consider the impact of those rules on
small businesses. The Commission has previously established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its rules on such entities in accordance with
the RFA.\18\ The Commission has previously determined that FCMs,
registered CPOs, and LTMs are not small entities for the purpose of the
RFA.\19\ Therefore, the requirements of the RFA do not apply to those
entities. With respect to the remaining entities, the rule amendments
will not place any additional burdens upon such parties since all
registrants are already subject to the registration filing requirements
of the Act and part 3 of the Commission's regulations. To the contrary,
the amendments will help to streamline and simplify the current
registration procedures. The Commission notes that no comments were
received from the public on the RFA and its relation to the rule
amendments.
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\17\ 5 U.S.C. 601 et seq.
\18\ 47 FR 18618 (April 30, 1982).
\19\ Id. at 18619-20 (discussing FCMs and CPOs); 54 FR 19556,
19557 (May 8, 1989) (discussing LTMs).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \20\ 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. The rule amendments do not require a
new collection of information on the part of any entities subject to
the proposed rule amendments. Accordingly, for purposes of the PRA, the
Commission certifies that these rule amendments will not impose any new
reporting or recordkeeping requirements. The Commission did not receive
any comments on any potential paperwork burden associated with these
amendments. The Commission has submitted hard copies of how the screens
will appear in the electronic registration system to the Office of
Management and Budget.
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\20\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Analysis
Section 15(a) of the Act 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.
Section 15(a) further specifies that costs and benefits shall be
evaluated in light of five broad areas of market and public concern:
protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. Accordingly, the Commission could in its discretion
give greater weight to any one of the five enumerated areas and could
in its discretion determine that, notwithstanding its costs, a
particular rule was 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.
These amendments are intended to facilitate a streamlined
registration process that would result in less redundancy and quicker
processing of applications. The Commission is considering the costs and
benefits of these rules in light of the specific provisions of section
15(a) of the Act:
1. Protection of market participants and the public. While the
amendments are expected to lessen the burden imposed upon applicants in
the registration process, they do not reduce the fitness standards for
becoming registered with the Commission. Accordingly, they should have
no effect on the Commission's ability to protect market participants
and the public.
2. Efficiency and competition. The amendments are expected to
benefit efficiency and competition by more quickly facilitating entry
into the industry and by enabling information to be collected and made
available in a more timely manner.
3. Financial integrity of futures markets and price discovery. The
amendments should have no effect, from the standpoint of imposing costs
or creating benefits, on the financial integrity or price discovery
function of the futures and options markets.
4. Sound risk management practices. The amendments being adopted
herein should have no effect on the risk management practices of the
futures and options industry.
5. Other public interest considerations. The amendments, in
facilitating the change to an online registration system, are expected
to result in a registration system that is easier to use and more
efficient in its processing of registration applications. Additionally,
the system should permit more information about registrants to be
readily accessible by the public more quickly.
After considering these factors, the Commission has determined to
adopt the amendments discussed above. The Commission invited public
comment on its application of the cost-benefit provision. The
Commission did not receive any comments regarding the application of
the cost-benefit provision.
D. Administrative Procedure Act
The Administrative Procedure Act provides that the required
publication of a substantive rule shall be made not less than 30 days
before its effective date, but provides an exception ``for good cause
found and published with the rule.'' \21\ On June 3, 2002, NFA will
bring its new registration system online. As part of this changeover,
NFA has shut down its old mainframe-based registration database, and is
currently not capable of accepting hardcopies of registration filings
and entering the information into its registration database system.
Moreover, the Commission
[[Page 38874]]
notes that NFA has spent much of the last few months making the futures
industry aware of the change to an online registration system, through
its Web site as well as seminars and training workshops held in New
York, New Jersey, and Chicago. Accordingly, the Commission has
determined to make the rule amendments being adopted herein effective
immediately.
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\21\ 5 U.S.C. 553(d)(3).
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Lists of Subjects in 17 CFR Part 3
Brokers, Commodity Futures, Registration.
For the reasons discussed in the foregoing, the Commission hereby
amends Chapter I of Title 17 of the Code of Federal Regulations 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 3.2 is amended by revising paragraph (c) to read as
follows:
Sec. 3.2 Registration processing by the National Futures Association;
notification and duration of registration.
* * * * *
(c) The National Futures Association shall notify the registrant,
or the sponsor in the case of an applicant for registration as an
associated person, and each designated contract market or registered
derivatives trading execution facility that has granted the applicant
trading privileges in the case of an applicant for registration as a
floor broker or floor trader, if registration has been granted under
the Act.
(1) If an applicant for registration as an associated person
receives a temporary license in accordance with Sec. 3.40, the National
Futures Association shall notify the sponsor that only a temporary
license has been granted.
(2) If an applicant for registration as a floor broker or floor
trader receives a temporary license in accordance with Sec. 3.40, the
National Futures Association shall notify the designated contract
market or registered derivatives trading execution facility that has
granted the applicant trading privileges that only a temporary license
has been granted.
* * * * *
3. Section 3.10 is amended by revising paragraph (a)(2)(i) and by
removing 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.
(a) * * *
(2)(i) Each Form 7-R filed in accordance with the requirements of
paragraph (a)(1)(i) of this section must be accompanied by a Form 8-R,
completed in accordance with the instructions thereto and executed by
each natural person who is a principal of the applicant, and must be
accompanied by the fingerprints of that principal on a fingerprint card
provided by the National Futures Association for that purpose:
Provided, however, that if such principal is a director who qualifies
for the exemption from the fingerprint requirement pursuant to
Sec. 3.21(c) or has a current Form 8-R on file with the Commission or
the National Futures Association, the fingerprints of that principal do
not need to accompany the Form 7-R.
* * * * *
4. Section 3.11 is amended by revising paragraphs (a)(2), (a)(3),
and (b), and by removing paragraphs (c) and (d) to read as follows:
Sec. 3.11 Registration of floor brokers and floor traders.
(a) * * *
(2) An applicant for registration as a floor broker or floor trader
will not be registered or issued a temporary license as a floor broker
or floor trader unless the applicant has been granted trading
privileges by a board of trade designated as a contract market or
registered as a derivatives transaction execution facility by the
Commission.
(3) When the Commission or the National Futures Association
determines that an applicant for registration as a floor broker or
floor trader is not disqualified from such registration or temporary
license, the National Futures Association will notify the applicant and
any contract market or derivatives transaction execution facility that
has granted the applicant trading privileges that the applicant's
registration or temporary license as a floor broker or floor trader is
granted.
(b) Duration of registration. A person registered as a floor broker
or floor trader in accordance with paragraph (a) of this section, and
whose registration has neither been revoked nor withdrawn, will
continue to be so registered unless such person's trading privileges on
all contract markets or derivatives transaction execution facilities
have ceased: Provided, That if a floor broker or floor trader whose
trading privileges on all contract markets or derivatives transaction
execution facilities have ceased for reasons unrelated to any
Commission action or any contract market or derivatives transaction
execution facility disciplinary proceeding and whose registration is
not revoked, suspended or withdrawn is granted trading privileges as a
floor broker or floor trader, respectively, by any contract market or
derivatives transaction execution facility where he held such
privileges within the preceding sixty days, such registration as a
floor broker or floor trader, respectively, shall be deemed to continue
and no new Form 8-R or Form 3-R need be filed solely on the basis of
the resumption of trading privileges. A floor broker or floor trader is
prohibited from engaging in activities requiring registration under the
Act or from representing himself to be a registrant under the Act or
the representative or agent of any registrant during the pendency of
any suspension of such registration or of all such trading privileges.
In accordance with Sec. 3.31(d), each contract market or derivatives
transaction execution facility that has granted trading privileges to a
person who is registered, or has applied for registration, as a floor
broker or floor trader, must notify the National Futures Association
within sixty days after such person's trading privileges on such
contract market or derivatives transaction execution facility have
ceased.
5. Section 3.12 is amended as follows:
a. By revising paragraphs (c)(1), (c)(4), and the introductory text
of paragraph (d)(1);
b. By redesignating paragraphs (d)(2) and (d)(3) as (d)(3) and
(d)(4) and revising paragraphs (d)(3) and (d)(4) as redesignated;
c. By adding a new paragraph (d)(2); and
d. By revising paragraph (f).
The revisions and addition read as follows:
Sec. 3.12 Registration of associated persons of futures commission
merchants, introducing brokers, commodity trading advisors, commodity
pool operators, and leverage transaction merchants.
* * * * *
(c) * * *
(1) No person will be registered as an associated person in
accordance with this paragraph (c) unless a person duly authorized by
the sponsor certifies that:
* * * * *
(4) When the Commission or the National Futures Association
determines that an applicant for registration as an associated person
is not unfit for such registration, it will
[[Page 38875]]
notify the sponsor that has made the certifications required by
paragraph (c)(1) of this section that the applicant's registration as
an associated person is granted contingent upon the sponsor hiring or
otherwise employing the applicant as such within thirty days.
* * * * *
(d) Special temporary licensing and registration procedures for
certain persons. (1) Registration terminated within the preceding 60
days. Except as otherwise provided in paragraphs (f) and (i) of this
section, any person whose registration as an associated person in any
capacity has terminated within the preceding 60 days and who becomes
associated with a new sponsor will be granted a temporary license to
act in the capacity of an associated person of such sponsor upon filing
by that sponsor with the National Futures Association a Form 8-R,
completed in accordance with the instructions thereto and, if
applicable, a Supplemental Sponsor Certification Statement filed on
behalf of the new sponsor (who must meet the requirements set forth in
Sec. 3.60(b)(2)(i)(A) and (B)) stating that the new sponsor will
supervise the applicant in accordance with conditions identical to
those agreed to by the previous sponsor, which includes certifications
stating:
* * * * *
(2) Any temporary license granted pursuant to paragraph (d)(1) of
this section shall be terminated immediately upon notice to the sponsor
of the person granted the temporary license that, within 20 days
following the date the temporary license was issued, the National
Futures Association has not received the applicant's fingerprints.
(3) A temporary license received in accordance with paragraph
(d)(1) of this section shall be subject to the provisions of Secs. 3.42
and 3.43.
(4) The certifications permitted by paragraphs (d)(1)(i) and (v) of
this section must be filed by a person duly authorized by the sponsor.
The certifications permitted by paragraphs (d)(1)(ii)-(iv) must be
filed by the applicant for registration as an associated person.
* * * * *
(f) Reporting of dual and multiple associations. (1)(i) Except as
otherwise provided in paragraph (f)(4) of this section, a person who is
already registered as an associated person in any capacity whose
registration is not subject to conditions or restrictions may become
associated as an associated person with another sponsor if the new
sponsor (who must meet the requirements set forth in Sec. 3.60(b)(2)(i)
(A) and (B)) files with the National Futures Association a Form 8-R in
accordance with the instructions thereto.
(ii) NFA shall notify each sponsor of the associated person that
the associated person has applied to become associated with another
sponsor.
(iii) Each sponsor of the associated person shall supervise that
associated person and each sponsor is jointly and severally responsible
for the conduct of the associated person with respect to the:
(A) Solicitation or acceptance of customers' orders,
(B) Solicitation of funds, securities, or property for a
participation in a commodity pool,
(C) Solicitation of a client's or prospective client's
discretionary account,
(D) Solicitation or acceptance of leverage customers' orders for
leverage transactions, and
(E) Associated person's supervision of any person or persons
engaged in any of the foregoing solicitations or acceptances, with
respect to any customers common to it and any other futures commission
merchant, introducing broker, commodity trading advisor, commodity pool
operator, or leverage transaction merchant with which the associated
person is associated.
(2) Upon receipt by the National Futures Association of a Form 8-R
filed in accordance with paragraph (f)(1) of this section from an
associated person, the associated person named therein shall be
registered as an associated person of the new sponsor.
* * * * *
6. Section 3.31, is amended as follows:
a. By revising paragraph (a)(1);
b. By redesignating paragraph (a)(2) as paragraph (a)(3);
c. By adding a new paragraph (a)(2);
d. By revising newly redesignated paragraph (a)(3); and
e. By amending paragraph (d) by adding ``or derivatives transaction
execution facility'' after each instance of ``contract market''.
The revisions and addition read as follows:
Sec. 3.31 Deficiencies, inaccuracies, and changes, to be reported.
(a)(1) Each applicant or registrant as a futures commission
merchant, commodity trading advisor, commodity pool operator,
introducing broker, or leverage transaction merchant shall, in
accordance with the instructions thereto, promptly correct any
deficiency or inaccuracy in Form 7-R or Form 8-R which no longer
renders accurate and current the information contained therein. Each
such correction shall be made on Form 3-R and shall be prepared and
filed in accordance with the instructions thereto. Provided, however,
that where a registrant is reporting a change in the form of
organization from or to a sole proprietorship, the registrant must file
a Form 7-W regarding the pre-existing organization and a Form 7-R
regarding the newly formed organization.
(2) If a registrant files a Form 3-R, pursuant to this section, to
report a change in the form of the organization of the registrant, the
registrant shall be liable for all obligations of the pre-existing
organization under the Act, as it may be amended from time to time, and
the rules, regulations, or orders which have been or may be promulgated
thereunder.
(3) Where the deficiency or inaccuracy is created by the addition
of a new principal not listed on the registrant's application for
registration (or amendment of such application prior to the granting of
registration), and the new principal is not a natural person, the
registrant shall file a Form 3-R filed in accordance with the
requirements of paragraph (a)(1) of this section. Provided, however,
that if the new principal is a natural person, the registrant shall
file a Form 8-R, completed in accordance with the instructions thereto
and executed by such person who is a principal of the registrant and
who was not listed on the registrant's initial application for
registration or any amendment thereto. The Form 8-R for each such
principal shall be accompanied by the fingerprints of that principal on
a fingerprint card provided by the National Futures Association for
that purpose, unless such principal is a director who qualifies for the
exemption from the fingerprint requirement pursuant to Sec. 3.21(c) or
such principal has a current Form 8-R on file with the Commission or
the National Futures Association.
* * * * *
Sec. 3.33 [Amended]
7. Section 3.33 is amended as follows:
a. By amending the introductory text of paragraph (b) by removing
``the sole proprietor if the registrant is a sole proprietorship, by a
general partner if a partnership, or by the president or chief
executive officer if a corporation,'' and by adding in its place ``a
person duly authorized by the registrant'';
b. By removing paragraph (b)(3);
c. By redesignating paragraphs (b)(4) through (b)(7) as (b)(3)
through (b)(6);
[[Page 38876]]
d. By removing paragraph (c)(1);
e. By redesignating paragraph (c)(2) as (c);
f. By removing paragraph (d); and
g. By amending paragraph (e) by removing ``sent to the National
Futures Association, Registration Office, 200 West Madison Street,
Chicago, Illinois 60606'' and adding in its place ``filed with the
National Futures Association''.
8. Section 3.40 is revised to read as follows:
Sec. 3.40 Temporary licensing of applicants for associated person,
floor broker or floor trader registration.
(a) Notwithstanding any other provision of these regulations and
pursuant to the terms and conditions of this subpart:
(1) The National Futures Association may grant a temporary license
to any applicant for registration as an associated person upon the
contemporaneous filing with the National Futures Association of:
(i) A Form 8-R, properly completed in accordance with the
instructions thereto; and
(ii) The sponsor's certification required by Sec. 3.12(c):
Provided, however, that the fingerprints of the applicant on a
fingerprint card provided by the National Futures Association for that
purpose must be filed with the National Futures Association within 20
days following the date the temporary license is issued; and, provided
further, that failure to file the fingerprints within this period will
result in the termination of the temporary license immediately upon
notice to the applicant's sponsor that the National Futures Association
has not received the applicant's fingerprints.
(2) The National Futures Association may grant a temporary license
to any applicant for registration as a floor broker or floor trader
upon the contemporaneous filing with the National Futures Association
of:
(i) A Form 8-R, properly completed in accordance with the
instructions thereto;
(ii) The fingerprints of the applicant on a fingerprint card
provided by the National Futures Association for that purpose;
(iii) A Supplemental Sponsor Certification Statement executed by a
sponsor meeting the requirements under Sec. 3.60(b)(2)(i), if the
applicant is subject to an order imposing conditions on the applicant's
registration; and
(iv) Evidence that the applicant has been granted trading
privileges by a contract market or derivatives transaction execution
facility that has filed with the National Futures Association a
certification signed by its chief operating officer with respect to the
review of an applicant's employment, credit and other history in
connection with the granting of trading privileges.
(b) The failure of an applicant or the applicant's sponsor to
respond to a request by the Commission or the National Futures
Association for clarification of any information set forth in the
application of the applicant or for the resubmission of fingerprints in
accordance with such request will be deemed to constitute a withdrawal
of the applicant's registration application and shall result in the
immediate termination of the applicant's temporary license.
(c) Subject to the provisions of Sec. 3.42 and all of the
obligations imposed on such registrants under the Act (in particular,
section 14 thereof) and the rules, regulations, and orders thereunder,
an applicant for registration as an associated person who has received
notification that a temporary license has been granted may act in the
capacity of an associated person, an applicant for registration as a
floor trader who has received written notification that a temporary
license has been granted may act in the capacity of a floor trader, and
an applicant for registration as a floor broker who has received
written notification that a temporary license has been granted may act
in the capacity of a floor broker.
Sec. 3.41 [Removed]
9. Section 3.41 is removed.
10. Section 3.42 is amended by revising paragraphs (a)(2), (a)(3),
(a)(4) and (a)(6) to read as follows:
Sec. 3.42 Termination.
(a) * * *
(2) Immediately upon termination of the association of the
applicant for registration as an associated person with the registrant
which filed the sponsorship certification, or immediately upon loss of
trading privileges by an applicant for registration as a floor broker
or floor trader on all contract markets which filed the certification
described in Sec. 3.40;
(3) Immediately upon the withdrawal of the registration application
pursuant to Sec. 3.40;
(4) Immediately upon failure to comply with an order to pay a civil
monetary penalty, restitution, or disgorgement within the time
permitted under sections 6(e), 6b, or 6c(d) of the Act;
* * * * *
(6) Immediately upon failure to comply with an award in an
arbitration proceeding conducted pursuant to the rules of a designated
contract market, registered derivatives transaction execution facility,
or registered futures association within the time specified in section
10(g) of the National Futures Association's Code of Arbitration or the
comparable time period specified in the rules of a contract market,
registered derivatives transaction execution facility, or other
appropriate arbitration forum.
* * * * *
11. Section 3.44 is amended by revising the introductory text of
paragraph (a)(4) and revising paragraph (a)(5) to read as follows:
Sec. 3.44 Temporary licensing of applicants for guaranteed introducing
broker registration.
(a) * * *
(4) A certification executed by a person duly authorized by the
futures commission merchant that has executed the guarantee agreement
required by paragraph (a)(1) of this section, stating that:
* * * * *
(5) The fingerprints of the applicant, if a sole proprietor, and of
each principal (including each branch office manager) thereof on
fingerprint cards provided by the National Futures Association for that
purpose: Provided, that a principal who has a current Form 8-R on file
with the National Futures Association or the Commission is not required
to submit a fingerprint card.
* * * * *
12. Section 3.46 is amended by revising paragraphs (a)(6) and
(a)(8) to read as follows:
Sec. 3.46 Termination
(a) * * *
(6) Immediately upon failure to comply with an order to pay a civil
monetary penalty, restitution, or disgorgement within the time
permitted unders sections 6(e), 6b, or 6c(d) of the Act;
* * * * *
(8) Immediately upon failure to comply with an award in an
arbitration proceeding conducted pursuant to the rules of a designated
contract market, registered derivatives transaction execution facility,
or registered futures association within the time specified in section
10(g) of the National Futures Association's Code of Arbitration or the
comparable time period specified in the rules of a contract market,
registered derivatives transaction execution
[[Page 38877]]
facility, or other appropriate arbitration forum.
* * * * *
Issued in Washington, DC, on May 30, 2002, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-14027 Filed 6-5-02; 8:45 am]
BILLING CODE 6351-01-P
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