[Federal Register: November 22, 2006 (Volume 71, Number 225)]
[Rules and Regulations]
[Page 67462-67465]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22no06-9]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AC34
Financial Reporting Requirements for Introducing Brokers
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rulemaking.
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SUMMARY: The Commodity Futures Trading Commission ("Commission" or
"CFTC") is amending Commission regulations to require introducing
brokers ("IBs") submitting CFTC financial Forms 1-FR-IB that are
certified by independent public accountants to file such financial
reports electronically with the National Futures Association ("NFA").
The amendments also require that certified Financial and Operational
Combined Uniform Single Reports ("FOCUS" Reports), submitted by IBs
registered with the Securities and Exchange Commission ("SEC") as
securities brokers or dealers ("B/Ds") in lieu of Form 1-FR-IB, be
filed either electronically or in paper form in accordance with the
rules of the NFA. The CFTC also is amending Commission regulations to
require that, with respect to any such electronic filing, a paper copy
including the original signed certification be maintained by the IB in
its records for a period of five years in accordance with Commission
Regulation 1.31.
DATES: Effective Date: December 22, 2006.
FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director and
[[Page 67463]]
Chief Accountant, at (202) 418-5430 or Jennifer C.P. Bauer, Special
Counsel, at (202) 418-5472, Division of Clearing and Intermediary
Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581. Electronic mail:
[email protected] or [email protected].
SUPPLEMENTARY INFORMATION:
I. Background
Section 4f(b) of the Commodity Exchange Act ("Act") authorizes
the Commission to adopt regulations imposing minimum financial
requirements on IBs.\1\ Commission Regulation 1.10(a)(2)(ii)(A) \2\
requires each person filing an application for registration as an IB to
file a financial Form 1-FR-IB \3\ certified by an independent public
accountant concurrently with the application. IBs that also are
registered with the SEC as a B/D may file a FOCUS Report in lieu of a
Form 1-FR-IB. The application for registration, and the certified Form
1-FR-IB or FOCUS Report, must be filed with the NFA in paper form.\4\
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\1\ 7 U.S.C. 6f(b).
\2\ The regulations of the Commission cited in this release may
be found at 17 CFR Ch. I (2006).
\3\ The Form 1-FR-IB is a financial report that includes a
statement of financial condition, a statement of income or loss, a
statement of minimum net capital, and appropriate footnote
disclosures.
\4\ NFA is a registered futures association under Section 17 of
the Commodity Exchange Act, 7 U.S.C. 21, and has been delegated
responsibility for processing the Commission's registration
function. NFA also is a self-regulatory organization, as defined in
Regulation 1.3(ee).
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Regulation 1.10(b)(2)(ii)(A) requires each registered IB to
annually file a certified Form 1-FR-IB as of the close of the IB's
fiscal year with NFA. IBs that are registered with the SEC as B/Ds may
file an annual FOCUS Report with NFA in lieu of the Form 1-FR-IB.
Regulation 1.10(b)(2)(iii) requires that certified Forms 1-FR-IB, or
FOCUS Reports, must be filed in paper form with NFA and may not be
filed electronically. Regulation 1.10(d)(4) requires that Forms 1-FR-
IB, or FOCUS reports filed in lieu thereof, be accompanied by an oath
or affirmation from specified persons that the information in the
filing is true and correct.
The Commission previously has approved rules submitted by NFA that
require IBs to submit uncertified Forms 1-FR-IB, or FOCUS Reports,
electronically using the NFA EasyFile electronic filing system.\5\ NFA
implemented electronic filing of the uncertified Form 1-FR for IBs
beginning in 2002 by providing them with the WinJammer software
utilized by other self-regulatory organizations and the Commission for
the Forms 1-FR and FOCUS Reports filed electronically by futures
commission merchants ("FCMs"). The EasyFile system was developed by
NFA as a web-based alternative to WinJammer using the same security
procedure available under NFA's On-line Registration System, or ORS.\6\
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\5\ By letter dated June 1, 2004, NFA submitted to the
Commission for its review and approval, pursuant to Section 17(j) of
the Act (7 U.S.C. 21(j)), amendments to Section 5 of NFA Financial
Requirements, regarding IB financial requirements, which amendments
were approved by the Commission and were effective June 30, 2004.
\6\ The firm's security manager can establish users with unique
and secure user identification and password combinations and assign
them abilities to enter data and/or submit the report in the NFA
EasyFile system. This "Security Manager" procedure is part of
NFA's existing electronic system for registration processing.
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NFA petitioned the Commission to amend its regulations to permit
NFA to expand the EasyFile electronic 1-FR-IB submissions of IBs to
include the mandatory filing of certified Form 1-FR-IBs through the use
of an electronic file in the Portable Document Format (".pdf
format"). The Commission has determined to amend its Regulations 1.10
and 1.31 as set forth herein to effectuate this purpose. NFA has not
requested the amendment of regulations to require mandatory electronic
filing of certified FOCUS Reports from IBs that are SEC registered B/Ds
as NFA currently does not have the systems capability to receive FOCUS
reports through EasyFile.\7\ However, NFA has indicated that it will
develop a mechanism to receive certified FOCUS Reports from IBs
electronically in the future, and the Commission has determined to also
amend its Regulation 1.10 to accommodate the future electronic filing
of such reports by requiring such reports to be submitted in accordance
with NFA rules, either electronically or in paper form.
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\7\ NFA's petition states that EasyFile is not yet equipped to
handle the receipt of FOCUS reports from IBs. Uncertified FOCUS
reports of IBs are still submitted to NFA electronically using
WinJammer.
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NFA previously petitioned the Commission for rule amendments in
2005 to enable NFA to implement mandatory electronic filing of
commodity pool certified annual reports using the Web-based structure
of EasyFile system, which amendments were adopted by the Commission and
became effective in March 2006.\8\ As a result of these amendments and
NFA's rules, currently all certified commodity pool annual reports must
be received by NFA electronically, through the use of electronic files
in the Portable Document Format (".pdf format").
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\8\ 71 FR 8939 (Feb. 22, 2006).
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NFA's electronic filing system for certified financial statements
from IBs will similarly require that the IB submit an electronic .pdf
file of the entire certified statement, including the financial
information, footnotes, auditors' statement, and any necessary
reconciliation of the IB's certified financial statement and most
recent unaudited 1-FR. Because the IB will have already electronically
submitted the unaudited Form 1-FR-IB to NFA through EasyFile, the IB
will not have to re-enter any data from the certified statement unless
that statement includes a reconciliation and difference from the
unaudited Form 1-FR-IB of the same date. When the IB submits the
electronic filing, NFA's EasyFile system prompts the submitter to read
and to indicate agreement to an electronic oath or affirmation. The
submitter already will have securely accessed NFA's system and had his
or her identification authenticated through the use of his or her
unique user identification and password combination, established and
maintained by the firm's Security Manager. The IB's Security Manager
can establish users and assign them abilities to enter data and/or
submit the report and data in the NFA electronic filing system. The IB
is responsible for ensuring that only persons who are duly authorized
to bind the IB, in accordance with Regulation 1.10(d)(4), are granted
the permission, through the use of a unique user identification and
password, to submit the report and make the required oath or
affirmation. This oath or affirmation is made with respect to the .pdf
file of the annual report and any information entered into the system
from the certified statement. The electronic version of the oath or
affirmation will appear in dialog boxes when reports or data are
submitted, and completion of the submission will require an affirmative
acceptance of the oath or affirmation by the user. In clarification of
the proposing release, a Personal Identification Number is not used to
authenticate the identity of the authorized representative in the NFA's
EasyFile system. The EasyFile system architecture uses a secure user
identification and password combination for the same purpose, to
authenticate the identity of the authorized user submitting the report.
II. Comments
NFA was the only entity to file a comment letter on the proposed
amendments. NFA supported the proposed amendments and stated that
"(t)hese amendments will simplify the filing process and allow it to
keep pace with technological changes without
[[Page 67464]]
losing any of the protections provided by the current requirements".
NFA also commented in support of the additional amendment to require
IBs that file FOCUS reports in lieu of Form 1-FR to file electronically
or in paper copy, according to NFA instructions, which will permit NFA
to implement electronic filing of such reports when it develops the
systems capacity to receive them electronically. NFA staff also
verbally commented that the current EasyFile system architecture used
by IBs and commodity pool operators does not include the use of a
Personal Identification Number as discussed in the proposing release,
but instead uses a unique user identification and password combination
that fully satisfies the same purpose for the authentication of the
authorized person making the electronic oath or affirmation. The
Commission has therefore changed the language proposed for Regulation
1.10(d)(4)(iii) to clarify that in the case of a Form 1-FR filed via
electronic transmission in accordance with procedures established or
approved by the Commission, such transmission must be accompanied by
the Personal Identification Number or other user authentication
assigned under such procedures to the authorized signer, and such
Personal Identification Number or other user authentication will
constitute and become a substitute for the manual signature of such
authorized representative.
III. Amendments
Regulation 1.10(b)(2)(iii) requires that a Form 1-FR certified by
an independent public accountant that is filed by an FCM, IB or
applicant for registration as an FCM or IB, must be filed in paper form
and may not be filed electronically. The Commission is amending
Regulation 1.10(b)(2)(iii) to provide that a certified Form 1-FR
required from an IB, or applicant for IB registration, must be filed
electronically with NFA through compliance with NFA's electronic filing
procedures, and that a paper copy with the original, manually signed
certification must be maintained by the IB in accordance with
Regulation 1.31.
The Commission also is amending Regulation 1.10(d)(4)(ii), by
revising the second sentence and redesignating the revised sentence as
Regulation 1.10(d)(4)(iii). Regulation 1.10(d)(4)(iii) would confirm
that, in the case of a Form 1-FR-IB filed via electronic transmission
in accordance with NFA procedures approved by the Commission, such
transmission must be accompanied by the user authentication assigned
under such procedures to the authorized signer, and the use of such
user authentication will constitute and become a substitute for the
manual signature of the authorized signer for the purpose of making the
required oath or affirmation.
In addition, the Commission is amending Regulation 1.10(h), to
provide that an IB that is permitted to file a copy of its certified
FOCUS Report in lieu of Form 1-FR file such report either in paper
form, or through compliance with NFA's electronic filing procedures,
according to the rules of NFA. The amendment to Regulation 1.10(h) also
will require that a paper copy with the original, manually signed
certification be maintained by the IB in accordance with Regulation
1.31 for any IB FOCUS Report electronically filed with NFA. Lastly, the
Commission is amending Regulation 1.31(d) to provide that paper copies
of electronically filed certified Forms 1-FR or FOCUS Reports must be
retained by the IB in hard copy with the original manually signed
certification. These amendments implement mandatory electronic filing
of certified annual reports on Form 1-FR-IB with NFA, as NFA has
petitioned, and allow electronic filing by IBs of certified FOCUS
reports as NFA may in the future require.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act ("RFA"), 5 U.S.C. 601 et seq.,
requires that agencies, in rulemaking consider the impact of those
rules on small businesses. The Commission previously has 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.\9\ These amendments will not place any additional burdens
upon IBs that are small businesses since all such parties already are
subject to the financial reporting requirements under Regulation 1.10
and already comply with the electronic filing of uncertified reports
through NFA's electronic filing system. The Commission's proposal
solicited public comment on this analysis.\10\ No comments were
received. Accordingly, the Chairman, on behalf of the Commission,
hereby certifies, pursuant to 5 U.S.C. 605(b), that the action taken
herein will not have a significant economic impact on a substantial
number of small entities.
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\9\ 47 FR 18618 (April 30, 1982).
\10\ 71 FR 54789 at 54791 (September 19, 2006).
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B. Paperwork Reduction Act
This rulemaking alters the method of collection for a required
collection of information under Part 1 of the Commission's rules, but
is not anticipated to change the burden under such collection as the
actual financial reporting requirement has not changed and all the
parties subject to such requirement already must use NFA's electronic
filing system for the filing of uncertified reports. As required by the
Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), the Commission
submitted a copy of this section to the Office of Management and Budget
("OMB") for its review. No comments were received in response to the
Commission's invitation in the notice of proposed rulemaking \11\ to
comment on any change in the potential paperwork burden associated with
these rule amendments.
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\11\ Id.
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C. Cost-Benefit Analysis
Section 15(a) of the Act, as amended by Section 119 of the CFMA,
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 regulation outweigh its costs. Rather, Section 15(a) simply
requires the Commission to "consider the costs and benefits" of its
action.
Section 15(a) of the Act 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 regulation 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.
The Commission's proposal contained an analysis of its
consideration of these costs and benefits and solicited public comment
thereon.\12\ No comments were received with respect to the analysis of
the Commission's consideration. Therefore, pursuant to such
consideration, the Commission has decided to adopt these amendments as
discussed above.
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\12\ 71 FR at 54791-2.
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[[Page 67465]]
List of Subjects in 17 CFR Part 1
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
Accordingly, 17 CFR part 1 is amended as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a,
13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity
Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554,
114 Stat. 2763 (2000).
0
2. Section 1.10 is amended by:
0
a. revising paragraph (b)(2)(iii);
0
b. revising paragraph (d)(4)(ii);
0
c. adding paragraph (d)(4)(iii); and
0
c. revising paragraph (h), to read as follows:
Sec. 1.10 Financial reports of futures commission merchants and
introducing brokers.
* * * * *
(b) * * *
(2) * * *
(iii) A Form 1-FR required to be certified by an independent public
accountant in accordance with Sec. 1.16 which is filed by a futures
commission merchant or applicant for registration as a futures
commission merchant must be filed in paper form and may not be filed
electronically. A Form 1-FR required to be certified by an independent
public accountant in accordance with Sec. 1.16 which is filed by an
introducing broker or applicant for registration as an introducing
broker must be filed electronically in accordance with NFA's electronic
filing procedures, and a paper copy of such filing with the original
manually signed certification must be maintained by such introducing
broker or applicant in accordance with Sec. 1.31.
* * * * *
(d) * * *
(4) * * *
(ii) If the registrant or applicant is registered with the
Securities and Exchange Commission as a securities broker or dealer,
the representative authorized under Sec. 240.17a-5 of this title to
file for the securities broker or dealer its Financial and Operational
Combined Uniform Single Report under the Securities Exchange Act of
1934, Part II, Part IIA, or Part II CSE.
(iii) In the case of a Form 1-FR filed via electronic transmission
in accordance with procedures established or approved by the
Commission, such transmission must be accompanied by the Personal
Identification Number or other user authentication assigned under such
procedures to the authorized signer, and the use of such Personal
Identification Number or other user authentication will constitute and
become a substitute for the manual signature of the authorized signer
for the purpose of making the oath or affirmation referred to in this
paragraph.
* * * * *
(h) Filing option available to a futures commission merchant or an
introducing broker that is also a securities broker or dealer. Any
applicant or registrant which is registered with the Securities and
Exchange Commission as a securities broker or dealer may comply with
the requirements of this section by filing (in accordance with
paragraphs (a), (b), (c), and (j) of this section) a copy of its
Financial and Operational Combined Uniform Single Report under the
Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE
(FOCUS Report), in lieu of Form 1-FR; Provided, however, That all
information which is required to be furnished on and submitted with
Form 1-FR is provided with such FOCUS Report; and Provided, further,
That a certified FOCUS Report filed by an introducing broker or
applicant for registration as an introducing broker in lieu of a
certified Form 1-FR-IB must be filed according to NFA rules, either in
paper form or electronically in accordance with NFA electronic filing
procedures, and if filed electronically, a paper copy of such filing
with the original manually signed certification must be maintained by
such introducing broker or applicant in accordance with Sec. 1.31.
* * * * *
0
3. Section 1.31 is amended by revising paragraph (d) to read as
follows:
Sec. 1.31 Books and records; keeping and inspection.
* * * * *
(d) Trading cards, documents on which trade information is
originally recorded in writing, written orders required to be kept
pursuant to Sec. 1.35(a), (a-1)(1), (a-1)(2) and (d), and paper copies
of electronically filed certified Forms 1-FR and FOCUS Reports with the
original manually signed certification must be retained in hard-copy
for the required time period.
* * * * *
Issued in Washington, DC, on November 14, 2006 by the
Commission.
Eileen Donovan,
Acting Secretary of the Commission.
[FR Doc. E6-19533 Filed 11-21-06; 8:45 am]
BILLING CODE 6351-01-P