[Federal Register: February 20, 1998 (Volume 63, Number 34)]
[Rules and Regulations]
[Page 8566-8571]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20fe98-5]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 30, 33, and 190
Distribution of Risk Disclosure Statements by Futures Commission
Merchants and Introducing Brokers
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rules.
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SUMMARY: On September 10, 1997, the Commodity Futures Trading
Commission ("CFTC" or "Commission") published for comment proposed
amendments to its rules concerning the mandatory risk disclosure
obligations of futures commission merchants ("FCMs") and introducing
brokers ("IBs") to their customers (the "Proposal").\1\
Specifically, the Commission proposed to relieve FCMs and IBs from the
requirements to furnish certain defined customers with mandatory risk
disclosure statements and to receive from such customers a signed
acknowledgment of receipt of such statements pursuant to Rule 1.55(a)
(risk disclosure pertaining to domestic futures); Rule 30.6(a) (risk
disclosure pertaining to foreign futures or foreign options); Rule
33.7(a) (risk disclosure pertaining to domestic exchange-traded
commodity options); Rule 1.65(a)(3) (risk disclosure for customers
whose accounts are transferred other than at the customer's request to
another FCM or IB) and Rule 190.10(c) (disclosure pertaining to
treatment in bankruptcy of non-cash property held by an FCM as margin
for commodity interest contracts). The comment period for the Proposal
was sixty days and closed on November 10, 1997.
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\1\ 62 FR 47612 (September 10, 1997).
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The Commission has carefully considered the comments received on
the Proposal, and based upon its review of these comments and its
reconsideration of the proposed rule amendments, it is adopting the
Proposal as modified herein.
EFFECTIVE DATE: April 21, 1998.
FOR FURTHER INFORMATION CONTACT:
Thomas E. Joseph, Attorney-Adviser, Division of Trading and Markets,
Commodity Futures Trading Commission, 1155 21st Street, N.W.,
Washington D.C. 20581. Telephone (202) 418-5450.
SUPPLEMENTARY INFORMATION:
I. Background
CFTC rules require FCMs and IBs to provide customers with
Commission-approved disclosure statements describing the risks of
trading in domestic (and, as applicable, foreign) commodity futures and
options and to receive written acknowledgment of receipt of such
statements prior to opening an account for the customer.\2\ In
addition, Commission Rule 190.10(c) requires an FCM to provide a
customer with a disclosure statement concerning the treatment in
bankruptcy of any non-cash property deposited as margin at the FCM by a
customer before the FCM may accept this property from the customer to
margin, guarantee or secure any commodity interest contract.\3\ As
discussed more fully in the Proposal, the Commission, based upon its
previous efforts to simplify disclosure obligations of Commission
registrants, believed that it was appropriate to provide FCMs and IBs
with relief from certain disclosure and bankruptcy statement
requirements in the context of accounts for specified customers and
thus published for comment proposed amendments to the risk disclosure
and bankruptcy rules.\4\
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\2\ See Rule 1.55(a) (risk disclosure requirement concerning
trading domestic commodity futures); Rule 30.6(a) (risk disclosure
requirement concerning non-United States commodity futures or
options contracts); and Rule 33.7(a) (risk disclosure requirement
concerning domestic, exchange-traded commodity options).
\3\ Commission Rule 190.10 does not require an FCM to obtain a
customer's written acknowledgment of receipt of this statement.
\4\ See 62 FR at 47612-13 (discussing previous Commission
efforts to reduce and streamline disclosure obligations of
registrants).
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The comment period for the Proposal closed on November 10, 1997,
although the Commission considered comments received after this date.
The Commission received comment letters from: (1) The Chicago Board of
Trade ("CBOT"); (2) the Government Finance Officers Association
("GFOA"); (3) the Chicago Mercantile Exchange ("CME"); (4) the
Futures Industry Association ("FIA"); (5) the National Futures
Association ("NFA"); and (6) the Association of the Bar of the City
of New York, Committee on Futures Regulation ("NYCBar"). Only the
GFOA opposed the Commission's effort to modify its risk disclosure
rules, although the GFOA alternatively requested that the Commission
delete government entities from the list of customers for whom this
relief can be claimed. The remaining five commenters generally
supported the Proposal but suggested certain modifications, as
discussed more fully below. The following discussion focuses
principally on the comments received on the Proposal and the
modifications to the Proposal made in response to these comments.
Additional background information on these final rules is found in the
Federal Register release setting forth the Proposal.\5\
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\5\ 62 FR 47612 (September 10, 1997).
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II. Discussion
The rule amendments adopted herein eliminate the requirement that
FCMs and IBs provide specified customers, defined in Rule 1.55(f), with
Commission-mandated risk disclosure statements and obtain from these
customers a written acknowledgment of receipt of the risk disclosure
statement, as required by Rules 1.55(a), 1.65(a)(3), 30.6(a), and
33.7(a), before opening a commodity futures or options account for
these customers. Additionally, the amendments relieve FCMs of the
obligation to furnish these customers with the bankruptcy disclosure
statement required by Rule 190.10(c) before accepting non-cash property
from such customers to margin a commodity interest contract. FCMs or
IBs will remain free to provide customers specified in proposed Rule
1.55(f) with the Commission-approved risk disclosure statement without
obtaining a written acknowledgement of receipt of this statement from
these qualifying customers.\6\
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\6\ FCMs will also remain free to provide all customers with the
disclosure statement concerning the treatment in bankruptcy of non-
cash property held by an FCM to margin, secure or guarantee a
commodity interest contract.
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[[Page 8567]]
The categories of customers specified in Rule 1.55(f) for whom an
FCM or IB may claim the relief adopted herein are based substantially
upon the categories of eligible swap participants in part 35 of the
Commission rules \7\ and eligible participants in part 36 of the
Commission rules.\8\ Rule 1.55(f) provides FCMs and IBs with clear,
objective criteria for identifying the customers to whom delivery of
the Commission-approved disclosure statements is not required. In this
regard, the Commission notes that the rule contains no specific
requirement that FCMs and IBs maintain with their books and records any
information in addition to that already required by other Commission
rules in order to identify a particular customer's eligibility for the
relief provided by the proposed amendments.\9\ However, FCMs and IBs
are required to assure that mandated disclosure statements are provided
to customers other than those to whom this relief applies. In order to
substantiate compliance with such disclosure requirements and exercise
meaningful supervision over customer accounts, FCMs and IBs should
maintain and review on a regular basis adequate documentation relevant
to establish the qualifications of the customers for whom the relief
adopted herein will be claimed and to confirm the identities of
customers to whom specified risk disclosures have been made and from
whom acknowledgments have been obtained.\10\
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\7\ See CFTC Rule 35.1(b)(2). Part 35 of the Commission's rules
exempts certain swap agreements from most provisions of the Act and
Commission rules.
\8\See CFTC Rule 36.1(c)(2). Part 36 of the Commission's rules
exempts certain contract market transactions from specified
provisions of the Act and Commission regulations thereunder. Parts
35 and 36 of the Commission rules were adopted pursuant to authority
set forth in Section 4(c) of the Act, 7 U.S.C. 6(c). See 58 FR 5587
(January 22, 1993) (adopting Part 35) and 60 FR 51323 (October 2,
1995) (adopting Part 36). Section 4(c)(2) of the Act, 7 U.S.C.
6(c)(2), requires that, among other conditions, any agreement,
contract or transaction exempted from any provision of the Act
pursuant to Section 4(c) of the Act must "be entered into solely
between appropriate persons," who are defined in Section 4(c)(3)
(A) through (J) of the Act, 7 U.S.C. 6(c)(3)(A)-(J). Thus, the lists
of eligible swap participants and eligible participants were, in
turn, modeled closely on the list of appropriate persons provided in
Section 4(c) of the Act.
\9\ For example, FCMs and IBs would be required to obtain and
maintain the information required by CFTC Rule 1.37 concerning all
customers, including customers listed in Rule 1.55(f).
\10\ Rule 166.3 requires FCMs and IBs to supervise diligently
the handling of commodity interest accounts.
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The comments received on the Proposal are summarized below. The
Commission has carefully considered these comments. For the reasons
discussed herein, the Commission is adopting these rule amendments
substantially as proposed, although the Commission is removing
government entities from the list of qualifying customers set forth in
Rule 1.55(f) \11\ and deleting language, which commenters felt was
redundant, from Rule 1.55(f) that had referred to the obligation of any
FCM or IB claiming this relief to "provide such disclosure as is
material in the circumstances."
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\11\ The Commission's reasons for deleting "government
entities" from the categories of customers for whom the relief
adopted may be claimed is discussed below in the subsection entitled
Government Entities.
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Comment in Opposition to the Proposal
The GFOA objected to the Proposal and recommended that no change be
made in the Commission's risk disclosure requirements. The GFOA
stressed the difficulty of developing generalized standards to assess
financial sophistication and the likelihood that the proposed rule
amendments will erode customer protections. However, as the Commission
emphasized in the Proposal, its previous efforts to consolidate and
reduce disclosure obligations for registrants have not negatively
affected the public interest. Moreover, the Commission believes that
the stringent criteria set forth in Rule 1.55(f), along with the
continuing disclosure obligations set forth in newly-designated Rule
1.55(g), will allow it to eliminate requirements for standardized risk
disclosures and customer acknowledgments of that disclosure for certain
specified customers without eroding overall customer protection. Thus,
after considering GFOA's objections, the Commission continues to
believe that it would not be contrary to the public interest to adopt
the Proposal, as modified herein, and has decided to adopt these final
rule amendments.
Categories of Customers for Whom Relief May Be Claimed
All the commenters urged the Commission to reconsider the
categories of parties for whom FCMs and IBs can claim the relief
adopted herein. Most generally, the NYCBar questioned "the creation of
a further group of `sophisticated' customers" in defining the
categories of customers for whom FCMs or IBs can claim the risk
disclosure relief and urged the Commission to adopt an already existing
standard such as that used by the Commission for defining qualified
eligible participants ("QEPs"), qualified eligible clients ("QECs")
or appropriate persons,\12\ or used by the Securities and Exchange
Commission ("SEC") to define accredited investor, qualified
institutional buyer or qualified purchaser.\13\ The NYCBar commented
that creation of a new class of customers will lead to even more
paperwork as FCMs or IBs try "to insure that they receive the
appropriate representations permitting them to invoke the expected
relief." The NYCBar also suggested that the policy reasons behind the
selection of the criteria used to define the customers set forth in
Rule 1.55(f) were not sufficiently explained.
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\12\ Commission Rule 4.7, 17 CFR 4.7, defines the terms QEP and
QEC. The term "appropriate persons" is defined in Section 4(c) of
the Act.
\13\ The term "accredited investor" as used in SEC Regulation
D is defined at 17 CFR 230.501. The term "qualified institutional
buyer" is defined at 17 CFR 230.144A. The term "qualified
purchaser" is defined at 15 U.S.C. 80-2(a)(51)(A) and 17 CFR
270.2a51-1. See 62 FR 17512 (April 9, 1997) (adopting, among other
rules, 17 CFR 270.2a51-1).
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As stated in the Proposal, the categories of customers for whom an
FCM or IB can claim the risk disclosure relief are based substantially
upon the existing definitions of eligible swap participant and eligible
Part 36 participant, which themselves are based upon the definition of
appropriate persons contained in the Act. The Commission explained that
these definitions were "appropriate models for the definitions set
forth in proposed Rule 1.55(f) inasmuch as the Part 35 and 36 rules
exempt parties from providing mandatory risk disclosure statements * *
* in connection with transactions covered by these rules." \14\
Modifications were made to the Part 35 and 36 definitions only to
assure that the Proposal did not cause some commodity pools to be given
risk disclosure statements when then-current Rule 1.55 did not require
any pool to receive such a statement and to prevent applying criteria
from the Part 35 and 36 rules that made little sense in the context of
the Proposal.\15\
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\14\ 62 FR at 47613.
\15\ Id.
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Moreover, as discussed more fully below, the Commission does not
believe that the criteria applicable to securities regulations or to
other commodities transactions are as relevant as the Part 35 and Part
36 standards in identifying which categories of FCM or IB customers do
not require the protections afforded by mandatory risk disclosure. By
contrast, the criteria set forth in the Part 35 and Part 36 rules
provide a reasonable basis for protecting the public interest and
limiting the affected categories of commodity futures or options
customers to those persons
[[Page 8568]]
whose wealth, line of business or other proxies of financial
sophistication render them unlikely to require the protections afforded
by standardized risk disclosure. Therefore, with the exception of
removing government entities, the Commission has adopted in Rule
1.55(f) the categories of customers for whom FCMs and IBs may claim
this relief, as proposed, based upon the reasons explained below.
Government Entities
As an alternative to its recommendation that the Commission not
adopt the Proposal, the GFOA urged that government entities be removed
from the list of qualifying customers. The GFOA emphasized that the
proposed rule did not distinguish between small, local governmental
organizations and large state treasury operations. In this respect,
GFOA commented that:
Finance officers in many of the smallest jurisdictions often
have additional responsibilities as far removed from finance as
handling public works projects and supervising public safety
officers. These small jurisdictions often rely on public servants
who may have little expertise with commodities. At a minimum, they
should be able to expect full disclosure regarding the risk of
commodities futures prior to deciding whether or not to open a
commodities futures account and to commit taxpayer funds to such an
investment.
Further, the GFOA commented that "asset-based or, similarly portfolio-
size measurement tests have proved to be ineffective as predictors of
problems. Large entities and investors, both public and private, have
been the victims of misrepresentations and other misconduct just as
small ones have." \16\
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\16\ In its comment letter, the GFOA noted that it had supported
the inclusion of local governments among the entities deemed
"eligible swap participants" by the Part 35 rules because it
believed that to exclude such entities would have been an
unwarranted federal intrusion into what is properly a state
function--that is, the regulation of allowable investment activity
by a state and its political subdivisions. The GFOA further noted
that, in its comments on the Part 35 rules, it recommended that the
Commission require improved disclosure regarding the types of
contracts being entered into and the risks involved in such
transactions. The GFOA also stated that it had opposed the
Commission's Part 36 professional trading market exemption.
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The GFOA is a 13,500-member professional association of state and
local government finance officials and other public finance specialists
whose responsibilities include debt, cash and pension fund management
and is in a unique position to comment upon the financial
sophistication and disclosure needs of governmental organizations. The
Commission, based upon the GFOA's comments, believes that government
entities, especially those in smaller jurisdictions, would benefit from
continued receipt of the mandatory risk and bankruptcy disclosure
statements. Moreover, the Commission has taken note, in particular, of
the GFOA's comments that taxpayers deserve the full protection of the
CFTC's risk disclosure regulations. Therefore, after careful
consideration of the GFOA's comments, the Commission has decided to
remove government entities from the list of customers for whom FCMs or
IBs may claim the relief provided herein.
Natural Persons
The CBOT, CME, FIA and NFA urged the Commission to allow FCMs and
IBs to claim the proposed relief for customers who are natural persons
who meet financial criteria significantly less stringent than the $10
million total asset standard proposed in the rule. The two Chicago
futures exchanges recommended that FCMs and IBs be allowed to claim the
relief for natural persons who are accredited investors as defined in
SEC Regulation D. The FIA urged the Commission to allow FCMs and IBs to
claim the relief for natural persons with a net worth of $1 million
while the NFA suggested that the Commission apply the same standard
used to define a natural person who is a QEP under CFTC Rule 4.7(a).
These commenters generally argued that the standards applied to
regulated exchange-traded futures should be less onerous than those
applied in unregulated markets such as the swaps market. The CBOT, in
particular, believed that it was not realistic to require an individual
to have the same level of assets as a qualifying corporation or to have
asset holdings twice as large as those required for a qualifying
investment company.
As already mentioned, the total asset test is a proxy for financial
sophistication. Trading futures even on regulated exchanges involves
different risks than investments in securities. Thus, the private
offering safeharbor codified in SEC Regulation D is not necessarily
relevant to determining when a futures customer is not in need of
standardized risk disclosure.\17\ Moreover, the Commission does not
believe that in the context of this relief, it is unreasonable for
natural persons to be required to have asset holdings larger than
entities which are directly involved in the financial industry and are
otherwise regulated since such entities would be less likely than
individuals to require the protections afforded by mandatory risk
disclosure.
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\17\ This point is also applicable to FIA's suggestion
concerning the net worth criteria for natural persons inasmuch as
the SEC's Regulation D defines an "accredited investor" to include
a natural person with a net worth of $1 million.
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Perhaps more relevant to the issues raised by the proposal is the
suggestion that FCMs and IBs be able to claim the relief with respect
to natural persons who qualify as QEPs under CFTC Rule 4.7(a). Rule
4.7(a) relieves CPOs from providing eligible clients who invest in
qualifying pools with a Commission required Disclosure Document (which
normally would include a standardized risk disclosure statement),
provided that any offering memorandum must include all disclosures
necessary to make the information contained therein not misleading.
However, a pool participant's potential losses are generally limited to
the amount of his or her investment in the pool, while persons trading
directly in the futures markets (i.e., customers of an FCM or IB) are
exposed potentially to losses beyond amounts deposited as initial
margin and are responsible for any deficits that occur in their
accounts as a result of adverse price movements. Given the potentially
disparate risk exposures assumed by pool investors and customers of IBs
and FCMs, the QEP criteria would not necessarily be a reasonable basis
for defining customers for whom an FCM and IB can claim the relief
adopted herein.\18\
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\18\ The Commission notes that natural persons, along with other
specified persons, may qualify as a QEC of a CTA under Rule 4.7(b).
QECs are potentially exposed to unlimited liability in connection
with the trading of their commodity futures accounts. Some but not
all QECs will be among the categories of customers listed in Rule
1.55(f). Under CFTC rules in effect prior to the rule amendments
adopted herein, all QECs received a standardized risk disclosure
statement from an FCM or IB before opening a commodity trading
account although AECs would not receive a Disclosure Document from a
CTA who correctly claimed the 4.7(b) relief. Given that QECs have
received the full protections of the CFTC risk disclosure rules
governing FCMs and IBs, the Commission does not believe that the QEC
criteria are appropriate for determining which persons are no longer
in need of the protections afforded by the standardized FCM/IB risk
disclosure statements.
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Requirement That FCMs and IBs Claiming Relief Disclose Material
Information
FIA and NFA urged the Commission to eliminate from proposed Rule
1.55(f) the statement that FCMs and IBs claiming relief "provide such
disclosure as is material in the circumstances." FIA and NFA commented
that the requirement could be viewed as imposing a higher disclosure
standard on FCMs and IBs claiming relief under the amendments than on
other FCMs and IBs and, in any event, it was
[[Page 8569]]
duplicative of disclosure obligations recognized in then-current Rule
1.55(f) (redesignated Rule 1.55(g) by this final rule).\19\
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\19\ Newly-designated Rule 1.55(g) provides: "This section
[Rule 1.55] does not relieve a futures commission merchant or
introducing broker from any other disclosure obligation it may have
under applicable law."
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As the Commission stated in the Proposal, FCMs and IBs currently
have obligations independent of the duty to deliver the standardized
risk disclosure statement to disclose to customers information that
would be material in the circumstances. These rule amendments are not
intended to enlarge the scope of an FCM's or IB's existing duties.
Given that the proposed wording may create confusion concerning the
disclosure obligations for FCMs and IBs which claim this relief, the
Commission has decided to delete the above-cited language from Rule
1.55(f). As the commenters noted, however, FCMs and IBs continue to
have disclosure obligations to customers for whom this relief has been
claimed as recognized in newly-designated Rule 1.55(g).\20\ Moreover,
as the Commission stated when it first adopted Rule 1.55(g), "the
essential purpose of the rule [is] to confirm the existing obligations
of an FCM or IB under the law to disclose material information to its
customers." \21\
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\20\ The NYCBar also urged the Commission to define "the scope
and duty of such remaining [risk] disclosure obligations." As the
Commission stated in the Proposal, these minimum disclosure
obligations arise under the Act, under state law and under common
law, and may differ in particular circumstances. See 62 FR at 47614-
15. Thus, the scope of an FCM's or IB's disclosure obligations will
be affected by the particular facts surrounding a transaction and by
the Act, by state law and by common law, as interpreted by the
courts or in administrative proceedings. See id. at 47615 n.22.
\21\ 50 FR 5380, 5381 (February 8, 1985).
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Obligation That FCM or IB Assure That Customers for Whom Relief Is
Claimed Qualify for Such Relief
FIA argued that FCMs or IBs should be able to claim the proposed
relief and be relieved of any disclosure obligation if a customer's
investment adviser or CTA represents that the client qualifies for
relief and that the adviser or the CTA has made all necessary
disclosure to such client. FIA contended that an institutional client's
primary market relationship is with its investment adviser or CTA and
not the FCM or IB and, thus, a CTA or adviser should have primary
responsibility for disclosure. FIA also urged the Commission to
consider whether CTAs and investment advisers, and not the carrying
FCMs, should be responsible for providing their clients with the
necessary risk and related disclosures in all circumstances, without
regard to the financial status of those clients.
FCMs and IBs have obligations under Commission Rules 166.3, 1.37
and, as designated herein, 1.55(g) to supervise customer accounts
diligently, to maintain accounts in the name of the ultimate customer,
and to provide customers with adequate disclosure. In addition, the
Commission has stated, and current law has already recognized, that an
FCM's or IB's disclosure obligations vary with the functions and
responsibilities that an FCM or IB undertakes on behalf of a
customer.\22\ This current rulemaking is not intended to shift an FCM's
or IB's existing obligations to other parties, such as a CTA or
investment adviser, and therefore, the Commission has not made any
change in the Proposal in response to this comment.
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\22\ See 50 FR at 5381-82 ("the extent of the required risk
disclosure [by an FCM or IB] will vary with the precise nature of
the customer relationship and with the degree of customer reliance
on an FCM's or IB's advice").
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Financial and Segregation Interpretation No. 12
The CBOT, CME, FIA and NFA suggested that the Commission eliminate
the requirement under Financial and Segregation Interpretation No. 12
that FCMs receive a signed, Commission-mandated subordination agreement
from customers before the customer may have segregated funds held in
foreign depositories. The Commission notes that on December 30, 1997,
it published a concept release soliciting public comment on how to
address risks related to holding segregated funds offshore or in
foreign currencies.\23\ Since the subordination agreement has been one
means by which the Commission has addressed these risks,\24\ comments
concerning the need for or effectiveness of the subordination agreement
requirement would best be considered by the Commission in connection
with the December 30, 1997 concept release and not as part of this
rulemaking exercise.\25\
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\23\ 62 FR 67841 (December 30, 1997).
\24\ See 53 FR 46911, 46913 (November 21, 1988) (release
adopting Financial and Segregation Interpretation No. 12).
\25\ Comments concerning the issues addressed in the concept
release, including those related to the subordination agreement
requirement, should be received by the Commission on or before March
2, 1998. See 62 FR 67841.
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Electronic Distribution of Risk Disclosure Statement
FIA and NFA also urged the Commission to allow FCMs/IBs to
establish customer acknowledgment of receipt of electronically-
distributed risk disclosure statements through means of a unique
customer identifier. Such a change would bring FCM and IB disclosure
rules into line with similar, recently-amended rules for CPOs and CTAs
\26\ and permit FCMs and IBs to deliver the required risk disclosure
statements electronically to all categories of customers.
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\26\ See 62 FR 39104 (July 22, 1997) (amending Rules 4.21 and
4.31).
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The Commission did not address the question of a customer's
"electronic" acknowledgment of risk disclosure statements in the
Proposal. Any change in current procedures would clearly affect the
rights of commodity futures customers beyond those persons identified
in Rule 1.55(f), and such customers should be allowed adequate notice
and opportunity to comment on any possible changes to current rules.
However, although the Commission believes that this suggested change is
outside the scope of the current rulemaking, the Commission recognizes
the importance of the issues raised by FIA and NFA and will consider
undertaking a future rulemaking or other action to address these
issues.\27\
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\27\ CFTC staff is reviewing issues related to the electronic
distribution and acknowledgment of documents and will provide the
Commission with recommendations on how best to address these issues.
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III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act ("RFA"), 5 U.S.C. 601-611,
requires that agencies, in promulgating final rules, consider the
impact of those rules on small businesses. The rules discussed herein
will affect FCMs and IBs. The Commission has already established
certain definitions of "small entities" to be used by the Commission
in evaluating the impact of its rules on such small entities in
accordance with the RFA. FCMs have been determined not to be small
entities under the RFA.
With respect to IBs, the Commission has stated that it is
appropriate to evaluate within the context of a particular rule whether
some or all IBs should be considered to be small entities and, if so,
to analyze the economic impact on such entities at that time. These
rule amendments would not require any IB to alter its current method of
doing business. Instead the rule amendments provide IBs with relief
from certain disclosure and recordkeeping requirements with respect to
certain identified customers. Presumably, an IB would only choose to
make use of this relief if it were cost-
[[Page 8570]]
effective to do so. Further, these rule amendments impose no
additional burden or requirements on IBs and, thus, should not have a
significant economic impact on a substantial number of IBs.
B. Paperwork Reduction Act
When publishing final rules, the Paperwork Reduction Act of 1995
(Pub. L. 104-13 (May 13, 1995)) imposes certain requirements on federal
agencies (including the Commission) in connection with their conducting
or sponsoring any collection of information as defined by the Paperwork
Reduction Act. There is no burden associated with the rule amendments
to Rule 1.55 or Rule 1.65. While these rule amendments have no burden,
the group of rules (3038-0024) of which these rules are a part has the
following burden:
Average burden hours per response: 128
Number of Respondents: 3,148
Frequency of response: 36
Three OMB approved collections are affected by the adoption of
these rule amendments. In compliance with the Act, this final rule
informs the public of:
(1) The reasons the information is planned to be and/or has been
collected; (2) the way such information is planned to be and/or has
been used to further the proper performance of the functions of the
agency; (3) an estimate, to the extent practicable, of the average
burden of the collection (together with a request that the public
direct to the agency any comments concerning the accuracy of this
burden estimate and any suggestions for reducing this burden); (4)
whether responses to the collection of information are voluntary,
required to obtain or retain a benefit or mandatory; (5) the nature
and extent of confidentiality to be provided, if any; and (6) the
fact that an agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it
displays a currently valid OMB control number.
The Commission previously submitted these rule amendments in
proposed form and its associated information collection requirements to
the Office of Management and Budget. The Office of Management and
Budget approved the associated information collection on January 6,
1998.
3038-0007--Regulation of Domestic Exchange-Traded Commodity
Options. The burden associated with collection 3038-0007, including
these final rule amendments, is as follows:
Average burden hours per response: 50.57
Number of Respondents: 190,422
Frequency of response: 1,111
The burden associated with Rule 33.7 is as follows:
Average burden hours per response: 0.08
Number of Respondents: 175
Frequency of response: 115
3038-0021--Regulations Governing Bankruptcies of Commodity Brokers.
The burden associated with collection 3038-0021, including these final
rule amendments, is as follows:
Average burden hours per response: 0.35
Number of Respondents: 472
Frequency of response: 34
The burden associated with Rule 190.10(c) is as follows:
Average burden hours per response: 0.05
Number of Respondents: 235
Frequency of response: 8
3038-0035--Rules Relating to the Offer and Sale of Foreign Futures
and Options. The burden associated with collection 3038-0035, including
these final rule amendments, is as follows:
Average burden hours per response: 15.70
Number of Respondents: 2,832
Frequency of response: 48
The burden associated with Rule 30.6 is as follows:
Average burden hours per response: 0.60
Number of Respondents: 360
Frequency of response: 4
Persons wishing to comment on the information which would be
required by these amended rules should contact the Desk Officer, CFTC,
Office of Management and Budget, Room 10202, NEOB, Washington, DC
20503, (202) 395-7340. Copies of the information collection submission
to OMB are available from the CFTC Clearance Officer, 1155 21st Street,
N.W., Washington, DC 20581, (202) 418-5160.
List of Subjects
17 CFR Part 1
Customer protection, Risk disclosure statements, Commodity futures.
17 CFR Part 30
Foreign futures and options transactions, Customer protection, Risk
disclosure statements.
17 CFR Part 33
Domestic exchange-traded commodity options transactions.
17 CFR Part 190
Bankruptcy.
In consideration of the foregoing and pursuant to the authority
contained in the Commodity Exchange Act and in particular sections
2(a)(1), 4b, 4c, 4d, 4f, 4g and 8a of the Act, as amended, 7 U.S.C. 2,
6b, 6c, 6f, 6g and 12a, the Commission hereby amends Chapter I of title
17 of the Code of Federal Regulations as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 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, 24.
2. Section 1.55 is amended by revising paragraph (a)(1), by
removing paragraph (a)(1)(iii), by redesignating paragraph (f) as
paragraph (g), and by adding new paragraph (f) to read as follows:
Sec. 1.55 Distribution of "Risk Disclosure Statement" by futures
commission merchants and introducing brokers.
(a)(1) Except as provided in Sec. 1.65, no futures commission
merchant, or in the case of an introduced account no introducing
broker, may open a commodity futures account for a customer, other than
for a customer specified in paragraph (f) of this section, unless the
futures commission merchant or introducing broker first:
* * * * *
(f) A futures commission merchant or, in the case of an introduced
account an introducing broker, may open a commodity futures account for
a customer without furnishing such customer the disclosure statements
or obtaining the acknowledgments required under paragraph (a) of this
section, Sec. 1.65(a)(13), and Sec. 30.6(a), Sec. 33.7(a), and
Sec. 190.10(c) of this chapter, provided that the customer is, at the
time at which the account is opened:
(1) A bank or trust company;
(2) A savings association or credit union;
(3) An insurance company;
(4) An investment company subject to regulation under the
Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1, et seq.) or a
foreign entity performing a similar role or function subject as such to
foreign regulations, provided that such investment company has total
assets exceeding $5,000,000;
(5) A pool operated by a commodity pool operator registered under
the Commodity Exchange Act or exempt such registration or by a foreign
person performing a similar function to that of a commodity pool
operator and subject as such to foreign regulation;
(6) A corporation, partnership, proprietorship, organization,
trust, or other entity:
(i) which has total assets exceeding $10,000,000; or
[[Page 8571]]
(ii) which has a net worth of $1,000,000;
(7) An employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, or a foreign person performing a similar
role or function and subject as such to foreign regulation, with total
assets exceeding $5,000,000 or whose investment decisions are made by a
bank, trust company, insurance company, investment adviser subject to
regulation under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1,
et seq.), or a commodity trading advisor subject to regulation under
the Commodity Exchange Act;
(8) A broker-dealer subject to regulation under the Securities
Exchange Act of 1934 (15 U.S.C. 78a, et seq.) or a foreign person
performing a similar role or function subject as such to foreign
regulation, acting on its own behalf: provided, however, that if such
broker-dealer is a natural person or proprietorship, the broker-dealer
must also meet the requirements of paragraphs (f)(6) or (f)(10) of this
section;
(9) A futures commission merchant, floor brokers, or floor traders
subject to regulation under the Commodity Exchange Act or a foreign
person performing a similar role or function subject as such to foreign
regulation; or
(10) Any natural person with total assets exceeding $10,000,000.
* * * * *
3. Section 1.65 is amended by redesignating paragraph (a)(3)(ii) as
(a)(3)(iii) and adding new paragraph (a)(3)(ii) to read as follows:
Sec. 1.65 Notice of bulk transfers and disclosure obligations to
customers.
(a) * * *
(3) * * *
(ii) As to customers for which the transferee futures commission
merchant or introducing broker has clear evidence that such customer
was at the time the account was opened by the transferring futures
commission merchant or introducing broker, or is at the time the
account is being transferred, a customer listed in Sec. 1.55(f); or
* * * * *
PART 30--FOREIGN FUTURES OR FOREIGN OPTIONS TRANSACTIONS
4. The authority citation for part 30 continues to read:
Authority: 7 U.S.C. 1a, 2, 4, 6, 6c and 12a, unless otherwise
noted.
5. Section 30.6 is amended by revising paragraph (a) to read as
follows:
Sec. 30.6 Disclosure.
(a) Future commission merchants and introducing brokers. Except as
provided in Sec. 1.65 of this chapter, no futures commission merchant,
or in the case of an introduced account no introducing broker, may open
a foreign futures or option account for a foreign futures or option
customer, other than for a customer specified in Sec. 1.55(f) of this
chapter, unless the futures commission merchant or introducing broker
first furnishes the customer with a separate written disclosure
statement containing only the language set forth in Sec. 1.55(b) of
this chapter or as otherwise approved under Sec. 155(c) of this chapter
(except for nonsubstantive additions such as captions), which has been
acknowledged in accordance with Sec. 1.55 of this chapter: Provided,
however, that the risk disclosure statement may be attached to other
documents as the cover page or the first page of such documents and as
the only material on such page.
* * * * *
PART 33--REGULATION OF DOMESTIC EXCHANGE-TRADED COMMODITY OPTION
TRANSACTIONS
6. The authority citation for part 33 continues to read:
Authority: 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c,6d, 6e, 6f, 6g, 6h,
6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 7b, 8, 9, 11, 12a, 12c, 13a, 13a-
1, 13b, 19, and 21, unless otherwise noted.
7. Section 33.7 is amended by revising paragraph (a)(1)
introductory text, to read as follows:
Sec. 33.7 Disclosure.
(a)(1) Except as provided in Sec. 1.65 of this chapter, no futures
commission merchant, or in the case of an introduced account no
introducing broker, may open or cause the opening of a commodity option
account for an option customer, other than for a customer specified in
Sec. 1.55(f) of this chapter, unless the futures commission merchant or
introducing broker first:
* * * * *
PART 190--BANKRUPTCY
8. The authority citation for Part 190 continues to read:
Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19, and 24,
and 11 U.S.C. 362, 546, 548, 556 and 761-766, unless otherwise
noted.
9. Section 190.10 is amended by revising paragraph (c)(1) to read
as follows:
Sec. 190.10 General.
* * * * *
(c) Disclosure statement for non-cash margin. (1) Except as
provided in Sec. 1.65 of this chapter, no commodity broker (other than
a clearing organization) may accept property other than cash from or
for the account of a customer, other than a customer specified in
Sec. 1.55(f) of this chapter, to margin, guarantee, or secure a
commodity contract unless the commodity broker first furnishes the
customer with the disclosure statement set forth in paragraph (c)(2) of
this section in boldface print in at least 10 point type which may be
provided as either a separate, written document or incorporated into
the customer agreement, or with another statement approved under
Sec. 1.55(c) of this chapter and set forth in appendix A to Sec. 1.55
which the Commission finds satisfies this requirement.
* * * * *
Issued in Washington, DC on February 13, 1998 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 98-4258 Filed 2-19-98; 8:45 am]
BILLING CODE 6351-01-M
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