[Federal Register: September 24, 1998 (Volume 63, Number 185)]
[Proposed Rules]
[Page 51048-51051]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24se98-21]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 3
Temporary Licenses for Associated Persons, Floor Brokers, Floor
Traders and Guaranteed Introducing Brokers
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rules.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing amendments to its rules governing the granting of a
temporary license (TL) by the National Futures Association (NFA) to
applicants for registration in the categories of associated person
(AP), floor broker (FB), floor trader (FT), and guaranteed introducing
broker (IBG). These amendments would authorize NFA, in appropriate
cases, to grant a TL to an applicant despite a "yes" answer to a
Disciplinary History question, which currently makes an applicant
ineligible for a TL. The Commission is proposing these amendments so
that it may approve certain registration rules submitted by NFA without
creating any inconsistency between the Commission's rules and those of
NFA.
DATES: Comments must be submitted on or before October 26, 1998.
ADDRESSES: Comments on the proposed rules should be sent to Jean A.
Webb, Secretary, Commodity Futures Trading Commission, Three Lafayette
Center, 1155 21st Street, NW., Washington, DC 20581. Comments may be
sent by facsimile transmission to (202) 418-5521, or by e-mail to
[email protected]. Reference should be made to "Temporary License
Eligibility."
FOR FURTHER INFORMATION CONTACT:
Lawrence B. Patent, Associate Chief Counsel, Division of Trading and
Markets, Commodity Futures Trading Commission, Three Lafayette Center,
1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 418-5439.
SUPPLEMENTARY INFORMATION:
I. Background
Section 8a(1) of the Commodity Exchange Act (Act) was amended in
1983 to authorize the Commission to grant a TL to an applicant for
registration for a period not to exceed six months, subject to such
rules, regulations and orders as the Commission may adopt.\1\ This
amendment to the Act was intended to "streamline and simplify the
current registration procedures to enable the Commission to register
fit persons more expeditiously." \2\
---------------------------------------------------------------------------
\1\ Futures Trading Act of 1982, Pub. L. 97-444, Section 223, 96
Stat. 2310 (1983).
\2\ H.R. Rep. No. 565 (Part 1), 97th Cong., 2d Sess. 50 (1982).
---------------------------------------------------------------------------
The Commission adopted Rules 3.40-3.43 on February 27, 1984, to
implement this authority with respect to AP applicants \3\ and
simultaneously authorized NFA to perform the function of granting TLs
to AP applicants in appropriate cases.\4\ The Commission added Rules
3.44-3.47 to govern TLs for IBG applicants on December 16, 1986,\5\ and
amended Rules 3.11 and 3.40-3.43 to govern TLs for FB and FT applicants
on April 9, 1993.\6\ NFA adopted its own rules concerning TLs for APs
and IBGs, which the Commission has approved.\7\ The Commission's rules
and the NFA's rules currently in effect provide that, except as
described below, one of the conditions for obtaining a TL is that an
applicant have no "yes" answers to the Disciplinary History questions
on the registration application.\8\ The exception concerns an applicant
for registration as an AP, FB or FT whose previous registration in
these capacities was terminated within the preceding 60 days. These
applicants will receive a TL upon mailing of a new registration
application (Form 8-R) if, among other things, the new registration
application (1) contains no "yes" answers to the Disciplinary History
questions, or (2)
[[Page 51049]]
none except those arising from a matter that already has been disclosed
in connection with a previous registration application if registration
was granted, or (3) the "yes" answer was disclosed more than 30 days
previously in an amendment to the prior registration application.\9\
---------------------------------------------------------------------------
\3\ 49 FR 8208 (March 5, 1984). An AP is a natural person who
(1) solicits or accepts customer orders for a futures commission
merchant (FCM) or IB, (2) solicits a client's or prospective
client's discretionary account for a commodity trading advisor, (3)
solicits funds, securities or property for a participation in a
commodity pool on behalf of a commodity pool operator, or (4)
supervises any of the foregoing persons so engaged. Section 4k(1)-
(3) of the Act; Commission Rule 1.3(aa).
\4\ 49 FR 8226 (March 5, 1984).
\5\ 51 FR 45759 (Dec. 22, 1986). An IBG is a person (except an
individual who elects to be and is registered as an AP of an FCM)
engaged in soliciting or accepting customer orders but not the
margin funds related thereto and who enters into a guarantee
agreement with an FCM. The guarantee agreement relieves the IBG of
the need to raise its own capital and restricts it to introducing
accounts only to its guarantor FCM. Section 1a(14) of the Act;
Commission Rules 1.3(mm), 1.17(a)(2)(ii) and 1.57(a)(1).
\6\ 58 FR 19575 (Apr. 15, 1993). The related delegation order to
NFA was issued simultaneously and published at 58 FR 19657 (Apr. 15,
1993). An FB can trade for others or for his or her own account on
or subject to the rules of any contract market; an FT can trade only
for his or her own account on or subject to the rules of any
contract market. Section 1a(8) and (9) of the Act; Commission Rule
1.3(n) and (x).
\7\ NFA Rules 301 and 302, respectively.
\8\ Commission Rules 3.40(a) and 3.44(a)(2). The no "yes"
answer restriction extends to principals of an IBG as well.
Commission Rule 3.44(a)(3). See also Commission Rules
3.11(c)(1)(ii)(D) and 3.11(c)(2)(ii) concerning an FT, or a person
whose registration as an FT terminated within the preceding 60 days,
seeking to become an FB.
\9\ Commission Rules 3.11(c)(1)(i)(C), 3.11(c)(1)(ii)(C) and
3.12(d)(1)(vi); NFA Rule 301(b)(1)(D). See also Commission Rule
3.44(a)(3) and NFA Rule 302(a)(3) concerning principals of an IBG.
---------------------------------------------------------------------------
Rules authorizing the issuance of TLs were adopted so that
apparently fit persons (i.e., those who had not self-declared any
derogatory information on their registration applications) could begin
acting like registrants in certain categories while various background
checks were conducted. For example, checking an individual's
fingerprints through the Federal Bureau of Investigation database can
take six to eight weeks. The Commission believes that providing TLs is
appropriate in light of the time required to complete the various
background checks on applicants for registration.
II. NFA Proposals
NFA has adopted and submitted for Commission approval amendments to
NFA Rules 301 and 302, governing TLs for APs and IBGs, as well as new
NFA Rule 303 to govern TLs for FBs and FTs. NFA's submission was made
pursuant to Section 17(j) of the Act by letter dated August 25, 1997.
In response to letters from the Commission's Division of Trading and
Markets, NFA supplemented its submission by letters dated January 22,
February 19 and August 11, 1998.\10\
---------------------------------------------------------------------------
\10\ Copies of the NFA rules submitted for Commission approval
may be obtained upon request from the Commission's Office of the
Secretariat at the address listed above.
---------------------------------------------------------------------------
NFA's rule amendments and the new rule would eliminate the no
"yes" answer criterion as an absolute bar to issuance of a TL. NFA
notes that it now may not grant TLs to new applicants (i.e., those not
registered within the preceding 60 days) with "yes" answers no matter
how innocuous the disclosed matter may be, even if NFA has previously
granted registration despite the "yes" answer. NFA believes that this
restriction is no longer necessary because it has developed sufficient
expertise exercising the authority granted to it in various Commission
delegation orders to identify in an accurate and prompt manner those
types of disciplinary matters that it would not use to disqualify an
applicant from registration.
NFA represents that under its proposed approach it would use its
authority to grant TLs to applicants with "yes" answers that (1) NFA
had previously cleared, or (2) NFA knew that it intended to clear. NFA
further represents that it only brings adverse actions in circumstances
that are "similar to those in which the Commission has instituted
registration actions based upon disciplinary offenses" and that, in
evaluating whether any applicant should be granted a TL despite a
"yes" answer to a Disciplinary History question, it will follow the
recent guidance set forth by the Commission concerning the treatment of
disciplinary histories of FBs, FTs and applicants for registration in
either category.\11\
---------------------------------------------------------------------------
\11\ See Commission Advisory 61-97 (Dec. 8, 1997), to which is
attached a letter to Robert K. Wilmouth, NFA President, from Jean A.
Webb, Secretary of the Commission, dated Dec. 4, 1997.
---------------------------------------------------------------------------
NFA's new rule and rule amendments would also affect applicants for
AP, FB and FT registration applying within 60 days of their last
registration. Currently, these applicants may receive TLs upon mailing
of a new Form 8-R if they have no new "yes" answers to Disciplinary
History questions. A new "yes" answer in these circumstances is an
answer that the applicant has not previously disclosed or has disclosed
for the first time within 30 days of the submitted application.
NFA represents that this "no-new-yes" answer requirement creates
processing difficulties for NFA's automated registration processing
system, the Membership Registration Receivables System (MRRS). NFA
explained that, in order to process transfer TLs,\12\ MRRS must compare
the date of the application and the date of the applicant's last
registration termination in order to determine if the 60-day
requirement is met. Next, MRRS must determine whether the applicant has
previously disclosed the "yes" answer. MRRS then compares the date of
the current application to the date the applicant previously disclosed
the "yes" answer to determine if the 30-day requirement is satisfied.
NFA represents that the procedures for transferring registrations also
can produce processing errors that must be manually reviewed and
corrected, thus consuming a significant amount of staff resources.\13\
---------------------------------------------------------------------------
\12\ The term "transfer TL" is used because the Commission's
rules and similar NFA rules in this area were intended to permit an
AP to move from one firm to another without an interruption. For
example, an AP could leave Firm A on Friday, mail in his new Form 8-
R with a sponsor certification from Firm B, and be at work for Firm
B under a TL on Monday morning.
\13\ As an example, NFA indicates that in 1996 there were 24
instances in which it did not grant TLs because of new "yes"
answers. However, NFA ultimately granted registration to all but one
of those individuals, while the remaining individual withdrew his
application.
---------------------------------------------------------------------------
NFA proposes to eliminate the no-new-yes answer requirement from
its Registration Rules. NFA believes that its proposal would enable it
to achieve its regulatory goals more efficiently. NFA contends that,
under this proposed approach, MRRS would operate more efficiently and
staff resources could be redirected to facilitate the quick
identification of transfer applicants who receive TLs despite
problematic disciplinary history information. NFA represents that, when
appropriate, it would promptly terminate such TLs and institute
registration denial proceedings.
III. Proposed Commission Rule Amendments
Although the NFA rule amendments concerning TLs submitted for
Commission approval remain subject to Commission review and possible
further refinement, the Commission preliminarily views the NFA rule
amendments positively. As noted above, however, the NFA rule amendments
are not consistent with Commission rules issued under Section 8a(1) of
the Act, and therefore, the Commission could not approve them pursuant
to Section 17(j) of the Act.\14\ Accordingly, in order to permit the
Commission to approve the NFA rule amendments, the Commission is
proposing to amend its rules governing TLs.\15\ The Commission's rule
amendments would eliminate the provision that NFA may not grant a TL to
an AP, FB, FT or IBG applicant if the applicant's registration
application contains a "yes" answer to a Disciplinary History
question.\16\ The Commission is also proposing to eliminate the no-new-
yes answer requirement from its rules governing TLs of AP, FB and FT
applicants whose
[[Page 51050]]
registration terminated within the preceding 60 days.\17\
---------------------------------------------------------------------------
\14\ Section 17(j) of the Act provides in pertinent part that
"A registered futures association shall submit to the Commission
any change in or addition to its rules * * *. The Commission shall
approve such rules, if such rules are determined by the Commission
to be consistent with the requirements of this section and not
otherwise in violation of this Act or the regulations issued
pursuant to this Act * * *."
\15\ The Commission anticipates that, if it determines to
approve NFA's rule amendments discussed above, such approval will be
made concurrent with adoption of final Commission rule amendments
that are being proposed herein.
\16\ In the case of an IBG applicant, the provision pertaining
to principals of the applicant would be amended similarly. See
proposed amendments to Rules 3.40(a) and 3.44(a) (2) and (3).
\17\ See proposed amendments to Commission Rules 3.11(c)(1)(i)
and (c)(1)(ii), and 3.12(d)(1) and (d)(3).
---------------------------------------------------------------------------
There are two provisions of the Commission's rules where a "yes"
answer to a Disciplinary History question will prevent granting of
registration, not merely at TL. These circumstances pertain to: (1) a
registered FT seeking to become registered as an FB (Commission Rule
3.11(c)(2)(ii)); and (2) an AP whose registration is terminated because
of the revocation or withdrawal of the sponsor's registration and who
becomes associated with a new sponsor (Commission Rule 3.12(i)).\18\
Since these provisions are modeled upon those governing TLs, the
Commission believes that it is appropriate to amend these provisions to
remove the no "yes" answer restriction as well.
---------------------------------------------------------------------------
\18\ The AP situation could arise where, for example, one FCM
merges into another, the merged FCM withdraws its registration and
the surviving FCM absorbs the APs of the disappearing FCM.
---------------------------------------------------------------------------
The Commission also wishes to note that certain of its rules
related to TLs are not being amended. Commission rules provide that a
TL shall terminate immediately upon notice to an applicant that the
applicant failed to disclose relevant disciplinary history or to
disclose that, following the submission of the application, an event
has occurred leading to an affirmative response. Such a notice must
also be provided to the applicant's sponsor (in the case of an AP
applicant), the contract market that has granted trading privileges (in
the case of an FB or FT applicant) or the guarantor FCM (in the case of
an IBG applicant).\19\ The Commission emphasizes that it is important
for all applicants to continue to declare derogatory information as
required by the registration forms since failure to do so can lead to
termination of a TL and, if willful, to denial or conditioning of
registration.\20\
---------------------------------------------------------------------------
\19\ The notice concerning failure to disclose or the occurrence
of an event leading to an affirmative response also applies to a
principal of an IBG. Commission Rules 3.42(a)(8) and 3.46(a)(10).
\20\ See Section 8a(2)(G) and (3)(G) of the Act.
---------------------------------------------------------------------------
The Commission further notes that it is not amending the provisions
of its rules governing TLs for FB applicants that restrict such persons
to operating as an FT while the applicant has a TL prior to being
granted registration as an FB.\21\
---------------------------------------------------------------------------
\21\ This restriction to acting only in the capacity of an FT
during the pendency of the TL does not apply if the FB applicant was
registered as an FB within the preceding 60 days. Commission Rule
3.41(a).
---------------------------------------------------------------------------
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The rule amendments discussed herein
would affect APs, FBs, FTs and IBGs. The Commission has previously
determined to evaluate within the context of a particular rule proposal
whether all or some FBs, FTs, and IBGs should be considered "small
entities" for purposes of the RFA and, if so, to analyze the economic
impact on FBs, FTs and IBGs of any such rule at that time.\22\ The rule
amendments proposed herein will not affect the requirements for filing
an application for registration. If adopted, these amendments will
permit certain persons to obtain a TL where it now is not possible and
thus permit them to begin lawfully acting as industry professionals
sooner. Accordingly, the Chairperson, 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.
---------------------------------------------------------------------------
\22\ See 47 FR 18618, 18620 (Apr. 30, 1982) (FBs); 48 FR 35248,
35276-35278 (Aug. 3, 1983) (IBGs); and 58 FR 19575, 19588 (Apr. 15,
1993) (FTs). With respect to APs, the Commission has previously
stated that the RFA does not apply to APs because APs must be
individuals under Section 4k of the Act and Rule 1.3(aa). See 48 FR
14933, 14954 n.115 (Apr. 6, 1983).
---------------------------------------------------------------------------
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.
(Supp. I 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 PRA. While
the proposed rule amendments have no burden, the group of rules (3038-
0023) of which they are a part has the following burden:
Average Burden Hours Per Response......... 15.76
Numberr of Respondents.................... 73,435
Frequency of Response..................... Annually and on occasion.
Copies of the OMB approved information collection package
associated with these rules may be obtained from Desk Officer, CFTC,
Office of Management and Budget, Room 10202, NEOB, Washington, DC
20503, (202) 395-7340.
List of Subjects in 17 CFR Part 3
Brokers, Registration.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, Sections
4d, 4e, 4k, 8a and 17 thereof, 7 U.S.C. 6d, 6e, 6k, 12a and 21, the
Commission hereby proposes to amend Part 3 of 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. 552, 552b; 7 U.S.C. 1a, 2, 4, 4a, 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, and 23.
2. Section 3.11 is proposed to be amended by revising paragraphs
(c)(1)(i)(A) and (c)(1)(i)(B), by removing paragraph (c)(1)(i)(C), by
revising paragraphs (c)(1)(ii)(A), (c)(1)(ii)(B) and (c)(1)(ii)(C), by
removing paragraph (c)(1)(ii)(D) and redesignating paragraph
(c)(1)(ii)(E) as paragraph (c)(1)(ii)(D), and by revising paragraph
(c)(2)(ii) to read as follows:
Sec. 3.11 Registration of floor brokers and floor traders.
* * * * *
(c) * * *
(1) * * *
(i) * * *
(A) The person's registration as a floor broker is not suspended or
revoked; and
(B) There is no pending adjudicatory proceeding against the person
under sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Sec. Sec. 3.55
or 3.60 and, within the preceding twelve months, the Commission has not
permitted the withdrawal of an application for registration in any
capacity after initiating the procedures provided in Sec. 3.51.
(ii) * * *
(A) The person's registration as a floor trader is not suspended or
revoked; and
(B) There is no pending adjudicatory proceeding against the person
under sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Secs. 3.55 or
3.60 and, within the preceding twelve months, the Commission has not
permitted the withdrawal of an application for registration in any
capacity after initiating the procedures provided in Sec. 3.51.
(C) If such person is seeking registration as a floor broker, the
person will be granted a temporary license to act in the capacity of
floor trader only if the person's prior registration was not subject to
conditions or restrictions.
* * * * *
(2) * * *
(ii) Any person registered as a floor trader whose registration is
not subject
[[Page 51051]]
to conditions or restrictions and who continuously maintains trading
privileges at any contract market that has made the certification
required under Sec. 3.40 will be registered as, and in the capacity of,
a floor broker upon mailing to the National Futures Association of a
Form 3-R completed and filed in accordance with the instructions
thereto indicating the intention to change registration category,
accompanied by evidence of the granting of trading privileges at the
new contract market, if applicable.
* * * * *
3. Section 3.12 is proposed to be amended by revising paragraphs
(d)(1)(iv) and (d)(1)(v), by removing paragraph (d)(1)(vi), by revising
paragraphs (d)(3) and (i)(1)(v), by removing paragraph (i)(1)(vi) and
redesignating paragraph (i)(1)(vii) as paragraph (i)(1)(vi), and by
revising paragraph (i)(2) to 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.
* * * * *
(d) * * *
(1) * * *
(iv) Whether there is a pending adjudicatory proceeding under
sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Secs. 3.55, 3.56 or
3.60 or if, within the preceding twelve months, the Commission has
permitted the withdrawal of an application for registration in any
capacity after instituting the procedures provided in Sec. 3.51 and, if
so, that the sponsor has been given a copy of the notice of the
institution of a proceeding in connection therewith; and
(v) That the sponsor has received a copy of the notice of the
institution of a proceeding if the applicant has certified, in
accordance with paragraph (d)(1)(iv) of this section, that there is a
proceeding pending against the applicant as described in that paragraph
or that the Commission has permitted the withdrawal of an application
for registration as described in that paragraph.
* * * * *
(3) The certifications permitted by paragraphs (d)(1)(i) and (v) of
this section must be signed and dated by an officer, if the sponsor is
a corporation, a general partner, if a partnership, or the proprietor,
if a sole proprietorship. The certifications permitted by paragraphs
(d)(1)(ii)-(iv) of this section must be signed and dated by the
applicant for registration as an associated person.
* * * * *
(i) * * *
(1) * * *
(v) That the new sponsor has received a copy of the notice of the
institution of a proceeding if the applicant for registration has
certified, in accordance with paragraph (i)(1)(iv) of this section,
that there is a proceeding pending against the applicant as described
in that paragraph or that the Commission has permitted the withdrawal
of an application for registration as described in that paragraph; and
* * * * *
(2) The certifications required by paragraphs (i)(1)(i), (i)(1)(v),
and (i)(1)(vi) of this section must be signed and dated by an officer,
if the sponsor is a corporation, a general partner, if a partnership,
or the proprietor, if a sole proprietorship. The certifications
required by paragraphs (i)(1)(ii)-(iv) of this section must be signed
and dated by the applicant for registration as an associated person.
* * * * *
4. Section 3.40 is proposed to be amended by revising paragraph (a)
to read as follows:
Sec. 3.40 Temporary licensing of applicants for associated person,
floor broker or floor trader registration.
* * * * *
(a) A Form 8-R, properly completed in accordance with the
instructions thereto;
* * * * *
5. Section 3.44 is proposed to be amended by revising paragraphs
(a)(2) and (a)(3) to read as follows:
Sec. 3.44 Temporary licensing of applicants for guaranteed introducing
broker registration.
* * * * *
(a) * * *
(2) A Form 7-R properly completed in accordance with the
instructions thereto;
(3) A Form 8-R for the applicant, if a sole proprietor, and each
principal (including each branch office manager) thereof, properly
completed in accordance with the instructions thereto, all of whom
would be eligible for a temporary license if they had applied as
associated persons;
* * * * *
Issued in Washington, DC on September 21, 1998, by the
Commission.
Jean A. Webb,
Secretary of Commission.
[FR Doc. 98-25622 Filed 9-23-98; 8:45 am]
BILLING CODE 6351-01-M
======== RETURN TO INDEX ========