2012-20962

Federal Register, Volume 77 Issue 167 (Tuesday, August 28, 2012)[Federal Register Volume 77, Number 167 (Tuesday, August 28, 2012)]

[Rules and Regulations]

[Pages 51898-51910]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2012-20962]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 3

RIN 3038-AC96

Registration of Intermediaries

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is

adopting regulations to further implement new statutory provisions

enacted by Title VII of the Dodd-Frank Wall Street Reform and Consumer

Protection Act (Dodd-Frank Act) regarding registration of

intermediaries. Specifically, the Commission is adopting certain

conforming amendments to the Commission's regulations regarding the

registration of intermediaries, consistent with other Commission

rulemakings issued pursuant to the Dodd-Frank Act, and other non-

substantive, technical amendments to its regulations.

DATES: Effective October 29, 2012.

FOR FURTHER INFORMATION CONTACT: Andrew Chapin, Associate Director,

Division of Swap Dealer and Intermediary Oversight, (202) 418-5465,

[email protected]; or Claire Noakes, Attorney Advisor, Division of Swap

Dealer and Intermediary Oversight, (202) 418-5444, [email protected];

Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Introduction

On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\

Title VII of the Dodd-Frank Act amended the Commodity Exchange Act

(CEA) \2\ to establish a comprehensive new regulatory framework to

reduce risk, increase transparency, and promote market integrity within

the financial system by, among other things: (1) Providing for the

registration and comprehensive regulation of swap dealers (SDs) and

major swap participants (MSPs); (2) imposing clearing and trade

execution requirements on standardized derivative products; (3)

creating rigorous recordkeeping and real-time reporting regimes; and

(4) enhancing the Commission's rulemaking and enforcement authorities

with respect to all registered entities and intermediaries subject to

the Commission's oversight.

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\1\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376

(2010). The text of the Dodd-Frank Act may be accessed at: http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.

\2\ 7 U.S.C. 1 et seq.

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As discussed below, the regulations the Commission is adopting

today concern conforming and technical amendments to part 3 governing

the registration of intermediaries. These final regulations are based

in large part on the Commission's proposed regulations regarding part 3

(Proposal).\3\ The conforming amendments largely consist of adding

references, where appropriate, to SDs, MSPs and swap execution

facilities (SEFs). In addition, the adopted regulations contain

modernizing and technical amendments to part 3 in anticipation of an

influx of new registrants. Further, the adopted regulations clarify or

update definitions, outdated cross-references to other regulations, and

other typographical errors.

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\3\ 76 FR 12888, Mar. 9, 2011.

\4\ The comments the Commission received on the Proposal are

currently available on the Commission's Web site.

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II. Comments \4\ and Responses

A. In General

In response to the Proposal, the Commission received four comments

from the Futures Industry Association (FIA), the National Futures

Association (NFA), and two individuals, Chris Barnard and Bill Nolan.

In addition, the Commission also received comments relevant to the

Proposal in a global comment letter submitted by a U.S. investor and a

petition for exemption submitted pursuant to Section 4(c) of the CEA

\5\ by a group of trade industry associations.\6\ The commenters

generally supported the Commission's efforts to update and modernize

part 3 consistent with the regulatory developments set forth in the

Dodd-Frank Act. In consideration of the comments received,\7\ and

unless specifically addressed below in the section-by-section analysis,

the Commission adopts the final regulations as proposed.

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\5\ 7 U.S.C. 6(c).

\6\ The Commission determined that the issues raised in the

global comment letter with respect to addressing the types of

activities that would cause a market participant to be deemed an

introducing broker engaged in swap-related activities were outside

of the scope of the Proposal, and therefore is not addressing them

in this final rule. Likewise, the petition submitted by the trade

industry associations cited the Proposal as an example of amendments

that would likely not be effective in time for a July 16, 2011

compliance deadline. Those concerns were addressed when the

Commission granted related relief and extended the effective and/or

compliance date applicable to many Dodd-Frank requirements. See the

second amended version of the effective date order at 77 FR 41260,

July 13, 2012.

\7\ NFA requested that the Commission specifically list the

chief compliance officer of a registered foreign exchange dealer in

the definition of principal. The Commission addressed this request

in another rulemaking, wherein chief compliance officer is listed as

an example of a principal of a registrant. See 77 FR 20200, Apr. 3,

2012.

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B. Section 3.1--Definitions

Section 3.1 proposed alterations to the scope of persons who, by

reason of their ownership of securities of a registrant, must be listed

as a principal. The Commission proposed to narrow the current category

of persons in Sec. 3.1(a)(2)(i) to only those individuals who are the

owners or are entitled to vote or have the power to sell or direct the

sale of 10 percent or more of the outstanding shares of any class of

equity securities, other than non-voting securities. The Commission

intended to narrow the scope of the provision because the existing

provision was over-inclusive, in that it captured individuals without

the ability to influence a company's actions, such as owners of 10% of

a class of preferred stock. However, upon further reflection, the

Commission is concerned that the Proposal might, in other ways, be

under-inclusive, in that it would fail to capture an owner who might

indirectly have the power--such as through a membership agreement--to

dictate upfront the entity's activities that are subject to regulation

by the Commission. Consequently, in order to strike the right balance

between the over-inclusive existing provision and the under-inclusive

proposed language, the Commission is modifying Sec. 3.1(a)(2)(i) to

include individuals who have the power to exercise a controlling

influence over the entity's activities that are subject to regulation

by the Commission.\8\

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\8\ In comparison, broker-dealers regulated by the Securities

and Exchange Commission are required to disclose on Form BD that is

filed with the Financial Industry Regulatory Authority any person

not otherwise named on Schedule A as a direct owner or Schedule B as

an indirect owner who nonetheless controls the management or

policies of the applicant through agreement or otherwise. See http://www.sec.gov/about/forms/formbd.pdf.

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[[Page 51899]]

C. Section 3.10--Registration of Futures Commission Merchants, Retail

Foreign Exchange Dealers, Introducing Brokers, Commodity Trading

Advisors, Commodity Pool Operators, Swap Dealers, Major Swap

Participants, and Leverage Transaction Merchants. Section 3.11--

Registration of Floor Brokers and Floor Traders. Section 3.12--

Registration of Associated Persons of Futures Commission Merchants,

Retail Foreign Exchange Dealers, Introducing Brokers, Commodity Trading

Advisors, Commodity Pool Operators and Leverage Transaction Merchants

Section 3.10 generally sets forth the registration requirements for

various Commission registrants. Section 3.11 generally sets forth the

registration requirements for floor brokers and floor traders. Section

3.12 generally sets forth the registration requirements for natural

persons associated with a Commission registrant in certain capacities,

referred to as associated persons (APs).

With respect to APs, the Commission proposed to amend Sec. 3.10 to

add a new paragraph (c)(5) to clarify that a person employed by either

an SD or a MSP and acting as its AP is not required to separately

person's activities as an AP. The Commission sought public comment as

to whether this exemption is necessary to clarify the registration

responsibilities of employees, in light of the current absence of a

registration requirement as an AP of an SD or an MSP, and in light of

the definition requiring persons who engage in certain swap activities

to register as an SD or an MSP.\9\ FIA and Chris Barnard were

supportive of this clarification on the grounds that it provided

regulatory certainty. The Commission is adopting the language in new

paragraph (c)(5) with a change in the language to reflect that it is

not appropriate to consider the AP's activities as an AP of an SD for

the purpose of determining whether the person is an SD.

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\9\ See 77 FR 30596, May 23, 2012.

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With respect to intermediaries, current Sec. 3.10(c)(2) and (3)

provides exemptions from registration as a futures commission merchant

(FCM) for foreign brokers and other foreign intermediaries conducting

activities in commodity interest transactions on designated contract

markets (DCMs) solely on behalf of customers located outside the U.S.

The Commission proposed to amend this section to expand these

registration exemptions to foreign brokers and foreign intermediaries

engaged in commodity interest transactions solely on behalf of non-U.S.

customers executed on a SEF and cleared on a designated clearing

organization through the customer omnibus account maintained with a

registered FCM. FIA supported the Commission's proposal to align

registration exemptions for foreign intermediaries across DCMs and

SEFs. The Commission also sought comment as to whether it should expand

such exemption to swap transactions executed bilaterally, and FIA

supported this suggestion as well. Finally, the Commission sought

comment as to whether any expansion should distinguish between

bilateral swap transactions that occur within the U.S. and those that

occur abroad. The Commission did not receive any comments regarding

such a distinction. Therefore, the Commission is amending Sec.

3.10(c)(2) and (3) to extend the registration exemption to commodity

interest transactions executed bilaterally, on or subject to the rules

of a DCM, or on or subject to the rules of a SEF, that are submitted

for clearing on an omnibus basis through a registered FCM.

As proposed, Sec. 3.11 pertaining to registration of floor brokers

and floor traders contained a series of technical changes, such as

consolidating an exemption found in Sec. 3.4 and removing references

to DTEFs. Subsequently, the Commission has promulgated the further

definition of the term ``swap dealer'' \10\ which, among other things,

excludes certain swaps entered into by registered floor traders from

the SD determination. Specifically, Sec. 1.3(ggg)(6)(iv) states that

``[i]n determining whether a person is a swap dealer, each swap that

the person enters into in its capacity as a floor trader as defined by

section 1a(23) of the Act or on or subject to the rules of a swap

execution facility shall not be considered for the purpose of

determining whether the person is a swap dealer,'' provided that the

person is registered as a floor trader pursuant to Sec. 3.11 and

otherwise satisfies other conditions with respect to its trading,

including certain requirements as if it were an SD.\11\

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\10\ 77 FR 30596, May 23, 2012.

\11\ 17 CFR 1.3(ggg)(6)(iv) (emphasis added). Section 1a(23) of

the CEA restricts floor traders to the offer and sale of contracts

``solely for such person's own account.'' 7 U.S.C. 1a(23).

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Given that legal entities, in addition to natural persons, may seek

to avail themselves of the exclusion set forth above, the Commission

therefore is adding a reference to Form 7-R in Sec. 3.11. Form 7-R, as

the application for registration as an intermediary, is the appropriate

form for NFA to process an entity's application for registration as a

floor trader engaged in swaps activities. Additionally, references to

SEFs are being added throughout Sec. 3.11 as one of the two categories

of facilities for which floor traders in swaps will be granted trading

privileges. Although these additions were omitted in the Proposal, the

Commission believes that insertion of the appropriate reference to the

type of registration form, and the type of facility, that would allow

the NFA to properly process applications for registration of floor

traders engaged in swaps activities are conforming changes to the

registration rule that are necessary to implement the SD definition.

Consequently, the Commission is adopting additional technical

modifications in Sec. 3.21 to address the processing of fingerprints

for principals of a floor trader that is a non-natural person, as well

as in Sec. 3.33 to reflect the use of Form 7-W for a request for

withdrawal from a floor trader that is a non-natural person. The

Commission is also adopting other technical modifications in Sec. Sec.

3.30 and 3.40 to reflect the registration of legal entities as floor

traders,\12\ and in Sec. Sec. 3.2, 3.4, 3.42, 3.56, 3.60 and 3.64 to

add references to SEFs.

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\12\ In Sec. 3.40, the provision for temporary licenses is

limited to individual floor traders because this provision is

applicable only to natural persons (such as APs addressed in Sec.

3.40(a)).

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The Commission proposed to amend Sec. 3.12(h)(1) to provide that a

person is not required to register as an AP in any capacity if such

person is registered in one of the other enumerated categories,

including an SD or MSP. FIA agreed with the Commission that it is

highly improbable that an individual, rather than an entity, would

light of the regulatory certainty that it provides. Accordingly, the

Commission is adopting Sec. 3.12(h)(1) as proposed.

D. Section 3.31--Deficiencies, Inaccuracies, and Changes To Be

Reported. Section 3.33--Withdrawal From Registration

Section 3.31 sets forth procedural requirements for a registrant to

update and/or correct information previously provided to the Commission

and the NFA. The NFA is a registered futures association (RFA) to which

the Commission has delegated certain registration functions.\13\

Currently, NFA

[[Page 51900]]

exercises discretion in determining whether changes to the information

originally filed on the registrant's Form 7-R or 8-R,\14\ including its

legal name, form of organization, and list of principals, would require

a registrant to withdraw and re-register or, in the alternative, amend

its Form 7-R or 8-R. The NFA's discretion is subject only to the

requirement to withdraw and re-register set forth in Sec. 3.31(a)(1)

where a registrant is reporting a change in the form of organization

from or to a sole proprietorship, and the safe-harbor from re-

registration set forth in Sec. 3.31(a)(3).

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\13\ Section 17(o)(1) of the CEA, 7 U.S.C. 21(o)(1), provides

that the Commission may require an RFA to perform certain Commission

registration functions, in accordance with the CEA and the rules of

the RFA.

\14\ Form 7-R is the Commission's application for registration

as an intermediary or floor broker that is a non-natural person and

application for NFA membership, while Form 8-R is the Commission's

application for registration as an AP, floor broker, or individual

floor trader, as well as the application for listing as a principal

of a registrant.

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Among other changes set forth in the Proposal, the Commission

proposed: (1) To adopt Sec. 3.31(a)(5) to require re-registration in

the event of a change in name or form of organization and a change in

principal, while preserving the existing safe harbor in Sec.

3.31(a)(3) in the event that there is no change in principal and the

registrant will be liable for its predecessor organization. The

Commission specifically requested comment on whether the additional

transparency under the new provisions of Sec. 3.31 is beneficial and

necessary to fulfill the Commission's mandate to protect customers, and

whether the existing safe harbors from re-registration should be

maintained. In response to the Commission's request, NFA and FIA

opposed the proposed re-registration requirements as unnecessary, while

Bill Nolan supported the proposed re-registration requirements as

necessary to ensure that the existing process is not abused by

registrants to the detriment of customers.

In particular, the NFA challenged the proposed amendments to Sec.

3.31 on the following grounds: (1) It will be more difficult for

members of the public to uncover a ``new'' firm's true disciplinary

information; (2) the change in the legal name or form of a business

organization and the addition of a principal does not necessarily

trigger a regulatory need for re-registration; and (3) the proposed

changes do not adequately address the timing of events sufficient to

require re-registration. FIA similarly opposed the proposed changes on

the grounds that re-registration should not be required for concurrent

changes to the name or form of an organization, or the addition of a

principal because re-registration is not required separately for each

of these occurrences. FIA also stated that, upon implementation of the

Dodd-Frank Act, the prospective mergers of affiliated companies will be

negatively impacted by the proposed requirements.

After carefully considering the foregoing comments, the Commission

has determined not to adopt the amendment in Sec. 3.31(a)(3) and (5)

as proposed.\15\ The Commission intends to promptly consider

alternatives to the Proposal's re-registration requirements \16\ in

order to address customer protection issues raised by the current

rules. In the meantime, a prospective customer will continue to be able

to obtain disciplinary history of any associated organizations by

reviewing the list of principals shared by both the currently and

formerly registered organizations, which is already contained in a

publicly available database maintained by the NFA.

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\15\ In its comment letter, the NFA also suggested a few

technical edits to the language in proposed Sec. 3.31(a)(2) and (4)

to reflect the current filing requirements associated with the

filing of Form 7-R. The Commission agrees with these comments and is

adopting these technical edits in the final rule. Additionally, as a

technical change, the Commission is deleting Sec. 3.31(b)(2)

because it duplicates some of the language in Sec. 3.31(a)(1) with

respect to the obligations of applicants for registration as SDs or

MSPs, and is combining the reference to principals of SDs or MSPs

found in current Sec. 3.31(b)(2) with the reference to principals

of other registrants in current Sec. 3.31(b)(1).

\16\ In comparison, consider that broker-dealers regulated by

the Securities and Exchange Commission are required to provide on

Form BD, which is filed with the Financial Industry Regulatory

Authority, any information about business predecessors, including

the date of succession, name of predecessor, and the registration

number for any predecessor.

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In its comment letter, the NFA also suggested a few technical edits

to the language in proposed Sec. 3.31 to clarify that: (1) It is not

the electronic update reporting a change on a Form 7-R that creates any

deficiency or inaccuracy; and (2) an applicant or registrant no longer

lists its principals who are individuals on its application for

registration, as only holding companies are listed. The Commission

believes that these comments improve upon the proposed language and is

adopting these suggested changes in the final regulation. Finally, as

previously mentioned, the Commission is also adopting additional

technical modifications in Sec. 3.31 to reflect the use of Form 7-R

for floor traders that are non-natural persons.

E. Corrections

In the Proposal, the Commission noted that it would be necessary to

harmonize any distinctions between the Proposal and other rulemakings

as they become final. On January 19, 2012, the Commission published in

the Federal Register a final rulemaking regarding the registration of

SDs and MSPs.\17\ In that final rulemaking, the Commission adopted new

registration requirements for SDs and MSPs that were not contained in

the rule language on which the Proposal was based. In order to

integrate the new rule language from the above final rulemaking with

the proposed language to be finalized in this release, the Commission

is incorporating, where relevant, the amended rule language referencing

SDs and MSPs into this release.\18\

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\17\ 77 FR 2613, Jan. 19, 2012. The Commission subsequently

published a correction regarding certain language set forth in the

January 19, 2012 release. See 77 FR 3590, Jan. 25, 2012.

\18\ See, e.g., Sec. 3.12.

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III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (Reg Flex Act) requires that

agencies consider whether the rules they propose will have a

significant economic impact on a substantial number of small entities

and, if so, provide a regulatory flexibility analysis respecting the

impact.\19\ A regulatory flexibility analysis or certification is

required for ``any rule for which the agency publishes a general notice

of proposed rulemaking pursuant to'' the notice-and-comment provisions

of the Administrative Procedure Act, 5 U.S.C. 553(b) or any other

law.\20\ The final rules promulgated today amend existing rules in part

3 regarding the registration of intermediaries consistent with other

Commission rulemakings issued pursuant to the Dodd-Frank Act, and also

make other technical, non-substantive amendments to part 3.

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\19\ 5 U.S.C. 601 et seq.

\20\ See 5 U.S.C. 601(2), 603, 604 and 605.

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As set forth in the Proposal,\21\ the final rules shall affect

registered FCMs, IBs, commodity trading advisors, commodity pool

operators, SDs, and MSPs. The Commission has previously determined that

FCMs, commodity pool operators, SDs, and MSPs are not small entities

for purposes of the Reg Flex Act.\22\ The Commission has previously

made a determination with respect to IBs and commodity trading advisors

to evaluate within the context of a

[[Page 51901]]

particular rule proposal whether all or some IBs or commodity trading

advisors should be considered to be small entities and, if so, to

analyze the economic impact on them of any such rule.\23\ The final

rules will also affect floor traders. The Commission has not previously

made a determination regarding floor traders, since currently all

registered floor traders are individuals, and individuals are not

included in the small entity analysis under the Reg Flex Act.

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\21\ The Commission did not receive any comments regarding the

Reg Flex Act and the Proposal.

\22\ See 47 FR 18618, 18619-20, Apr. 30, 1982 (FCMs and

commodity pool operators); 77 FR 30596, 30701 (finding that MSPs are

not small entities and that the number of SDs that are small

entities, if any, is not significant).

\23\ See, with respect to commodity trading advisors, 47 FR

18620, Apr. 30, 1982, and see, with respect to IBs, 48 FR 35276,

Aug. 3, 1983.

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Since there could be some small entities that register as IBs,

commodity trading advisors, or floor traders, the Commission considered

whether this rulemaking would have a significant economic impact on

these registrants. The final rules would clarify the mechanics of

registration by updating cross-references, consolidating exemptions,

and deleting obsolete forms. The Commission does not expect registrants

to incur additional expenses as a result of these clarifications.

Consequently, the Commission finds that there is no significant

economic impact on IBs or commodity trading advisors resulting from

this rulemaking. The final rules also provide clarity to floor traders

regarding existing registration requirements (for example, the

revisions to Sec. 3.11 clarify that an entity that wishes to register

as a floor trader shall do so by filing Form 7-R), rather than imposing

any new registration requirement. Consequently, the Commission finds

that there is no significant economic impact on floor traders resulting

from this rulemaking.

Accordingly, for the reasons stated in the Proposal and the

additional rationale provided above, the Commission believes that the

conforming and other technical amendments in this rulemaking will not

have a significant economic impact on a substantial number of small

entities. Therefore, the Chairman, on behalf of the Commission, hereby

certifies, pursuant to 5 U.S.C. 605(b), that the regulations being

published today by this Federal Register release will not have a

significant economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

Under the Paperwork Reduction Act of 1995 (PRA), 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 control

number.\24\ In the Proposal, the Commission indicated that the proposed

rules would not impose any new recordkeeping or information collection

requirements, or other collections of information that require approval

of the Office of Management and Budget under the PRA. The Commission

invited public comment on the accuracy of its estimate that no

additional information collection requirements or changes to existing

collection requirements would result from the rules proposed herein. In

response, the Commission received no comments.

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\24\ 44 U.S.C. 3501 et seq.

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The currently approved rule collection covering the regulatory

filings discussed in this final rule (3038-0023, which covers Forms 3-

R, 7-R, 8-R and 8-T) has a burden of 78,109 respondents and 7,030

annual hours.\25\ The Commission believes that the number of entities

filing Form 7-R will increase slightly, since that form may now be used

by an entity to register as a floor trader, and the number of persons

filing Form 8-R and 8-T will also increase slightly, when individuals

who are principals of entities that are registered as floor traders use

those forms to list themselves.

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\25\ See currently approved information collection, available at

http://www.reginfo.gov/public/do/PRAICList?ref_nbr=201203-3038-004.

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Therefore, the Commission has determined to revise the burden for

this information collection as follows. The burden associated with the

use of Form 7-R for the registration of entities as floor traders is

estimated to be 60 hours, assuming 60 respondents,\26\ which will

result from: (1) Application for registration by entities as floor

traders and submission of required information on behalf of their

respective principals; (2) initially, no withdrawals from registration

by floor traders and a relatively small decrease in the number of their

respective principals; and (3) initially, no reported corrections.

Burden means the total time, effort, or financial resources expended by

persons to generate, maintain, retain, disclose or provide information

to or for a federal agency.

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\26\ The Commission has previously estimated that approximately

120 entities will register as SDs. See 77 FR 2613, 2622 (January 19,

2012). The Commission believes it is reasonable to estimate that

half as many entities will register as floor traders.

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The respondent burden for this collection is estimated to average 1

hour per response for the Form 7-R; 0.8 hours per response for the Form

8-R; and 0.2 hours per response for the Form 8-T.\27\ These estimates

include the time needed to review instructions; to prepare technology

and systems for the purposes of collecting, validating, and verifying

information, processing and maintaining information, and disclosing and

providing information; to adjust the existing ways to comply with any

previously applicable instructions and requirements; to train personnel

to be able to respond to a collection of information; and to transmit

or otherwise disclose the information.

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\27\ See id. at 2643.

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Form 7-R

Respondents/Affected Entities: 60.

Estimated number of responses: 60.

Estimated total annual burden on respondents: 1 hour.

Frequency of collection: On occasion and annually.

Burden Statement: 60 respondents x 1 hour = 60 Burden Hours.

Form 8-R

Respondents/Affected Entities: 5 principals per each of 60 floor

traders.

Estimated number of responses: 300.

Estimated total annual burden on respondents: 0.8 hours.

Frequency of collection: On occasion.

Burden Statement: 300 respondents x 0.8 hours = 240 Burden Hours.

Form 8-T

Respondents/Affected Entities: 1 principal per each of 10 floor

traders.

Estimated number of responses: 10.

Estimated total annual burden on respondents: 0.2 hours.

Frequency of collection: On occasion.

Burden Statement: 10 respondents x 0.2 hours = 2 Burden Hours.

C. Cost-Benefit Considerations

Section 15(a) of the CEA \28\ requires the Commission to consider

the costs and benefits of its actions before promulgating a regulation

under the CEA or issuing an order. Section 15(a) further specifies that

the costs and benefits shall be evaluated in light of the following

five broad areas of market and public concern: (1) Protection of market

participants and the public; (2) efficiency, competitiveness, and

financial integrity of futures markets; (3) price discovery; (4) sound

risk management practices; and (5) other public interest

considerations. The Commission considers the costs and benefits

resulting from its discretionary determinations with respect to the

Section 15(a) factors.

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\28\ 7 U.S.C. 19(a).

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The regulations being adopted today conform, modernize, and make

technical amendments to part 3 governing the regulation of

intermediaries. Their purpose is to

[[Page 51902]]

ensure that the Commission's current rules are consistent with other

Commission rulemakings issued pursuant to the Dodd-Frank Act. Before

adopting these regulations, the Commission sought public comment on the

Proposal, including comment on the costs and benefits of the Proposal.

While inviting public comments on its cost-benefit considerations, the

Proposal clarified that the substantive proposed rulemakings with which

this rulemaking is associated have addressed the costs and benefits of

the proposals as required by section 15(a) of the CEA.\29\

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\29\ 76 FR at 12891.

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The Commission received few specific comments concerning the

Proposal's consideration of costs and benefits beyond general comments

that the costs associated with particular rule amendments would

outweigh the benefits. Those it did receive are addressed in the

discussion below. None of the comments received provided a basis to

quantify estimated costs or benefits.

The Commission's baseline for consideration of the costs and

benefits of this rulemaking are the costs and benefits that the public

and market participants would experience in the absence of this

proposed regulatory action. In other words, the proposed baseline is an

alternative situation in which the Commission takes no action to

conform, modernize, and make technical adjustments to its existing

rules as described above in light of the Dodd-Frank Act amendments to

the CEA.

1. Costs and Benefits of the Conforming Amendments--In General

As set forth in the Proposal, the regulations the Commission is

adopting concern conforming and technical amendments to part 3

governing the registration of intermediaries. Although the conforming

amendments do not involve substantive changes to existing regulations,

and hence no significant changes to the costs or benefits of the same,

the final rules do benefit market participants by adding specificity to

the mechanics of registration, which also benefits customers in the

form of increased transparency. For example, the conforming amendments

will add references to SEFs in Sec. 3.42 to clarify that a temporary

license would immediately terminate upon failure to comply with an

award in an arbitration proceeding conducted pursuant to the rules of a

SEF.

2. Costs and Benefits of the Definitions

Current Sec. 3.1(a) sets forth the definition of ``principal,''

and Sec. 3.1(a)(3) carves out from that definition certain persons

that have made capital contributions in the form of subordinated debt

to a registrant, including unaffiliated banks operating in the U.S. and

U.S. branches of foreign banks. The Commission is adopting amendments

to expand the carve-out to accommodate the likelihood that persons with

capital contributions from foreign banks might register as SDs and thus

be included within the definition of principal. This expanded

definitional carve-out makes the foreign bank registration process

consistent with that for domestic banks. This consistency promotes

market efficiency by avoiding additional costs that foreign banks would

otherwise incur to comply with listing and qualification requirements.

No comments were received with respect to any cost or benefit

implications of this definitional amendment, notwithstanding that the

Commission specifically sought comments concerning it.\30\

---------------------------------------------------------------------------

\30\ The Commission requested comments on whether the provision

is warranted to ensure uniform listing of principals by domestic and

foreign-domiciled registrants, and whether the expansion would

ensure that the list of principals remains a meaningful reflection

of the persons who actually exercise control over the registrant's

regulated activities.

---------------------------------------------------------------------------

3. Costs and Benefits of Section 3.10--Registration of Futures

Commission Merchants, Retail Foreign Exchange Dealers, Introducing

Brokers, Commodity Trading Advisors, Commodity Pool Operators, Swap

Dealers, Major Swap Participants, and Leverage Transaction Merchants.

Section 3.11--Registration of Floor Brokers and Floor Traders. Section

3.12--Registration of Associated Persons of Futures Commission

Merchants, Retail Foreign Exchange Dealers, Introducing Brokers,

Commodity Trading Advisors, Commodity Pool Operators and Leverage

Transaction Merchants

Section 3.10 generally sets forth the registration requirements for

various Commission registrants. The Commission has decided to implement

the expansion of the existing exemption in Sec. 3.10(c)(2) and (3),

which will introduce parity between registration obligations of foreign

brokers and foreign intermediaries conducting commodity interest

transactions bilaterally, on DCMs, and on SEFs. The Commission expects

such expansion of the exemption to reduce compliance costs without

affecting customer protection. The Commission has also decided to

implement the proposed new paragraph Sec. 3.10(c)(5), which will

provide regulatory certainty that the activities engaged in solely as

an associated person of an SD would not require such person to register

as an SD. The Commission believes that this amendment is beneficial by

reducing the costs to market participants of approaching the Commission

for clarifications.

Section 3.11 is being amended to reflect the further definition of

the term ``swap dealer'' which, among, other things, excludes certain

swaps entered into by registered floor traders from the SD

determination. Traditionally, natural persons have registered as floor

traders. However, following promulgation of rules further defining the

term ``swap dealer,'' the Commission foresees that firms will register

as floor traders, making the previous rule requiring fingerprinting for

all floor traders impractical without clarification. The new rules

clarify that principals of a firm registering as a floor trader, and

each individual responsible for entry of orders from that floor

trader's own account, will be subject to the fingerprinting

requirement. The Commission believes that this amendment is beneficial

by obviating the need for potentially impacted market participants to

incur costs to approach the Commission for clarifications. The other

amendments extending the scope of Sec. 3.11 to SEFs, while mainly

technical in nature, will improve operational efficiency by allowing

NFA to properly process applications for registration for floor traders

engaged in swap activities.

Section 3.12 generally sets forth the registration requirement for

APs. The Commission is adopting an amendment to Sec. 3.12(h)(1)(i) to

provide that a person is not required to register as an AP in any

capacity if he or she is registered in one of the other enumerated

categories, including an SD or MSP. FIA agreed with the Commission that

it is highly improbable that an individual, rather than an entity,

would register as an SD and MSP, but supported the Commission's

proposal in light of the clarity it provides. As the change clarifies

and extends the exemptions to activities of an SD or MSP, it will not

create additional costs, and will benefit the markets by promoting

efficiency by eliminating the need for multiple registrations by a

single individual.

4. Costs and benefits--DTEF

The rules amendments adopted today delete the term DTEF from

Sec. Sec. 3.2(c), 3.2(c)(2), 3.10(a)(3)(i)(A), 3.10(c)(2)(i),

[[Page 51903]]

3.10(c)(3)(i), 3.10(c)(4)(ii) and (iv), 3.11(a)(2) and (3), 3.11(b),

3.31(d), 3.40(a)(2)(iv), 3.42(a)(6), and 3.46(a)(8). This will

implement the abolishment of DTEF as a market category by the Dodd-

Frank Act.

As this change is mandated by statute, it will not create costs and

benefits relative to the baseline. No comments were received on the

costs and benefits of this aspect of the Proposal.

5. Cost and Benefits of Modernization and Technical Amendments to Part

3--Definitions

Section 3.1(a)(2) defines a principal to include persons who exceed

a threshold for equity ownership. As a technical matter, the Commission

is adopting amendments to harmonize the references to outstanding

classes of securities in Sec. 3.1(a)(2)(i) and (ii) by referring

throughout to ``outstanding shares of any class of equity securities,

other than non-voting securities.'' The primary benefit from these

amended regulations is that they provide specificity for calculations

involving authorized but unissued securities, or debt securities.

Also, the Commission is amending its regulations to move the

concept of indirect owners found in the definition of beneficial

ownership in Sec. 3.1(d) to Sec. 3.1(a)(4) to serve as a backstop to

the requirement to list indirect owners in Sec. 3.1(a)(2). The

Commission received no comments with respect to the costs and benefits

of this amendment. The Commission does not believe that this amendment

will have a material impact on costs and benefits relative to the

baseline.

The rules incorporate revised language further defining the

definition of principal to include any person who has the power to

exercise a controlling influence over an entity's activities that are

subject to regulation by the Commission. As described earlier, the

proposed amendments were designed to reduce the scope of persons who

might potentially be covered by the definition. Under certain

circumstances, the revised Sec. 3.1(a)(2)(i) language referencing

those with power to exercise a controlling influence could potentially

increase the scope of persons covered by the definition. But, given

that this amendment is similar to an existing requirement in Form BD

covering broker-dealers, the Commission believes that any additional

costs will be limited to the subset of firms that are not already

registered with the SEC and within this subset, those firms which have

individuals who are not subject to the existing equity ownership

threshold, or the existing director or officer function threshold, but

nonetheless who possess the power to exercise control. Given the nature

of the control structure being addressed, while it is not feasible for

the Commission to estimate the number of firms likely to be impacted by

this rule, it believes that costs of complying with the rule are likely

to be minimal because information on which owners of an entity exercise

control is generally known to officers of that entity. Furthermore, the

minimal costs are justified by the benefits to the market and market

participants from ensuring that individuals cannot circumvent the

fitness qualifications presently in place for principals by structuring

their holdings into non-voting securities, and then exercising control

through a separate agreement.

6. Costs and Benefits of Section 3.31--Deficiencies, Inaccuracies, and

Changes To Be Reported, and Section 3.33--Withdrawal From Registration

Current Sec. 3.31 sets forth procedural requirements for a

registrant to update and/or correct information previously provided to

the Commission and the NFA. Section 3.33 addresses the procedural

requirements for the withdrawal of registration. The Commission is

adopting amendments to Sec. 3.31(a) to reference the requirement in

amended Sec. 3.33 to withdraw registration upon certain events of

dissolution, and in Sec. 3.31(b), (c) and (d) to make technical

corrections.

The adopted amendments in Sec. 3.31 are technical and are not

expected to involve costs, but will provide greater clarity by

correcting references to outdated forms and by deleting duplicate

instructions. The amendments to Sec. 3.33 clarify the requirement to

withdraw under certain circumstances involving dissolution of a

company, and would improve the predictability of withdrawal

requirements to the benefit of market participants. There were no

comments on the costs and benefits of the proposed withdrawal

requirements under Sec. 3.33.

7. Costs and Benefits of Registration Forms

The Commission is adopting amendments to the regulations addressing

the forms used during the registration process. These changes are

technical in nature--for example, the changes would delete references

to an obsolete form and obsolete cross-references. The Commission does

not believe that increased costs to market participants or the public

will result from these changes. That said, the Commission believes they

do provide a benefit by addressing gaps in the current information

collected through the various forms, particularly those forms cross-

referencing other data.

There were no comments on the costs and benefits of the proposed

technical amendments to the forms.

8. Section 15(a) Factors

Protection of market participants and the public.

The Commission believes that the amendments to Sec. 3.33 will

improve the protection of market participants and the public by

requiring withdrawal of registration in the event of dissolution of a

registrant, thus improving the protection of the public.

Efficiency, competitiveness, and financial integrity.

The amendments to Sec. 3.1 clarify the calculations used to

determine who meets the definition of principal, reducing uncertainty

surrounding compliance by intermediaries. The amendments to the

regulations addressing the forms used during the registration process

will update the description of information collection and make it more

accurate, which improves the overall efficiency of our markets.

Price discovery. The Commission has not identified any

impact to the price discovery process from these rules.

Sound risk management policies. The Commission has not

identified any impact to sound risk management practices from these

rules.

Other public interest considerations. The Commission has

not identified any impact to other public interest considerations from

these rules.

List of Subjects in 17 CFR Part 3

Administrative practice and procedure, Brokers, Commodity futures,

Major swap participants, Reporting and recordkeeping requirements, Swap

dealers.

For the reasons stated in the preamble, the Commission amends 17

CFR part 3 as follows:

PART 3--REGISTRATION

1. The authority citation for part 3 is revised to read as follows:

Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1, 6c,

6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a,

13b, 13c, 16a, 18, 19, 21, 23.

2. Amend Sec. 3.1 by revising paragraphs (a) introductory text,

(a)(2), and (a)(3), adding paragraph (a)(4), and removing and reserving

paragraphs (d) and (e). The revisions and addition read as follows:

[[Page 51904]]

Sec. 3.1 Definitions.

(a) Principal. Principal means, with respect to an entity that is

an applicant for registration, a registrant or a person required to be

registered under the Act or the regulations in this part:

* * * * *

(2)(i) Any individual who directly or indirectly, through

agreement, holding company, nominee, trust or otherwise, is either the

owner of ten percent or more of the outstanding shares of any class of

equity securities, other than non-voting securities, is entitled to

vote or has the power to sell or direct the sale of ten percent or more

of the outstanding shares of any class of equity securities, other than

non-voting securities, is entitled to receive ten percent or more of

the profits of the entity, or has the power to exercise a controlling

influence over the entity's activities that are subject to regulation

by the Commission; or

(ii) Any person other than an individual that is the direct owner

of ten percent or more of the outstanding shares of any class of equity

securities, other than non-voting securities; or

(3) Any person that has contributed ten percent or more of the

capital of the entity, provided, however, that if such capital

contribution consists of subordinated debt contributed by either:

(i) An unaffiliated bank insured by the Federal Deposit Insurance

Corporation,

(ii) An unaffiliated ``foreign bank,'' as defined in 12 CFR

211.21(n) that currently operates an ``office of a foreign bank,'' as

defined in 12 CFR 211.21(t), which is licensed under 12 CFR 211.24(a),

(iii) Such unaffiliated office of a foreign bank that is licensed,

(iv) An insurance company subject to regulation by any State, such

bank, foreign bank, office of a foreign bank, or insurance company will

not be deemed to be a principal for purposes of this section, provided

such debt is not guaranteed by another party not listed as a principal.

(4) Any individual who, directly or indirectly, creates or uses a

trust, proxy, power of attorney, pooling arrangement or any other

contract, arrangement, or device with the purpose or effect of

divesting such person of direct or indirect ownership of an equity

security of the entity, other than a non-voting security, or preventing

the vesting of such ownership, or of avoiding making a contribution of

ten percent or more of the capital of the entity, as part of a plan or

scheme to evade being deemed a principal of the entity, shall be deemed

to be a principal of the entity.

* * * * *

3. Amend Sec. 3.2 by revising the section heading and paragraphs (c)

introductory text and (c)(2) to read as follows:

Sec. 3.2 Registration processing by the National Futures Association;

notification and duration of registration.

* * * * *

or the sponsor in the case of an applicant for registration as an

associated person, and each designated contract market and swap

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.

* * * * *

(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 swap execution facility that has granted the applicant

trading privileges that only a temporary license has been granted.

* * * * *

4. Amend Sec. 3.4 by revising paragraph (a) to read as follows:

Sec. 3.4 Registration in one capacity not included in registration in

any other capacity.

(a) Except as may be otherwise provided in the Act or in any rule,

regulation, or order of the Commission, each futures commission

merchant, retail foreign exchange dealer, swap dealer, major swap

participant, floor broker, floor trader of any commodity for future

delivery, commodity trading advisor, commodity pool operator,

introducing broker, leverage transaction merchant, and associated

person (other than an associated person of a swap dealer or major swap

participant) must register as such under the Act. Except as may be

otherwise provided in the Act or in any rule, regulation, or order of

the Commission, registration in one capacity under the Act shall not

include registration in any other capacity.

* * * * *

5. Amend Sec. 3.10 by revising paragraphs (a)(3)(i)(A), (c)(2)(i),

(c)(3)(i), (c)(4)(ii), (c)(4)(iii), and (c)(4)(iv) and adding paragraph

(c)(5) to read as follows:

Sec. 3.10 Registration of futures commission merchants, introducing

brokers, commodity trading advisors, commodity pool operators, swap

dealers, major swap participants, and leverage transaction merchants.

(a) * * *

(3) * * *

(i) * * *

(A) The broker or dealer limits its solicitation of orders,

acceptance of orders, or execution of orders, or placing of orders on

behalf of others involving any contracts of sale of any commodity for

future delivery, on or subject to the rules of any contract market, to

security futures products as defined in section 1a(44) of the Act;

* * * * *

(2)(i) A foreign broker, as defined in Sec. 1.3(xx) of this

chapter, is not required to register as a futures commission merchant

if it submits any commodity interest transactions executed bilaterally,

on or subject to the rules of a designated contract market, or on or

subject to the rules of a swap execution facility, for clearing on an

omnibus basis through a futures commission merchant registered in

accordance with section 4d of the Act.

* * * * *

(3)(i) A person located outside the United States, its territories

or possessions engaged in the activity of: An introducing broker, as

defined in Sec. 1.3(mm) of this chapter; a commodity trading advisor,

as defined in Sec. 1.3(bb) of this chapter; or a commodity pool

operator, as defined in Sec. 1.3(nn) of this chapter, in connection

with any commodity interest transaction executed bilaterally or made on

or subject to the rules of any designated contract market or swap

execution facility only on behalf of persons located outside the United

States, its territories or possessions, is not required to register in

such capacity provided that any such commodity interest transaction is

submitted for clearing through a futures commission merchant registered

in accordance with section 4d of the Act.

* * * * *

(4) * * *

(ii) Such a person introduces, on a fully-disclosed basis in

accordance with Sec. 1.57 of this chapter, any institutional customer,

as defined in Sec. 1.3(g) of this chapter, to a registered futures

commission merchant for the purpose of trading on a designated contract

market;

(iii) Such person's affiliated futures commission merchant has

filed with the National Futures Association (Attn: Vice President,

Compliance) an acknowledgement that the affiliated futures commission

merchant will be jointly and severally liable for any violations of the

Act or the Commission's regulations committed by such person in

connection with those introducing activities, whether or not

[[Page 51905]]

the affiliated futures commission merchant submits for clearing any

trades resulting from those introducing activities; and

(iv) Such person does not solicit any person located in the United

States, its territories or possessions for trading on a designated

contract market, nor does such person handle the customer funds of any

person located in the United States, its territories or possessions for

the purpose of trading on any designated contract market.

* * * * *

(5) In determining whether a person is a swap dealer, the

activities of a registered swap dealer with respect to which such

person is an associated person shall not be considered.

* * * * *

6. Revise Sec. 3.11 to read as follows:

Sec. 3.11 Registration of floor brokers and floor traders.

(a) Application for registration. (1) Application for registration

as a floor broker or floor trader must be on Form 8-R, if as an

individual, or Form 7-R, if as a non-natural person, and must be

completed and filed with the National Futures Association in accordance

with the instructions thereto. Each Form 7-R filed in accordance with

this paragraph (a) must be accompanied by a Form 8-R, completed in

accordance with the instructions thereto and executed by each

individual who is a principal of the applicant, and each individual

responsible for entry of orders from that applicant's own account. Each

Form 8-R filed in accordance with this paragraph (a) must be

accompanied by the fingerprints of the applicant on a fingerprint card

provided for that purpose by the National Futures Association, except

that a fingerprint card need not be filed by any applicant who has a

current Form 8-R on file with the Commission or the National Futures

Association.

(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 swap 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 swap 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 and swap execution facilities have ceased:

provided, that if a floor broker or floor trader whose trading

privileges on all contract markets and swap execution facilities have

ceased for reasons unrelated to any Commission action or any contract

market or swap 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 swap execution facility where such person 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 7-R, Form 8-R or Form 3-R record of a change to Form 7-

R or Form 8-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 such person 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. Each

contract market and swap 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 provide notice in

accordance with Sec. 3.31(d) after such person's trading privileges on

such contract market or swap execution facility have ceased.

a floor trader in order to engage in activity as a floor trader.

7. Amend Sec. 3.12 by revising paragraphs (b), (c) introductory text,

(g), (h)(1) introductory text, and (h)(1)(i) and (ii) to read as

follows:

Sec. 3.12 Registration of associated persons of futures commission

merchants, retail foreign exchange dealers, introducing brokers,

commodity trading advisors, commodity pool operators and leverage

transaction merchants.

* * * * *

(b) Duration of registration. A person registered in accordance

with paragraphs (c), (d), (f), or (i) of this section and whose

registration has not been revoked will continue to be so registered

until the revocation or withdrawal of the registration of each of the

registrant's sponsors, or until the cessation of the association of the

registrant with each of the registrant's sponsors. Such person will be

prohibited from engaging in activities requiring registration under the

Act or from representing himself or herself to be a registrant under

the Act or the representative or agent of any registrant during the

pendency of any suspension of his or her registration, or his or her

sponsor's registration. Each of the registrant's sponsors must file a

notice in accordance with Sec. 3.31(c) reporting the termination of

the association of the associated person.

paragraphs (d), (f), and (i) of this section, application for

registration as an associated person in any capacity must be on Form 8-

R, completed and filed in accordance with the instructions thereto.

* * * * *

(g) Petitions for exemption. Any person adversely affected by the

operation of this section may file a petition with the Secretary of the

Commission, which petition must set forth with particularity the

reasons why that person believes that an applicant should be exempted

from the requirements of this section and why such an exemption would

not be contrary to the public interest and the purposes of the

provision from which exemption is sought. The petition will be granted

or denied by the Commission on the basis of the papers filed. The

Commission may grant such a petition if it finds that the exemption is

not contrary to the public interest and the purposes of the provision

from which exemption is sought. The petition may be granted subject to

such terms and conditions as the Commission may find appropriate.

(h) Exemption from registration. (1) A person is not required to

(i) Registered under the Act as a futures commission merchant,

retail foreign exchange dealer, swap dealer, major swap participant,

floor broker, or as an introducing broker;

(ii) Engaged in the solicitation of funds, securities, or property

for a participation in a commodity pool, or the supervision of any

person or persons so engaged, pursuant to registration

[[Page 51906]]

with the Financial Industry Regulatory Authority as a registered

representative, registered principal, limited representative or limited

principal, and that person does not engage in any other activity

subject to regulation by the Commission;

* * * * *

8. Amend Sec. 3.21 by:

a. Revising paragraphs (a)(1) and (2);

b. Adding paragraph (a)(3); and

c. Revising paragraphs (b)(1) through (3), (c) introductory text, and

(c)(4)(i) and (iii).

The revisions and addition read as follows:

Sec. 3.21 Exemption from fingerprinting requirement in certain cases.

(a) * * *

(1) A legible, accurate and complete photocopy of a fingerprint

card that has been submitted to the Federal Bureau of Investigation for

identification and appropriate processing and of each report, record,

and notation made available by the Federal Bureau of Investigation with

respect to that fingerprint card if such identification and processing

has been completed satisfactorily by the Federal Bureau of

Investigation not more than ninety days prior to the filing with the

National Futures Association of the photocopy;

(2) A statement that such person's application for initial

registration in any capacity was granted within the preceding ninety

days, provided that the provisions of this paragraph (a)(2) shall not

be applicable to any person who, by Commission rule, regulation, or

order, was not required to file a fingerprint card in connection with

such application for initial registration; or

(3) A statement that such person has a current Form 8-R on file

with the Commission or the National Futures Association.

(b) * * *

(1) With respect to the fingerprints of an associated person: An

officer, if the sponsor is a corporation; a general partner, if a

partnership; or the sole proprietor, if a sole proprietorship;

(2) With respect to fingerprints of a floor broker or individual

floor trader: The applicant for registration; and with respect to

fingerprints of each individual who is responsible for entry of orders

from the account of a floor trader that is a non-natural person, the

applicant for registration, or

(3) With respect to the fingerprints of a principal: An officer, if

the futures commission merchant, retail foreign exchange dealer, swap

dealer, major swap participant, commodity trading advisor, commodity

pool operator, introducing broker, floor trader that is a non-natural

person, or leverage transaction merchant with which the principal will

be affiliated is a corporation; a general partner, if a partnership; or

the sole proprietor, if a sole proprietorship.

foreign exchange dealer, swap dealer, major swap participant,

introducing broker, commodity pool operator, commodity trading advisor,

floor trader that is a non-natural person, or leverage transaction

merchant that has a principal who is a director but is not also an

officer or employee of the firm may, in lieu of submitting a

fingerprint card in accordance with the provisions of Sec. 3.10(a)(2),

file a ``Notice Pursuant to Rule 3.21(c)'' with the National Futures

Association. Such notice shall state, if true, that such outside

director:

* * * * *

(4) * * *

(i) The name of the futures commission merchant, retail foreign

exchange dealer, swap dealer, major swap participant, introducing

broker, commodity trading advisor, commodity pool operator, floor

trader that is a non-natural person, leverage transaction merchant, or

applicant for registration in any of these capacities of which the

person is an outside director;

* * * * *

(iii) The internal controls used to ensure that the outside

director for whom exemption under this paragraph (c) is sought does not

have access to the keeping, handling or processing of the items

described in paragraphs (c)(2)(i) and (ii) of this section; and

* * * * *

9. Amend Sec. 3.22 by revising paragraph (b) to read as follows:

Sec. 3.22 Supplemental filings.

* * * * *

(b) That the person, or any individual who, based upon his or her

relationship with that person is required to file a Form 8-R in

accordance with the requirements of this part, as applicable, must,

within such period of time as the Commission or the National Futures

Association may specify, complete and file with the Commission or the

National Futures Association a current Form 7-R, or if appropriate, a

Form 8-R, in accordance with the instructions thereto.

* * * * *

10. Revise Sec. 3.30 to read as follows:

Sec. 3.30 Current address for purpose of delivery of communications

from the Commission or the National Futures Association.

(a) The address of each registrant, applicant for registration, and

principal, as submitted on the application for registration (Form 7-R

or Form 8-R) or as submitted on the biographical supplement (Form 8-R)

shall be deemed to be the address for delivery to the registrant,

applicant or principal for any communications from the Commission or

the National Futures Association, including any summons, complaint,

reparation claim, order, subpoena, special call, request for

information, notice, and other written documents or correspondence,

unless the registrant, applicant or principal specifies another address

for this purpose: Provided that the Commission or the National Futures

Association may address any correspondence relating to a biographical

supplement submitted for or on behalf of a principal to the futures

commission merchant, retail foreign exchange dealer, swap dealer, major

swap participant, introducing broker, commodity pool operator,

commodity trading advisor, floor trader that is a non-natural person,

or leverage transaction merchant with which the principal is affiliated

and may address any correspondence relating to an associated person to

the futures commission merchant, retail foreign exchange dealer, swap

dealer, major swap participant, introducing broker, commodity pool

operator, commodity trading advisor, floor trader that is a non-natural

person, or leverage transaction merchant with which the associated

person or the applicant for registration is or will be associated as an

associated person.

(b) Each registrant, while registered and for two years after

termination of registration, and each principal, while affiliated and

for two years after termination of affiliation, must notify in writing

the National Futures Association of any change of the address on the

application for registration, biographical supplement, or other address

filed with the National Futures Association for the purpose of

receiving communications from the Commission or the National Futures

Association. Failure to file a required response to any communication

sent to the latest such address filed with the National Futures

Association that is caused by a failure to notify in writing the

National Futures Association of an address change may result in an

order of default and award of claimed monetary damages or other

appropriate order in any National Futures Association or Commission

[[Page 51907]]

proceeding, including a reparation proceeding brought under part 12 of

this chapter.

11. Amend Sec. 3.31 by revising paragraphs (a), (b), (c)(1)

introductory text, (c)(2), and (d) to read as follows:

Sec. 3.31 Deficiencies, inaccuracies, and changes to be reported.

(a)(1) Each applicant or registrant as a futures commission

merchant, retail foreign exchange dealer, swap dealer, major swap

participant, commodity trading advisor, commodity pool operator,

introducing broker, floor trader that is a non-natural person 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 that no longer renders accurate and current the

information contained therein, with the exception of any change that

requires withdrawal from registration under Sec. 3.33. Each such

correction shall be prepared and filed in accordance with the

instructions thereto to create a Form 3-R record of such change.

(2) Where a registrant has changed its form of organization to or

from a sole proprietorship, the registrant must request withdrawal from

registration in accordance with Sec. 3.33.

(3) Where any person becomes a principal of an applicant or

registrant subsequent to the filing of the applicant's or registrant's

current Form 7-R:

(i) If the new principal is not a natural person, the registrant

shall update such Form 7-R to create a Form 3-R record of change.

(ii) 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.

(b) Each applicant or registrant as a floor broker, floor trader or

associated person, and each principal of a futures commission merchant,

retail foreign exchange dealer, swap dealer, major swap participant,

commodity trading advisor, commodity pool operator, introducing broker,

floor trader that is a non-natural person, or leverage transaction

merchant must, in accordance with the instructions thereto, promptly

correct any deficiency or inaccuracy in the Form 8-R or supplemental

statement thereto to create a Form 3-R record of change.

(c)(1) After the filing of a Form 8-R or updating a Form 8-R to

create a Form 3-R record of change by or on behalf of any person for

the purpose of permitting that person to be an associated person of a

futures commission merchant, retail foreign exchange dealer, commodity

trading advisor, commodity pool operator, introducing broker, or a

leverage transaction merchant, that futures commission merchant, retail

foreign exchange dealer, commodity trading advisor, commodity pool

operator, introducing broker or leverage transaction merchant must,

within thirty days after the occurrence of either of the following,

file a notice thereof with the National Futures Association indicating:

* * * * *

(2) Each person registered as, or applying for registration as, a

futures commission merchant, retail foreign exchange dealer, swap

dealer, major swap participant, commodity trading advisor, commodity

pool operator, introducing broker, floor trader that is a non-natural

person, or leverage transaction merchant must, within thirty days after

the termination of the affiliation of a principal with the registrant

or applicant, file a notice thereof with the National Futures

Association.

* * * * *

(d) Each contract market or swap execution facility that has

granted trading privileges to a person who is registered, has received

a temporary license, or has applied for registration as a floor broker

or floor trader, must notify the National Futures Association within

sixty days after such person has ceased having trading privileges on

such contract market or swap execution facility.

* * * * *

12. Amend Sec. 3.33 by revising paragraphs (a) introductory text, (b)

introductory text, and (e) to read as follows:

Sec. 3.33 Withdrawal from registration.

(a) A futures commission merchant, retail foreign exchange dealer,

swap dealer, major swap participant, introducing broker, commodity

trading advisor, commodity pool operator, floor trader that is a non-

natural person, or leverage transaction merchant must request that its

registration be withdrawn prior to any voluntary resolution to file

articles (or a certificate) of dissolution (or cancellation), and upon

notice of any involuntary dissolution initiated by a third-party. A

futures commission merchant, retail foreign exchange dealer, swap

dealer, major swap participant, introducing broker, commodity trading

advisor, commodity pool operator, leverage transaction merchant, floor

broker or floor trader may request that its registration be withdrawn

in accordance with the requirements of this section if:

* * * * *

(b) A request for withdrawal from registration as a futures

commission merchant, retail foreign exchange dealer, swap dealer, major

swap participant, introducing broker, commodity trading advisor,

commodity pool operator, floor trader that is a non-natural person, or

leverage transaction merchant must be made on Form 7-W, and a request

for withdrawal from registration as a floor broker or individual floor

trader must be made on Form 8-W, completed and filed with the National

Futures Association in accordance with the instructions thereto. The

request for withdrawal must be made by a person duly authorized by the

registrant and must specify:

* * * * *

(e) A request for withdrawal from registration as a futures

commission merchant, retail foreign exchange dealer, swap dealer, major

swap participant, introducing broker, commodity pool operator,

commodity trading advisor, floor trader that is a non-natural person,

or leverage transaction merchant on Form 7-W, and a request for

withdrawal from registration as a floor broker or individual floor

trader on Form 8-W, must be filed with the National Futures Association

and a copy of such request must be sent by the National Futures

Association within three business days of the receipt of such

withdrawal request to the Commodity Futures Trading Commission,

Division of Swap Dealer and Intermediary Oversight, Three Lafayette

Centre, 1155 21st Street NW., Washington, DC 20581. In addition, any

floor broker or individual floor trader requesting withdrawal from

registration must file a copy of his or her Form 8-W with each contract

market or swap execution facility that has granted him or her trading

privileges, and any floor trader that is a non-natural person

requesting withdrawal from registration must file a copy of its Form 7-

W with each contract market or swap execution facility that has granted

it trading privileges. Within three business days of any determination

by the National Futures Association under Sec. 3.10(d) to treat the

failure by a registrant to file an annual Form 7-R as a request for

withdrawal, the National Futures Association shall send the Commission

notice of that determination.

* * * * *

[[Page 51908]]

13. Amend Sec. 3.40 by revising paragraph (a)(2) introductory text and

(a)(2)(iv) to read as follows:

Sec. 3.40 Temporary licensing of applicants for associated person,

floor broker or floor trader registration.

(a) * * *

(2) The National Futures Association may grant a temporary license

to any applicant for registration as a floor broker or individual floor

trader upon the contemporaneous filing with the National Futures

Association of:

* * * * *

(iv) Evidence that the applicant has been granted trading

privileges by a contract market or swap 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.

* * * * *

14. Amend Sec. 3.42 by revising paragraphs (a) introductory text,

(a)(2), (a)(6), and (a)(8) to read as follows:

Sec. 3.42 Termination.

(a) A temporary license issued pursuant to Sec. 3.40 shall

terminate:

* * * * *

(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 and swap execution facilities

which filed the certification described in Sec. 3.40;

* * * * *

(6) Immediately upon failure to comply with an award in an

arbitration proceeding conducted pursuant to the rules of a designated

contract market, swap 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 or other appropriate

arbitration forum.

* * * * *

(8) Immediately upon notice to the applicant and the applicant's

sponsor or the contract market or swap execution facility that has

granted the applicant trading privileges that:

(i) The applicant failed to disclose relevant disciplinary history

information on the applicant's Form 8-R; or

(ii) An event has occurred leading to a required disclosure on the

applicant's Form 8-R.

* * * * *

15. Amend Sec. 3.44 by revising paragraph (a)(5) to read as follows:

Sec. 3.44 Temporary licensing of applicants for guaranteed

introducing broker registration.

(a) * * *

(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.

* * * * *

16. Amend Sec. 3.46 by revising paragraphs (a) introductory text,

(a)(6), (a)(8), and (a)(10) to read as follows:

Sec. 3.46 Termination.

(a) A temporary license issued pursuant to Sec. 3.44 shall

terminate:

* * * * *

(6) Immediately upon failure to comply with an order to pay a civil

monetary penalty, restitution, or disgorgement within the time

permitted under section 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, swap 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, swap execution facility,

or other appropriate arbitration forum.

* * * * *

(10) Immediately upon notice to the applicant and the guarantor

futures commission merchant that:

(i) The applicant or any principal (including any branch officer

manager) failed to disclose relevant disciplinary history information

on the applicant's Form 7-R or on a principal's Form 8-R; or

(ii) An event has occurred leading to a required disclosure on the

applicant's Form 7-R or on a principal's Form 8-R.

* * * * *

17. Amend Sec. 3.56 by revising paragraph (b)(1)(iv) to read as

follows:

Sec. 3.56 Suspension or modification of registration pursuant to

section 8a(11) of the Act.

* * * * *

(b) * * *

(1) * * *

(iv) The statement accompanying the notice referred to in paragraph

(a)(2) of this section and, in an effort to have his registration

modified rather than suspended, the Supplemental Sponsor Certification

Statement signed by a sponsor, supervising floor broker or, in the case

of a floor trader, a supervising registrant, principal, contract

market, or swap execution facility, as appropriate for the registrant

in accordance with Sec. 3.60(b)(2)(i) and who meets the standards set

forth in Sec. 3.60(b)(2)(i)(A) and (C).

* * * * *

18. Amend Sec. 3.60 by revising paragraphs (b)(2)(i) introductory

text, (f)(3), and (l) to read as follows:

Sec. 3.60 Procedure to deny, condition, suspend, revoke or place

restrictions upon registration pursuant to sections 8a(2), 8a(3) and

8a(4) of the Act.

* * * * *

(b) * * *

(2)(i) In the response, if the person is not an associated person,

a floor broker or a floor trader or an applicant for registration in

any of those capacities, the applicant or registrant shall also state

whether he or she intends to show that registration would not pose a

substantial risk to the public despite the existence of the

disqualification set forth in the notice. If the person is an

associated person, a floor broker or a floor trader or an applicant for

registration in any of those capacities, the applicant or registrant

shall also state whether he or she intends to show that full,

conditioned or restricted registration would not pose a substantial

risk to the public despite the existence of the disqualification set

forth in the notice. If the person is an associated person or an

applicant for registration as an associated person and intends to make

such a showing, he or she must also submit a letter signed by an

officer or general partner authorized to bind the sponsor whereby the

sponsor agrees to sign a Supplemental Sponsor Certification Statement

and supervise compliance with any conditions or restrictions that may

be imposed on the applicant or registrant as a result of a statutory

disqualification proceeding under this section; if the person is a

floor broker or a floor trader or an applicant for registration in

either capacity and intends to make such a showing, he or she must, in

the case of a floor broker or applicant for registration as a floor

broker, also submit a letter signed by his employer or if he or she has

no employer by another floor broker or, in the case of a floor trader

or applicant for registration

[[Page 51909]]

as a floor trader, also submit a letter signed by an officer of the

floor trader's clearing member, if such officer is a registrant or a

principal of a registrant, or the chief operating officer of each

contract market or swap execution facility that has granted trading

privileges, whereby the employer or floor broker, appropriate

registrant, principal or chief operating officer (on behalf of the

contract market or swap execution facility) agrees to sign a

Supplemental Sponsor Certification Statement and supervise compliance

with any conditions or restrictions that may be imposed on the

applicant or registrant as a result of a statutory disqualification

proceeding under this section; provided, that, with respect to such

sponsor, supervising employer or floor broker, supervising registrant

or principal:

* * * * *

(f) * * *

(3) If the person is an associated person, a floor broker or a

floor trader or an applicant for registration in any of those

capacities, evidence that the applicant's or registrant's registration

on a conditioned or restricted basis would be subject to supervisory

controls likely both to detect future wrongdoing by the applicant or

registrant and protect the public from any harm arising from future

wrongdoing by the applicant or registrant. Any decision providing for a

conditioned or restricted registration shall take into consideration

the applicant's or registrant's statutory disqualification and the time

period remaining on such statutory disqualification, and shall fix a

time period after which the registrant and his or her sponsor,

supervising employer or floor broker, or supervising registrant,

principal, contract market, or swap execution facility may petition to

lift or modify the conditions or restrictions in accordance with Sec.

3.64.

* * * * *

(l) The failure of any sponsor, supervising employer or floor

broker, or supervising registrant, principal, contract market, or swap

execution facility to fulfill its obligations with respect to

supervision or monitoring of a conditioned or restricted registrant as

agreed to in the Supplemental Sponsor Certification Statement shall be

deemed a violation of this rule under the Act.

19. Amend Sec. 3.64 by revising paragraph (a)(2) to read as follows:

Sec. 3.64 Procedure to lift or modify conditions or restrictions.

(a) * * *

(2) In the petition, the registrant and his or her sponsor,

supervising employer or floor broker, or supervising registrant,

principal, contract market, or swap execution facility shall be limited

to a showing, by affidavit, that the conditions or restrictions have

been satisfied pursuant to the order which imposed them. The affidavit

must be sworn to by a person with actual knowledge of the registrant's

activities on behalf of the sponsor, supervising employer or floor

broker, or supervising registrant, principal, contract market or swap

execution facility.

* * * * *

20. Amend Sec. 3.75 by revising paragraph (a) to read as follows:

Sec. 3.75 Delegation and reservation of authority.

(a) The Commission hereby delegates, until such time as it orders

otherwise, to the Director of the Division of Swap Dealer and

Intermediary Oversight or his or her designee the authority to grant or

deny requests filed pursuant to Sec. 3.12(g). The Director of the

Division of Swap Dealer and Intermediary Oversight may submit to the

Commission for its consideration any matter which has been delegated to

him pursuant to Sec. 3.12(g). The Commission hereby delegates, until

such time as it orders otherwise, the authority to perform all

functions specified in subparts B through D of this part to the persons

authorized to perform them thereunder.

* * * * *

Issued in Washington, DC, on August 15, 2012, by the Commission.

Sauntia S. Warfield,

Assistant Secretary of the Commission.

Appendices to Registration of Intermediaries--Commission Voting Summary

and Statements of Commissioners

Note: The following appendices will not appear in the Code of

Federal Regulations.

Appendix 1--Commission Voting Summary

On this matter, Chairman Gensler and Commissioners Sommers,

Chilton and Wetjen voted in the affirmative; Commissioner O'Malia

voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

I support the final rule to amend certain provisions of Part 3

of the Commission's regulations regarding the registration of

intermediaries. The final amendments are necessary to conform

existing regulations to the new requirements in the Dodd-Frank Wall

Street Reform and Consumer Protection Act.

The final rule would amend Part 3 to facilitate the extension of

the existing registration process to apply to new categories of

registrants, such as swap dealers and major swap participants.

Customers will benefit from the increased transparency of the

registration process. The final amendments also modernize existing

provisions that will apply to all Commission registrants.

In addition, the Commission has made technical changes to permit

legal entities (in addition to natural persons) to register as floor

traders. This change was required to implement the exception from

the definition of a swap dealer for floor traders that trade cleared

swaps on swap execution facilities.

Appendix 3--Statement of Commissioner Scott O'Malia

I respectfully dissent with the Commodity Futures Trading

Commission's (``Commission'') final rule to adopt certain conforming

amendments to part 3 of the Commission's regulations regarding the

registration of intermediaries.\1\ I find it disturbing that coming

off of two widely publicized incidents of intermediary fraud and

misappropriation of customer funds (i.e., MF Global Holdings and

Peregrine Financial Group), the Commission is not adopting a rule

that will provide customers with greater transparency of the

professional and disciplinary background of Commission registrants.

While I support most of what is included in this rule, I am unable

to vote in the affirmative because of what has been excluded. The

Commission indicates in the final rule that it will work with the

National Futures Association (``NFA'') to increase transparency, but

does not set forth any details describing how the Commission and NFA

will accomplish that goal.

---------------------------------------------------------------------------

\1\ See 17 CFR Part 3 (Registration).

---------------------------------------------------------------------------

The Commission and NFA should follow the lead of the Securities

and Exchange Commission (``SEC'') and the Financial Industry

Regulatory Authority (``FINRA'') in terms of how professional and

disciplinary background information is disclosed to the potential

customers of SEC-registered broker-dealers. FINRA's

BrokerCheck[supreg] is a tool that provides potential customers with

detailed information regarding the professional backgrounds of

current and former FINRA-registered brokerage firms and brokers, as

well as investment adviser firms and representatives.\2\ Through

BrokerCheck[supreg], these customers can research certain criminal

matters, regulatory actions, civil judicial proceedings, and

financial matters in which the broker-dealer, one of its control

affiliates, or representatives has been involved.

---------------------------------------------------------------------------

\2\ For more information regarding BrokerCheck[supreg], see

http://www.finra.org/Investors/ToolsCalculators/BrokerCheck.

---------------------------------------------------------------------------

Today's futures markets need better technology solutions that

will help futures customers make informed choices about the

Commission-registered intermediaries with which they may wish to do

business. Instead of promising to take action in the future, the

Commission's final rule should do everything it can right now to

protect customer funds. I believe the final rule should enable the

public to receive access to information about current and formerly

registered intermediaries who may seek to attain

[[Page 51910]]

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positions of trust with potential futures customers.

[FR Doc. 2012-20962 Filed 8-27-12; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: August 28, 2012

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