[Title 17 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2010 Edition]
[From the U.S. Government Printing Office]
[[Page i]]
17
Parts 1 to 199
Revised as of April 1, 2010
Commodity and Securities Exchanges
________________________
Containing a codification of documents of general
applicability and future effect
As of April 1, 2010
With Ancillaries
Published by
Office of the Federal Register
National Archives and Records
Administration
A Special Edition of the Federal Register
[[Page ii]]
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[[Page iii]]
Table of Contents
Page
Explanation................................................. v
Title 17:
Chapter I--Commodity Futures Trading Commission 3
Finding Aids:
Table of CFR Titles and Chapters........................ 687
Alphabetical List of Agencies Appearing in the CFR...... 707
List of CFR Sections Affected........................... 717
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Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 17 CFR 1.1 refers to
title 17, part 1, section
1.
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[[Page v]]
EXPLANATION
The Code of Federal Regulations is a codification of the general and
permanent rules published in the Federal Register by the Executive
departments and agencies of the Federal Government. The Code is divided
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parts covering specific regulatory areas.
Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
The appropriate revision date is printed on the cover of each
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collection request.
[[Page vi]]
Many agencies have begun publishing numerous OMB control numbers as
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the revision dates of the 50 CFR titles.
[[Page vii]]
REPUBLICATION OF MATERIAL
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Raymond A. Mosley,
Director,
Office of the Federal Register.
April 1, 2010.
[[Page ix]]
THIS TITLE
Title 17--Commodity and Securities Exchanges is composed of three
volumes. The first volume containing parts 1 to 199, comprises Chapter
I--Commodity Futures Trading Commission. The second volume contains
Chapter II--Securities and Exchange Commission, parts 200 to 239. The
third volume, comprising part 240 to end, contains the remaining
regulations of the Securities and Exchange Commission, and Chapter IV--
Department of the Treasury. The contents of these volumes represent all
current regulations issued by the Commodity Futures Trading Commission,
the Securities and Exchange Commission, and the Department of the
Treasury as of April 1, 2010.
The OMB control numbers for the Securities and Exchange Commission
appear in Sec. 200.800 of chapter II. For the convenience of the user,
Sec. 200.800 is reprinted in the Finding Aids section of the volume
containing part 240 to end.
For this volume, Jonn V. Lilyea was Chief Editor. The Code of
Federal Regulations publication program is under the direction of
Michael L. White, assisted by Ann Worley.
[[Page 1]]
TITLE 17--COMMODITY AND SECURITIES EXCHANGES
(This book contains parts 1 to 199)
--------------------------------------------------------------------
Part
chapter i--Commodity Futures Trading Commission............. 1
[[Page 3]]
CHAPTER I--COMMODITY FUTURES TRADING COMMISSION
--------------------------------------------------------------------
Part Page
1 General regulations under the Commodity
Exchange Act............................ 5
2 Official seal............................... 121
3 Registration................................ 122
4 Commodity pool operators and commodity
trading advisors........................ 164
5
[Reserved]
7 Contract market rules altered or
supplemented by the Commission.......... 217
8 Exchange procedures for disciplinary,
summary, and membership denial actions.. 217
9 Rules relating to review of exchange
disciplinary, access denial or other
adverse actions......................... 224
10 Rules of practice........................... 234
11 Rules relating to investigations............ 267
12 Rules relating to reparations............... 271
13 Public rulemaking procedures................ 310
14 Rules relating to suspension or disbarment
from appearance and practice............ 312
15 Reports--general provisions................. 314
16 Reports by reporting markets................ 321
17 Reports by reporting markets, futures
commission merchants, clearing members,
and foreign brokers..................... 324
18 Reports by traders.......................... 330
19 Reports by persons holding bona fide hedge
positions pursuant to Sec. 1.3(z) of
this chapter and by merchants and
dealers in cotton....................... 333
20
[Reserved]
21 Special calls............................... 335
30 Foreign futures and foreign options
transactions............................ 338
31 Leverage transactions....................... 355
32 Regulation of commodity option transactions. 388
33 Regulation of domestic exchange-traded
commodity option transactions........... 402
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34 Regulation of hybrid instruments............ 412
35 Exemption of swap agreements................ 413
36 Exempt markets.............................. 415
37 Derivatives transaction execution facilities 431
38 Designated contract markets................. 442
39 Derivatives clearing organizations.......... 455
40 Provisions common to registered entities.... 463
41 Security futures products................... 477
42 Anti-money laundering, terrorist financing.. 503
100 Delivery period required.................... 503
140 Organization, functions, and procedures of
the Commission.......................... 503
141 Salary offset............................... 528
142 Indemnification of CFTC employees........... 532
143 Collection of claims owed the United States
arising from activities under the
Commission's jurisdiction............... 533
144 Procedures regarding the disclosure of
information and the testimony of present
or former officers and employees in
response to subpoenas or other demands
of a court.............................. 537
145 Commission records and information.......... 539
146 Records maintained on individuals........... 553
147 Open Commission meetings.................... 562
148 Implementation of the Equal Access to
Justice Act in covered adjudicatory
proceedings before the Commission....... 569
149 Enforcement of nondiscrimination on the
basis of handicap in programs or
activities conducted by the Commodity
Futures Trading Commission.............. 576
150 Limits on positions......................... 582
155 Trading standards........................... 587
156 Broker Associations......................... 591
160 Privacy of consumer financial information... 592
166 Customer protection rules................... 621
170 Registered futures associations............. 625
171 Rules relating to review of National Futures
Association decisions in disciplinary,
membership denial, registration and
member responsibility actions........... 628
190 Bankruptcy.................................. 642
191-199
[Reserved]
[[Page 5]]
PART 1_GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT--Table of
Contents
Definitions
Sec.
1.1 Fraud in or in connection with transactions in foreign currency
subject to the Commodity Exchange Act.
1.2 Liability of principal for act of agent.
1.3 Definitions.
1.4 Use of electronic signatures.
Minimum Financial and Related Reporting Requirements
1.10 Financial reports of futures commission merchants and introducing
brokers.
1.11 [Reserved]
1.12 Maintenance of minimum financial requirements by futures commission
merchants and introducing brokers.
1.13 [Reserved]
1.14 Risk assessment recordkeeping requirements for futures commission
merchants.
1.15 Risk assessment reporting requirements for futures commission
merchants.
1.16 Qualifications and reports of accountants.
1.17 Minimum financial requirements for futures commission merchants and
introducing brokers.
1.18 Records for and relating to financial reporting and monthly
computation by futures commission merchants and introducing
brokers.
Prohibited Trading in Commodity Options
1.19 Prohibited trading in certain ``puts'' and ``calls''.
Customers' Money, Securities, and Property
1.20 Customer funds to be segregated and separately accounted for.
1.21 Care of money and equities accruing to customers.
1.22 Use of customer funds restricted.
1.23 Interest of futures commission merchant in segregated funds;
additions and withdrawals.
1.24 Segregated funds; exclusions therefrom.
1.25 Investment of customer funds.
1.26 Deposit of instruments purchased with customer funds.
1.27 Record of investments.
1.28 Appraisal of instruments purchased with customer funds.
1.29 Increment or interest resulting from investment of customer funds.
1.30 Loans by futures commission merchants; treatment of proceeds.
Recordkeeping
1.31 Books and records; keeping and inspection.
1.32 Segregated account; daily computation and record.
1.33 Monthly and confirmation statements.
1.34 Monthly record, ``point balance''.
1.35 Records of cash commodity, futures, and option transactions.
1.36 Record of securities and property received from customers and
option customers.
1.37 Customer's or option customer's name, address, and occupation
recorded; record of guarantor or controller of account.
1.38 Execution of transactions.
1.39 Simultaneous buying and selling orders of different principals;
execution of, for and between principals.
Miscellaneous
1.40 Crop, market information letters, reports; copies required.
1.41-1.43 [Reserved]
1.44 Records and reports of warehouses, depositories, and other similar
entities; visitation of premises.
1.45 [Reserved]
1.46 Application and closing out of offsetting long and short positions.
1.47 Requirements for classification of purchases or sales of contracts
for future delivery as bona fide hedging under Sec. 1.3(z)(3)
of the regulations.
1.48 Requirements for classification of sales or purchases for future
delivery as bona fide hedging of unsold anticipated production
or unfilled anticipated requirements under Sec. 1.3(z)(2)
(i)(B) or (ii)(C) of the regulations.
1.49 Denomination of customer funds and location of depositories.
1.50-1.51 [Reserved]
1.52 Self-regulatory organization adoption and surveillance of minimum
financial requirements.
1.53 Enforcement of contract market bylaws, rules, regulations, and
resolutions.
1.54 Contract market rules submitted to and approved or not disapproved
by the Secretary of Agriculture.
1.55 Distribution of ``Risk Disclosure Statement'' by futures commission
merchants and introducing brokers.
1.56 Prohibition of guarantees against loss.
1.57 Operations and activities of introducing brokers.
1.58 Gross collection of exchange-set margins.
1.59 Activities of self-regulatory organization employees, governing
board members, committee members, and consultants.
1.60 Pending legal proceedings.
1.61 [Reserved]
[[Page 6]]
1.62 Contract market requirement for floor broker and floor trader
registration.
1.63 Service on self-regulatory organization governing boards or
committees by persons with disciplinary histories.
1.64 Composition of various self-regulatory organization governing
boards and major disciplinary committees.
1.65 Notice of bulk transfers and disclosure obligations to customers.
1.66 No-action positions with respect to floor traders.
1.67 Notification of final disciplinary action involving financial harm
to a customer.
1.68 Customer election not to have funds, carried by a futures
commission merchant for trading on a registered derivatives
transaction execution facility, separately accounted for and
segregated.
1.69 Voting by interested members of self-regulatory organization
governing boards and various committees.
1.70 Notification of State enforcement actions brought under the
Commodity Exchange Act.
Appendix A to Part 1 [Reserved]
Appendix B to Part 1--Fees for Contract Market Rule Enforcement Reviews
and Financial Reviews
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i,
6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a-1,
16, 16a, 19, 21, 23, and 24, as amended by the Commodity Futures
Modernization Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763
(2000).
Source: 41 FR 3194, Jan. 21, 1976, unless otherwise noted.
Definitions
Sec. 1.1 Fraud in or in connection with transactions in foreign
currency subject to the Commodity Exchange Act.
(a) Scope. The provisions of this section shall be applicable to
accounts, agreements, contracts, or transactions described in section
2(c)(1) of the Act, to the extent that the Commission exercises
jurisdiction over such accounts, agreements, contracts and transactions
as provided in section 2(c)(2)(B) of the Act (except that this section
shall not be applicable to persons described in section
2(c)(2)(B)(ii)(II) or 2(c)(2)(B)(ii)(III) of the Act).
(b) Fraudulent conduct prohibited. It shall be unlawful for any
person, directly or indirectly, in or in connection with any account,
agreement, contract or transaction that is subject to paragraph (a) of
this section:
(1) To cheat or defraud or attempt to cheat or defraud any person;
(2) Willfully to make or cause to be made to any person any false
report or statement or cause to be entered for any person any false
record; or
(3) Willfully to deceive or attempt to deceive any person by any
means whatsoever.
[66 FR 42269, Aug. 10, 2001]
Sec. 1.2 Liability of principal for act of agent.
The act, omission, or failure of any official, agent, or other
person acting for any individual, association, partnership, corporation,
or trust, within the scope of his employment or office, shall be deemed
the act, omission, or failure of such individual, association,
partnership, corporation, or trust as well as of such official, agent,
or other person.
Sec. 1.3 Definitions.
Words used in the singular form in the rules and regulations in this
chapter shall be deemed to import the plural and vice versa, as the
context may require. The following terms, as used in the Commodity
Exchange Act, or in the rules and regulations in this chapter, shall
have the meanings hereby assigned to them, unless the context otherwise
requires:
(a) Board of Trade. This term means any exchange or association,
whether incorporated or unincorporated, of persons who shall be engaged
in the business of buying or selling any commodity or receiving the same
for sale on consignment.
(b) Business day. This term means any day other than a Sunday or
holiday. In all notices required by the act or by the rules and
regulations in this chapter to be given in terms of business days the
rule for computing time shall be to exclude the day on which notice is
given and include the day on which shall take place the act of which
notice is given.
(c) Clearing member. This term means any person who is a member of,
or enjoys the privilege of clearing trades in his own name through, the
clearing organization of a designated contract market or registered
derivatives transaction execution facility.
[[Page 7]]
(d) Clearing organization. This term means the person or
organization which acts as a medium for clearing transactions in
commodities for future delivery or commodity option transactions, or for
effecting settlements of contracts for future delivery or commodity
option transactions, for and between members of any designated contract
market or registered derivatives transaction execution facility.
(e) Commodity. This term means and includes wheat, cotton, rice,
corn, oats, barley, rye, flaxseed, grain sorghums, millfeeds, butter,
eggs, Irish potatoes, wool, wool tops, fats and oils (including lard,
tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and
oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal,
livestock, livestock products, and frozen concentrated orange juice, and
all other goods and articles, except onions as provided in Pub. L. 85-
839, and all services, rights and interests in which contracts for
future delivery are presently or in the future dealt in.
(Sec. 2(a)(1), 88 Stat. 1395; 7 U.S.C. 2(1))
(f) Commodity Exchange Act; the Act. These terms mean the Commodity
Exchange Act, as amended, 7 U.S.C. 1 et seq.
(g) Institutional customer. This term has the same meaning as
``eligible contract participant'' as defined in section 1a(12) of the
Act.
(h) Contract market. This term means a board of trade designated by
the Commission as a contract market under the Commodity Exchange Act or
in accordance with the provisions of part 33 of this chapter.
(i) Contract of sale. This term includes sales, purchases,
agreements of sale or purchase and agreements to sell or purchase.
(j) Controlled account. An account shall be deemed to be controlled
by a person if such person by power of attorney or otherwise actually
directs trading for such account.
(k) Customer; commodity customer. These terms have the same meaning
and refer to a customer trading in any commodity named in the definition
of commodity herein: Provided, however, An owner or holder of a
proprietary account as defined in paragraph (y) of this section shall
not be deemed to be a customer within the meaning of section 4d of the
Act, the regulations that implement sections 4d and 4f of the Act and
Sec. 1.35, and such an owner or holder of such a proprietary account
shall otherwise be deemed to be a customer within the meaning of the Act
and Sec. Sec. 1.37 and 1.46 and all other sections of these rules,
regulations and orders which do not implement sections 4d and 4f.
(l) Delivery month. This term means the month of delivery specified
in a contract of sale of any commodity for future delivery.
(m) [Reserved]
(n) Floor broker. This term means any person who, in or surrounding
any pit, ring, post or other place provided by a contract market for the
meeting of persons similarly engaged, shall purchase or sell for any
other person any commodity for future delivery on or subject to the
rules of any contract market and shall include any person required to
register as a floor broker under the Act by virtue of part 33 of this
chapter.
(o) Future delivery. This term does not include any sale of a cash
commodity for deferred shipment or delivery.
(p) Futures commission merchant. This term means:
(1) Individuals, associations, partnerships, corporations, and
trusts engaged in soliciting or in accepting orders for the purchase or
sale of any commodity for future delivery on or subject to the rules of
any contract market and that, in or in connection with such solicitation
or acceptance of orders, accepts any money, securities, or property (or
extends credit in lieu thereof) to margin, guarantee or secure any
trades or contracts that result or may result therefrom; and
(2) Shall include any person required to register as a futures
commission merchant under the Act by virtue of part 32 or part 33 of
this chapter.
(q) Member of a contract market. This term means and includes
individuals, associations, partnerships, corporations, and trusts owning
or holding membership in, or admitted to membership representation on, a
contract
[[Page 8]]
market or given members' trading privileges thereon.
(r) Net equity. This term means the credit balance which would be
obtained by combining the commodity margin balance of any person with
the net profit or loss, if any, accruing on the open trades or contracts
or commodity option transactions of such person.
(s) Net deficit. This term means the debit balance which would be
obtained by combining the commodity margin balance of any person with
the net profit or loss, if any, accruing on the open trades or contracts
or commodity option transactions of such person.
(t) Open contracts. This term means contracts of purchase or sale of
any commodity made by or for any person on or subject to the rules of a
board of trade for future delivery during a specified month or delivery
period which have not been fulfilled by delivery nor offset by other
contracts of sale or purchase in the same commodity and delivery month.
(u) Person. This term includes individuals, associations,
partnerships, corporations, and trusts.
(v) [Reserved]
(w) Secretary of Agriculture. This term means the Secretary of
Agriculture or any person to whom authority has heretofore lawfully been
delegated or to whom authority may hereafter lawfully be delegated to
act in his stead.
(x) Floor trader. This term means any person who, in our surrounding
any pit, ring, post, or other place provided by a contract market for
the meeting of persons similarly engaged, purchases or sells solely for
such person's own account, or has been authorized by a contract market
to purchase or sell for such person's own account, any commodity for
future delivery on or subject to the rules of any contract market and
shall include any person required to register as a floor trader under
the Act by virtue of part 33 of this chapter or by rule or regulation of
the Commission pertaining to the operation of an electronic trading
system.
(y) Proprietary account. This term means a commodity futures or
commodity option trading account carried on the books and records of an
individual, a partnership, corporation or other type association (1) for
one of the following persons, or (2) of which ten percent or more is
owned by one of the following persons, or an aggregate of ten percent or
more of which is owned by more than one of the following persons:
(i) Such individual himself, or such partnership, corporation or
association itself;
(ii) In the case of a partnership, a general partner in such
partnership;
(iii) In the case of a limited partnership, a limited or special
partner in such partnership whose duties include:
(A) The management of the partnership business or any part thereof,
(B) The handling of the trades or customer funds of customers or
option customers of such partnership,
(C) The keeping of records pertaining to the trades or customer
funds of customers or option customers of such partnership, or
(D) The signing or co-signing of checks or drafts on behalf of such
partnership;
(iv) In the case of a corporation or association, an officer,
director or owner of ten percent or more of the capital stock, of such
organization;
(v) An employee of such individual, partnership, corporation or
association whose duties include:
(A) The management of the business of such individual, partnership,
corporation or association or any part thereof,
(B) The handling of the trades or customer funds of customers or
option customers of such individual, partnership, corporation or
association,
(C) The keeping of records pertaining to the trades or customer
funds of customers or option customers of such individual, partnership,
corporation or association, or
(D) The signing or co-signing of checks or drafts on behalf of such
individual, partnership, corporation or association;
(vi) A spouse or minor dependent living in the same household of any
of the foregoing persons;
(vii) A business affiliate that directly or indirectly controls such
individual, partnership, corporation or association.
(viii) A business affiliate that, directly or indirectly is
controlled by or
[[Page 9]]
is under common control with, such individual, partnership, corporation
or association. Provided, however, That an account owned by any
shareholder or member of a cooperative association of producers, within
the meaning of sections 5(5) and 6a of the Act, which association is
registered as a futures commission merchant and carries such account on
its records, shall be deemed to be an account of a customer or option
customer and not a proprietary account of such association, unless the
shareholder or member is an officer, director or manager of the
association.
(z) Bona fide hedging transactions and positions--(1) General
definition. Bona fide hedging transactions and positions shall mean
transactions or positions in a contract for future delivery on any
contract market, or in a commodity option, where such transactions or
positions normally represent a substitute for transactions to be made or
positions to be taken at a later time in a physical marketing channel,
and where they are economically appropriate to the reduction of risks in
the conduct and management of a commercial enterprise, and where they
arise from:
(i) The potential change in the value of assets which a person owns,
produces, manufactures, processes, or merchandises or anticipates
owning, producing, manufacturing, processing, or merchandising,
(ii) The potential change in the value of liabilities which a person
owns or anticipates incurring, or
(iii) The potential change in the value of services which a person
provides, purchases, or anticipates providing or purchasing.
Notwithstanding the foregoing, no transactions or positions shall be
classified as bona fide hedging unless their purpose is to offset price
risks incidental to commercial cash or spot operations and such
positions are established and liquidated in an orderly manner in
accordance with sound commercial practices and, for transactions or
positions on contract markets subject to trading and position limits in
effect pursuant to section 4a of the Act, unless the provisions of
paragraphs (z) (2) and (3) of this section and Sec. Sec. 1.47 and 1.48
of the regulations have been satisfied.
(2) Enumerated hedging transactions. The definitions of bona fide
hedging transactions and positions in paragraph (z)(1) of this section
includes, but is not limited to, the following specific transactions and
positions:
(i) Sales of any commodity for future delivery on a contract market
which do not exceed in quantity:
(A) Ownership or fixed-price purchase of the same cash commodity by
the same person; and
(B) Twelve months' unsold anticipated production of the same
commodity by the same person provided that no such position is
maintained in any future during the five last trading days of that
future.
(ii) Purchases of any commodity for future delivery on a contract
market which do not exceed in quantity.
(A) The fixed-price sale of the same cash commodity by the same
person.
(B) The quantity equivalent of fixed-price sales of the cash
products and by-products of such commodity by the same person; and
(C) Twelve months' unfilled anticipated requirements of the same
cash commodity for processing, manufacturing, or feeding by the same
person, provided that such transactions and positions in the five last
trading days of any one future do not exceed the person's unfilled
anticipated requirements of the same cash commodity for that month and
for the next succeeding month.
(iii) Offsetting sales and purchases for future delivery on a
contract market which do not exceed in quantity that amount of the same
cash commodity which has been bought and sold by the same person at
unfixed prices basis different delivery months of the contract market,
provided that no such position is maintained in any future during the
five last trading days of that future.
(iv) Sales and purchases for future delivery described in paragraphs
(z)(2) (i), (ii), and (iii) of this section may also be offset other
than by the same quantity of the same cash commodity, provided that the
fluctuations in value of the position for future delivery are
substantially related to the fluctuations in value of the actual or
anticipated cash position, and provided
[[Page 10]]
that the positions in any one future shall not be maintained during the
five last trading days of that future.
(3) Non-enumerated cases. Upon specific request made in accordance
with Sec. 1.47 of the regulations, the Commission may recognize
transactions and positions other than those enumerated in paragraph
(z)(2) of this section as bona fide hedging in such amount and under
such terms and conditions as it may specify in accordance with the
provisions of Sec. 1.47. Such transactions and positions may include,
but are not limited to, purchases or sales for future delivery on any
contract market by an agent who does not own or who has not contracted
to sell or purchase the offsetting cash commodity at a fixed price,
provided That the person is responsible for the merchandising of the
cash position which is being offset.
(aa) Associated person. This term means any natural person who is
associated in any of the following capacities with:
(1) A futures commission merchant as a partner, officer, or employee
(or any natural person occupying a similar status or performing similar
functions), in any capacity which involves (i) the solicitation or
acceptance of customers' or option customers' orders (other than in a
clerical capacity) or (ii) the supervision of any person or persons so
engaged;
(2) An introducing broker as a partner, officer, employee, or agent
(or any natural person occupying a similar status or performing similar
functions), in any capacity which involves (i) the solicitation or
acceptance of customers' or option customers' orders (other than in a
clerical capacity) or (ii) the supervision of any person or persons so
engaged;
(3) A commodity pool operator as a partner, officer, employee,
consultant, or agent (or any natural person occupying a similar status
or performing similar functions), in any capacity which involves (i) the
solicitation of funds, securities, or property for a participation in a
commodity pool or (ii) the supervision of any person or persons so
engaged; or
(4) A commodity trading advisor as a partner, officer, employee,
consultant, or agent (or any natural person occupying a similar status
or performing similar functions), in any capacity which involves: (i)
The solicitation of a client's or prospective client's discretionary
account, or (ii) the supervision of any person or persons so engaged;
and
(5) A leverage transaction merchant as a partner, officer, employee,
consultant, or agent (or any natural person occupying a similar status
or performing similar functions), in any capacity which involves: (i)
The solicitation or acceptance of leverage customers' orders (other than
in a clerical capacity) for leverage transactions as defined in Sec.
31.4(x) of this chapter, or (ii) the supervision of any person or
persons so engaged.
(bb)(1) Commodity trading advisor. This term means any person who,
for compensation or profit, engages in the business of advising others,
either directly or through publications, writings or electronic media,
as to the value of or the advisability of trading in any contract of
sale of a commodity for future delivery made or to be made on or subject
to the rules of a contract market or derivatives transaction execution
facility, any commodity option authorized under section 4c of the Act,
or any leverage transaction authorized under section 19 of the Act, or
who, for compensation or profit, and as part of a regular business,
issues or promulgates analyses or reports concerning any of the
foregoing; but such term does not include (i) Any bank or trust company
or any person acting as an employee thereof, (ii) any news reporter,
news columnist, or news editor of the print or electronic media, or any
lawyer, accountant, or teacher, (iii) any floor broker or futures
commission merchant, (iv) the publisher or producer of any print or
electronic data of general and regular dissemination, including its
employees, (v) the named fiduciary, or trustee, of any defined benefit
plan which is subject to the provisions of the Employee Retirement
Income Security Act of 1974, or any fiduciary whose sole business is to
advise that plan, (vi) any contract market or derivatives transaction
execution facility, and (vii) such other persons not within the intent
of this definition as the Commission may specify by rule,
[[Page 11]]
regulation or order: Provided, That the furnishing of such services by
the foregoing persons is solely incidental to the conduct of their
business or profession: Provided further, That the Commission, by rule
or regulation, may include within this definition, any person advising
as to the value of commodities or issuing reports or analyses concerning
commodities, if the Commission determines that such rule or regulation
will effectuate the purposes of this provision.
(2) Client. This term, as it relates to a commodity trading advisor,
means any person (i) to whom a commodity trading advisor provides
advice, for compensation or profit, either directly or through
publications, writings, or electronic media, as to the value of, or the
advisability of trading in, any contract of sale of a commodity for
future delivery made or to be made on or subject to the rules of a
contract market or derivatives transaction execution facility, any
commodity option authorized under section 4c of the Act, or any leverage
transaction authorized under section 19 of the Act; or (ii) to whom, for
compensation or profit, and as part of a regular business, the commodity
trading advisor issues or promulgates analyses or reports concerning any
of the activities referred to in paragraph (bb)(2)(i) of this section.
The term ``client'' includes, without limitation, any subscriber of a
commodity trading advisor.
(cc) Commodity pool operator. This term means any person engaged in
a business which is of the nature of an investment trust, syndicate, or
similar form of enterprise, and who, in connection therewith, solicits,
accepts, or receives from others, funds, securities, or property, either
directly or through capital contributions, the sale of stock or other
forms of securities, or otherwise, for the purpose of trading in any
commodity for future delivery or commodity option on or subject to the
rules of any contract market, but does not include such persons not
within the intent of this definition as the Commission may specify by
rule or regulation or by order.
(dd) Commission. This term means the Commodity Futures Trading
Commission.
(ee) Self-regulatory organization. This term means a contract market
(as defined in Sec. 1.3(h)), or a registered futures association under
section 17 of the Act.
(ff) Designated self-regulatory organization. This term means:
(1) Self-regulatory organization of which a futures commission
merchant, an introducing broker or a leverage transaction merchant is a
member; or
(2) If a futures commission merchant or an introducing broker is a
member of more than one self-regulatory organization and such futures
commission merchant or introducing broker is the subject of an approved
plan under Sec. 1.52 of this part, then a self-regulatory organization
delegated the responsibility by such a plan for monitoring and auditing
such futures commission merchant or introducing broker for compliance
with the minimum financial and related reporting requirements of the
self-regulatory organizations of which the futures commission merchant
or introducing broker is a member, and for receiving the financial
reports necessitated by such minimum financial and related reporting
requirements from such futures commission merchant or introducing
broker; or
(3) If a leverage transaction merchant is a member of more than one
self-regulatory organization and such leverage transaction merchant is
the subject of an approved plan under Sec. 31.28 of this chapter, then
a self-regulatory organization delegated the responsibility by such a
plan for monitoring and auditing such leverage transaction merchant for
compliance with the minimum financial, cover, segregation and sales
practice, and related reporting requirements of the self-regulatory
organizations of which the leverage transaction merchant is a member,
and for receiving the reports necessitated by such minimum financial,
cover, segregation and sales practice, and related reporting
requirements from such leverage transaction merchant.
(gg) Customer funds. This term means all money, securities, and
property received by a futures commission merchant or by a clearing
organization from, for, or on behalf of, customers or option customers:
[[Page 12]]
(1) In the case of commodity customers, to margin, guarantee, or
secure contracts for future delivery on or subject to the rules of a
contract market and all money accruing to such customers as the result
of such contracts; and
(2) In the case of option customers, in connection with a commodity
option transaction on or subject to the rules of a contract market:
(i) To be used as a premium for the purchase of a commodity option
for an option customer;
(ii) As a premium payable to an option customer;
(iii) To guarantee or secure performance of a commodity option by an
option customer; or
(iv) Representing accruals (including, for purchasers of a commodity
option for which the full premium has been paid, the market value of
such commodity option) to an option customer.
(3) Notwithstanding paragraphs (gg)(1) and (2) of this section, the
term customer funds shall exclude money, securities or property received
to margin, guarantee or secure the trades or contracts of opt-out
customers, and all money accruing to opt-out customers as the result of
such trades or contracts, to the extent that such trades or contracts
are made on or subject to the rules of any registered derivatives
transaction execution facility that has authorized opting out in
accordance with Sec. 37.7 of this chapter.
(4) Notwithstanding paragraphs (gg)(1), (2) and (3) of this section,
the term customer funds shall exclude money, securities or property held
to margin, guarantee or secure security futures products held in a
securities account, and all money accruing as the result of such
security futures products.
(hh) Commodity option transaction; commodity option. These terms
each mean any transaction or agreement in interstate commerce which is
or is held out to be of the character of, or is commonly known to the
trade as, an ``option,'' ``privilege,'' ``indemnity,'' ``bid,''
``offer,'' ``call,'' ``put.'' ``advance guaranty,'' or ``decline
guaranty,'' and which is subject to regulation under the Act and these
regulations.
(ii) Premium. This term means the amount agreed upon between the
purchaser and seller, or their agents, for the purchase or sale of a
commodity option on or subject to the rules of a contract market.
(jj) Option customer. This term means any person who directly or
indirectly, purchases or grants (sells), or otherwise acquires or
disposes of any interest in a commodity option for value, but does not
include:
(1) For purposes of Sec. Sec. 1.16, 1.17, 1.20-1.30, 1.32, 1.36,
33.3 and 33.7 of this chapter, the owner or holder of a proprietary
account; and
(2) Option customers whose option transactions are conducted in
accordance with the requirements of part 32 of this chapter.
(kk) Strike price. This term means the price, per unit, at which a
person may purchase or sell the contract of sale of a commodity for
future delivery or the physical which is the subject of a commodity
option: Provided, That for purposes of Sec. 1.17, the term ``strike
price'' means the total price at which a person may purchase or sell the
contract of sale of a commodity for future delivery or the physical
which is the subject of a commodity option (i.e., price per unit times
the number of units).
(ll) Physical. This term means any good, article, service, right or
interest upon which a commodity option may be traded in accordance with
the Act and these regulations.
(mm) Introducing broker. This term means:
(1) Any person who, for compensation or profit, whether direct or
indirect, is engaged in soliciting or in accepting orders (other than in
a clerical capacity) for the purchase or sale of any commodity for
future delivery on or subject to the rules of any contract market who
does not accept any money, securities, or property (or extend credit in
lieu thereof) to margin, guarantee, or secure any trades or contracts
that result or may result therefrom; and
(2) Includes any person required to register as an introducing
broker by virtue of part 33 of this chapter: Provided, That the term
``introducing broker'' shall not include:
[[Page 13]]
(i) Any futures commission merchant, floor broker, or associated
person, acting in its capacity as such, regardless of whether that
futures commission merchant, floor broker, or associated person is
registered or exempt from registration in such capacity;
(ii) Any commodity trading advisor, which, acting in its capacity as
a commodity trading advisor, is not compensated on a per-trade basis or
which solely manages discretionary accounts pursuant to a power of
attorney, regardless of whether that commodity trading advisor is
registered or exempt from registration in such capacity; and
(iii) Any commodity pool operator which, acting in its capacity as a
commodity pool operator, solely operates commodity pools, regardless of
whether that commodity pool operator is registered or exempt from
registration in such capacity.
(nn) Guarantee agreement. This term means an agreement of guaranty
in the form set forth in part B of Form 1-FR, executed by a registered
futures commission merchant and by an introducing broker or applicant
for registration as an introducing broker on behalf of an introducing
broker or applicant for registration as an introducing broker in
satisfaction of the alternative adjusted net capital requirement set
forth in Sec. 1.17(a)(2)(ii).
(oo) Leverage transaction merchant. Means and includes any
individual, association, partnership, corporation, trust or other person
that is engaged in the business of offering to enter into, entering into
or confirming the execution of leverage contracts, or soliciting or
accepting orders for leverage contracts, and who accepts leverage
customer funds (or extends credit in lieu thereof) in connection
therewith.
(pp) Leverage customer funds. Means all money, securities and
property received, directly or indirectly by a leverage transaction
merchant from, for, or on behalf of leverage customers to margin,
guarantee or secure leverage contracts and all money, securities and
property accruing to such customers as the result of such contracts, or
the customers' leverage equity. In the case of a long leverage
transaction, profit or loss accruing to a leverage customer is the
difference between the leverage transaction merchant's current bid price
for the leverage contract and the ask price of the leverage contract
when entered into. In the case of a short leverage transaction, profit
or loss accruing to a leverage customer is the difference between the
bid price of the leverage contract when entered into and the leverage
transaction merchant's current ask price for the leverage contract.
(qq) Leverage contract. Shall have the same meaning as that set
forth in Sec. 31.4(w) of this chapter.
(rr) Foreign futures or foreign options secured amount. This term
means all money, securities and property held by or held for or on
behalf of a futures commission merchant from, for, or on behalf of
foreign futures or foreign options customers as defined in Sec. 30.1 of
this chapter:
(1) In the case of foreign futures customers, money, securities and
property required by a futures commission merchant to margin, guarantee,
or secure open foreign futures contracts plus or minus any unrealized
gain or loss on such contracts; and
(2) In the case of foreign options customers in connection with open
foreign options transactions money, securities and property representing
premiums paid or received, plus any other funds required to guarantee or
secure open transactions plus or minus any unrealized gain or loss on
such transactions.
(ss) Foreign board of trade. This term means any board of trade,
exchange or market located outside the United States, its territories or
possessions, whether incorporated or unincorporated, where foreign
futures or foreign options transactions are entered into.
(tt) Electronic signature means an electronic sound, symbol, or
process attached to or logically associated with a record and executed
or adopted by a person with the intent to sign the record.
(uu) Opt-out customer. This term means a customer that is an
eligible contract participant, as defined in section 1a(12) of the Act,
and that, in accordance with Sec. 1.68, has elected not to have funds
that are being carried for purposes of trading on or through the
facilities of a registered derivatives
[[Page 14]]
transaction execution facility, separately accounted for and segregated
by the futures commission merchant pursuant to section 4d of the Act and
Sec. Sec. 1.20-1.30, 1.32 and 1.36. A customer is an opt-out customer
solely with respect to agreements, contracts or transactions, and the
money, securities or property received by a futures commission merchant
to margin, guarantee or secure such agreements, contracts or
transactions, made on or subject to the rules of any derivatives
transaction execution facility that has adopted rules permitting a
customer to elect to be an opt-out customer and with respect to which
the customer has made such an election. For all other purposes under the
Act and the rules thereunder, except where otherwise provided, an opt-
out customer shall be a customer as defined in Sec. 1.3(k).
(vv) Futures account. This term means an account that is maintained
in accordance with the segregation requirements of section 4d of the
Commodity Exchange Act and the rules thereunder.
(ww) Securities account. This term means an account that is
maintained in accordance with the requirements of section 15(c)(3) of
the Securities Exchange Act of 1934 and Rule 15c3-3 thereunder.
(xx) Foreign broker. This term means any person located outside the
United States, its territories or possessions who is engaged in
soliciting or in accepting orders only from persons located outside the
United States, its territories or possessions for the purchase or sale
of any commodity interest transaction on or subject to the rules of any
designated contract market or derivatives transaction execution facility
and that, in or in connection with such solicitation or acceptance of
orders, accepts any money, securities or property (or extends credit in
lieu thereof) to margin, guarantee, or secure any trades or contracts
that result or may result therefrom.
(yy) Commodity interest. This term means:
(1) Any contract for the purchase or sale of a commodity for future
delivery; and
(2) Any contract, agreement or transaction subject to Commission
regulation under section 4c or 19 of the Act.
[41 FR 3194, Jan. 21, 1976]
Editorial Note: For Federal Register citations affecting Sec. 1.3,
see the List of CFR Sections Affected, which appears in the Finding Aids
sections of the printed volume and on GPO Access.
Sec. 1.4 Use of electronic signatures.
For purposes of complying with any provision in the Commodity
Exchange Act or the rules or regulations in this Chapter I that requires
a document to be signed by a customer of a futures commission merchant
or introducing broker, a pool participant or a client of a commodity
trading advisor, an electronic signature executed by the customer,
participant or client will be sufficient, if the futures commission
merchant, introducing broker, commodity pool operator or commodity
trading advisor elects generally to accept electronic signatures;
Provided, however, That the electronic signature must comply with
applicable Federal laws and other Commission rules; And, Provided
further, That the futures commission merchant, introducing broker,
commodity pool operator or commodity trading advisor must adopt and
utilize reasonable safeguards regarding the use of electronic
signatures, including at a minimum safeguards employed to prevent
alteration of the electronic record with which the electronic signature
is associated, after such record has been electronically signed.
[65 FR 12469, Mar. 9, 2000, as amended at 71 FR 9445, Feb. 24, 2006]
Minimum Financial and Related Reporting Requirements
Sec. 1.10 Financial reports of futures commission merchants and
introducing brokers.
(a) Application for registration. (1) Except as otherwise provided,
a futures commission merchant or an applicant for registration as a
futures commission merchant, in order to satisfy any requirement in this
part that it file a Form 1-FR, must file a Form 1-FR-FCM, and any
reference in this part to Form 1-FR with respect to a futures commission
merchant or applicant
[[Page 15]]
therefor shall be deemed to be a reference to Form 1-FR-FCM. Except as
otherwise provided, an introducing broker or an applicant for
registration as an introducing broker, in order to satisfy any
requirement in this part that it file a Form 1-FR, must file a Form 1-
FR-IB, and any reference in this part to Form 1-FR with respect to an
introducing broker or applicant therefor shall be deemed to be a
reference to Form 1-FR-IB.
(2) (i) (A) Except as provided in paragraphs (a)(3) and (h) of this
section, each person who files an application for registration as a
futures commission merchant and who is not so registered at the time of
such filing, must, concurrently with the filing of such application,
file either:
(1) A Form 1-FR-FCM certified by an independent public accountant in
accordance with Sec. 1.16 as of a date not more than 45 days prior to
the date on which such report is filed; or
(2) A Form 1-FR-FCM as of a date not more than 17 business days
prior to the date on which such report is filed and a Form 1-FR-FCM
certified by an independent public accountant in accordance with Sec.
1.16 as of a date not more than one year prior to the date on which such
report is filed.
(B) Each such person must include with such financial report a
statement describing the source of his current assets and representing
that his capital has been contributed for the purpose of operating his
business and will continue to be used for such purpose.
(ii) (A) Except as provided in paragraphs (a)(3) and (h) of this
section, each person who files an application for registration as an
introducing broker and who is not so registered at the time of such
filing, must, concurrently with the filing of such application, file
either:
(1) A Form 1-FR-IB certified by an independent public accountant in
accordance with Sec. 1.16 as of a date not more than 45 days prior to
the date on which such report is filed;
(2) A Form 1-FR-IB as of a date not more than 17 business days prior
to the date on which such report is filed and a Form 1-FR-IB certified
by an independent public accountant in accordance with Sec. 1.16 as of
a date not more than one year prior to the date on which such report is
filed;
(3) A Form 1-FR-IB as of a date not more than 17 business days prior
to the date on which such report is filed, Provided, however, that such
applicant shall be subject to a review by the applicant's designated
self-regulatory organization within six months of registration; or
(4) A guarantee agreement.
(B) Each person filing in accordance with paragraphs (a)(2)(ii)(A)
(1), (2) or (3) of this section must include with such financial report
a statement describing the source of his current assets and representing
that his capital has been contributed for the purpose of operating his
business and will continue to be used for such purpose.
(3)(i) The provisions of paragraph (a)(2) of this section do not
apply to any person succeeding to and continuing the business of another
futures commission merchant. Each such person who files an application
for registration as a futures commission merchant and who is not so
registered in that capacity at the time of such filing must file a Form
1-FR-FCM as of the first month end following the date on which his
registration is approved. Such report must be filed with the National
Futures Association, the Commission and the designated self-regulatory
organization, if any, not more than 17 business days after the date for
which the report is made.
(ii) The provisions of paragraph (a)(2) of this section do not apply
to any person succeeding to and continuing the business of another
introducing broker.
(A) Each such person who succeeds to and continues the business of
an introducing broker which was not operating pursuant to a guarantee
agreement, or which was operating pursuant to a guarantee agreement and
was also a securities broker or dealer at the time of succession, who
files an application for registration as an introducing broker, and who
is not so registered in that capacity at the time of such filing, must
file with the National Futures Association either a guarantee agreement
with his application for registration or a Form 1-FR-IB as of the first
month end following the date on which his registration is approved. Such
Form 1-FR-
[[Page 16]]
IB must be filed not more than 17 business days after the date for which
the report is made.
(B) Each such person who succeeds to and continues the business of
an introducing broker which was operating pursuant to a guarantee
agreement and which was not also a securities broker or dealer at the
time of succession, who files an application for registration as an
introducing broker, and who is not so registered in that capacity at the
time of such filing, must file with the National Futures Association
either a guarantee agreement or a Form 1-FR-IB with his application for
registration. If such person files a Form 1-FR-IB with his application
for registration, such person must also file a Form 1-FR-IB, certified
by an independent public accountant, as of a date no later than the end
of the month registration is granted. The Form 1-FR-IB certified by an
independent public accountant must be filed with the National Futures
Association not more than 45 days after the date for which the report is
made.
(b) Filing of financial reports. (1)(i) Except as provided in
paragraphs (b)(3) and (h) of this section, each person registered as a
futures commission merchant must file a Form 1-FR-FCM as of the close of
business each month. Each Form 1-FR-FCM must be filed no later than 17
business days after the date for which the report is made.
(ii) In addition to the monthly financial reports required by
paragraph (b)(1)(i) of this section, each person registered as a futures
commission merchant must file a Form 1-FR-FCM as of the close of its
fiscal year, which must be certified by an independent public accountant
in accordance with Sec. 1.16, and must be filed no later than 90 days
after the close of the futures commission merchant's fiscal year:
Provided, however, that a registrant which is registered with the
Securities and Exchange Commission as a securities broker or dealer must
file this report not later than the time permitted for filing an annual
audit report under Sec. 240.17a-5(d)(5) of this title.
(2)(i) Except as provided in paragraphs (b)(3) and (h) of this
section, and except for an introducing broker operating pursuant to a
guarantee agreement which is not also a securities broker or dealer,
each person registered as an introducing broker must file a Form 1-FR-IB
semiannually as of the middle and the close of each fiscal year. Each
Form 1-FR-IB must be filed no later than 17 business days after the date
for which the report is made.
(ii)(A) In addition to the financial reports required by paragraph
(b)(2)(i) of this section, each person registered as an introducing
broker must file a Form 1-FR-IB as of the close of its fiscal year which
must be certified by an independent public accountant in accordance with
Sec. 1.16 no later than 90 days after the close of each introducing
broker's fiscal year: Provided, however, that a registrant which is
registered with the Securities and Exchange Commission as a securities
broker or dealer must file this report not later than the time permitted
for filing an annual audit report under Sec. 240.17a-5(d)(5) of this
title.
(B) If an introducing broker has filed previously a Form 1-FR-IB,
certified by an independent public accountant in accordance with the
provisions of paragraphs (a)(2)(ii) or (j)(8) of this section and Sec.
1.16 of this part, as of a date not more than one year prior to the
close of such introducing broker's fiscal year, it need not have
certified by an independent public accountant the Form 1-FR-IB filed as
of the introducing broker's first fiscal year-end following the as of
date of its initial certified Form 1-FR-IB. In such a case, the
introducing broker's Form 1-FR-IB filed as of the close of the second
fiscal year-end following the as of date of its initial certified Form
1-FR-IB must cover the period of time between those two dates and must
be certified by an independent public accountant in accordance with
Sec. 1.16 of this part.
(3) The provisions of paragraphs (b)(1) and (b)(2) of this section
may be met by any person registered as a futures commission merchant or
as an introducing broker who is a member of a designated self-regulatory
organization and conforms to minimum financial standards and related
reporting requirements set by such designated self-regulatory
organization in its bylaws, rules, regulations, or resolutions and
approved by the Commission pursuant to Section
[[Page 17]]
4f(b) of the Act and Sec. 1.52: Provided, however, That each such
registrant shall promptly file with the Commission a true and exact copy
of each financial report which it files with such designated self-
regulatory organization.
(4) Upon receiving written notice from any representative of the
National Futures Association, the Commission or any self-regulatory
organization of which it is a member, an applicant or registrant, except
an applicant for registration as an introducing broker which has filed
concurrently with its application for registration a guarantee agreement
and which is not also a securities broker or dealer, must, monthly or at
such times as specified, furnish the National Futures Association, the
Commission or the self-regulatory organization requesting such
information a Form 1-FR or such other financial information as requested
by the National Futures Association, the Commission or the self-
regulatory organization. Each such Form 1-FR or such other information
must be furnished within the time period specified in the written
notice, and in accordance with the provisions of paragraph (c) of this
section.
(c) Where to file reports. (1) Form 1-FR filed by an introducing
broker pursuant to paragraph (b)(2) of this section need be filed only
with, and will be considered filed when received by, the National
Futures Association. Other reports or information provided for in this
section will be considered filed when received by the regional office of
the Commission with jurisdiction over the state in which the
registrant's principal place of business is located and by the
designated self-regulatory organization, if any; and reports or other
information required to be filed by this section by an applicant for
registration will be considered filed when received by the National
Futures Association. Any report or information filed with the National
Futures Association pursuant to this paragraph shall be deemed for all
purposes to be filed with, and to be the official record of, the
Commission.
(2)(i) Except as provided in the last sentence of this subparagraph,
all filings or other notices prepared by a futures commission merchant
pursuant to this section may be submitted to the Commission in
electronic form using a form of user authentication assigned in
accordance with procedures established by or approved by the Commission,
and otherwise in accordance with instructions issued by or approved by
the Commission, if the futures commission merchant or a designated self-
regulatory organization has provided the Commission with the means
necessary to read and to process the information contained in such
report. A Form 1-FR required to be certified by an independent public
accountant in accordance with Sec. 1.16 which is filed by a futures
commission merchant must be filed in paper form and may not be filed
electronically.
(ii) Except as provided in paragraph (h) of this section, all
filings or other notices or applications prepared by an introducing
broker or applicant for registration as an introducing broker or futures
commission merchant pursuant to this section must be filed
electronically in accordance with electronic filing procedures
established by the National Futures Association. In the case of a Form
1-FR-IB that is required to be certified by an independent public
accountant in accordance with Sec. 1.16, a paper copy of any such
filing with the original manually signed certification must be
maintained by the introducing broker or applicant for registration as an
introducing broker in accordance with Sec. 1.31.
(3) Any information required of a registrant by a self-regulatory
organization pursuant to paragraph (b)(4) of this section need be
furnished only to such self-regulatory organization and the Commission,
and any information required of an applicant by the National Futures
Association pursuant to paragraph (b)(4) of this section need be
furnished only to the National Futures Association and the Commission.
(4) Any guarantee agreement entered into between a futures
commission merchant and an introducing broker in accordance with the
provisions of this section need be filed only with, and will be
considered filed when received by, the National Futures Association.
(d) Contents of financial reports. (1) Each Form 1-FR filed pursuant
to this
[[Page 18]]
Sec. 1.10 which is not required to be certified by an independent
public accountant must be completed in accordance with the instructions
to the form and contain:
(i) A statement of financial condition as of the date for which the
report is made;
(ii) Statements of income (loss) and a statement of changes in
ownership equity for the period between the date of the most recent
statement of financial condition filed with the Commission and the date
for which the report is made;
(iii) A statement of changes in liabilities subordinated to claims
of general creditors for the period between the date of the most recent
statement of financial condition filed with the Commission and the date
for which the report is made;
(iv) A statement of the computation of the minimum capital
requirements pursuant to Sec. 1.17 as of the date for which the report
is made;
(v) For a futures commission merchant only, the statements of
segregation requirements and funds in segregation for customers trading
on U.S. commodity exchanges and for customers' dealer options accounts,
and the statement of secured amounts and funds held in separate accounts
for foreign futures and foreign options customers in accordance with
Sec. 30.7 of this chapter as of the date for which the report is made;
and
(vi) In addition to the information expressly required, such futher
material information as may be necessary to make the required statements
and schedules not misleading.
(2) Each Form 1-FR filed pursuant to this Sec. 1.10 which is
required to be certified by an independent public accountant must be
completed in accordance with the instructions to the form and contain:
(i) A statement of financial condition as of the date for which the
report is made;
(ii) Statements of income (loss), cash flows, changes in ownership
equity, and changes in liabilities subordinated to claims of general
creditors, for the period between the date of the most recent certified
statement of financial condition filed with the Commission and the date
for which the report is made: Provided, That for an applicant filing
pursuant to paragraph (a)(2) of this section the period must be the year
ending as of the date of the statement of financial condition;
(iii) A statement of the computation of the minimum capital
requirements pursuant to Sec. 1.17 as of the date for which the report
is made;
(iv) For a futures commission merchant only, the statements of
segregation requirements and funds in segregation for customers trading
on U.S. commodity exchanges and for customers' dealer options accounts,
and the statement of secured amounts and funds held in separate accounts
for foreign futures and foreign options customers in accordance with
Sec. 30.7 of this chapter as of the date for which the report is made;
(v) Appropriate footnote disclosures;
(vi) A reconciliation, including appropriate explanations, of the
statement of the computation of the minimum capital requirements
pursuant to Sec. 1.17 and, for a futures commission merchant only, the
statements of segregation requirements and funds in segregation for
customers trading on U.S. commodity exchanges and for customers' dealer
option accounts, and the statement of secured amounts and funds held in
separate accounts for foreign futures and foreign options customers in
accordance with Sec. 30.7 of this chapter, in the certified Form 1-FR
with the applicant's or registrant's corresponding uncertified most
recent Form 1-FR filing when material differences exist or, if no
material differences exist, a statement so indicating; and
(vii) In addition to the information expressly required, such
further material information as may be necessary to make the required
statements not misleading.
(3) The statements required by paragraphs (d)(2)(i) and (d)(2)(ii)
of this section may be presented in accordance with generally accepted
accounting principles in the certified reports filed as of the close of
the registrant's fiscal year pursuant to paragraphs (b)(1)(ii) or
(b)(2)(ii) of this section or accompanying the application for
registration pursuant to paragraph (a)(2) of
[[Page 19]]
this section, rather than in the format specifically prescribed by these
regulations: Provided, the statement of financial condition is presented
in a format as consistent as possible with the Form 1-FR and a
reconciliation is provided reconciling such statement of financial
condition to the statement of the computation of the minimum capital
requirements pursuant to Sec. 1.17. Such reconciliation must be
certified by an independent public accountant in accordance with Sec.
1.16.
(4) Attached to each Form 1-FR filed pursuant to this section must
be an oath or affirmation that to the best knowledge and belief of the
individual making such oath or affirmation the information contained in
the Form 1-FR is true and correct. The individual making such oath or
affirmation must be:
(i) If the registrant or applicant is a sole proprietorship, the
proprietor; if a partnership, any general partner; if a corporation, the
chief executive officer or chief financial officer; and, if a limited
liability company or limited liability partnership, the chief executive
officer, the chief financial officer, the manager, the managing member,
or those members vested with the management authority for the limited
liability company or limited liability partnership; or
(ii) If the registrant or applicant is registered with the
Securities and Exchange Commission as a securities broker or dealer, the
representative authorized under Sec. 240.17a-5 of this title to file
for the securities broker or dealer its Financial and Operational
Combined Uniform Single Report under the Securities Exchange Act of
1934, part II, part IIA, or part II CSE.
(iii) In the case of a Form 1-FR filed via electronic transmission
in accordance with procedures established by or approved by the
Commission, such transmission must be accompanied by the user
authentication assigned to the authorized signer under such procedures,
and the use of such user authentication will constitute and become a
substitute for the manual signature of the authorized signer for the
purpose of making the oath or affirmation referred to in this paragraph.
(e) Election of fiscal year. (1) An applicant wishing to establish a
fiscal year other than the calendar year may do so by notifying the
National Futures Association of its election of such fiscal year, in
writing, concurrently with the filing of the Form 1-FR pursuant to
paragraph (a)(2) of this section, but in no event may such fiscal year
end more than one year from the date of the Form 1-FR filed pursuant to
paragraph (a)(2) of this section. An applicant that does not so notify
the National Futures Association will be deemed to have elected the
calendar year as its fiscal year.
(2) (i) A registrant must continue to use its elected fiscal year,
calendar or otherwise, unless a change in such fiscal year has been
approved pursuant to this paragraph (e)(2).
(ii) Futures commission merchant registrants. (A) A futures
commission merchant may file with its designated self-regulatory
organization an application to change its fiscal year, a copy of which
the registrant must file with the Commission. The application shall be
approved or denied in writing by the designated self-regulatory
organization. The registrant must file immediately with the Commission a
copy of any notice it receives from the designated self-regulatory
organization to approve or deny the registrant's application to change
its fiscal year. A written notice of approval shall become effective
upon the filing by the registrant of a copy with the Commission, and a
written notice of denial shall be effective as of the date of the
notice.
(B) A futures commission merchant that is registered with the
Securities and Exchange Commission as a securities broker or dealer may
file with its designated self-regulatory organization copies of any
notice or application filed with its designated examining authority,
pursuant to Sec. 240.17a-5(d)(1)(i) of this title, for a change in
fiscal year or ``as of'' date for its annual audited financial
statement. The registrant must also file immediately with the designated
self-regulatory organization and the Commission copies of any notice it
receives from its designated examining authority to approve or deny the
registrant's request for change in
[[Page 20]]
fiscal year or ``as of'' date. Upon the receipt by the designated self-
regulatory organization and the Commission of copies of any such notice
of approval, the change in fiscal year or ``as of'' date referenced in
the notice shall be deemed approved under this paragraph (e)(2).
(C) Any copy that under this paragraph (e)(2) is required to be
filed with the Commission shall be filed with the regional office of the
Commission with jurisdiction over the state in which the registrant's
principal place of business is located, and any copy or application to
be filed with the designated self-regulatory organization shall be filed
at its principal place of business.
(iii) Introducing broker registrants. (A) An introducing broker may
file with the National Futures Association an application to change its
fiscal year, which shall be approved or denied in writing.
(B) An introducing broker that is registered with the Securities and
Exchange Commission as a securities broker or dealer may file with the
National Futures Association copies of any notice or application filed
with its designated examining authority, pursuant to Sec. 240.17a-
5(d)(1)(i) of this title, for a change in fiscal year or ``as of'' date
for its annual audited financial statement. The registrant must also
file immediately with the National Futures Association copies of any
notice it receives from its designated examining authority to approve or
deny the registrant's request for change in fiscal year or ``as of''
date. Upon the receipt by the National Futures Association of copies of
any such notice of approval, the change in fiscal year or ``as of'' date
referenced in the notice shall be deemed approved under this paragraph
(e)(2).
(f) Extension of time for filing uncertified reports. (1) In the
event a registrant finds that it cannot file its Form 1-FR, or, in
accordance with paragraph (h) of this section, its Financial and
Operational Combined Uniform Single Report under the Securities Exchange
Act of 1934, part II, part IIA, or part II CSE (FOCUS report), for any
period within the time specified in paragraphs (b)(1)(i) or (b)(2)(i) of
this section without substantial undue hardship, it may request approval
for an extension of time, as follows:
(i) Futures commission merchant registrants. (A) A futures
commission merchant may file with its designated self-regulatory
organization an application for extension of time, a copy of which the
registrant must file with the Commission. The application shall be
approved or denied in writing by the designated self-regulatory
organization. The registrant must file immediately with the Commission a
copy of any notice it receives from the designated self-regulatory
organization to approve or deny the registrant's request for extension
of time. A written notice of approval shall become effective upon the
filing by the registrant of a copy with the Commission, and a written
notice of denial shall be effective as of the date of the notice.
(B) A futures commission merchant that is registered with the
Securities and Exchange Commission as a securities broker or dealer may
file with its designated self-regulatory organization a copy of any
application that the registrant has filed with its designated examining
authority, pursuant to Sec. 240.17-a5(l)(5) of this title, for an
extension of time to file its FOCUS report. The registrant must also
file immediately with the designated self-regulatory organization and
the Commission copies of any notice it receives from its designated
examining authority to approve or deny the requested extension of time.
Upon receipt by the designated self-regulatory organization and the
Commission of copies of any such notice of approval, the requested
extension of time referenced in the notice shall be deemed approved
under this paragraph (f)(1).
(C) Any copy that under this subparagraph (f)(1)(i) is required to
be filed with the Commission shall be filed with the regional office of
the Commission with jurisdiction over the state in which the
registrant's principal place of business is located.
(ii) Introducing broker registrants. (A) An introducing broker may
file with the National Futures Association an application for extension
of the time, which shall be approved or denied in writing.
[[Page 21]]
(B) An introducing broker that is registered with the Securities and
Exchange Commission as a securities broker or dealer may file with the
National Futures Association copies of any application that the
registrant has filed with its designated examining authority, pursuant
to Sec. 240.17-a5(l)(5) of this title, for an extension of time to file
its FOCUS report. The registrant must also file immediately with the
National Futures Association copies of any notice it receives from its
designated examining authority to approve or deny the requested
extension of time. Upon the receipt by the National Futures Association
of a copy of any such notice of approval, the requested extension of
time referenced in the notice shall be deemed approved under this
paragraph (f)(1)(ii).
(2) In the event an applicant finds that it cannot file its report
for any period within the time specified in paragraph (b)(4) of this
section without substantial undue hardship, it may file with the
National Futures Association an application for an extension of time to
a specified date which may not be more than 90 days after the date as of
which the financial statements were to have been filed. The application
must state the reasons for the requested extension and must contain an
agreement to file the report on or before the specified date. The
application must be received by the National Futures Association before
the time specified in paragraph (b)(4) of this section for filing the
report. Notice of such application must be filed with the regional
office of the Commission with jurisdiction over the state in which the
applicant's principal place of business is located concurrently with the
filing of such application with the National Futures Association. Within
ten calendar days after receipt of the application for an extension of
time, the National Futures Association shall:
(i) Notify the applicant of the grant or denial of the requested
extension; or
(ii) Indicate to the applicant that additional time is required to
analyze the request, in which case the amount of time needed will be
specified.
(g) Public availability of reports. (1) Forms 1-FR filed pursuant to
this section, and FOCUS reports filed in lieu of Forms 1-FR pursuant to
paragraph (h) of this section, will be treated as exempt from mandatory
public disclosure for purposes of the Freedom of Information Act and the
Government in the Sunshine Act and parts 145 and 147 of this chapter,
except for the information described in paragraph (g)(2) of this
section.
(2) The following information in Forms 1-FR, and the same or
equivalent information in FOCUS reports filed in lieu of Forms 1-FR,
will be publicly available:
(i) The amount of the applicant's or registrant's adjusted net
capital; the amount of its minimum net capital requirement under Sec.
1.17 of this chapter; and the amount of its adjusted net capital in
excess of its minimum net capital requirement; and
(ii) The following statements and footnote disclosures thereof: the
Statement of Financial Condition in the certified annual financial
reports of futures commission merchants and introducing brokers; the
Statements (to be filed by a futures commission merchant only) of
Segregation Requirements and Funds in Segregation for customers trading
on U.S. commodity exchanges and for customers' dealer options accounts,
and the Statement (to be filed by a futures commission merchant only) of
Secured Amounts and Funds held in Separate Accounts for foreign futures
and foreign options customers in accordance with Sec. 30.7 of this
chapter.
(3) [Reserved]
(4) All information that is exempt from mandatory public disclosure
under paragraph (g)(1) of this section will, however, be available for
official use by any official or employee of the United States or any
State, by any self-regulatory organization of which the person filing
such report is a member, by the National Futures Association in the case
of an applicant, and by any other person to whom the Commission believes
disclosure of such information is in the public interest. Nothing in
this paragraph (g) will limit the authority of any self-regulatory
organization to request or receive any information relative to its
members' financial condition.
[[Page 22]]
(5) The independent accountant's opinion and a guarantee agreement
filed pursuant to this section will be deemed public information.
(h) Filing option available to a futures commission merchant or an
introducing broker that is also a securities broker or dealer. Any
applicant or registrant which is registered with the Securities and
Exchange Commission as a securities broker or dealer may comply with the
requirements of this section by filing (in accordance with paragraphs
(a), (b), (c), and (j) of this section) a copy of its Financial and
Operational Combined Uniform Single Report under the Securities Exchange
Act of 1934, Part II, Part IIA, or Part II CSE (FOCUS Report), in lieu
of Form 1-FR; Provided, however, That all information which is required
to be furnished on and submitted with Form 1-FR is provided with such
FOCUS Report; and Provided, further, That a certified FOCUS Report filed
by an introducing broker or applicant for registration as an introducing
broker in lieu of a certified Form 1-FR-IB must be filed according to
National Futures Association rules, either in paper form or
electronically, in accordance with procedures established by the
National Futures Association, and if filed electronically, a paper copy
of such filing with the original manually signed certification must be
maintained by such introducing broker or applicant in accordance with
Sec. 1.31.
(i) Filing option available to an introducing broker or applicant
for registration as an introducing broker which is also a country
elevator. Any introducing broker or applicant for registration as an
introducing broker which is also a country elevator but which is not
also a securities broker or dealer may comply with the requirements of
this section by filing (in accordance with paragraphs (a), (b) and (c)
of this section) a copy of a financial report prepared by a grain
commission firm which has been authorized by the Deputy Vice President
of the Commodity Credit Corporation of the United States Department of
Agriculture to provide a compilation report of financial statements of
warehousemen for purposes of Uniform Grain Storage Agreements, and which
complies with the standards for independence set forth in Sec.
1.16(b)(2) with respect to the registrant or applicant: Provided,
however, That all information which is required to be furnished on and
submitted with Form 1-FR is provided with such financial report,
including a statement of the computation of the minimum capital
requirements pursuant to Sec. 1.17: And, provided further, That the
balance sheet is presented in a format as consistent as possible with
the Form 1-FR and a reconciliation is provided reconciling such balance
sheet to the statement of the computation of the minimum capital
requirements pursuant to Sec. 1.17. Attached to each financial report
filed pursuant to this paragraph (i) must be an oath or affirmation that
to the best knowledge and belief of the individual making such oath or
affirmation the information contained therein is true and correct. If
the applicant or registrant is a sole proprietorship, then the oath or
affirmation must be made by the proprietor; if a partnership, by a
general partner; or if a corporation, by the chief executive officer or
chief financial officer.
(j) Requirements for guarantee agreement. (1) A guarantee agreement
filed pursuant to this section must be signed in a manner sufficient to
be a binding guarantee under local law by an appropriate person on
behalf of the futures commission merchant and the introducing broker,
and each signature must be accompanied by evidence that the signatory is
authorized to enter the agreement on behalf of the futures commission
merchant or introducing broker and is such an appropriate person. For
purposes of this paragraph (j), an appropriate person shall be the
proprietor, if the firm is a sole proprietorship; a general partner, if
the firm is a partnership; and either the chief executive officer or the
chief financial officer, if the firm is a corporation.
(2) No futures commission merchant may enter into a guarantee
agreement if:
(i) It knows or should have known that its adjusted net capital is
less than the amount set forth in Sec. 1.12(b); or
(ii) There is filed against the futures commission merchant an
adjudicatory proceeding brought by or before the Commission pursuant to
the provisions
[[Page 23]]
of sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Sec. Sec. 3.55,
3.56 or 3.60 of this chapter.
(3) A guarantee agreement filed in connection with an application
for initial registration as an introducing broker in accordance with the
provisions of Sec. 3.10(a) of this chapter shall become effective upon
the granting of registration or, if appropriate, a temporary license, to
the introducing broker. A guarantee agreement filed other than in
connection with an application for initial registration as an
introducing broker shall become effective as of the date agreed to by
the parties.
(4)(i) If the registration of the introducing broker is suspended,
revoked, or withdrawn in accordance with the provisions of this chapter,
the guarantee agreement shall expire as of the date of such suspension,
revocation or withdrawal.
(ii) If the registration of the futures commission merchant is
suspended or revoked, the guarantee agreement shall expire 30 days after
such suspension or revocation, or at such earlier time as may be
approved by the Commission, the introducing broker, and the introducing
broker's designated self-regulatory organization.
(5) A guarantee agreement may be terminated at any time during the
term thereof:
(i) By mutual written consent of the parties, signed by an
appropriate person on behalf of each party, with prompt written notice
thereof, signed by an appropriate person on behalf of each party, to the
Commission and to the designated self-regulatory organizations of the
futures commission merchant and the introducing broker;
(ii) For good cause shown, by either party giving written notice of
its intention to terminate the agreement, signed by an appropriate
person, to the other party to the agreement, to the Commission, and to
the designated self-regulatory organizations of the futures commission
merchant and the introducing broker; or
(iii) By either party giving written notice of its intention to
terminate the agreement, signed by an appropriate person, at least 30
days prior to the proposed termination date, to the other party to the
agreement, to the Commission, and to the designated self-regulatory
organizations of the futures commission merchant and the introducing
broker.
(6) The termination of a guarantee agreement by a futures commission
merchant or an introducing broker, or the expiration of such an
agreement, shall not relieve either party from any liability or
obligation arising from acts or omissions which occurred during the term
of the agreement.
(7) An introducing broker may not simultaneously be a party to more
than one guarantee agreement: Provided, however, That the provisions of
this paragraph (j)(7) shall not be deemed to preclude an introducing
broker from entering into a guarantee agreement with another futures
commission merchant if the introducing broker or the futures commission
merchant which is a party to the existing agreement has provided notice
of termination of the existing agreement in accordance with the
provisions of paragraph (j)(5) of this section, and the new guarantee
agreement does not become effective until the day following the date of
termination of the existing agreement: And, provided further, That the
provisions of this paragraph (j)(7) shall not be deemed to preclude an
introducing broker from entering into a guarantee agreement with another
futures commission merchant if the futures commission merchant which is
a party to the existing agreement ceases to remain registered and the
existing agreement would therefore expire in accordance with the
provisions of paragraph (j)(4)(ii) of this section.
(8)(i)(A) An introducing broker that is a party to a guarantee
agreement that has been terminated in accordance with the provisions of
paragraph (j)(5) of this section, or that is due to expire in accordance
with the provisions of paragraph (j)(4)(ii) of this section, must cease
doing business as an introducing broker on or before the effective date
of such termination or expiration unless, on or before 10 days prior to
the effective date of such termination or expiration or such other
period of time as the Commission or the designated self-regulatory
organization may allow for good cause shown, the introducing
[[Page 24]]
broker files with its designated self-regulatory organization either a
new guarantee agreement effective as of the day following the date of
termination of the existing agreement, or, in the case of a guarantee
agreement that is due to expire in accordance with the provisions of
paragraph (j)(4)(ii) of this section, a new guarantee agreement
effective on or before such expiration, or either:
(1) A Form 1-FR-IB certified by an independent public accountant in
accordance with Sec. 1.16 as of a date not more than 45 days prior to
the date on which the report is filed; or
(2) A Form 1-FR-IB as of a date not more than 17 business days prior
to the date on which the report is filed and a Form 1-FR-IB certified by
an independent public accountant in accordance with Sec. 1.16 as of a
date not more than one year prior to the date on which the report is
filed.
(B) Each person filing a Form 1-FR-IB in accordance with this
section must include with the financial report a statement describing
the source of his current assets and representing that his capital has
been contributed for the purpose of operating his business and will
continue to be used for such purpose.
(ii)(A) Notwithstanding the provisions of paragraph (j)(8)(i) of
this section or of Sec. 1.17(a), an introducing broker that is a party
to a guarantee agreement that has been terminated in accordance with the
provisions of paragraph (j)(5)(ii) of this section shall not be deemed
to be in violation of the minimum adjusted net capital requirement of
Sec. 1.17(a)(1)(iii) or (a)(2) for 30 days following such termination.
Such an introducing broker must cease doing business as an introducing
broker on or after the effective date of such termination, and may not
resume doing business as an introducing broker unless and until it files
a new agreement or either:
(1) A Form 1-FR-IB certified by an independent public accountant in
accordance with Sec. 1.16 as of a date not more than 45 days prior to
the date on which the report is filed; or
(2) A Form 1-FR-IB as of a date not more than 17 business days prior
to the date on which the report is filed and a Form 1-FR-IB certified by
an independent public accountant in accordance with Sec. 1.16 as of a
date not more than one year prior to the date on which the report is
filed.
(B) Each person filing a Form 1-FR-IB in accordance with this
section must include with the financial report a statement describing
the source of his current assets and representing that his capital has
been contributed for the purpose of operating his business and will
continue to be used for such purpose.
(k) Filing option available to an introducing broker. (1) Any
introducing broker or applicant for registration as an introducing
broker which is not operating or intending to operate pursuant to a
guarantee agreement may comply with the requirements of this section by
filing (in accordance with paragraphs (a), (b) and (c) of this section)
a Form 1-FR-IB in lieu of a Form 1-FR-FCM.
(2) If an introducing broker or applicant therefor avails itself of
the filing option available under paragraph (k)(1) of this section, the
report required to be filed in accordance with Sec. 1.16(c)(5) of this
part must be filed as of the date of the Form 1-FR-IB being filed, and
such an introducing broker or applicant therefor must maintain its
financial records and make its monthly formal computation of its
adjusted net capital, as required by Sec. 1.18 of this part, in a
manner consistent with Form 1-FR-IB.
(The information collection requirements contained in Sec. 1.10 were
approved by the Office of Management and Budget under control number
3038-0024; in paragraphs (a) and (b) under control number 3038-0023; and
in paragraph (f) under control number 3038-0003.)
[43 FR 39967, Sept. 8, 1978]
Editorial Note: For Federal Register citations affecting Sec. 1.10,
see the List of CFR Sections Affected, which appears in the Finding Aids
sections of the printed volume and on GPO Access.
[[Page 25]]
Sec. 1.11 [Reserved]
Sec. 1.12 Maintenance of minimum financial requirements by futures
commission merchants and introducing brokers.
(a) Each person registered as a futures commission merchant or who
files an application for registration as a futures commission merchant,
and each person registered as an introducing broker or who files an
application for registration as an introducing broker (except for an
introducing broker or applicant for registration as an introducing
broker operating pursuant to, or who has filed concurrently with its
application for registration, a guarantee agreement and who is not also
a securities broker or dealer), who knows or should have known that its
adjusted net capital at any time is less than the minimum required by
Sec. 1.17 or by the capital rule of any self-regulatory organization to
which such person is subject, if any, must:
(1) Give telephonic notice, to be confirmed in writing by facsimile
notice, as set forth in paragraph (i) of this section that the
applicant's or registrant's adjusted net capital is less than required
by Sec. 1.17 or by other capital rule, identifying the applicable
capital rule. The notice must be given immediately after the applicant
or registrant knows or should know that its adjusted net capital is less
than required by any of the aforesaid rules to which the applicant or
registrant is subject; and
(2) Provide together with such notice documentation in such form as
necessary to adequately reflect the applicant's or registrant's capital
condition as of any date such person's adjusted net capital is less than
the minimum required. The applicant or registrant must provide similar
documentation for other days as the Commission may request.
(b) Each person registered as a futures commission merchant, or who
files an application for registration as a futures commission merchant,
who knows or should have known that its adjusted net capital at any time
is less than the greatest of:
(1) 150 percent of the minimum dollar amount required by Sec.
1.17(a)(1)(i)(A);
(2) 110 percent of the amount required by Sec. 1.17(a)(1)(i)(B);
(3) 150 percent of the amount of adjusted net capital required by a
registered futures association of which it is a member, unless such
amount has been determined by a margin-based capital computation set
forth in the rules of the registered futures association, and such
amount meets or exceeds the amount of adjusted net capital required
under the margin-based capital computation set forth in Sec.
1.17(a)(1)(i)(B), in which case the required percentage is 110 percent,
or
(4) For securities brokers or dealers, the amount of net capital
specified in Rule 17a-11(c) of the Securities and Exchange Commission
(17 CFR 240.17a-11(c)), must file written notice to that effect as set
forth in paragraph (i) of this section within twenty-four (24) hours of
such event.
(c) If an applicant or registrant at any time fails to make or keep
current the books and records required by these regulations, such
applicant or registrant must, on the same day such event occurs, provide
facsimile notice of such fact, specifying the books and records which
have not been made or which are not current, and within forty-eight (48)
hours after giving such notice file a written report stating what steps
have been and are being taken to correct the situation.
(d) Whenever any applicant or registrant discovers or is notified by
an independent public accountant, pursuant to Sec. 1.16(e)(2) of this
chapter, of the existence of any material inadequacy, as specified in
Sec. 1.16(d)(2) of this chapter, such applicant or registrant must give
facsimile notice of such material inadequacy within twenty-four (24)
hours, and within forty-eight (48) hours after giving such notice file a
written report stating what steps have been and are being taken to
correct the material inadequacy.
(e) Whenever any self-regulatory organization learns that a member
registrant has failed to file a notice or written report as required by
Sec. 1.12, that self-regulatory organization must immediately report
this failure by telephone, confirmed in writing immediately by facsimile
notice, as provided in paragraph (i) of this section.
[[Page 26]]
(f)(1) Whenever a clearing organization determines that any position
it carries for one of its clearing members which is registered as a
futures commission merchant or as a leverage transaction merchant must
be liquidated immediately, transferred immediately or that the trading
of any account of such futures commission merchant or such leverage
transaction merchant shall be only for the purposes of liquidation,
because that clearing member has failed to meet a call for margin or to
make other required deposits, the clearing organization must immediately
give telephonic notice, confirmed in writing immediately by facsimile
notice, of such a determination to the principal office of the
Commission at Washington, DC.
(2) Whenever a registered futures commission merchant determines
that any position it carries for another registered futures commission
merchant or for a registered leverage transaction merchant must be
liquidated immediately, transferred immediately or that the trading of
any account of such futures commission merchant or leverage transaction
merchant shall be only for purposes of liquidation, because the other
futures commission merchant or the leverage transaction merchant has
failed to meet a call for margin or to make other required deposits, the
carrying futures commission merchant must immediately give telephonic
notice, confirmed in writing immediately by facsimile notice, of such a
determination to the principal office of the Commission at Washington,
DC.
(3) Whenever a registered futures commission merchant determines
that an account which it is carrying is undermargined by an amount which
exceeds the futures commission merchant's adjusted net capital
determined in accordance with Sec. 1.17, the futures commission
merchant must immediately give telephonic notice, confirmed in writing
immediately by facsimile notice, of such a determination to the
designated self-regulatory organization and the principal office of the
Commission at Washington, DC. This paragraph (f)(3) shall apply to any
account carried by the futures commission merchant, whether a customer,
noncustomer, omnibus or proprietary account. For purposes of this
paragraph (f)(3), if any person has an interest of 10 percent or more in
ownership or equity in, or guarantees, more than one account, or has
guaranteed an account in addition to his own account, all such accounts
shall be combined. A designated self-regulatory organization may grant
an exemption from the provisions of this paragraph to a futures
commission merchant with respect to any particular account on a
continuous basis provided the designated self-regulatory organization
documents the reasons for granting such an exemption and continues to
monitor any such account.
(4) A futures commission merchant shall report immediately by
telephone, confirmed immediately in writing by facsimile notice,
whenever any commodity interest account it carries is subject to a
margin call, or call for other deposits required by the futures
commission merchant, that exceeds the futures commission merchant's
excess adjusted net capital, determined in accordance with Sec. 1.17,
and such call has not been answered by the close of business on the day
following the issuance of the call. This applies to all accounts carried
by the futures commission merchant, whether customer, noncustomer, or
omnibus, that are subject to margining, including commodity futures and
options. In addition to actual margin deposits by an account owner, a
futures commission merchant may also take account of favorable market
moves in determining whether the margin call is required to be reported
under this paragraph.
(5)(i) A futures commission merchant shall report immediately by
telephone, confirmed immediately in writing by facsimile notice,
whenever its excess adjusted net capital is less than six percent of the
maintenance margin required by the futures commission merchant on all
positions held in accounts of a noncustomer other than a noncustomer who
is subject to the minimum financial requirements of:
(A) A futures commission merchant, or
(B) The Securities and Exchange Commission for a securities broker
and dealer.
[[Page 27]]
(ii) For purposes of paragraph (f)(5)(i) of this section,
maintenance margin shall include all deposits which the futures
commission merchant requires the noncustomer to maintain in order to
carry its positions at the futures commission merchant.
(g) A futures commission merchant shall provide written notice of a
substantial reduction in capital as compared to that last reported in a
financial report filed with the Commission pursuant to Sec. 1.10. This
notice shall be provided as follows:
(1) If any event or series of events, including any withdrawal,
advance, loan or loss cause, on a net basis, a reduction in net capital
(or, if the futures commission merchant is qualified to use the filing
option available under Sec. 1.10(h), tentative net capital as defined
in the rules of the Securities and Exchange Commission) of 20 percent or
more, notice must be provided within two business days of the event or
series of events causing the reduction; and
(2) If equity capital of the futures commission merchant or a
subsidiary or affiliate of the futures commission merchant consolidated
pursuant to Sec. 1.17(f) (or 17 CFR 240.15c3-1e) would be withdrawn by
action of a stockholder or a partner or a limited liability company
member or by redemption or repurchase of shares of stock by any of the
consolidated entities or through the payment of dividends or any similar
distribution, or an unsecured advance or loan would be made to a
stockholder, partner, sole proprietor, limited liability company member,
employee or affiliate, such that the withdrawal, advance or loan would
cause, on a net basis, a reduction in excess adjusted net capital (or,
if the futures commission merchant is qualified to use the filing option
available under Sec. 1.10(h), excess net capital as defined in the
rules of the Securities and Exchange Commission) of 30 percent or more,
notice must be provided at least two business days prior to the
withdrawal, advance or loan that would cause the reduction: Provided,
however, That the provisions of paragraphs (g)(1) and (g)(2) of this
section do not apply to any futures or securities transaction in the
ordinary course of business between a futures commission merchant and
any affiliate where the futures commission merchant makes payment to or
on behalf of such affiliate for such transaction and then receives
payment from such affiliate for such transaction within two business
days from the date of the transaction.
(3) Upon receipt of such notice from a futures commission merchant,
the Director of the Division of Clearing and Intermediary Oversight or
the Director's designee may require that the futures commission merchant
provide or cause a Material Affiliated Person (as that term is defined
in Sec. 1.14(a)(2)) to provide, within three business days from the
date of request or such shorter period as the Division Director or
designee may specify, such other information as the Division Director or
designee determines to be necessary based upon market conditions,
reports provided by the futures commission merchant, or other available
information.
(h) Whenever a person registered as a futures commission merchant
knows or should know that the total amount of its funds on deposit in
segregated accounts on behalf of customers, or that the total amount set
aside on behalf of customers trading on non-United States markets, is
less than the total amount of such funds required by the Act and the
Commission's rules to be on deposit in segregated or secured amount
accounts on behalf of such customers, the registrant must report such
deficiency immediately by telephone notice, confirmed immediately in
writing by facsimile notice, to the registrant's designated self-
regulatory organization and the principal office of the Commission in
Washington, DC, to the attention of the Director and the Chief
Accountant of the Division of Clearing and Intermediary Oversight.
(i)(1) Every notice and written report required to be given or filed
by this section (except for notices required by paragraph (f) of this
section) by a futures commission merchant or a self-regulatory
organization must be filed with the regional office of the Commission
with jurisdiction over the state in which the registrant's principal
place of business is located, with the principal office of the
Commission in Washington, DC, with the designated self-regulatory
organization, if any; and
[[Page 28]]
with the Securities and Exchange Commission, if such registrant is a
securities broker or dealer. Every notice and written report required to
be given or filed by this section by an applicant for registration as a
futures commission merchant must be filed with the National Futures
Association (on behalf of the Commission), with the designated self-
regulatory organization, if any, and with the Securities and Exchange
Commission, if such applicant is a securities broker or dealer. Any
notice or report filed with the National Futures Association pursuant to
this paragraph shall be deemed for all purposes to be filed with, and to
be the official record of, the Commission.
(2) Every notice and written report which an introducing broker or
applicant for registration as an introducing broker is required to give
or file by paragraphs (a), (c) and (d) of this section must be filed
with the National Futures Association (on behalf of the Commission),
with the designated self-regulatory organization, if any, and with every
futures commission merchant carrying or intending to carry customer
accounts for the introducing broker or applicant for registration as an
introducing broker. Any notice or report filed with the National Futures
Association pursuant to this paragraph shall be deemed for all purposes
to be filed with, and to be the official record of, the Commission.
(3) Every notice or report required to be provided in writing to the
Commission under this section may, in lieu of facsimile, be filed via
electronic transmission using a form of user authentication assigned in
accordance with procedures established by or approved by the Commission,
and otherwise in accordance with instructions issued by or approved by
the Commission. Any such electronic submission must clearly indicate the
registrant or applicant on whose behalf such filing is made and the use
of such user authentication in submitting such filing will constitute
and become a substitute for the manual signature of the authorized
signer.
(Approved by the Office of Management and Budget under control number
3038-0024)
[43 FR 39969, Sept. 8, 1978]
Editorial Note: For Federal Register citations affecting Sec. 1.12,
see the List of CFR Sections Affected, which appears in the Finding Aids
sections of the printed volume and on GPO Access.
Sec. 1.13 [Reserved]
Sec. 1.14 Risk assessment recordkeeping requirements for futures
commission merchants.
(a) Requirement to maintain and preserve information. (1) Each
futures commission merchant registered with the Commission pursuant to
Section 4d of the Act, unless exempt pursuant to paragraph (d) of this
section, shall prepare, maintain and preserve the following information:
(i) An organizational chart which includes the futures commission
merchant and each of its affiliated persons. Included in the
organizational chart shall be a designation of which affiliated persons
are ``Material Affiliated Persons'' as that term is used in paragraph
(a)(2) of this section, which Material Affiliated Persons file routine
financial or risk exposure reports with the Securities and Exchange
Commission, a federal banking agency, an insurance commissioner or other
similar official or agency of a state, or a foreign regulatory
authority, and which Material Affiliated Persons are dealers in
financial instruments with off-balance sheet risk and, if a Material
Affiliated Person is such a dealer, whether it is also an end-user of
such instruments;
(ii) Written policies, procedures, or systems concerning the futures
commission merchant's:
(A) Method(s) for monitoring and controlling financial and
operational risks to it resulting from the activities of any of its
affiliated persons;
(B) Financing and capital adequacy, including information regarding
sources of funding, together with a narrative discussion by management
of the liquidity of the material assets of the futures commission
merchant, the structure of debt capital, and sources of alternative
funding;
(C) Establishing and maintaining internal controls with respect to
market risk, credit risk, and other risks created by the futures
commission merchant's proprietary and noncustomer
[[Page 29]]
clearing activities, including systems and policies for supervising,
monitoring, reporting and reviewing trading activities in securities,
futures contracts, commodity options, forward contracts and financial
instruments; policies for hedging or managing risks created by trading
activities or supervising accounts carried for noncustomer affiliates,
including a description of the types of reviews conducted to monitor
positions; and policies relating to restrictions or limitations on
trading activities: Provided, however, that if the futures commission
merchant has no such written policies, procedures or systems, it must so
state in writing;
(iii) Fiscal year-end consolidated and consolidating balance sheets
for the highest level Material Affiliated Person within the futures
commission merchant's organizational structure, which shall include the
futures commission merchant and its other Material Affiliated Persons,
prepared in accordance with generally accepted accounting principles,
which consolidated balance sheets shall be audited by an independent
certified public accountant if an annual audit is performed in the
ordinary course of business, but which otherwise may be unaudited, and
which shall include appropriate explanatory notes. The consolidating
balance sheets may be those prepared by the futures commission
merchant's highest level Material Affiliated Person as part of its
internal financial reporting process. Any additional information
required to be filed under Sec. 1.15(a)(2)(iii) shall also be
maintained and preserved; and
(iv) Fiscal year-end consolidated and consolidating income
statements and consolidated cash flow statements for the highest level
Material Affiliated Person within the futures commission merchant's
organizational structure, which shall include the futures commission
merchant and its other Material Affiliated Persons, prepared in
accordance with generally accepted accounting principles, which
consolidated statements shall be audited by an independent certified
public accountant if an annual audit is performed in the ordinary course
of business, but which otherwise may be unaudited, and which shall
include appropriate explanatory notes. The consolidating statements may
be those prepared by the futures commission merchant's highest level
Material Affiliated Person as part of its internal financial reporting
process. Any additional information required to be filed under Sec.
1.15(a)(2)(iii) shall also be maintained and preserved.
(2) The determination of whether an affiliated person of a futures
commission merchant is a Material Affiliated Person shall involve
consideration of all aspects of the activities of, and the relationship
between, both entities, including without limitation, the following
factors:
(i) The legal relationship between the futures commission merchant
and the affiliated person;
(ii) The overall financing requirements of the futures commission
merchant and the affiliated person, and the degree, if any, to which the
futures commission merchant and the affiliated person are financially
dependent on each other;
(iii) The degree, if any, to which the futures commission merchant
or its customers rely on the affiliated person for operational support
or services in connection with the futures commission merchant's
business;
(iv) The level of market, credit or other risk present in the
activities of the affiliated person; and
(v) The extent to which the affiliated person has the authority or
the ability to cause a withdrawal of capital from the futures commission
merchant.
(3) For purposes of this section and Sec. 1.15, the term Material
Affiliated Person does not include a natural person.
(4) The information, reports and records required by this section
shall be maintained and preserved, and made readily available for
inspection, in accordance with the provisions of Sec. 1.31.
(b) Special provisions with respect to Material Affiliated Persons
subject to the supervision of certain domestic regulators. A futures
commission merchant shall be deemed to be in compliance with the
recordkeeping requirements of paragraphs (a)(1)(i), (a)(1)(iii) and
(a)(1)(iv) of this section with respect to a Material Affiliated Person
if:
[[Page 30]]
(1) The futures commission merchant is required, or that Material
Affiliated Person is required, to maintain and preserve information, or
such information is maintained and preserved by the futures commission
merchant on behalf of the Material Affiliated Person, pursuant to Sec.
240.17h-1T of this title, or such other risk assessment regulations as
the Securities and Exchange Commission may adopt, and maintains and
makes available for inspection by the Commission in accordance with the
provisions of this section copies of the records and reports maintained
and filed on Form 17-H (or such other forms or reports as may be
required) by such futures commission merchant or its Material Affiliated
Person with the Securities and Exchange Commission pursuant to
Sec. Sec. 240.17h-1T and 240.17h-2T of this title, or such other risk
assessment regulations as the Securities and Exchange Commission may
adopt;
(2) In the case of a Material Affiliated Person (including a foreign
banking organization) that is subject to examination by, or the
reporting requirements of, a Federal banking agency, the futures
commission merchant or such Material Affiliated Person maintains and
makes available for inspection by the Commission in accordance with the
provisions of this section copies of all reports submitted by such
Material Associated Person to the Federal banking agency pursuant to
section 5211 of the Revised Statutes, section 9 of the Federal Reserve
Act, section 7(a) of the Federal Deposit Insurance Act, section 10(b) of
the Home Owners' Loan Act, or section 5 of the Bank Holding Company Act
of 1956; or
(3) In the case of a Material Affiliated Person that is subject to
the supervision of an insurance commissioner or other similar official
or agency of a state, the futures commission merchant or such Material
Affiliated Person maintains and makes available for inspection by the
Commission in accordance with the provisions of this section copies of
the annual statements with schedules and exhibits prepared by the
Material Affiliated Person on forms prescribed by the National
Association of Insurance Commissioners or by a state insurance
commissioner.
(c) Special provisions with respect to Material Affiliated Persons
subject to the supervision of a Foreign Regulatory Authority. A futures
commission merchant shall be deemed to be in compliance with the
recordkeeping requirements of paragraphs (a)(1)(iii) and (a)(1)(iv) of
this section with respect to a Material Affiliated Person if such
futures commission merchant maintains and makes available, or causes
such Material Affiliated Person to make available, for inspection by the
Commission in accordance with the provisions of this section copies of
any financial or risk exposure reports filed by such Material Affiliated
Person with a foreign futures authority or other foreign regulatory
authority, provided that: (1) the futures commission merchant agrees to
use its best efforts to obtain from the Material Affiliated Person and
to cause the Material Affiliated Person to provide, directly or through
its foreign futures authority or other foreign regulatory authority, any
supplemental information the Commission may request and there is no
statute or other bar in the foreign jurisdiction that would preclude the
futures commission merchant, the Material Affiliated Person, the foreign
futures authority or other foreign regulatory authority from providing
such information to the Commission; or (2) the foreign futures authority
or other foreign regulatory authority with whom the Material Affiliated
Person files such reports has entered into an information-sharing
agreement with the Commission which is in effect as of the futures
commission merchant's fiscal year-end and which will allow the
Commission to obtain the type of information required herein. The
futures commission merchant shall maintain a copy of the original report
and a copy translated into the English language. For the purposes of
this section, the term ``Foreign Futures Authority'' shall have the
meaning set forth in section 1a(10) of the Act.
(d) Exemptions. (1) The provisions of this section shall not apply
to any futures commission merchant which holds funds or property of or
for futures customers of less than $6,250,000 and has less than
$5,000,000 in adjusted
[[Page 31]]
net capital as of the futures commission merchant's current fiscal year-
end; provided, however, that such futures commission merchant is not a
clearing member of an exchange.
(2) The Commission may, upon written application by a Reporting
Futures Commission Merchant, exempt from the provisions of this section,
other than paragraph (a)(1)(ii) of this section, either unconditionally
or on specified terms and conditions, any futures commission merchant
affiliated with such Reporting Futures Commission Merchant. The term
``Reporting Futures Commission Merchant'' shall mean, in the case of a
futures commission merchant that is affiliated with another registered
futures commission merchant, the futures commission merchant which
maintains the greater amount of adjusted net capital as last reported on
financial reports filed with the Commission pursuant to Sec. 1.10
unless another futures commission merchant is acting as the Reporting
Broker or Dealer under Sec. 240.17h-2T of this title, or the Commission
permits another futures commission merchant to act as the Reporting
Futures Commission Merchant. In granting exemptions under this section,
the Commission shall consider, among other factors, whether the records
required by this section concerning the Material Affiliated Persons of
the futures commission merchant affiliated with the Reporting Futures
Commission Merchant will be available to the Commission pursuant to this
section or Sec. 1.15. A request for exemption filed under this
paragraph (d)(2) shall explain the basis for the designation of a
particular futures commission merchant as the Reporting Futures
Commission Merchant and will become effective on the thirtieth day after
receipt of such request by the Commission unless the Commission objects
to the request by that date.
(3) The Commission may exempt any futures commission merchant from
any provision of this section if it finds that the exemption is not
contrary to the public interest and the purposes of the provisions from
which the exemption is sought. The Commission may grant the exemption
subject to such terms and conditions as it may find appropriate.
(e) Location of records. A futures commission merchant required to
maintain records concerning Material Affiliated Persons pursuant to this
section may maintain those records either at the principal office of the
Material Affiliated Person or at a records storage facility, provided
that, except as set forth in paragraph (c) of this section, the records
are located within the boundaries of the United States and the records
are kept and available for inspection in accordance with Sec. 1.31. If
such records are maintained at a place other than the futures commission
merchant's principal place of business, the Material Affiliated Person
or other entity maintaining the records shall file with the Commission a
written undertaking, in a form acceptable to the Commission, signed by a
duly authorized person, to the effect that the records will be treated
as if the futures commission merchant were maintaining the records
pursuant to this section and that the entity maintaining the records
will permit examination of such records at any time, or from time to
time during business hours, by representatives or designees of the
Commission and promptly furnish the Commission representative or its
designee true, correct, complete and current hard copy of all or any
part of such records. The election to maintain records at the principal
place of business of the Material Affiliated Person or at a records
storage facility pursuant to the provisions of this paragraph shall not
relieve the futures commission merchant required to maintain and
preserve such records from any of its responsibilities under this
section or Sec. 1.15.
(f) Confidentiality. All information obtained by the Commission
pursuant to the provisions of this section from a futures commission
merchant concerning a Material Affiliated Person shall be deemed
confidential information for the purposes of section 8 of the Act.
(g) Implementation schedule. (1) Each futures commission merchant
registered as of December 31, 1994 and subject to the requirements of
this section shall maintain and preserve the information required by
paragraphs (a)(1)(i)
[[Page 32]]
and (a)(1)(ii) of this section commencing April 30, 1995 and the
information required by paragraphs (a)(1)(iii) and (a)(1)(iv) of this
section commencing May 15, 1995 or, if December 31, 1994 is not the
futures commission merchant's fiscal year-end, 135 calendar days
following the first fiscal year-end occurring after December 31, 1994.
(2) Each futures commission merchant whose registration becomes
effective after December 31, 1994 and is subject to the requirements of
this section shall maintain and preserve the information required by
paragraphs (a)(1)(i) and (a)(1)(ii) of this section commencing 60
calendar days after registration become effective and the information
required by paragraphs (a)(1)(iii) and (a)(1)(iv) of this section
commencing 105 calendar days following the first fiscal year-end
occurring after registration becomes effective.
[59 FR 66688, Dec. 28, 1994]
Sec. 1.15 Risk assessment reporting requirements for futures
commission merchants.
(a) Reporting requirements with respect to information required to
be maintained by Sec. 1.14. (1) Each futures commission merchant
registered with the Commission pursuant to Section 4d of the Act, unless
exempt pursuant to paragraph (c) of this section, shall file the
following with the regional office with which it files periodic
financial reports by no later than April 30, 1995, provided that in the
case of a futures commission merchant whose registration becomes
effective after December 31, 1994, such futures commission merchant
shall file the following within 60 calendar days after the effective
date of such registration, or by April 30, 1995, whichever comes later:
(i) A copy of the organizational chart maintained by the futures
commission merchant pursuant to paragraph (a)(l)(i) of Sec. 1.14. Where
there is a material change in information provided, an updated
organizational chart shall be filed within sixty calendar days after the
end of the fiscal quarter in which the change has occurred; and
(ii) Copies of the financial, operational, and risk management
policies, procedures and systems maintained by the futures commission
merchant pursuant to paragraph (a)(l)(ii) of Sec. 1.14. If the futures
commission merchant has no such written policies, procedures or systems,
it must file a statement so indicating. Where there is a material change
in information provided, such change shall be reported within sixty
calendar days after the end of the fiscal quarter in which the change
has occurred.
(2) Each futures commission merchant registered with the Commission
pursuant to Section 4d of the Act, unless exempt pursuant to paragraph
(c) of this section, shall file the following with the regional office
with which it files periodic financial reports within 105 calendar days
after the end of each fiscal year or, if a filing is made pursuant to a
written notice issued under paragraph (a)(2)(iii) of this section,
within the time period specified in the written notice:
(i) Fiscal year-end consolidated and consolidating balance sheets
for the highest level Material Affiliated Person within the futures
commission merchant's organizational structure, which shall include the
futures commission merchant and its other Material Affiliated Persons,
prepared in accordance with generally accepted accounting principles,
which consolidated balance sheets shall be audited by an independent
certified public accountant if an annual audit is performed in the
ordinary course of business, but which otherwise may be unaudited, and
which consolidated balance sheets shall include appropriate explanatory
notes. The consolidating balance sheets may be those prepared by the
futures commission merchant's highest level Material Affiliated Person
as part of its internal financial reporting process;
(ii) Fiscal year-end annual consolidated and consolidating income
statements and consolidated cash flow statements for the highest level
Material Affiliated Person within the futures commission merchant's
organizational structure, which shall include the futures commission
merchant and its other Material Affiliated Persons, prepared in
accordance with generally accepted accounting principles, which
[[Page 33]]
consolidated statements shall be audited by an independent certified
public accountant if an annual audit is performed in the ordinary course
of business, but which otherwise may be unaudited, and which
consolidated statements shall include appropriate explanatory notes. The
consolidating statements may be those prepared by the futures commission
merchant's highest level Material Affiliated Person as part of its
internal financial reporting process; and
(iii) Upon receiving written notice from any representative of the
Commission and within the time period specified in the written notice,
such additional information which the Commission determines is necessary
for a complete understanding of a particular affiliate's financial
impact on the futures commission merchant's organizational structure.
(3) For the purposes of this section, the term Material Affiliated
Person shall have the meaning used in Sec. 1.14.
(4) The reports required to be filed pursuant to paragraphs (a)(1)
and (a)(2) of this section shall be considered filed when received by
the regional office of the Commission with whom the futures commission
files financial reports pursuant to Sec. 1.10.
(b) [Reserved]
(c) Exemptions. (1) The provisions of this section shall not apply
to any futures commission merchant which holds funds or property of or
for futures customers of less than $6,250,000 and has less than
$5,000,000 in adjusted net capital as of the futures commission
merchant's fiscal year-end; provided, however, that such futures
commission merchant is not a clearing member of an exchange.
(2) The Commission may, upon written application by a Reporting
Futures Commission Merchant, exempt from the provisions of this section,
other than paragraph (a)(1)(ii) of this section, either unconditionally
or on specified terms and conditions, any futures commission merchant
affiliated with such Reporting Futures Commission Merchant. The term
``Reporting Futures Commission Merchant'' shall mean, in the case of a
futures commission merchant that is affiliated with another registered
futures commission merchant, the futures commission merchant which
maintains the greater amount of net capital as last reported on its
financial reports filed with the Commission pursuant to Sec. 1.10
unless another futures commission merchant is acting as the Reporting
Broker or Dealer under Sec. 240.17h-2T of this title or the Commission
permits another futures commission merchant to act as the Reporting
Futures Commission Merchant. In granting exemptions under this section,
the Commission shall consider, among other factors, whether the records
and other information required to be maintained pursuant to Sec. 1.14
concerning the Material Affiliated Persons of the futures commission
merchant affiliated with the Reporting Futures Commission Merchant will
be available to the Commission pursuant to the provisions of this
section. A request for exemption filed under this paragraph (c)(2) shall
explain the basis for the designation of a particular futures commission
merchant as the Reporting Futures Commission Merchant and will become
effective on the thirtieth day after receipt of such request by the
Commission unless the Commission objects to the request by that date.
The Reporting Futures Commission Merchant must submit the information
required by paragraph (a)(1)(ii) of this section on behalf of its
affiliated futures commission merchants.
(3) The Commission may exempt any futures commission merchant from
any provision of this section if it finds that the exemption is not
contrary to the public interest and the purposes of the provisions from
which the exemption is sought. The Commission may grant the exemption
subject to such terms and conditions as it may find appropriate.
(d) Special provisions with respect to Material Affiliated Persons
subject to the supervision of certain domestic regulators. (1) In the
case of a futures commission merchant which is required to file, or has
a Material Affiliated Person which is required to file, Form 17-H (or
such other forms or reports as may be required) with the Securities and
Exchange Commission pursuant to Sec. 240.17h-2T of this title, or such
other risk assessment regulations as the Securities and Exchange
Commission
[[Page 34]]
may adopt, such futures commission merchant shall be deemed to be in
compliance with the reporting requirements of paragraphs (a)(1)(i) and
(a)(2) of this section if the futures commission merchant furnishes, in
accordance with paragraph (a)(2) of this section, a copy of the most
recent Form 17-H filed by the futures commission merchant or its
Material Affiliated Person with the Securities and Exchange Commission,
provided however, that if the futures commission merchant has designated
any of its affiliated persons as Material Affiliated Persons for
purposes of this section and Sec. 1.14 which are not designated as
Material Associated Persons for purposes of the Form 17-H filed pursuant
to Sec. Sec. 240.17h-1T and 240.17h-2T of this title, the futures
commission must also designate any such affiliated person as a Material
Affiliated Person on the organizational chart required as Item 1 of part
I of Form 17-H. To comply with paragraphs (a)(1)(i) and (a)(2) of this
section, such futures commission merchant may, at its option, file Form
17-H in its entirety or file such form without the information required
under part II of Form 17-H.
(2) In the case of a Material Affiliated Person (including a foreign
banking organization) that is subject to examination by, or the
reporting requirements of, a Federal banking agency, the futures
commission merchant shall be deemed to be in compliance with the
reporting requirements of paragraph (a)(2) of this section with respect
to such Material Affiliated Person if the futures commission merchant or
such Material Affiliated Person maintains in accordance with Sec. 1.14
copies of all reports filed by the Material Affiliated Person with the
Federal banking agency pursuant to section 5211 of the Revised Statutes,
section 9 of the Federal Reserve Act, section 7(a) of the Federal
Deposit Insurance Act, section 10(b) of the Home Owners' Loan Act, or
section 5 of the Bank Holding Company Act of 1956.
(3) In the case of a futures commission merchant that has a Material
Affiliated Person that is subject to the supervision of an insurance
commissioner or other similar official or agency of a state, such
futures commission merchant shall be deemed to be in compliance with the
reporting requirements of paragraph (a)(2) of this section with respect
to the Material Affiliated Person if:
(i) With respect to a Material Affiliated Person organized as a
mutual insurance company or a non-public stock company, the futures
commission merchant or such Material Affiliated Person maintains in
accordance with Sec. 1.14 copies of the annual statements with
schedules and exhibits prepared by the Material Affiliated Person on
forms prescribed by the National Association of Insurance Commissioners
or by a state insurance commissioner; and
(ii) With respect to a Material Affiliated Person organized as a
public stock company, the futures commission merchant or such Material
Affiliated Person maintains, in addition to the annual statements with
schedules and exhibits required to be maintained pursuant to Sec. 1.14,
copies of the filings made by the Material Affiliated Person pursuant to
sections 13 or 15 of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940.
(4) No futures commission merchant shall be required to furnish to
the Commission any examination report of any Federal banking agency or
any supervisory recommendations or analyses contained therein with
respect to a Material Affiliated Person that is subject to the
regulation of a Federal banking agency. All information received by the
Commission pursuant to this section concerning a Material Affiliated
Person that is subject to examination by or the reporting requirements
of a Federal banking agency shall be deemed confidential for the
purposes of section 8 of the Act.
(5) The furnishing of any information or documents by a futures
commission merchant pursuant to this section shall not constitute an
admission for any purpose that a Material Affiliated Person is otherwise
subject to the Act.
(e) Special provisions with respect to Material Affiliated Persons
subject to the supervision of a Foreign Regulatory Authority. A futures
commission merchant shall be deemed to be in compliance with the
reporting requirements of paragraph (a)(2) of this section with respect
to a Material Affiliated Person
[[Page 35]]
if such futures commission merchant furnishes, or causes such Material
Affiliated Person to make available, in accordance with the provisions
of this section, copies of any financial or risk exposure reports filed
by such Material Affiliated Person with a foreign futures authority or
other foreign regulatory authority, provided that:
(1) The futures commission merchant agrees to use its best efforts
to obtain from the Material Affiliated Person and to cause the Material
Affiliated Person to provide, directly or through its foreign futures
authority or other foreign regulatory authority, any supplemental
information the Commission may request and there is no statute or other
bar in the foreign jurisdiction that would preclude the futures
commission merchant, the Material Affiliated Person, the foreign futures
authority or other foreign regulatory authority from providing such
information to the Commission; or
(2) The foreign futures authority or other foreign regulatory
authority with whom the Material Affiliated Person files such reports
has entered into an information sharing agreement with the Commission
which is in effect as of the futures commission merchant's fiscal year-
end and which will allow the Commission to obtain the type of
information required herein. The futures commission merchant shall file
a copy of the original report and a copy translated into the English
language. For the purposes of this section, the term ``Foreign Futures
Authority'' shall have the meaning set forth in section 1a(10) of the
Act.
(f) Confidentiality. All information obtained by the Commission
pursuant to the provisions of this section from a futures commission
merchant concerning a Material Associated Person shall be deemed
confidential information for the purposes of section 8 of the Act.
(g) Implementation schedule. Each futures commission merchant
registered as of December 31, 1994 and subject to the requirements of
this section shall file the information required by paragraph (a)(1) of
this section no later than April 30, 1995 and the information required
by paragraph (a)(2) of this section no later than May 15, 1995. Each
futures commission merchant whose registration becomes effective after
December 31, 1994 and is subject to the requirements of this section
shall file the information required by paragraph (a)(1) of this section
within 60 calendar days after registration is granted, or by April 30,
1995, whichever comes later and the information required by paragraph
(a)(2) of this section within 105 calendar days after registration is
granted or by May 15, 1995, whichever comes later.
[59 FR 66690, Dec. 28, 1994; 60 FR 13901, Mar. 15, 1995]
Sec. 1.16 Qualifications and reports of accountants.
(a) Definitions--(1) Accountant's report. The term ``accountant's
report,'' when used in regard to financial statements and schedules,
means a document in which an independent licensed or certified public
accountant indicates the scope of the audit (or examination) which he
has made and sets forth his opinion regarding the financial statements
and schedules taken as a whole or an assertion to the fact that an
overall opinion cannot be expressed. When an overall opinion cannot be
expressed, the reasons therefore must be stated.
(2) Audit or examination. The terms ``audit'' and ``examination,''
when used in regard to financial statements and schedules, mean an
examination of the statements and schedules by an accountant in
accordance with generally accepted auditing standards for the purposes
of expressing an opinion thereon.
(3) Certified. The term ``certified,'' when used in regard to
financial statements and schedules, means audited and reported upon with
an opinion expressed by an independent certified public accountant or
independent licensed public accountant.
(4) Customer. The term ``customer'' means customer (as defined in
Sec. 1.3(k)) and option customer (as defined in Sec. 1.3(jj) of this
part and in Sec. 32.1(c) of this chapter) and includes a foreign
futures and foreign options customer (as defined in Sec. 30.1(c) of
this chapter).
(b) Qualifications of accountants. (1) The Commission will recognize
any person as a certified public accountant who is duly registered and
in good
[[Page 36]]
standing as such under the laws of the place of his residence or
principal office. The Commission will recognize any person as a licensed
public accountant who was duly licensed on or before December 31, 1970,
and is in good standing as such under the laws of the place of his
residence or principal office.
(2) The Commission will not recognize any certified public
accountant or licensed public accountant as independent who is not in
fact independent. For example, an accountant will not be considered
independent with respect to any applicant or registrant or any parent,
subsidiary, or other affiliate of such applicant or registrant (i) in
which, during the period of his professional engagement to examine the
financial statements and schedules being reported on or at the date of
his report, he or his firm or a member thereof had, or was committed to
acquire, any direct financial interest or any material indirect
financial interest, or (ii) with which, during the period of his
professional engagement to examine the financial statements and
schedules being reported on, at the date of his report or during the
period covered by the financial statements, he or his firm or a member
thereof was connected as a promoter, underwriter, voting trustee,
director, officer, or employee, except that a firm will be deemed
independent with respect to an applicant or registrant and its
affiliates if a former employee or officer of such applicant or
registrant or any such affiliate is employed by the firm and such
individual has completely disassociated himself from the applicant or
registrant and its affiliates and does not participate in auditing
financial statements and schedules of the applicant or registrant or its
affiliates covering any period of his employment by the applicant or
registrant or its affiliates. An accountant will not be considered
independent if he or his firm or a member thereof performs manual or
automated bookkeeping services or assumes responsibility for maintenance
of the accounting records, including accounting classification
decisions, of such applicant or registrant or any of its affiliates. For
the purposes of this Sec. 1.16(b), the term ``member'' means all
partners in the firm and all professional employees participating in the
audit or located in the office of the firm participating in a
significant portion of the audit.
(3) In determining whether an accountant may in fact not be
independent with respect to a particular applicant or registrant, the
Commission will give appropriate consideration to all relevant
circumstances, including evidence bearing on all relationships between
the accountant and that applicant or registrant or any affiliate
thereof, and will not confine itself to the relationship existing in
connection with the filing of reports with the Commission.
(c) Accountant's reports--(1) Technical requirements. The
accountant's report (i) must be dated, (ii) must be signed manually,
(iii) must indicate the city and State where issued and (iv) must
identify without detailed enumeration the financial statements covered
by the report.
(2) Representations as to the audit. The accountant's report (i)
must state whether the audit was made in accordance with generally
accepted auditing standards, and (ii) must designate any auditing
procedures deemed necessary by the accountant under the circumstances of
the particular case which have been omitted and the reasons for their
omission. However, nothing in this paragraph (c)(2) shall be construed
to imply authority for the omission of any procedure which independent
accountants would ordinarily employ in the course of an audit made for
the purposes of expressing the opinion required by paragraph (c)(3) of
this section.
(3) Opinion to be expressed. The accountant's report must state
clearly: (i) The opinion of the accountant with respect to the financial
statements and schedules covered by the report and the accounting
principles and practices reflected therein and (ii) the opinion of the
accountant as to the consistency of the application of the accounting
principles, or as to any changes in such principles which have material
effect on the financial statements and schedules.
(4) Exceptions. Any matters to which the accountant takes exception
must
[[Page 37]]
be clearly identified, such exceptions specifically and clearly stated,
and to the extent practicable, the effect of each exception on related
financial statements and schedules given.
(5) Accountant's report on material inadequacies. A registrant must
file concurrently with the annual audit report a supplemental report by
the accountant describing any material inadequacies found to exist or
found to have existed since the date of the previous audit. An applicant
must file concurrently with the audit report a supplemental report by
the accountant describing any material inadequacies found to exist as of
the date of the Form 1-FR being filed: Provided, however, That if such
applicant is registered with the Securities and Exchange Commission as a
securities broker or dealer, and it files (in accordance with Sec.
1.10(h)) a copy of its Financial and Operational Combined Uniform Single
Report under the Securities Exchange Act of 1934, Part II, Part IIA, or
Part II CSE, in lieu of Form 1-FR, the accountant's supplemental report
must be made as of the date of such report. The supplemental report must
indicate any corrective action taken or proposed by the applicant or
registrant in regard thereto. If the audit did not disclose any material
inadequacies, the supplemental report must so state.
(d) Audit objectives. (1) The audit must be made in accordance with
generally accepted auditing standards and must include a review and
appropriate tests of the accounting system, the internal accounting
control, and the procedures for safeguarding customer and firm assets in
accordance with the provisions of the Act and the regulations
thereunder, since the prior examination date. The audit must include all
procedures necessary under the circumstances to enable the independent
licensed or certified public accountant to express an opinion on the
financial statements and schedules. The scope of the audit and review of
the accounting system, the internal controls, and procedures for
safeguarding customer and firm assets must be sufficient to provide
reasonable assurance that any material inadequacies existing at the date
of the examination in (i) the accounting system, (ii) the internal
accounting controls, and (iii) the procedures for safeguarding customer
and firm assets (including, in the case of a futures commission
merchant, the segregation requirements of section 4d(a)(2) of the Act
and these regulations and the secured amount requirements of the Act and
these regulations) will be discovered. Additionally, as specified
objectives the audit must include reviews of the practices and
procedures followed by the registrant in making (A) periodic
computations of the minimum financial requirements pursuant to Sec.
1.17 and (B) in the case of a futures commission merchant, daily
computations of the segregation requirements of section 4d(a)(2) of the
Act and these regulations and the secured amount requirements of the Act
and these regulations.
(2) A material inadequacy in the accounting system, the internal
accounting controls, the procedures for safeguarding customer and firm
assets, and the practices and procedures referred to in paragraph (d)(1)
of this section which is to be reported in accordance with paragraph
(e)(2) of this section includes any conditions which contributed
substantially to or, if appropriate corrective action is not taken,
could reasonably be expected to:
(i) Inhibit an applicant or registrant from promptly completing
transactions or promptly discharging his responsibilities to customers
or other creditors;
(ii) Result in material financial loss;
(iii) Result in material misstatement of the applicant's or
registrant's financial statements and schedules; or
(iv) Result in violations of the Commission's segregation or secured
amount (in the case of a futures commission merchant), recordkeeping or
financial reporting requirements to the extent that could reasonably be
expected to result in the conditions described in paragraph (d)(2) (i),
(ii), or (iii) of this section.
(e) Extent and timing of audit procedures. (1) The extent and timing
of audit procedures are matters for the independent public accountant to
determine on the basis of his review and evaluation of existing internal
controls and other audit procedures performed
[[Page 38]]
in accordance with generally accepted auditing standards and the audit
objectives set forth in paragraph (d) of this section. In determining
the extent of testing, consideration must be given to the materiality of
an area and to the possible effect on the financial statements and
schedules of a material misstatement in a related account.
(2) If during the course of an audit or interim work, the
independent public accountant determines that any material inadequacies
exist in the accounting system, in the internal accounting control, in
the procedures for safeguarding customer or firm assets, or as otherwise
defined in paragraph (d) of this section, he must call such inadequacies
to the attention of the applicant or registrant, which has the
responsibility to give notice to the National Futures Association and,
if an applicant, or the Commission and the designated self-regulatory
organization, if any, if a registrant, in accordance with paragraphs (d)
and (g) of Sec. 1.12: Provided, however, That if the applicant or
registrant is an introducing broker or applicant for registration as an
introducing broker, it also has the responsibility to give notice to the
National Futures Association, the designated self-regulatory
organization, if any, and every futures commission merchant carrying or
intending to carry customer accounts for the introducing broker or
applicant for registration as an introducing broker. The applicant or
registrant must also furnish the accountant with a copy of said notice
within three (3) business days. If the accountant fails to receive such
notice from the applicant or registrant within three (3) business days,
or if he disagrees with the statements contained in the notice of the
applicant or registrant, the accountant must inform the National Futures
Association, in the case of an applicant, or the Commission and the
designated self-regulatory organization, if any, in the case of a
registrant, by reporting the material inadequacy and, in the case of an
applicant or registrant which is an introducing broker or applicant for
registration as in introducing broker, the accountant must also inform
the National Futures Association, the designated self-regulatory
organization, if any, and every futures commission merchant carrying or
intending to carry customer accounts for the introducing an introducing
broker, within three (3) business days thereafter. Such report from the
accountant must, if the applicant or registrant failed to file a notice,
describe the material inadequacies found to exist. If the applicant or
registrant filed a notice, the accountant must file a report detailing
the aspects, if any, of the applicant's or registrant's notice with
which the accountant does not agree.
(f)(1) Extension of time for filing audited reports. In the event a
registered futures commission merchant or a registered introducing
broker finds that it cannot file, without substantial undue hardship,
its certified financial statements and schedules for any year within the
time specified in Sec. 1.10 (b)(1)(ii) or Sec. 1.10 (b)(2)(ii) of this
part, as applicable, such registrants may request approval for an
extension of time, as follows:
(i) Futures commission merchant registrants. (A) A futures
commission merchant may file with its designated self-regulatory
organization an application for an extension of time, a copy of which
the registrant must file with the Commission. The application shall be
approved or denied in writing by the designated self-regulatory
organization. The registrant must file immediately with the Commission a
copy of any notice it receives from the designated self-regulatory
organization to approve or deny the registrant's request for extension
of time. A written notice of approval shall become effective upon the
filing by the registrant of a copy with the Commission, and a written
notice of denial shall be effective as of the date of the notice.
(B) A futures commission merchant that is registered with the
Securities and Exchange Commission as a securities broker or dealer may
file with its designated self-regulatory organization a copy of any
application that the registrant has filed with its designated examining
authority, pursuant to Sec. 240.17-a5(l)(1)of this title, for an
extension of time to file audited annual financial statements. The
registrant must also file immediately with the designated self-
regulatory organization and the
[[Page 39]]
Commission copies of any notice it receives from its designated
examining authority to approve or deny the requested extension of time.
Upon receipt by the designated self-regulatory organization and the
Commission of copies of any such notice of approval, the requested
extension of time referenced in the notice shall be deemed approved
under this paragraph (f)(1)(i).
(C) Any copy that under this paragraph (f)(1)(i) is required to be
filed with the Commission shall be filed with the regional office of the
Commission with jurisdiction over the state in which the registrant's
principal place of business is located.
(ii) Introducing broker registrants. (A) An introducing broker may
file with the National Futures Association an application for extension
of time, which shall be approved or denied in writing.
(B) An introducing broker that is registered with the Securities and
Exchange Commission as a securities broker or dealer may file with the
National Futures Association copies of any application that the
registrant has filed with its designated examining authority, pursuant
to Sec. 240.17-a5(l)(1) of this title, for an extension of time to file
audited annual financial statements. The registrant must also file
immediately with the National Futures Association copies of any notice
it receives from its designated examining authority to approve or deny
the requested extension of time. Upon the receipt by the National
Futures Association of a copy of any such notice of approval, the
requested extension of time referenced in the notice shall be deemed
approved under this paragraph (f)(1)(ii).
(2) Exemption requests. On the written request of any designated
self-regulatory organization or registrant, or on its own motion, the
Commission may grant an extension of time or an exemption from any of
the certified financial reporting requirements of this chapter either
unconditionally or on specified terms and conditions.
(g) Replacement of accountant. (1) In the event (i) the independent
public accountant who was previously engaged as the principal accountant
to audit an applicant's or registrant's financial statements resigns (or
indicates he declines to stand for re-election after the completion of
the current audit) or is dismissed as the applicant's or registrant's
principal accountant, (ii) another independent accountant is engaged as
principal accountant, or (iii) an independent accountant on whom the
principal accountant expresses reliance in his report regarding a
subsidiary resigns (or formally indicates he declines to stand for re-
election after completion of the current audit) or is dismissed or
another independent public accountant is engaged to audit that
subsidiary, an applicant shall file written notice of such occurrence
with the National Futures Association, and a registrant shall file
written notice of such occurrence with the Commission at its principal
office in Washington, DC, and with the designated self-regulatory
organization, if any, not more than 15 business days after such
occurrence.
(2) Such notice must state (i) the date of such resignation (or
declination to stand for re-election, dismissal or engagement) and (ii)
whether, in connection with the audit of the two most recent fiscal
years and any subsequent interim period preceding such resignation,
dismissal or engagement, there were any disagreements with the former
accountant on any matter of accounting principles or practices,
financial statements disclosure, auditing scope or procedures, or
compliance with the applicable rules of the Commission, which, if not
resolved to the satisfaction of the former accountant, would have caused
him to make reference in connection with his report to the subject
matter of the disagreements (if so, describe such disagreements). The
disagreements required to be reported in this paragraph (g)(2) include
both those resolved to the former accountant's satisfaction and those
not resolved to the former accountant's satisfaction. Disagreements
contemplated by this paragraph (g)(2) are those which occur at the
decision-making level, i.e., between personnel of the applicant or
registrant responsible for presentation of its financial statements and
schedules and personnel of the accounting firm responsible for rendering
its report. The notice must
[[Page 40]]
also state whether the accountant's report on the financial statements
and schedules for any of the past two years contained an adverse opinion
or a disclaimer of opinion or was qualified as to uncertainties, audit
scope, or accounting principles (if so, describe the nature of each such
adverse opinion, disclaimer of opinion, or qualification). An applicant
must also request the former accountant to furnish the applicant with a
letter addressed to the National Futures Association, and a registrant
must also request the former accountant to furnish the registrant with a
letter addressed to the Commission, stating whether he agrees with the
statements contained in the notice of the applicant or registrant and,
if not, stating the respects in which he does not agree. Each copy of
the notice and accountant's letter must be manually signed by the sole
proprietor or a general partner or a duly authorized corporate officer
of the applicant or registrant, as appropriate, and by the accountant.
(3) If (i) within the 24 months prior to the date of the most recent
audited financial statement, a notice has been filed pursuant to
paragraph (g)(1) of this section reporting a change of accountants, (ii)
included in such filing there is a reported disagreement on any matters
of accounting principles or practices, financial statements disclosure,
auditing scope, or noncompliance with the applicable rules of the
Commission, (iii) during the fiscal year in which the change in
accountants took place or during the subsequent fiscal year, there have
been any transactions or events similar to those which involved a
reported disagreement, and (iv) such transactions or events are material
and were accounted for or disclosed in a manner different from that
which the former accountant apparently would have concluded was
required, the existence and nature of the disagreements and also the
effect on the financial statements must be stated in a written notice to
the National Futures Association, in the case of an applicant, or to the
Commission at its principal office in Washington, DC, and the designated
self-regulatory organization, if any, in the case of a registrant, if
the method which the former accountant apparently would have concluded
was required had been followed. These disclosures need not be made if
the method asserted by the former accountant ceases to be generally
accepted because of authoritative standards or interpretations
subsequently issued. The notice required by this paragraph (g)(3) must
be filed by the applicant or registrant concurrently with the financial
statements and schedules to which it pertains.
(h) Exemption for introducing broker or applicant therefor. The
provisions of this section do not apply to an introducing broker which
is operating pursuant to a guarantee agreement, nor do such provisions
apply to an applicant for registration as an introducing broker who
files concurrently with such application a guarantee agreement, provided
such introducing broker or applicant therefor is not also a securities
broker or dealer.
(Approved by the Office of Management and Budget under control numbers
3038-0007, 3038-0024)
[43 FR 39970, Sept. 8, 1978, as amended at 46 FR 54516, Nov. 3, 1981; 46
FR 63035, Dec. 30, 1981; 48 FR 35284, Aug. 3, 1983; 49 FR 39526, Oct. 9,
1984; 52 FR 28995, Aug. 5, 1987; 53 FR 4612, Feb. 17, 1988; 69 FR 41426,
July 9, 2004; 69 FR 49798, Aug. 12, 2004; 71 FR 5593, Feb. 2, 2006]
Sec. 1.17 Minimum financial requirements for futures commission
merchants and introducing brokers.
(a)(1)(i) Except as provided in paragraph (a)(2)(i) of this section,
each person registered as a futures commission merchant must maintain
adjusted net capital equal to or in excess of the greatest of:
(A) $1,000,000;
(B) The futures commission merchant's risk-based capital
requirement, computed as eight percent of the total risk margin
requirement for positions carried by the futures commission merchant in
customer accounts and noncustomer accounts.
(C) The amount of adjusted net capital required by a registered
futures association of which it is a member; or
(D) For securities brokers and dealers, the amount of net capital
required by Rule 15c3-1(a) of the Securities and
[[Page 41]]
Exchange Commission (17 CFR 240.15c3-1(a)).
(ii) Each person registered as a futures commission merchant engaged
in soliciting or accepting orders and customer funds related thereto for
the purchase or sale of any commodity for future delivery or any
commodity option on or subject to the rules of a registered derivatives
transaction execution facility from any customer who does not qualify as
an ``institutional customer'' as defined in Sec. 1.3(g) must:
(A) Be a clearing member of a derivatives clearing organization and
maintain net capital in the amount of the greater of $20,000,000 or the
amounts otherwise specified in paragraph (a)(1)(i) of this section; or
(B) Receive orders on behalf of the customer from a commodity
trading advisor acting in accordance with Sec. 4.32 of this chapter.
(iii) Except as provided in paragraph (a)(2) of this section, each
person registered as an introducing broker must maintain adjusted net
capital equal to or in excess of the greatest of:
(A) $45,000;
(B) The amount of adjusted net capital required by a registered
futures association of which it is a member; or
(C) For securities brokers and dealers, the amount of net capital
required by Rule 15c3-1(a) of the Securities and Exchange Commission (17
CFR 240.15c3-1(a)).
(2)(i) The requirements of paragraph (a)(1) of this section shall
not be applicable if the registrant is a member of a designated self-
regulatory organization and conforms to minimum financial standards and
related reporting requirements set by such designated self-regulatory
organization in its bylaws, rules, regulations or resolutions approved
by the Commission pursuant to section 4f(b) of the Act and Sec. 1.52.
(ii) The minimum requirements of paragraph (a)(1)(iii) of this
section shall not be applicable to an introducing broker which elects to
meet the alternative adjusted net capital requirement for introducing
brokers by operation pursuant to a guarantee agreement which meets the
requirements set forth in Sec. 1.10(j). Such an introducing broker
shall be deemed to meet the adjusted net capital requirement under this
section so long as such agreement is binding and in full force and
effect, and, if the introducing broker is also a securities broker or
dealer, it maintains the amount of net capital required by Rule 15c3-
1(a) of the Securities and Exchange Commission (17 CFR 240.15c3-1(a)).
(3) No person applying for registration as a futures commission
merchant or as an introducing broker shall be so registered unless such
person affirmatively demonstrates to the satisfaction of the National
Futures Association that it complies with the financial requirements of
this section. Each registrant must be in compliance with this section at
all times and must be able to demonstrate such compliance to the
satisfaction of the Commission or the designated self-regulatory
organization.
(4) A futures commission merchant who is not in compliance with this
section, or is unable to demonstrate such compliance as required by
paragraph (a)(3) of this section, must transfer all customer accounts
and immediately cease doing business as a futures commission merchant
until such time as the firm is able to demonstrate such compliance:
Provided, however, The registrant may trade for liquidation purposes
only unless otherwise directed by the Commission and/or the designated
self-regulatory organization: And, Provided further, That if such
registrant immediately demonstrates to the satisfaction of the
Commission or the designated self-regulatory organization the ability to
achieve compliance, the Commission or the designated self-regulatory
organization may in its discretion allow such registrant up to a maximum
of 10 business days in which to achieve compliance without having to
transfer accounts and cease doing business as required above. Nothing in
this paragraph (a)(4) shall be construed as preventing the Commission or
the designated self-regulatory organization from taking action against a
registrant for non-compliance with any of the provisions of this
section.
(5) An introducing broker who is not in compliance with this
section, or is unable to demonstrate such compliance as required by
paragraph (a)(3) of this section, must immediately cease
[[Page 42]]
doing business as an introducing broker until such time as the
registrant is able to demonstrate such compliance: Provided, however,
That if such registrant immediately demonstrates to the satisfaction of
the Commission or the designated self-regulatory organization the
ability to achieve compliance, the Commission or the designated self-
regulatory organization may in its discretion allow such registrant up
to a maximum of 10 business days in which to achieve compliance without
having to cease doing business as required above. If the introducing
broker is required to cease doing business in accordance with this
paragraph (a)(5), the introducing broker must immediately notify each of
its customers and the futures commission merchants carrying the account
of each customer that it has ceased doing business. Nothing in this
paragraph (a)(5) shall be construed as preventing the Commission or the
designated self-regulatory organization from taking action against a
registrant for non-compliance with any of the provisions of this
section.
(b) For the purposes of this section:
(1) Where the applicant or registrant has an asset or liability
which is defined in Securities Exchange Act Rule 15c3-1 (Sec. 240.15c3-
1 of this title) the inclusion or exclusion of all or part of such asset
or liability for the computation of adjusted net capital shall be in
accordance with Sec. 240.15c3-1 of this title, unless specifically
stated otherwise in this section.
(2) Customer means customer (as defined in Sec. 1.3(k)), option
customer (as defined in Sec. 1.3(jj) and in Sec. 32.1(c) of this
chapter), cleared over the counter customer (as defined in Sec.
1.17(b)(10)), and includes a foreign futures, foreign options customer
(as defined in Sec. 30.1(c) of this chapter).
(3) Proprietary account means an account in which commodity futures,
options or cleared over the counter derivative positions are carried on
the books of the applicant or registrant for the applicant or registrant
itself, or for general partners in the applicant or registrant.
(4) Noncustomer account means an account in which commodity futures,
options or cleared over the counter derivative positions are carried on
the books of the applicant or registrant which is either:
(i) An account that is not included in the definition of customer
(as defined in Sec. 1.17(b)(2)) or proprietary account (as defined in
Sec. 1.17(b)(3)), or
(ii) An account for a foreign-domiciled person trading futures or
options on a foreign board of trade, and such account is a proprietary
account as defined in Sec. 1.3(y) of this title, but is not a
proprietary account as defined in Sec. 1.17(b)(3).
(5) Clearing organization means clearing organization (as defined in
Sec. 1.3(d)) and includes a clearing organization of any board of
trade.
(6) Business day means any day other than a Sunday, Saturday, or
holiday.
(7) Customer account means an account in which commodity futures,
options or cleared over the counter derivative positions are carried on
the books of the applicant or registrant which is either:
(i) An account that is included in the definition of customer (as
defined in Sec. 1.17(b)(2)), or
(ii) An account for a foreign-domiciled person trading on a foreign
board of trade, where such account for the foreign-domiciled person is
not a proprietary account (as defined in Sec. 1.17(b)(3)) or a
noncustomer account (as defined in Sec. 1.17(b)(4)(ii)).
(8) Risk margin for an account means the level of maintenance margin
or performance bond required for the customer or noncustomer positions
by the applicable exchanges or clearing organizations, and, where margin
or performance bond is required only for accounts at the clearing
organization, for purposes of the FCM's risk-based capital calculations
applying the same margin or performance bond requirements to customer
and noncustomer positions in accounts carried by the FCM, subject to the
following.
(i) Risk margin does not include the equity component of short or
long option positions maintained in an account;
(ii) The maintenance margin or performance bond requirement
associated with a long option position may be excluded from risk margin
to the extent
[[Page 43]]
that the value of such long option position does not reduce the total
risk maintenance or performance bond requirement of the account that
holds the long option position;
(iii) The risk margin for an account carried by a futures commission
merchant which is not a member of the exchange or the clearing
organization that requires collection of such margin should be
calculated as if the futures commission merchant were such a member; and
(iv) If a futures commission merchant does not possess sufficient
information to determine what portion of an account's total margin
requirement represents risk margin, all of the margin required by the
exchange or the clearing organization that requires collection of such
margin for that account, shall be treated as risk margin.
(9) Cleared over the counter derivative positions means ``over the
counter derivative instrument'' (as defined in 12 U.S.C. 4421) positions
of any person in accounts carried on the books of the futures commission
merchant and cleared by any organization permitted to clear such
instruments under the laws of the relevant jurisdiction.
(10) Cleared over the counter customer means any person that is not
a proprietary person as defined in Sec. 1.3(y) and for whom the futures
commission merchant carries on its books one or more accounts for the
over the counter-cleared derivative positions of such person.
(c) Definitions: For the purposes of this section:
(1) Net capital means the amount by which current assets exceed
liabilities. In determining ``net capital'':
(i) Unrealized profits shall be added and unrealized losses shall be
deducted in the accounts of the applicant or registrant, including
unrealized profits and losses on fixed price commitments and forward
contracts;
(ii) All long and all short positions in commodity options which are
traded on a contract market and listed security options shall be marked
to their market value and all long and all short securities and
commodities positions shall be marked to their market value;
(iii) The value attributed to any commodity option which is not
traded on a contract market shall be the difference between the option's
strike price and the market value for the physical or futures contract
which is the subject of the option. In the case of a call commodity
option which is not traded on a contract market, if the market value for
the physical or futures contract which is the subject of the option is
less than the strike price of the option, it shall be given no value. In
the case of a put commodity option which is not traded on a contract
market, if the market value for the physical or futures contract which
is the subject of the option is more than the strike price of the
option, it shall be given no value; and
(iv) The value attributed to any unlisted security option shall be
the difference between the option's exercise value or striking value and
the market value of the underlying security. In the case of an unlisted
call, if the market value of the underlying security is less than the
exercise value or striking value of such call, it shall be given no
value; and, in the case of an unlisted put, if the market value of the
underlying security is more than the exercise value or striking value of
the unlisted put, it shall be given no value.
(2) The term current assets means cash and other assets or resources
commonly identified as those which are reasonably expected to be
realized in cash or sold during the next 12 months. ``Current assets''
shall:
(i) Exclude any unsecured commodity futures or option account
containing a ledger balance and open trades, the combination of which
liquidates to a deficit or containing a debit ledger balance only:
Provided, however, Deficits or debit ledger balances in unsecured
customers', non-customers', and proprietary accounts, which are the
subject of calls for margin or other required deposits may be included
in current assets until the close of business on the business day
following the date on which such deficit or debit ledger balance
originated providing that the account had timely satisfied, through the
deposit of new funds, the previous day's debit or deficits, if any, in
its entirety.
(ii) Exclude all unsecured receivables, advances and loans except
for:
[[Page 44]]
(A) Receivables resulting from the marketing of inventories commonly
associated with the business activities of the applicant or registrant
and advances on fixed price purchases commitments: Provided, Such
receivables or advances are outstanding no longer than 3 calendar months
from the date that they are accrued;
(B) Interest receivable, floor brokerage receivable, commissions
receivable from other brokers or dealers (other than syndicate profits),
mutual fund concessions receivable and management fees receivable from
registered investment companies and commodity pools: Provided, Such
receivables are outstanding no longer than thirty (30) days from the
date they are due; and dividends receivable outstanding no longer than
thirty (30) days from the payable date;
(C) Receivables from clearing organizations and securities clearing
organizations;
(D) Receivables from registered futures commission merchants or
brokers, resulting from commodity futures or option transactions, except
those specifically excluded under paragraph (c)(2)(i) of this section;
(E) Insurance claims which arise from a reportable segment of the
applicant's or registrant's overall business activities, as defined in
generally accepted accounting principles, other than in the commodity
futures, commodity option, security and security option segments of the
applicant's or registrant's business activities which are not
outstanding more than 3 calendar months after the date they are recorded
as a receivable;
(F) All other insurance claims not subject to paragraph
(c)(2)(ii)(E) of this section, which are not older than seven (7)
business days from the date the loss giving rise to the claim is
discovered; insurance claims which are not older than twenty (20)
business days from the date the loss giving rise to the claim is
discovered and which are covered by an option of outside counsel that
the claim is valid and is covered by insurance policies presently in
effect; insurance claims which are older than twenty (20) business days
from the date the loss giving rise to the claim is discovered and which
are covered by an opinion of outside counsel that the claim is valid and
is covered by insurance policies presently in effect and which have been
acknowledged in writing by the insurance carrier as due and payable:
Provided, Such claims are not outstanding longer than twenty (20)
business days from the date they are so acknowledged by the carrier;
(iii) Exclude all prepaid expenses and deferred charges;
(iv) Exclude all inventories except for:
(A) Readily marketable spot commodities; or spot commodities which
``adequately collateralize'' indebtedness under paragraph (c)(7) of this
section;
(B) Securities which are considered ``readily marketable'' (as
defined in Sec. 240.15c3-1(c)(11) of this title) or which ``adequately
collateralize'' indebtedness under paragraph (c)(7) of this section;
(C) Work in process and finished goods which result from the
processing of commodities at market value;
(D) Raw materials at market value which will be combined with spot
commodities to produce a finished proc- essed commodity; and
(E) Inventories held for resale commonly associated with the
business activities of the applicant or registrant;
(v) Include fixed assets and assets which otherwise would be
considered noncurrent to the extent of any long-term debt adequately
collateralized by assets acquired for use in the ordinary course of the
trade or business of an applicant or registrant and any other long-term
debt adequately collateralized by assets of the applicant or registrant
if the sole recourse of the creditor for nonpayment of such liability is
to such asset: Provided, Such liabilities are not excluded from
liabilities in the computation of net capital under paragraph (c)(4)(vi)
of this section;
(vi) Exclude all assets doubtful of collection or realization less
any reserves established therefor;
(vii) Include, in the case of future income tax benefits arising as
a result of unrealized losses, the amount of such benefits not exceeding
the amount of income tax liabilities accrued on the books and records of
the applicant or
[[Page 45]]
registrant, but only to the extent such benefits could have been applied
to reduce accrued tax liabilities on the date of the capital
computation, had the related unrealized losses been realized on that
date;
(viii) Include guaranteee deposits with clearing organizations and
stock in clearing organizations to the extent of its margin value;
(ix) In the case of an introducing broker or an applicant for
registration as an introducing broker, include 50 percent of the value
of a guarantee or security deposit with a futures commission merchant
which carries or intends to carry accounts for the customers of the
introducing broker; and
(x) Exclude exchange memberships.
(3) A loan or advance or any other form of receivable shall not be
considered ``secured'' for the purposes of paragraph (c)(2) of this
section unless the following conditions exist:
(i) The receivable is secured by readily marketable collateral which
is otherwise unencumbered and which can be readily converted into cash:
Provided, however, That the receivable will be considered secured only
to the extent of the market value of such collateral after application
of the percentage deductions specified in paragraph (c)(5) of this
section; and
(ii)(A) The readily marketable collateral is in the possession or
control of the applicant or registrant; or
(B) The applicant or registrant has a legally enforceable, written
security agreement, signed by the debtor, and has a perfected security
interest in the readily marketable collateral within the meaning of the
laws of the State in which the readily marketable collateral is located.
(4) The term liabilities means the total money liabilities of an
applicant or registrant arising in connection with any transaction
whatsoever, including economic obligations of an applicant or registrant
that are recognized and measured in conformity with generally accepted
accounting principles. ``Liabilities'' also include certain deferred
credits that are not obligations but that are recognized and measured in
conformity with generally accepted accounting principles. For the
purposes of computing ``net capital'', the term ``liabilities'':
(i) Excludes liabilities of an applicant or registrant which are
subordi- nated to the claims of all general creditors of the applicant
or registrant pursuant to a satisfactory subordination agreement, as
defined in paragraph (h) of this section;
(ii) Excludes, in the case of a futures commission merchant, the
amount of money, securities and property due to commodity futures or
option customers which is held in segregated accounts in compliance with
the requirements of the Act and these regulations: Provided, however,
That such exclusion may be taken only if such money, securities and
property held in segregated accounts have been excluded from current
assets in computing net capital;
(iii) Includes, in the case of an applicant or registrant who is a
sole proprietor, the excess of liabilities which have not been incurred
in the course of business as a futures commission merchant or as an
introducing broker over assets not used in the business;
(iv) Excludes the lesser of any deferred income tax liability
related to the items in paragraphs (c)(4)(i) (A), (B), and (C) below, or
the sum of paragraphs (c)(4)(i) (A), (B), and (C) below:
(A) The aggregate amount resulting from applying to the amount of
the deductions computed in accordance with paragraph (c)(5) of this
section the appropriate Federal and State tax rate(s) applicable to any
unrealized gain on the asset on which the deduction was computed;
(B) Any deferred tax liability related to income accrued which is
directly related to an asset otherwise deducted pursuant to this
section;
(C) Any deferred tax liability related to unrealized appreciation in
value of any asset(s) which has been otherwise excluded from current
assets in accordance with the provisions of this section;
(v) Excludes any current tax liability related to income accrued
which is directly related to an asset otherwise deducted pursuant to
this section; and
(vi) Excludes liabilities which would be classified as long term in
accordance with generally accepted accounting principles to the extent
of the net
[[Page 46]]
book value of plant, property and equipment which is used in the
ordinary course of any trade or business of the applicant or registrant
which is a reportable segment of the applicant's or registrant's overall
business activities, as defined in generally accepted accounting
principles, other than in the commodity futures, commodity option,
security and security option segments of the applicant's or registrant's
business activities: Provided, That such plant, property and equipment
is not included in current assets pursuant to paragraph (c)(2)(v) of
this section.
(5) The term adjusted net capital means net capital less:
(i) The amount by which any advances paid by the applicant or
registrant on cash commodity contracts and used in computing net capital
exceeds 95 percent of the market value of the commodities covered by
such contracts;
(ii) In the case of all inventory, fixed price commitments and
forward contracts, the applicable percentage of the net position
specified below:
(A) Inventory which is currently registered as deliverable on a
contract market and covered by an open futures contract or by a
commodity option on a physical.--No charge.
(B) Inventory which is covered by an open futures contract or
commodity option.--5 percent of the market value.
(C) Inventory which is not covered.--20 percent of the market value.
(D) Inventory and forward contracts in those foreign currencies that
are purchased or sold for future delivery on or subject to the rules of
a contract market, and which are covered by an open futures contract.--
No charge
(E) Inventory and forward contracts in euros, British pounds,
Canadian dollars, Japanese yen, or Swiss francs, and which are not
covered by an open futures contract or commodity option.--6 percent of
the market value.
(F) Fixed price commitments (open purchases and sales) and forward
contracts which are covered by an open futures contract or commodity
option.--10 percent of the market value.
(G) Fixed price commitments (open purchases and sales) and forward
contracts which are not covered by an open futures contract or commodity
option.--20 percent of the market value.
(iii)--(iv) [Reserved]
(v) In the case of securities and obligations used by the applicant
or registrant in computing net capital, and in the case of a futures
commission merchant with securities in segregation pursuant to section
4d(2) of the Act and the regulations in this chapter which were not
deposited by customers, the percentages specified in Rule 240.15c3-
1(c)(2)(vi) of the Securities and Exchange Commission (17 CFR 240.15c3-
1(c)(2)(vi)) (``securities haircuts'') and 100 percent of the value of
``nonmarketable securities'' as specified in Rule 240.15c3-1(c)(2)(vii)
of the Securities and Exchange Commission (17 CFR 240.15c3-
1(c)(2)(vii));
(vi) In the case of securities options and/or other options for
which a haircut has been specified for the option or for the underlying
instrument in Sec. 240.15c3-1 appendix A of this title, the treatment
specified in, or under, Sec. 240.15c3-1 appendix A, after effecting
certain adjustments to net capital for listed and unlisted options as
set forth in such appendix;
(vii) In the case of an applicant or registrant who has open
contractual commitments, as hereinafter defined, the deductions
specified in Sec. 240.15c3-1(c)(2)(viii) of this title;
(viii) In the case of a futures commission merchant, for
undermargined customer commodity futures accounts and commodity option
customer accounts the amount of funds required in each such account to
meet maintenance margin requirements of the applicable board of trade or
if there are no such maintenance margin requirements, clearing
organization margin requirements applicable to such positions, after
application of calls for margin or other required deposits which are
outstanding three business days or less. If there are no such
maintenance margin requirements or clearing organization margin
requirements, then the amount of funds required to provide margin equal
to the amount necessary after application of calls for margin or other
required deposits outstanding three business days or less to restore
original margin when the original margin has been depleted by 50 percent
or more:
[[Page 47]]
Provided, To the extent a deficit is excluded from current assets in
accordance with paragraph (c)(2)(i) of this section such amount shall
not also be deducted under this paragraph (c)(5)(viii). In the event
that an owner of a customer account has deposited an asset other than
cash to margin, guarantee or secure his account, the value attributable
to such asset for purposes of this subparagraph shall be the lesser of
(A) the value attributable to the asset pursuant to the margin rules of
the applicable board of trade, or (B) the market value of the asset
after application of the percentage deductions specified in this
paragraph (c)(5);
(ix) In the case of a futures commission merchant, for undermargined
commodity futures and commodity option noncustomer and omnibus accounts
the amount of funds required in each such account to meet maintenance
margin requirements of the applicable board of trade or if there are no
such maintenance margin requirements, clearing organization margin
requirements applicable to such positions, after application of calls
for margin or other required deposits which are outstanding two business
days or less. If there are no such maintenance margin requirements or
clearing organization margin requirements, then the amount of funds
required to provide margin equal to the amount necessary after
application of calls for margin or other required deposits outstanding
two business days or less to restore original margin when the original
margin has been depleted by 50 percent or more: Provided, To the extent
a deficit is excluded from current assets in accordance with paragraph
(c)(2)(i) of this section such amount shall not also be deducted under
this paragraph (c)(5)(ix). In the event that an owner of a noncustomer
or omnibus account has deposited an asset other than cash to margin,
guarantee or secure his account the value attributable to such asset for
purposes of this subparagraph shall be the lesser of (A) the value
attributable to such asset pursuant to the margin rules of the
applicable board of trade, or (B) the market value of such asset after
application of the percentage deductions specified in this paragraph
(c)(5);
(x) In the case of open futures contracts or cleared OTC derivative
positions and granted (sold) commodity options held in proprietary
accounts carried by the applicant or registrant which are not covered by
a position held by the applicant or registrant or which are not the
result of a ``changer trade'' made in accordance with the rules of a
contract market:
(A) For an applicant or registrant which is a clearing member of a
clearing organization for the positions cleared by such member, the
applicable margin requirement of the applicable clearing organization;
(B) For an applicant or registrant which is a member of a self-
regulatory organization 150 percent of the applicable maintenance margin
requirement of the applicable board of trade, or clearing organization,
whichever is greater;
(C) For all other applicants or registrants, 200 percent of the
applicable maintenance margin requirements of the applicable board of
trade or clearing organization, whichever is greater; or
(D) For open contracts or granted (sold) commodity options for which
there are no applicable maintenance margin requirements, 200 percent of
the applicable initial margin requirement: Provided, The equity in any
such proprietary account shall reduce the deduction required by this
paragraph (c)(5)(x) if such equity is not otherwise includable in
adjusted net capital;
(xi) In the case of an applicant or registrant which is a purchaser
of a commodity option not traded on a contract market which has value
and such value is used to increase adjusted net capital, ten percent of
the market value of the physical or futures contract which is the
subject of such option but in no event more than the value attributed to
such option;
(xii) In the case of an applicant or registrant which is a purchaser
of a commodity option which is traded on a contract market the same
safety factor as if the applicant or registrant were the grantor of such
option in accordance with paragraph (c)(5)(x) of this section, but in no
event shall the safety factor be greater than the market value
attributed to such option;
[[Page 48]]
(xiii) Five percent of all unsecured receivables includable under
paragraph (c)(2)(ii)(D) of this section used by the applicant or
registrant in computing ``net capital'' and which are not due from:
(A) A registered futures commission merchant;
(B) A broker or dealer that is registered as such with the
Securities and Exchange Commission; or
(C) A foreign broker that has been granted comparability relief
pursuant to Sec. 30.10 of this chapter, Provided, however, that the
amount of the unsecured receivable not subject to the five percent
capital charge is no greater than 150 percent of the current amount
required to maintain futures and option positions in accounts with the
foreign broker, or 100 percent of such greater amount required to
maintain futures and option positions in the accounts at any time during
the previous six-month period, and Provided, that, in the case of
customer funds, such account is treated in accordance with the special
requirements of the applicable Commission order issued under Sec. 30.10
of this chapter.
(xiv) For securities brokers and dealers, all other deductions
specified in Sec. 240.15c3-1 of this title.
(6) Election of alternative capital deductions that have received
approval of Securities and Exchange Commission pursuant to Sec.
240.15c3-1(a)(7) of this title.
(i) Any futures commission merchant that is also registered with the
Securities and Exchange Commission as a securities broker or dealer, and
who also satisfies the other requirements of this paragraph (c)(6), may
elect to compute its adjusted net capital using the alternative capital
deductions that, under Sec. 240.15c3-1(a)(7) of this title, the
Securities and Exchange Commission has approved by written order. To the
extent that a futures commission merchant is permitted by the Securities
and Exchange Commission to use alternative capital deductions for its
unsecured receivables from over-the-counter transactions in derivatives,
or for its proprietary positions in securities, forward contracts, or
futures contracts, the futures commission merchant may use these same
alternative capital deductions when computing its adjusted net capital,
in lieu of the deductions that would otherwise be required by paragraph
(c)(2)(ii) of this section for its unsecured receivables from over-the-
counter derivatives transactions; by paragraph (c)(5)(ii) of this
section for its proprietary positions in forward contracts; by paragraph
(c)(5)(v) of this section for its proprietary positions in securities;
and by paragraph (c)(5)(x) of this section for its proprietary positions
in futures contracts.
(ii) Notifications of election or of changes to election. (A) No
election to use the alternative market risk and credit risk deductions
referenced in paragraph (c)(6)(i) of this section shall be effective
unless and until the futures commission merchant has filed with the
Commission, addressed to the Director of the Division of Clearing and
Intermediary Oversight, a notice that is to include a copy of the
approval order of the Securities and Exchange Commission referenced in
paragraph (c)(6)(i) of this section, and to include also a statement
that identifies the amount of tentative net capital below which the
futures commission merchant is required to provide notice to the
Securities and Exchange Commission, and which also provides the
following information: a list of the categories of positions that the
futures commission merchant holds in its proprietary accounts, and, for
each such category, a description of the methods that the futures
commission merchant will use to calculate its deductions for market risk
and credit risk, and also, if calculated separately, deductions for
specific risk; a description of the value at risk (VaR) models to be
used for its market risk and credit risk deductions, and an overview of
the integration of the models into the internal risk management control
system of the futures commission merchant; a description of how the
futures commission merchant will calculate current exposure and maximum
potential exposure for its deductions for credit risk; a description of
how the futures commission merchant will determine internal credit
ratings of counterparties and internal credit risk weights of
counterparties, if
[[Page 49]]
applicable; and a description of the estimated effect of the alternative
market risk and credit risk deductions on the amounts reported by the
futures commission merchant as net capital and adjusted net capital.
(B) A futures commission merchant must also, upon the request of the
Commission at any time, supplement the statement described in paragraph
(c)(6)(ii)(A) of this section, by providing any other explanatory
information regarding the computation of its alternative market risk and
credit risk deductions as the Commission may require at its discretion.
(C) A futures commission merchant must also file the following
supplemental notices with the Director of the Division and Clearing and
Intermediary Oversight:
(1) A notice advising that the Securities and Exchange Commission
has imposed additional or revised conditions for the approval evidenced
by the order referenced in paragraph (c)(6)(i) of this section, and
which describes the new or revised conditions in full, and
(2) A notice which attaches a copy of any approval by the Securities
and Exchange Commission of amendments that a futures commission merchant
has requested for its application, filed under 17 CFR 240.15c3-1e, to
use alternative market risk and credit risk deductions approved by the
Securities and Exchange Commission.
(D) A futures commission merchant may voluntarily change its
election to use the alternative market risk and credit risk deductions
referenced in paragraph (c)(6)(i) of this section, by filing with the
Director of the Division of Clearing and Intermediary Oversight a
written notice specifying a future date as of which it will no longer
use the alternative market risk and credit risk deductions, and will
instead compute such deductions in accordance with the requirements
otherwise applicable under paragraph (c)(2)(ii) of this section for
unsecured receivables from over-the-counter derivatives transactions; by
paragraph (c)(5)(ii) of this section for proprietary positions in
forward contracts; by paragraph (c)(5)(v) of this section for
proprietary positions in securities; and by paragraph (c)(5)(x) of this
section for proprietary positions in futures contracts.
(iii) Conditions under which election terminated. A futures
commission merchant may no longer elect to use the alternative market
risk and credit risk deductions referenced in paragraph (c)(6)(i) of
this section, and shall instead compute the deductions otherwise
required under paragraph (c)(2)(ii) of this section for unsecured
receivables from over-the-counter derivatives transactions; by paragraph
(c)(5)(ii) of this section for proprietary positions in forward
contracts; by paragraph (c)(5)(v) of this section for proprietary
positions in securities; and by paragraph (c)(5)(x) of this section for
proprietary positions in futures contracts, upon the occurrence of any
of the following:
(A) The Securities and Exchange Commission revokes its approval of
the market risk and credit risk deductions for such futures commission
merchant;
(B) A futures commission merchant fails to come into compliance with
its filing requirements under this paragraph (c)(6), after having
received from the Director of the Division of Clearing and Intermediary
Oversight written notification that the firm is not in compliance with
its filing requirements, and must cease using alternative capital
deductions permitted under this paragraph (c)(6) if it has not come into
compliance by a date specified in the notice; or
(C) The Commission by written order finds that permitting the
futures commission merchant to continue to use such alternative market
risk and credit risk deductions is no longer necessary or appropriate
for the protection of customers of the futures commission merchant or of
the integrity of the futures or options markets.
(iv) Additional filing requirements. Any futures commission merchant
that elects to use the alternative market risk and credit risk
deductions referenced in paragraph (c)(6)(i) of this section must file
with the Commission, in addition to the filings required by paragraph
(c)(6)(ii) of this section, copies of any and all of the following
documents, at such time as the originals are filed with the Securities
and Exchange Commission:
[[Page 50]]
(A) Information that the futures commission merchant files on a
monthly basis with its designated examining authority or the Securities
and Exchange Commission, whether by way of schedules to its FOCUS
reports or by other filings, in satisfaction of 17 CFR 240.17a-
5(a)(5)(i);
(B) The quarterly reports required by 17 CFR 240.17a-5(a)(5)(ii);
(C) The supplemental annual filings as required by 17 CFR 240.17a-
5(k);
(D) Any notification to the Securities and Exchange Commission or
the futures commission merchant's designated examining authority of
planned withdrawals of excess net capital; and
(E) Any notification that the futures commission merchant is
required to file with the Securities and Exchange Commission when its
tentative net capital is below an amount specified by the Securities and
Exchange Commission.
(7) Liabilities are ``adequately collateralized'' when, pursuant to
a legally enforceable written instrument, such liabilities are secured
by identified assets that are otherwise unencumbered and the market
value of which exceeds the amount of such liabilities.
(8) The term contractual commitments shall include underwriting,
when issued, when distributed, and delayed delivery contracts; and the
writing or endorsement of security puts and calls and combinations
thereof; but shall not include uncleared regular way purchases and sales
of securities. A series of contracts of purchase or sale of the same
security, conditioned, if at all, only upon issuance, may be treated as
an individual commitment.
(d) Each applicant or registrant shall have equity capital
(inclusive of satisfactory subordination agreements which qualify under
this paragraph (d) as equity capital) of not less than 30 percent of the
debt-equity total, provided, an applicant or registrant may be exempted
from the provisions of this paragraph (d) for a period not to exceed 90
days or for such longer period which the Commission may, upon
application of the applicant or registrant, grant in the public interest
or for the protection of investors. For the purposes of this paragraph
(d):
(1) Equity capital means a satisfactory subordination agreement
entered into by a partner or stockholder or limited liability company
member which has an initial term of at least 3 years and has a remaining
term of not less than 12 months if:
(i) It does not have any of the provisions for accelerated maturity
provided for by paragraphs (h)(2) (ix)(A), (x)(A), or (x)(B) of this
section, or the provisions allowing for special prepayment provided for
by paragraph (h)(2)(vii)(B) of this section, and is maintained as
capital subject to the provisions restricting the withdrawal thereof
required by paragraph (e) of this section; or
(ii) The partnership agreement provides that capital contributed
pursuant to a satisfactory subordination agreement as defined in
paragraph (h) of this section shall in all respects be partnership
capital subject to the provisions restricting the withdrawal thereof
required by paragraph (e) of this section, and
(A) In the case of a corporation, the sum of its par or stated value
of capital stock, paid in capital in excess of par, retained earnings,
unrealized profit and loss, and other capital accounts.
(B) In the case of a partnership, the sum of its capital accounts of
partners (inclusive of such partners' commodities, options and
securities accounts subject to the provisions of paragraph (e) of this
section), and unrealized profit and loss.
(C) In the case of a sole proprietorship, the sum of its capital
accounts of the sole proprietorship and unrealized profit and loss.
(D) In the case of a limited liability company, the sum of its
capital accounts of limited liability company members, and unrealized
profit and loss.
(2) Debt-equity total means equity capital as defined in paragraph
(d)(1) of this section plus the outstanding principal amount of
satisfactory subordination agreements.
(e) No equity capital of the applicant or registrant or a
subsidiary's or affiliate's equity capital consolidated pursuant to
paragraph (f) of this section,
[[Page 51]]
whether in the form of capital contributions by partners (including
amounts in the commodities, options and securities trading accounts of
partners which are treated as equity capital but excluding amounts in
such trading accounts which are not equity capital and excluding
balances in limited partners' capital accounts in excess of their stated
capital contributions), par or stated value of capital stock, paid-in
capital in excess of par or stated value, retained earnings or other
capital accounts, may be withdrawn by action of a stockholder or partner
or limited liability company member or by redemption or repurchase of
shares of stock by any of the consolidated entities or through the
payment of dividends or any similar distribution, nor may any unsecured
advance or loan be made to a stockholder, partner, sole proprietor,
limited liability company member, or employee if, after giving effect
thereto and to any other such withdrawals, advances, or loans and any
payments of payment obligations (as defined in paragraph (h) of this
section) under satisfactory subordination agreements and any payments of
liabilities excluded pursuant to paragraph (c)(4)(vi) of this section
which are scheduled to occur within six months following such
withdrawal, advance or loan:
(1) Either adjusted net capital of any of the consolidated entities
would be less than the greatest of:
(i) 120 percent of the appropriate minimum dollar amount required by
paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
(ii) For a futures commission merchant or applicant therefor, 120
percent of the amount required by paragraph (a)(1)(i)(B) of this
section;
(iii) 120 percent of the amount of adjusted net capital required by
a registered futures association of which it is a member; or
(iv) For an applicant or registrant which is also a securities
broker or dealer, the amount of net capital specified in Rule 15c3-1(e)
of the Securities and Exchange Commission (17 CFR 240.15c3-1(e)); or
(2) In the case of any applicant or registrant included within such
consolidation, if equity capital of the applicant or registrant
(inclusive of satisfactory subordination agreements which qualify as
equity under paragraph (d) of this section) would be less than 30
percent of the required debt-equity total as defined in paragraph (d) of
this section.
Provided, That this paragraph (e) shall not preclude an applicant or
registrant from making required tax payments or preclude the payment to
partners of reasonable compensation. The Commission may, upon
application of the applicant or registrant, grant relief from this
paragraph (e) if the Commission deems it to be in the public interest or
for the protection of nonproprietary accounts.
(f)(1) Every applicant or registrant, in computing its net capital
pursuant to this section must, subject to the provisions of paragraphs
(f)(2) and (f)(4) of this section, consolidate in a single computation,
assets and liabilities of any subsidiary or affiliate for which it
guarantees, endorses, or assumes directly or indirectly the obligations
or liabilities. The assets and liabilities of a subsidiary or affiliate
whose liabilities and obligations have not been guaranteed, endorsed, or
assumed directly or indirectly by the applicant or registrant may also
be so consolidated if an opinion of counsel is obtained as provided for
in paragraph (f)(2) of this section.
(2)(i) If the consolidation, provided for in paragraph (f)(1) of
this section, of any such subsidiary or affiliate results in the
increase of the applicant's or registrant's adjusted net capital or
decreases the minimum adjusted net capital requirement, and an opinion
of counsel called for in paragraph (f)(2)(ii) of this section has not
been obtained, such benefits shall not be recognized in the applicant's
or registrant's computation required by this section.
(ii) Except as provided for in paragraph (f)(2)(i) of this section,
consolidation shall be permitted with respect to any subsidiaries or
affiliates which are majority owned and controlled by the applicant or
registrant, and for which the applicant can demonstrate to the
satisfaction of the National Futures
[[Page 52]]
Association, or for which the registrant can demonstrate to the
satisfaction of the Commission and the designated self-regulatory
organization, if any, by an opinion of counsel, that the net asset
values or the portion thereof related to the parent's ownership interest
in the subsidiary or affiliate, may be caused by the applicant or
registrant or an appointed trustee to be distributed to the applicant or
registrant within 30 calendar days. Such opinion must also set forth the
actions necessary to cause such a distribution to be made, identify the
parties having the authority to take such actions, identify and describe
the rights of other parties or classes of parties, including but not
limited to customers, general creditors, subordinated lenders, minority
shareholders, employees, litigants, and governmental or regulatory
authorities, who may delay or prevent such a distribution and such other
assurances as the National Futures Association, the Commission or the
designated self-regulatory organization by rule or interpretation may
require. Such opinion must be current and periodically renewed in
connection with the applicant's or registrant's annual audit pursuant to
Sec. 1.10 or upon any material change in circumstances.
(3) In preparing a consolidated computation of adjusted net capital
pursuant to this section, the following minimum and non-exclusive
requirements shall be observed;
(i) Consolidated adjusted net capital shall be reduced by the
estimated amount of any tax reasonably anticipated to be incurred upon
distribution of the assets of the subsidiary or affiliate.
(ii) Liabilities of a consolidated subsidiary or affiliate which are
subordinated to the claims of present and future creditors pursuant to a
satisfactory subordination agreement shall be deducted from consolidated
adjusted net capital unless such subordination extends also to the
claims of present or future creditors of the parent applicant or
registrant and all consolidated subsidiaries.
(iii) Subordinated liabilities of a consolidated subsidiary or
affiliate which are consolidated in accordance with paragraph (f)(3)(ii)
of this section may not be prepaid, repaid, or accelerated if any of the
entities included in such consolidation would otherwise be unable to
comply with the provisions of paragraph (h) of this section.
(iv) Each applicant or registrant included within the consolidation
shall at all times be in compliance with the adjusted net capital
requirement to which it is subject.
(4) No applicant or registrant shall guarantee, endorse, or assume
directly or indirectly any obligation or liability of a subsidiary or
affiliate unless the obligation or liability is reflected in the
computation of adjusted net capital pursuant to this section except as
provided in paragraph (f)(2)(i) of this section.
(g)(1) The Commission may by order restrict, for a period up to
twenty business days, any withdrawal by a futures commission merchant of
equity capital, or any unsecured advance or loan to a stockholder,
partner, limited liability company member, sole proprietor, employee or
affiliate, if:
(i) Such withdrawal, advance or loan would cause, when aggregated
with all other withdrawals, advances or loans during a 30 calendar day
period from the futures commission merchant or a subsidiary or affiliate
of the futures commission merchant consolidated pursuant to Sec.
1.17(f) (or 17 CFR 240.15c3-1e), a net reduction in excess adjusted net
capital (or, if the futures commission merchant is qualified to use the
filing option available under Sec. 1.10(h), excess net capital as
defined in the rules of the Securities and Exchange Commission) of 30
percent or more, and
(ii) The Commission, based on the facts and information available,
concludes that any such withdrawal, advance or loan may be detrimental
to the financial integrity of the futures commission merchant, or may
unduly jeopardize its ability to meet customer obligations or other
liabilities that may cause a significant impact on the markets.
(2) The futures commission merchant may file with the Secretary of
the Commission a written petition to request rescission of the order
issued under paragraph (g)(1) of this section. The petition filed by the
futures commission merchant must specify the
[[Page 53]]
facts and circumstances supporting its request for rescission. The
Commission shall respond in writing to deny the futures commission
merchant's petition for rescission, or, if the Commission determines
that the order issued under paragraph (g)(1) of this section should not
remain in effect, the order shall be rescinded.
(h) The term satisfactory subordination agreement (``subordination
agreement'') means an agreement which contains the minimum and
nonexclusive requirements set forth below.
(1) Certain definitions for purposes of this section:
(i) A subordination agreement may be either a subordinated loan
agreement or a secured demand note agreement.
(ii) The term subordinated loan agreement means the agreement or
agreements evidencing or governing a subordinated borrowing of cash.
(iii) The term ``collateral value'' of any securities pledged to
secure a secured demand note means the market value of such securities
after giving effect to the percentage deductions specified in Rule
240.15c3-1d(a)(2)(iii) of the Securities and Exchange Commission (17 CFR
240.15c3-1d(a)(2)(iii)).
(iv) The term payment obligation means the obligation of an
applicant or registrant in respect to any subordination agreement:
(A) To repay cash loaned to the applicant or registrant pursuant to
a subordinated loan agreement; or
(B) To return a secured demand note contributed to the applicant or
registrant or to reduce the unpaid principal amount thereof and to
return cash or securities pledged as collateral to secure the secured
demand note; and (C) ``payment'' shall mean the performance by an
applicant or registrant of a payment obligation.
(v)(A) The term secured demand note agreement means an agreement
(including the related secured demand note) evidencing or governing the
contribution of a secured demand note to an applicant or registrant and
the pledge of securities and/or cash with the applicant or registrant as
collateral to secure payment of such secured demand note. The secured
demand note agreement may provide that neither the lender, his heirs,
executors, administrators, or assigns shall be personally liable on such
note and that in the event of default the applicant or registrant shall
look for payment of such note solely to the collateral then pledged to
secure the same.
(B) The secured demand note shall be a promissory note executed by
the lender and shall be payable on the demand of the applicant or
registrant to which it is contributed: Provided, however, That the
making of such demand may be conditioned upon the occurrence of any of
certain events which are acceptable to the designated self-regultory
organization and the Commission.
(C) If such note is not paid upon presentment and demand as provided
for therein, the applicant or registrant shall have the right to
liquidate all or any part of the securities then pledged as collateral
to secure payment of the same and to apply the net proceeds of such
liquidation, together with any cash then included in the collateral, in
payment of such note. Subject to the prior rights of the applicant or
registrant as pledgee, the lender, as defined in paragraph (h)(i)(v)(F)
of this section may retain ownership of the collateral and have the
benefit of any increases and bear the risks fo any decreases in the
value of the collateral and may retain the right to vote securities
contained within the collateral and any right to income therefrom or
distributions thereon, except the applicant or registrant shall have the
right to receive and hold as pledgee all dividends payable in securities
and all partial and complete liquidating dividends.
(D) Subject to the prior rights of the applicant or registrant as
pledgee, the lender may have the right to direct the sale of any
securities included in the collateral, to direct the purchase of
securities with any cash included therein, to withdraw excess collateral
or to substitute cash or other securities as collateral: Provided, That
the net proceeds of any such sale and the cash so substituted and the
securities so purchased or substituted are held by the applicant or
registrant as pledgee, and are included within the collateral to secure
payment of the secured demand
[[Page 54]]
note: And provided further, That no such transaction shall be permitted,
if, after giving effect therto, the sum of the amount of any cash, plus
the collateral value of the securities, then pledged as collateral to
secure the secured demand note would be less than the unpaid principal
amount of the secured demand note.
(E) Upon payment by the lender, as distinguished from a reduction by
the lender which is provided for in paragraph (h)(2)(vi)(C) of this
section or reduction by the applicant or registrant as provided for in
paragraph (h)(2)(vii) of this section, of all or any part of the unpaid
principal amount of the secured demand note, the applicant or registrant
shall issue to the lender a subordinated loan agreement in the amount of
such payment (or in the case of an applicant or registrant that is a
partnership, credit a capital account of the lender), or issue preferred
or common stock of the applicant or registrant in the amount of such
payment, or any combination of the foregoing, as provided for in the
secured demand note agreement.
(F) The term lender means the person who lends cash to an applicant
or registrant pursuant to a subordinated loan agreement and the person
who contributes a secured demand note to an applicant or registrant
pursuant to a secured demand note agreement.
(2) Minimum requirements for subordination agreements:
(i) Subject to paragraph (h)(1) of this section, a subordination
agreement shall mean a written agreement between the applicant or
registrant and the lender, which:
(A) Has a minimum term of 1 year, except for temporary subordination
agreements provided for in paragraph (h)(3)(v) of this section, and
(B) Is a valid and binding obligation enforceable in accordance with
its terms (subject as to enforcement to applicable bankruptcy,
insolvency, reorganization, moratorium, and other similar laws) against
the applicant or registrant and the lender and their respective heirs,
executors, administrators, successors, and assigns.
(ii) Specific amount. All subordination agreements shall be for a
specific dollar amount which shall not be reduced for the duration of
the agreement except by installments as specifically provided for
therein and except as otherwise provided in this paragraph (h)(2) of
this section.
(iii) Effective subordination. The subordination agreement shall
effectively subordinate any right of the lender to receive any payment
with respect thereto, together with accrued interest or compensation, to
the prior payment or provision for payment in full of all claims of all
present and future creditors of the applicant or registrant arising out
of any matter occurring prior to the date on which the related payment
obligation matures, except for claims which are the subject of
subordination agreements which rank on the same priority as or junior to
the claim of the lender under such subordination agreements.
(iv) Proceeds of subordinated loan agreements. The subordinated loan
agreement shall provide that the cash proceeds thereof shall be used and
dealt with by the applicant or registrant as part of its capital and
shall be subject to the risks of the business.
(v) Certain rights of the borrower. The subordination agreement
shall provide that the applicant or registrant shall have the right to:
(A) Deposit any cash proceeds of a subordinated loan agreement and
any cash pledged as collateral to secure a secured demand note in an
account or accounts in its own name in any bank or trust company;
(B) Pledge, repledge, hypothecate and rehypothecate, any or all of
the securities pledged as collateral to secure a secured demand note,
without notice, separately or in common with other securities or
property for the purpose of securing any indebtedness of the applicant
or registrant; and
(C) Lend to itself or others any or all of the securities and cash
pledged as collateral to secure a secured demand note.
(vi) Collateral for secured demand notes. Only cash and securities
which are fully paid for and which may be publicly offered or sold
without registration under the Securities Act of 1933, and the offer,
sale, and transfer of which are not otherwise restricted, may be pledged
as collateral to secure
[[Page 55]]
a secured demand note. The secured demand note agreement shall provide
that if at any time the sum of the amount of any cash, plus the
collateral value of any securities, then pledged as collateral to secure
the secured demand note is less than the unpaid principal amount of the
secured demand note, the applicant or registrant must immediately
transmit written notice to that effect to the lender. The secured demand
note agreement shall also provide that if the borrower is an applicant,
such notice must also be transmitted immediately to the National Futures
Association, and if the borrower is a registrant, such notice must also
be transmitted immediately to the designated self-regulatory
organization, if any, and the Commission. The secured demand note
agreement shall also require that following such transmittal:
(A) The lender, prior to noon of the business day next succeeding
the transmittal of such notice, may pledge as collateral additional cash
or securities sufficient, after giving effect to such pledge, to bring
the sum of the amount of any cash plus the collateral value of any
securities, then pledged as collateral to secure the secured demand
note, up to an amount not less than the unpaid principal amount of the
secured demand note; and
(B) Unless additional cash or securities are pledged by the lender
as provided in paragraph (h)(2)(vi)(A) above, the applicant or
registrant at noon on the business day next succeeding the transmittal
of notice to the lender must commence sale, for the account of the
lender, of such of the securities then pledged as collateral to secure
the secured demand note and apply so much of the net proceeds thereof,
together with such of the cash then pledged as collateral to secure the
secured demand note as may be necessary to eliminate the unpaid
principal amount of the secured demand note: Provided, however, That the
unpaid principal amount of the secured demand note need not be reduced
below the sum of the amount of any remaining cash, plus the collateral
value of the remaining securities, then pledged as collateral to secure
the secured demand note. The applicant or registrant may not purchase
for its own account any securities subject to such a sale; and
(C) The secured demand note agreement may also provide that, in lieu
of the procedures specified in the provisions required by paragraph
(h)(2)(vi)(B) of this section, the lender, with the prior written
consent of the applicant and the National Futures Association, or with
the prior written consent of the registrant and the designated self-
regulatory organization or, if the registrant is not a member of a
designated self-regulatory organization, the Commission, may reduce the
unpaid principal amount of the secured demand note: Provided, That after
giving effect to such reduction the adjusted net capital of the
applicant or registrant would not be less than the greatest of:
(1) 120 percent of the appropriate minimum dollar amount required by
paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
(2) For a futures commission merchant or applicant therefor, 120
percent of the amount required by paragraph (a)(1)(i)(B) of this
section;
(3) 120 percent of the amount of adjusted net capital required by a
registered futures association of which it is a member; or
(4) For an applicant or registrant which is also a securities broker
or dealer, the amount of net capital specified in Rule 15c3-
1d(b)(6)(iii) of the Securities and Exchange Commission (17 CFR
240.15c3-1d(b)(6)(iii)): Provided, further, That no single secured
demand note shall be permitted to be reduced by more than 15 percent of
its original principal amount and after such reduction no excess
collateral may be withdrawn.
(vii) Permissive prepayments and special prepayments. (A) An
applicant or registrant at its option, but not at the option of the
lender, may, if the subordination agreement so provides, make a payment
of all or any portion of the payment obligation thereunder prior to the
scheduled maturity date of such payment obligation (hereinafter referred
to as a ``prepayment''), but in no event may any prepayment be made
before the expiration of one year from the date such subordination
agreement
[[Page 56]]
became effective: Provided, however, That the foregoing restriction
shall not apply to temporary subordination agreements which comply with
the provisions of paragraph (h)(3)(v) of this section nor shall it apply
to ``special prepayments'' made in accordance with the provisions of
paragraph (h)(2)(vii)(B) of this section. No prepayment shall be made
if, after giving effect thereto (and to all payments of payment
obligations under any other subordination agreements then outstanding,
the maturity or accelerated maturities of which are scheduled to fall
due within six months after the date such prepayment is to occur
pursuant to this provision, or on or prior to the date on which the
payment obligation in respect to such prepayment is scheduled to mature
disregarding this provision, whichever date is earlier) without
reference to any projected profit or loss of the applicant or
registrant, the adjusted net capital of the applicant or registrant is
less than the greatest of:
(1) 120 percent of the appropriate minimum dollar amount required by
paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
(2) For a futures commission merchant or applicant therefor, 120
percent of the amount required by paragraph (a)(1)(i)(B) of this
section;
(3) 120 percent of the amount of adjusted net capital required by a
registered futures association of which it is a member; or
(4) For an applicant or registrant which is also a securities broker
or dealer, the amount of net capital specified in Rule 15c3-1d(b)(7) of
the Securities and Exchange Commission (17 CFR 240.15c3-1d(b)(7)).
(B) An applicant or registrant at its option, but not at the option
of the lender, may, if the subordination agreement so provides, make a
payment at any time of all or any portion of the payment obligation
thereunder prior to the scheduled maturity date of such payment
obligation (hereinafter referred to as a ``special prepayment''). No
special prepayment shall be made if, after giving effect thereto (and to
all payments of payment obligations under any other subordination
agreements then outstanding, the maturity or accelerated maturities of
which are scheduled to fall due within six months after the date such
special prepayment is to occur pursuant to this provision, or on or
prior to the date on which the payment obligation in respect to such
special prepayment is scheduled to mature disregarding this provision,
whichever date is earlier) without reference to any projected profit or
loss of the applicant or registrant, the adjusted net capital of the
applicant or registrant is less than the greatest of:
(1) 200 percent of the appropriate minimum dollar amount required by
paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
(2) For a futures commission merchant or applicant therefor, 125
percent of the amount required by paragraph (a)(1)(i)(B) of this
section;
(3) 120 percent of the amount of adjusted net capital required by a
registered futures association of which it is a member; or
(4) For an applicant or registrant which is also a securities broker
or dealer, the amount of net capital specified in Rule 15c3-1d(c)(5)(ii)
of the Securities and Exchange Commission (17 CFR 240.15c3-
1d(c)(5)(ii)): Provided, however, That no special prepayment shall be
made if pre-tax losses during the latest three-month period were greater
than 15 percent of current excess adjusted net capital.
(C)(1) Notwithstanding the provisions of paragraphs (h)(2)(vii)(A)
and (h)(2)(vii)(B) of this section, in the case of an applicant, no
prepayment or special prepayment shall occur without the prior written
approval of the National Futures Association; in the case of a
registrant, no prepayment or special prepayment shall occur without the
prior written approval of the designated self-regulatory organization,
if any, or of the Commission if the registrant is not a member of a
self-regulatory organization.
(2) A registrant may make a prepayment or special prepayment without
the prior written approval of the designated self-regulatory
organization: Provided, That the registrant: Is a securities broker or
dealer registered with the Securities and Exchange Commission; files a
request to make a prepayment or special prepayment with
[[Page 57]]
its applicable securities designated examining authority, as defined in
Rule 15c3-1(c)(12) of the Securities and Exchange Commission (17 CFR
240.15c3-1(c)(12)), in the form and manner prescribed by the designated
examining authority; files a copy of the prepayment request or special
prepayment request with the designated self-regulatory organization at
the time it files such request with the designated examining authority
in the form and manner prescribed by the designated self-regulatory
organization; and files a copy of the designated examining authority's
approval of the prepayment or special prepayment with the designated
self-regulatory organization immediately upon receipt of such approval.
The approval of the prepayment or special prepayment by the designated
examining authority will be deemed approval by the designated self-
regulatory organization, unless the designated self-regulatory
organization notifies the registrant that the designated examining
authority's approval shall not constitute designated self-regulatory
organization approval.
(3) The designated self-regulatory organization shall immediately
provide the Commission with a copy of any notice of approval issued
where the requested prepayment or special prepayment will result in the
reduction of the registrant's net capital by 20 percent or more or the
registrant's excess adjusted net capital by 30 percent or more.
(viii) Suspended repayment. (A) The payment obligation of the
applicant or registrant in respect of any subordination agreement shall
be suspended and shall not mature if, after giving effect to payment of
such payment obligation (and to all payments of payment obligations of
the applicant or registrant under any other subordination agreement(s)
then outstanding which are scheduled to mature on or before such payment
obligation), the adjusted net capital of the applicant or registrant
would be less than the greatest of:
(1) 120 percent of the appropriate minimum dollar amount required by
paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
(2) For a futures commission merchant or applicant therefor, 120
percent of the amount required by paragraph (a)(1)(i)(B) of this
section;
(3) 120 percent of the amount of adjusted net capital required by a
registered futures association of which it is a member; or
(4) For an applicant or registrant which is also a securities broker
or dealer, the amount of net capital specified in Rule 15c3-1d(b)(8)(i)
of the Securities and Exchange Commission (17 CFR 240.15c3-1d(b)(8)(i)):
Provided, That the subordination agreement may provide that if the
payment obligation of the applicant or registrant thereunder does not
mature and is suspended as a result of the requirement of this paragraph
(h)(2)(viii) for a period of not less than six months, the applicant or
registrant shall then commence the rapid and orderly liquidation of its
business, but the right of the lender to receive payment, together with
accrued interest or compensation, shall remain subordinate as required
by the provisions of this section.
(B) [Reserved]
(ix) Accelerated maturity. Obligation to repay to remain
subordinate:
(A) Subject to the provisions of paragraph (h)(2)(viii) of this
section, a subordination agreement may provide that the lender may, upon
prior written notice to the applicant and the National Futures
Association, or upon prior written notice to the registrant and the
designated self-regulatory organization or, if the registrant is not a
member of a designated self-regulatory organization, the Commission,
given not earlier than six months after the effective date of such
subordination agreement, accelerate the date on which the payment
obligation of the borrower, together with accrued interest or
compensation, is scheduled to mature to a date not earlier than six
months after giving of such notice, but the right of the lender to
receive payment, together with accrued interest or compensation, shall
remain subordinate as required by the provisions of this paragraph
(h)(2) of this section.
(B) Notwithstanding the provisions of paragraph (h)(2)(viii) of this
section, the payment obligation of the applicant or registrant with
respect to a subordination agreement, together
[[Page 58]]
with accrued interest and compensation, shall mature in the event of any
receivership, insolvency, liquidation pursuant to the Securities
Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for
the benefit of creditors, reorganization whether or not pursuant to the
bankruptcy laws, or any other marshalling of the assets and liabilities
of the applicant or registrant, but the right of the lender to receive
payment, together with accrued interest or compensation, shall remain
subordinate as required by the provisions of paragraph (h)(2) of this
section.
(x) Accelerated maturity of subordination agreements on event of
default and event of acceleration. Obligation to repay to remain
subordinate:
(A) A subordination agreement may provide that the lender may, upon
prior written notice to the applicant and the National Futures
Association, or upon prior written notice to the registrant and the
designated self-regulatory organization or, if the registrant is not a
member of a designated self-regulatory organization, the Commission, of
the occurrence of any event of acceleration (as hereinafter defined)
given no sooner than six months after the effective date of such
subordination agreement, accelerate the date on which the payment
obligation of the applicant or registrant, together with accrued
interest or compensation, is scheduled to mature, to the last business
day of a calendar month which is not less than six months after notice
of acceleration is received by the applicant and by the National Futures
Association, or by the registrant and the designated self-regulatory
organization or, if the registrant is not a member of a designated self-
regulatory organization, the Commission. Any subordination agreement
containing such events of acceleration may also provide that, if upon
such accelerated maturity date the payment obligation of the applicant
or registrant is suspended as required by paragraph (h)(2)(viii) of this
section and liquidation of the applicant or registrant has not commenced
on or prior to such accelerated maturity date, notwithstanding paragraph
(h)(2)(viii) of this section, the payment obligation of the applicant or
registrant with respect to such subordination agreement shall mature on
the day immediately following such accelerated maturity date and in any
such event the payment obligations of the applicant or registrant with
respect to all other subordination agreements then outstanding shall
also mature at the same time but the rights of the respective lenders to
receive payment, together with accrued interest or compensation, shall
remain subordinate as required by the provisions of paragraph (h)(2) of
this section. Events of acceleration which may be included in a
subordination agreement complying with this paragraph (h)(2)(x) of this
section shall be limited to:
(1) Failure to pay interest or any installment of principal on a
subordination agreement as scheduled;
(2) Failure to pay when due other money obligations of a specified
material amount;
(3) Discovery that any material, specified representation or
warranty of the applicant or registrant which is included in the
subordination agreement and on which the subordination agreement was
based or continued was inaccurate in a material respect at the time
made;
(4) Any specified and clearly measurable event which is included in
the subordination agreement and which the lender and the applicant or
registrant agree, (a) is a significant indication that the financial
position of the applicant or registrant has changed materially and
adversely from agreed upon specified norms; or (b) could materially and
adversely affect the ability of the applicant or registrant to conduct
its business as conducted on the date the subordination agreement was
made; or (c) is a significant change in the senior management of the
applicant or registrant or in the general business conducted by the
applicant or registrant from that which obtained on the date the
subordination agreement became effective;
(5) Any continued failure to perform agreed covenants included in
the subordination agreement relating to the conduct of the business of
the applicant or registrant or relating to the maintenance and reporting
of its financial position; and
[[Page 59]]
(B) Notwithstanding the provisions of paragraph (h)(2)(viii) of this
section, a subordination agreement may provide that, if liquidation of
the business of the applicant or registrant has not already commenced,
the payment obligation of the applicant or registrant shall mature,
together with accrued interest or compensation, upon the occurrence of
an event of default (as hereinafter defined). Such agreement may also
provide that, if liquidation of the business of the applicant or
registrant has not already commenced, the rapid and orderly liquidation
of the business of the applicant or registrant shall then commence upon
the happening of an event of default. Any subordination agreement which
so provides for maturity of the payment obligation upon the occurrence
of an event of default shall also provide that the date on which such
event of default occurs shall, if liquidation of the applicant or
registrant has not already commenced, be the date on which the payment
obligation of the applicant or registrant with respect to all other
subordination agreements then outstanding shall mature but the rights of
the respective lenders to receive payment, together with accrued
interest or compensation, shall remain subordinate as required by the
provisions of paragraph (h)(2) of this section. Events of default which
may be included in a subordination agreement shall be limited to:
(1) The making of an application by the Securities Investor
Protection Corporation for a decree adjudicating that customers of the
applicant or registrant are in need of protection under the Securities
Investor Protection Act of 1970 and the failure of the applicant or
registrant to obtain the dismissal of such application within 30 days;
(2) Failure to meet the minimum capital requirements of the
designated self-regulatory organization, or of the Commission,
throughout a period of 15 consecutive business days, commencing on the
day the borrower first determines and notifies the designated self-
regulatory organization, if any, of which he is a member and the
Commission, in the case of a registrant, or the National Futures
Association, in the case of an applicant, or commencing on the day any
self-regulatory organization, the Commission or the National Futures
Association first determines and notifies the applicant or registrant of
such fact;
(3) The Commission shall revoke the registration of the applicant or
registrant;
(4) The self-regulatory organization shall suspend (and not
reinstate within 10 days) or revoke the applicant or registrant's status
as a member thereof;
(5) Any receivership, insolvency, liquidation pursuant to the
Securities Investor Protection Act of 1970 or otherwise, bankruptcy,
assignment for the benefit of creditors, reorganization whether or not
pursuant to bankruptcy laws, or any other marshalling of the assets and
liabilities of the applicant or registrant. A subordination agreement
which contains any of the provisions permitted by this subparagraph
(2)(x) shall not contain the provision otherwise permitted by paragraph
(h)(2)(ix)(A) of this section.
(3) Miscellaneous provisions--(i) Prohibited cancellation. The
subordination agreement shall not be subject to cancellation by either
party; no payment shall be made with respect thereto and the agreement
shall not be terminated, rescinded or modified by mutual consent or
otherwise if the effect thereof would be inconsistent with the
requirements of paragraph (h) of this section.
(ii) Notice of maturity or accelerated maturity. Every applicant or
registrant shall immediately notify the National Futures Association,
and the registrant shall immediately notify the designated self-
regulatory organization, if any, and the Commission if, after giving
effect to all payments of payment obligations under subordination
agreements then outstanding which are then due or mature within the
following six months without reference to any projected profit or loss
of the applicant or registrant, its adjusted net capital would be less
than:
(A) 120 percent of the appropriate minimum dollar amount required by
paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
(B) For a futures commission merchant or applicant therefor, 120
percent of the amount required by paragraph (a)(1)(i)(B) of this
section;
[[Page 60]]
(C) 120 percent of the amount of adjusted net capital required by a
registered futures association of which it is a member; or
(D) For an applicant or registrant which is also a securities broker
or dealer, the amount of net capital specified in Rule 15c3-1d(c)(2) of
the Securities and Exchange Commission (17 CFR 240.15c3-1d(c)(2)).
(iii) Certain legends. If all the provisions of a satisfactory
subordination agreement do not appear in a single instrument, then the
debenture or other evidence of indebtedness shall bear on its face an
appropriate legend stating that it is issued subject to the provisions
of a satisfactory subordination agreement which shall be adequately
referred to and incorporated by reference.
(iv) Legal title to securities. All securities pledged as collateral
to secure a secured demand note must be in bearer form, or registered in
the name of the applicant or registrant or the name of its nominee or
custodian.
(v) Temporary subordinations. To enable an applicant or registrant
to participate as an underwriter of securities or undertake other
extraordinary activities and remain in compliance with the adjusted net
capital requirements of this section, an applicant or registrant shall
be permitted, on no more than three occasions in any 12-month period, to
enter into a subordination agreement on a temporary basis which has a
stated term of no more than 45 days from the date the subordination
agreement became effective: Provided, That this temporary relief shall
not apply to any applicant or registrant if the adjusted net capital of
the applicant or registrant is less than the greatest of:
(A) 120 percent of the appropriate minimum dollar amount required by
paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
(B) For a futures commission merchant or applicant therefor, 120
percent of the amount required by paragraph (a)(1)(i)(B) of this
section;
(C) 120 percent of the amount of adjusted net capital required by a
registered futures association of which it is a member;
(D) For an applicant or registrant which is also a securities broker
or dealer, the amount of net capital specified in Rule 15c3-1d(c)(5)(i)
of the Securities and Exchange Commission (17 CFR 240.15c3-1d(c)(5)(i));
or
(E) The amount of equity capital as defined in paragraph (d) of this
section is less than the limits specified in paragraph (d) of this
section. Such temporary subordination agreement shall be subject to all
the other provisions of this section.
(vi) Filing. An applicant shall file a signed copy of any proposed
subordination agreement (including nonconforming subordination
agreements) with the National Futures Association at least ten days
prior to the proposed effective date of the agreement or at such other
time as the National Futures Association for good cause shall accept
such filing. A registrant that is not a member of any designated self-
regulatory organization shall file two signed copies of any proposed
subordination agreement (including nonconforming subordination
agreements) with the regional office of the Commission nearest the
principal place of business of the registrant at least ten days prior to
the proposed effective date of the agreement or at such other time as
the Commission for good cause shall accept such filing. A registrant
that is a member of a designated self-regulatory organization shall file
signed copies of any proposed subordination agreement (including
nonconforming subordination agreements) with the designated self-
regulatory organization in such quantities and at such time as the
designated self-regulatory organization may require prior to the
effective date. The applicant or registrant shall also file with said
parties a statement setting forth the name and address of the lender,
the business relationship of the lender to the applicant or registrant
and whether the applicant or registrant carried funds or securities for
the lender at or about the time the proposed agreement was so filed. A
proposed agreement filed by an applicant with the National Futures
Association shall be reviewed by the National Futures Association, and
no such agreement shall be a satisfactory
[[Page 61]]
subordination agreement for the purposes of this section unless and
until the National Futures Association has found the agreement
acceptable and such agreement has become effective in the form found
acceptable. A proposed agreement filed by a registrant shall be reviewed
by the designated self-regulatory organization with whom such an
agreement is required to be filed prior to its becoming effective or, if
the registrant is not a member of any designated self-regulatory
organization, by the regional office of the Commission where the
agreement is required to be filed prior to its becoming effective. No
proposed agreement shall be a satisfactory subordination agreement for
the purposes of this section unless and until the designated self-
regulatory organization or, if a registrant is not a member of any
designated self-regulatory organization, the Commission, has found the
agreement acceptable and such agreement has become effective in the form
found acceptable: Provided, however, That a proposed agreement shall be
a satisfactory subordination agreement for purpose of this section if
the registrant: is a securities broker or dealer registered with the
Securities and Exchange Commission; files signed copies of the proposed
subordination agreement with the applicable securities designated
examining authority, as defined in Rule 15c3-1(c)(12) of the Securities
and Exchange Commission (17 CFR 240.15c3-1(c)(12)), in the form and
manner prescribed by the designated examining authority; files signed
copies of the proposed subordination agreement with the designated self-
regulatory organization at the time it files such copies with the
designated examining authority in the form and manner prescribed by the
designated self-regulatory organization; and files a copy of the
designated examining authority's approval of the proposed subordination
agreement with the designated self-regulatory organization immediately
upon receipt of such approval. The designated examining authority's
determination that the proposed subordination agreement satisfies the
requirements for a satisfactory subordination agreement will be deemed a
like finding by the designated self-regulatory organization, unless the
designated self-regulatory organization notifies the registrant that the
designated examining authority's determination shall not constitute a
like finding by the designated self-regulatory organization.
(vii) Subordination agreements that incorporate adjusted net capital
requirements in effect prior to September 30, 2004. Any subordination
agreement that incorporates the adjusted net capital requirements in
paragraphs (h)(2)(vi)(C)(2), (h)(2)(vii)(A)(2) and (B)(2),
(h)(2)(viii)(A)(2), (h)(3)(ii)(B), and (h)(3)(v)(B) of this section, as
in effect prior to September 30, 2004, and which has been deemed to be
satisfactorily subordinated pursuant to this section prior to September
30, 2004, shall continue to be deemed a satisfactory subordination
agreement until the maturity of such agreement. In the event, however,
that such agreement is amended or renewed for any reason, then such
agreement shall not be deemed a satisfactory subordination agreement
unless the amended or renewed agreement meets the requirements of this
section.
(4) A designated self-regulatory organization and the Commission may
allow debt with a maturity date of 1 year or more to be treated as
meeting the provisions of this paragraph (h): Provided, (i) Such
exemption shall only be given when the registrant's adjusted net capital
is less than the minimum required by this section or by the capital rule
of the designated self-regulatory organization to which such registrant
is subject;
(ii) That such debt did not exist prior to its use under this
paragraph (h)(4);
(iii) Such exemption shall be for a period of 30 days or such lesser
period as the designated self-regulatory organization and the Commission
may determine;
(iv) Such exemption shall not be allowed more than once in any 12
month period; and
(v) At all times during such exemption the registrant shall make a
good faith effort to comply with the provisions of this section or the
capital rule of the designated self-regulatory organization to which
such registrant is
[[Page 62]]
subject exclusive of any benefits derived from this paragraph (h)(4).
(i) [Reserved]
(j) For the purposes of this section cover is defined as follows:
(1) General definition. Cover shall mean transactions or positions
in a contract for future delivery on a board of trade or a commodity
option where such transactions or positions normally represent a
substitute for transactions to be made or positions to be taken at a
later time in a physical marketing channel, and where they are
economically appropriate to the reduction of risks in the conduct and
management of a commercial enterprise, and where they arise from:
(i) The potential change in the value of assets which a person owns,
produces, manufactures, processes, or merchandises or anticipates
owning, producing, manufacturing, processing, or merchandising.
(ii) The potential change in the value of liabilities which a person
owes or anticipates incurring, or
(iii) The potential change in the value of services which a person
provides, purchases or anticipates providing or purchasing.
Notwithstanding the foregoing, no transactions or positions shall be
classified as cover for the purposes of this section unless their
purpose is to offset price risks incidental to commercial cash or spot
operations and such positions are established and liquidated in
accordance with sound commercial practices and unless the provisions of
paragraphs (j) (2) and (3) of this section have been satisfied.
(2) Enumerated cover transactions. The definition of covered
transactions and positions in paragraph (j)(1) of this section includes,
but is not limited to, the following specific transactions and
positions:
(i) Ownership or fixed-price purchase of any commodity which does
not exceed in quantity (A) the sales of the same commodity for future
delivery on a board of trade or (B) the purchase of a put commodity
option of the same commodity for which the market value for the actual
commodity or futures contract which is the subject of the option is less
than the strike price of the option or (C) the ownership of a commodity
option position established by the sale (grant) of a call commodity
option of the same commodity for which the market value for the actual
commodity or futures contract which is the subject of the option is more
than the strike price of the option: Provided, That for purposes of
paragraph (c)(5)(x) of this section the market value for the actual
commodity or futures contract which is the subject of such option need
not be more than the strike price of that option;
(ii) Fixed-price sale of any commodity which does not exceed in
quantity (A) the purchase of the same commodity for future delivery on a
board of trade or (B) the purchase of a call commodity option of the
same commodity for which the market value for the actual commodity or
futures contract which is the subject of such option is more than the
strike price of the option or (C) ownership of a commodity option
position established by the sale (grant) of a put commodity option of
the same commodity for which the market value for the actual commodity
or futures comtract which is the subject of the option is less than the
strike price of the option: Provided, That for purposes of paragraph
(c)(5)(x) of this section the market value for the actual commodity or
futures contract which is the subject of such option need not be less
than the strike price of that option; and
(iii) Ownership or fixed-price contracts of a commodity described in
paragraphs (j)(2)(i) and (j)(2)(ii) of this section may also be covered
other than by the same quantity of the same cash commodity, provided
that the fluctuations in value of the position for future delivery or
commodity option are substantially related to the fluctuations in value
of the actual cash position.
(3) Nonenumerated cases. Upon specific request, the Commission may
recognize transactions and positions other than those enumerated in
paragraph (j)(2) of this section as cover in amounts and under the terms
and conditions as it may specify. Any applicant or registrant who wishes
to avail itself of the provisions of this paragraph (j)(3) must apply to
the Commission in writing at its principal office in Washington, DC
giving full details of the transaction
[[Page 63]]
including detailed information which will demonstrate that the
transaction is economically appropriate to the reduction of risk
exposure attendant to the conduct and management of a commercial
enterprise.
(Approved by the Office of Management and Budget under control number
3038-0024)
[43 FR 39972, Sept. 8, 1978]
Editorial Note: For Federal Register citations affecting Sec. 1.17,
see the List of CFR Sections Affected, which appears in the Finding Aids
section of the printed volume and on GPO Access.
Sec. 1.18 Records for and relating to financial reporting and
monthly computation by futures commission merchants and
introducing brokers.
(a) No person shall be registered as a futures commission merchant
or as an introducing broker under the Act unless, commencing on the date
his application for such registration is filed, he prepares and keeps
current ledgers or other similar records which show or summarize, with
appropriate references to supporting documents, each transaction
affecting his asset, liability, income, expense and capital accounts,
and in which (except as otherwise permitted in writing by the
Commission) all his asset, liability and capital accounts are classified
into either the account classification subdivisions specified on Form 1-
FR-FCM or Form 1-FR-IB, respectively, or, if such person is registered
with the Securities and Exchange Commission as a securities broker or
dealer and he files (in accordance with Sec. 1.10(h)) a copy of his
Financial and Operational Combined Uniform Single Report under the
Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE
(FOCUS report) in lieu of Form 1-FR-FCM or Form 1-FR-IB, the account
classification subdivisions specified on such FOCUS report, or
categories that are in accord with generally accepted accounting
principles. Each person so registered shall prepare and keep current
such records.
(b)(1) Each applicant or registrant must make and keep as a record
in accordance with Sec. 1.31 formal computations of its adjusted net
capital and of its minimum financial requirements pursuant to Sec. 1.17
or the requirements of the designated self-regulatory organization to
which it is subject as of the close of business each month. Such
computations must be completed and made available for inspection by any
representative of the National Futures Association, in the case of an
applicant, or of the Commission or designated self-regulatory
organization, if any, in the case of a registrant, within 17 business
days after the date for which the computations are made, commencing the
first month end after the date the application for registration is
filed.
(2) An applicant or registrant that has filed a monthly Form 1-FR or
Statement of Financial and Operational Combined Uniform Single Report
under the Securities Exchange Act of 1934, Part II, Part IIA, or Part II
CSE (FOCUS report) in accordance with the requirements of Sec. 1.10(b)
will be deemed to have satisfied the requirements of paragraph (b)(1) of
this section for such month.
(c) The provisions of this section do not apply to an introducing
broker which is operating pursuant to a guarantee agreement, nor do such
provisions apply to an applicant for registration as an introducing
broker who files concurrently with such application a guarantee
agreement, provided such introducing broker or applicant therefor is not
also a securities broker or dealer.
[48 FR 35288, Aug. 3, 1983, as amended at 49 FR 39530, Oct. 9, 1984; 62
FR 4641, Jan. 31, 1997; 69 FR 49800, Aug. 12, 2004; 71 FR 5594, Feb. 2,
2006]
Prohibited Trading in Commodity Options
Sec. 1.19 Prohibited trading in certain ``puts'' and ``calls''.
No futures commission merchant or introducing broker may make,
underwrite, issue, or otherwise assume any financial responsibility for
the fulfillment of, any commodity option except:
(a) Commodity options traded on or subject to the rules of a
contract market in accordance with the requirements of part 33 of this
chapter;
(b) Commodity options traded on or subject to the rules of a foreign
board
[[Page 64]]
of trade in accordance with the requirements of part 30 of this chapter;
or
(c) For futures commission merchants, any option permitted under
Sec. 32.4 of this chapter, provided however, that a capital treatment
for such options is referenced in Sec. 1.17(c)(5)(vi).
[52 FR 28997, Aug. 5, 1987, as amended at 58 FR 68520, Dec. 28, 1993]
Customers' Money, Securities, and Property
Sec. 1.20 Customer funds to be segregated and separately accounted for.
(a) All customer funds shall be separately accounted for and
segregated as belonging to commodity or option customers. Such customer
funds when deposited with any bank, trust company, clearing organization
or another futures commission merchant shall be deposited under an
account name which clearly identifies them as such and shows that they
are segregated as required by the Act and this part. Each registrant
shall obtain and retain in its files for the period provided in Sec.
1.31 a written acknowledgment from such bank, trust company, clearing
organization, or futures commission merchant, that it was informed that
the customer funds deposited therein are those of commodity or option
customers and are being held in accordance with the provisions of the
Act and this part: Provided, however, that an acknowledgment need not be
obtained from a clearing organization that has adopted and submitted to
the Commission rules that provide for the segregation as customer funds,
in accordance with all relevant provisions of the Act and the rules and
orders promulgated thereunder, of all funds held on behalf of customers.
Under no circumstances shall any portion of customer funds be obligated
to a clearing organization, any member of a contract market, a futures
commission merchant, or any depository except to purchase, margin,
guarantee, secure, transfer, adjust or settle trades, contracts or
commodity option transactions of commodity or option customers. No
person, including any clearing organization or any depository, that has
received customer funds for deposit in a segregated account, as provided
in this section, may hold, dispose of, or use any such funds as
belonging to any person other than the option or commodity customers of
the futures commission merchant which deposited such funds.
(b) All customer funds received by a clearing organization from a
member of the clearing organization to purchase, margin, guarantee,
secure or settle the trades, contracts or commodity options of the
clearing member's commodity or option customers and all money accruing
to such commodity or option customers as the result of trades, contracts
or commodity options so carried shall be separately accounted for and
segregated as belonging to such commodity or option customers, and a
clearing organization shall not hold, use or dispose of such customer
funds except as belonging to such commodity or option customers. Such
customer funds when deposited in a bank or trust company shall be
deposited under an account name which clearly shows that they are the
customer funds of the commodity or option customers of clearing members,
segregated as required by the Act and these regulations. The clearing
organization shall obtain and retain in its files for the period
provided by Sec. 1.31 an acknowledgment from such bank or trust company
that it was informed that the customer funds deposited therein are those
of commodity or option customers of its clearing members and are being
held in accordance with the provisions of the Act and these regulations.
(c) Each futures commission merchant shall treat and deal with the
customer funds of a commodity customer or of an option customer as
belonging to such commodity or option customer. All customer funds shall
be separately accounted for, and shall not be commingled with the money,
securities or property of a futures commission merchant or of any other
person, or be used to secure or guarantee the trades, contracts or
commodity options, or to secure or extend the credit, of any person
other than the one for whom the same are held: Provided, however, That
customer funds treated as belonging to the commodity or option customers
of a futures commission merchant may for
[[Page 65]]
convenience be commingled and deposited in the same account or accounts
with any bank or trust company, with another person registered as a
futures commission merchant, or with a clearing organization, and that
such share thereof as in the normal course of business is necessary to
purchase, margin, guarantee, secure, transfer, adjust, or settle the
trades, contracts or commodity options of such commodity or option
customers or resulting market positions, with the clearing organization
or with any other person registered as a futures commission merchant,
may be withdrawn and applied to such purposes, including the payment of
premiums to option grantors, commissions, brokerage, interest, taxes,
storage and other fees and charges, lawfully accruing in connection with
such trades, contracts or commodity options: Provided, further, That
customer funds may be invested in instruments described in Sec. 1.25.
(Approved by the Office of Management and Budget under control numbers
3038-0007, and 3038-0024)
[46 FR 54518, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 50
FR 36051, Sept. 5, 1985; 65 FR 78009, Dec. 13, 2000]
Sec. 1.21 Care of money and equities accruing to customers.
All money received directly or indirectly by, and all money and
equities accruing to, a futures commission merchant from any clearing
organization or from any clearing member or from any member of a
contract market incident to or resulting from any trade, contract or
commodity option made by or through such futures commission merchant on
behalf of any commodity or option customer shall be considered as
accruing to such commodity or option customer within the meaning of the
Act and these regulations. Such money and equities shall be treated and
dealt with as belonging to such commodity or option customer in
accordance with the provisions of the Act and these regulations. Money
and equities accruing in connection with commodity or option customers'
open trades, contracts, or commodity options need not be separately
credited to individual accounts but may be treated and dealt with as
belonging undivided to all commodity or option customers having open
trades, contracts, or commodity option positions which if closed would
result in a credit to such commodity or option customers.
[46 FR 54519, Nov. 3, 1981]
Sec. 1.22 Use of customer funds restricted.
No futures commission merchant shall use, or permit the use of, the
customer funds of one commodity and/or option customer to purchase,
margin, or settle the trades, contracts, or commodity options of, or to
secure or extend the credit of, any person other than such customer or
option customer. Customer funds shall not be used to carry trades or
positions of the same commodity and/or option customer other than in
commodities or commodity options traded throught the facilities of a
contract market.
[47 FR 57007, Dec. 22, 1982]
Sec. 1.23 Interest of futures commission merchant in segregated
funds; additions and withdrawals.
The provision in section 4d(a)(2) of the Act and the provision in
Sec. 1.20(c), which prohibit the commingling of customer funds with the
funds of a futures commission merchant, shall not be construed to
prevent a futures commission merchant from having a residual financial
interest in the customer funds, segregated as required by the Act and
the rules in this part and set apart for the benefit of commodity or
option customers; nor shall such provisions be construed to prevent a
futures commission merchant from adding to such segregated customer
funds such amount or amounts of money, from its own funds or
unencumbered securities from its own inventory, of the type set forth in
Sec. 1.25, as it may deem necessary to ensure any and all commodity or
option customers' accounts from becoming undersegregated at any time.
The books and records of a futures commission merchant shall at all
times accurately reflect its interest in the segregated funds. A futures
commission merchant may draw upon such segregated funds to its own
order, to
[[Page 66]]
the extent of its actual interest therein, including the withdrawal of
securities held in segregated safekeeping accounts held by a bank, trust
company, contract market clearing organization or other futures
commission merchant. Such withdrawal shall not result in the funds of
one commodity and/or option customer being used to purchase, margin or
carry the trades, contracts or commodity options, or extend the credit
of any other commodity customer, option customer or other person.
[62 FR 42400, Aug. 7, 1997, as amended at 69 FR 41426, July 9, 2004]
Sec. 1.24 Segregated funds; exclusions therefrom.
Money held in a segregated account by a futures commission merchant
shall not include: (a) Money invested in obligations or stocks of any
clearing organization or in memberships in or obligations of any
contract market; or (b) money held by any clearing organization which it
may use for any purpose other than to purchase, margin, guarantee,
secure, transfer, adjust, or settle the contracts, trades, or commodity
options of the commodity or option customers of such futures commission
merchant.
[46 FR 54519, Nov. 3, 1981]
Sec. 1.25 Investment of customer funds.
(a) Permitted investments. (1) Subject to the terms and conditions
set forth in this section, a futures commission merchant or a
derivatives clearing organization may invest customer money in the
following instruments (permitted investments):
(i) Obligations of the United States and obligations fully
guaranteed as to principal and interest by the United States (U.S.
government securities);
(ii) General obligations of any State or of any political
subdivision thereof (municipal securities);
(iii) General obligations issued by any enterprise sponsored by the
United States (government sponsored enterprise securities);
(iv) Certificates of deposit issued by a bank (certificates of
deposit) as defined in section 3(a)(6) of the Securities Exchange Act of
1934, or a domestic branch of a foreign bank that carries deposits
insured by the Federal Deposit Insurance Corporation;
(v) Commercial paper;
(vi) Corporate notes or bonds;
(vii) General obligations of a sovereign nation; and
(viii) Interests in money market mutual funds.
(2)(i) In addition, a futures commission merchant or derivatives
clearing organization may buy and sell the permitted investments listed
in paragraphs (a)(1)(i) through (viii) of this section pursuant to
agreements for resale or repurchase of the instruments, in accordance
with the provisions of paragraph (d) of this section.
(ii) A futures commission merchant or a derivatives clearing
organization may sell securities deposited by customers as margin
pursuant to agreements to repurchase subject to the following:
(A) Securities subject to such repurchase agreements must be
``readily marketable'' as defined in Sec. 240.15c3-1 of this title.
(B) Securities subject to such repurchase agreements must not be
``specifically identifiable property'' as defined in Sec. 190.01(kk) of
this chapter.
(C) The terms and conditions of such an agreement to repurchase must
be in accordance with the provisions of paragraph (d) of this section.
(D) Upon the default by a counterparty to a repurchase agreement,
the futures commission merchant or derivatives clearing organization
shall act promptly to ensure that the default does not result in any
direct or indirect cost or expense to the customer.
(3) In addition, subject to the provisions of paragraph (e) of this
section, a futures commission merchant that is also registered with the
Securities and Exchange Commission as a securities broker or dealer
pursuant to section 15(b)(1) of the Securities Exchange Act of 1934 may
enter into transactions in which:
(i) Customer money is exchanged for securities that are permitted
investments and are held by the futures commission merchant in
connection with its securities broker or dealer activities;
[[Page 67]]
(ii) Securities deposited by customers as margin are exchanged for
securities that are permitted investments and are held by the futures
commission merchant in connection with its securities broker or dealer
activities; or
(iii) Securities deposited by customers as margin are exchanged for
cash that is held by the futures commission merchant in connection with
its securities broker or dealer activities.
(b) General terms and conditions. A futures commission merchant or a
derivatives clearing organization is required to manage the permitted
investments consistent with the objectives of preserving principal and
maintaining liquidity and according to the following specific
requirements:
(1) Marketability. Except for interests in money market mutual
funds, investments must be ``readily marketable'' as defined in Sec.
240.15c3-1 of this title.
(2) Ratings. (i) Initial requirement. Instruments that are required
to be rated by this section must be rated by a nationally recognized
statistical rating organization (NRSRO), as that term is defined in
Securities and Exchange Commission rules or regulations, or in any
applicable statute. For an investment to qualify as a permitted
investment, ratings are required as follows:
(A) U.S. government securities and money market mutual funds need
not be rated;
(B) Municipal securities, government sponsored enterprise
securities, commercial paper, and corporate notes or bonds, except notes
or bonds that are asset-backed, must have the highest short-term rating
of an NRSRO or one of the two highest long-term ratings of an NRSRO;
(C) Corporate notes or bonds that are asset-backed must have the
highest ratings of an NRSRO;
(D) Sovereign debt must be rated in the highest category by at least
one NRSRO; and
(E) With respect to certificates of deposit, the commercial paper or
long-term debt instrument of the issuer of a certificate of deposit or,
if the issuer is part of a holding company system, its holding company's
commercial paper or long-term debt instrument, must have the highest
short-term rating of an NRSRO or one of the two highest long-term
ratings of an NRSRO.
(ii) Effect of downgrade. If an NRSRO lowers the rating of an
instrument that was previously a permitted investment on the basis of
that rating to below the minimum rating required under this section, the
value of the instrument recognized for segregation purposes will be the
lesser of:
(A) The current market value of the instrument; or
(B) The market value of the instrument on the business day preceding
the downgrade, reduced by 20 percent of that value for each business day
that has elapsed since the downgrade.
(3) Restrictions on instrument features. (i) With the exception of
money market mutual funds, no permitted investment may contain an
embedded derivative of any kind, except as follows:
(A) The issuer of an instrument otherwise permitted by this section
may have an option to call, in whole or in part, at par, the principal
amount of the instrument before its stated maturity date; or
(B) An instrument that meets the requirements of paragraph
(b)(3)(iv) of this section may provide for a cap, floor, or collar on
the interest paid; provided, however, that the terms of such instrument
obligate the issuer to repay the principal amount of the instrument at
not less than par value upon maturity.
(ii) No instrument may contain interest-only payment features.
(iii) No instrument may provide payments linked to a commodity,
currency, reference instrument, index, or benchmark except as provided
in paragraph (b)(3)(iv) of this section, and it may not otherwise
constitute a derivative instrument.
(iv)(A) Adjustable rate securities are permitted, subject to the
following requirements:
(1) The interest payments on variable rate securities must correlate
closely and on an unleveraged basis to a benchmark of either the Federal
Funds target or effective rate, the prime rate, the three-month Treasury
Bill rate, the one-month or three-month LIBOR rate, or the interest rate
of any fixed
[[Page 68]]
rate instrument that is a permitted investment listed in paragraph
(a)(1) of this section.;
(2) The interest payment, in any period, on floating rate securities
must be determined solely by reference, on an unleveraged basis, to a
benchmark of either the Federal Funds target or effective rate, the
prime rate, the three-month Treasury Bill rate, the one-month or three-
month LIBOR rate, or the interest rate of any fixed rate instrument that
is a permitted investment listed in paragraph (a)(1) of this section;
(3) Benchmark rates must be expressed in the same currency as the
adjustable rate securities that reference them; and
(4) No interest payment on an adjustable rate security, in any
period, can be a negative amount.
(B) For purposes of this paragraph, the following definitions shall
apply:
(1) The term adjustable rate security means, a floating rate
security, a variable rate security, or both.
(2) The term floating rate security means a security, the terms of
which provide for the adjustment of its interest rate whenever a
specified interest rate changes and that, at any time until the final
maturity of the instrument or the period remaining until the principal
amount can be recovered through demand, can reasonably be expected to
have a market value that approximates its amortized cost.
(3) The term variable rate security means a security, the terms of
which provide for the adjustment of its interest rate on set dates (such
as the last day of a month or calendar quarter) and that, upon each
adjustment until the final maturity of the instrument or the period
remaining until the principal amount can be recovered through demand,
can reasonably be expected to have a market value that approximates its
amortized cost.
(v) Certificates of deposit, if negotiable, must be able to be
liquidated within one business day or, if not negotiable, must be
redeemable at the issuing bank within one business day, with any penalty
for early withdrawal limited to any accrued interest earned according to
its written terms.
(4) Concentration. (i) Direct investments. (A) U.S. government
securities and money market mutual funds shall not be subject to a
concentration limit or other limitation.
(B) Securities of any single issuer of government sponsored
enterprise securities held by a futures commission merchant or
derivatives clearing organization may not exceed 25 percent of total
assets held in segregation by the futures commission merchant or
derivatives clearing organization.
(C) Securities of any single issuer of municipal securities,
certificates of deposit, commercial paper, or corporate notes or bonds
held by a futures commission merchant or derivatives clearing
organization may not exceed 5 percent of total assets held in
segregation by the futures commission merchant or derivatives clearing
organization.
(D) Sovereign debt is subject to the following limits: a futures
commission merchant may invest in the sovereign debt of a country to the
extent it has balances in segregated accounts owed to its customers
denominated in that country's currency; a derivatives clearing
organization may invest in the sovereign debt of a country to the extent
it has balances in segregated accounts owed to its clearing member
futures commission merchants denominated in that country's currency.
(ii) Repurchase agreements. For purposes of determining compliance
with the concentration limits set forth in this section, securities sold
by a futures commission merchant or derivatives clearing organization
subject to agreements to repurchase shall be combined with securities
held by the futures commission merchant or derivatives clearing
organization as direct investments.
(iii) Reverse repurchase agreements. For purposes of determining
compliance with the concentration limits set forth in this section,
securities purchased by a futures commission merchant or derivatives
clearing organization subject to agreements to resell shall be combined
with securities held by the futures commission merchant or derivatives
clearing organization as direct investments.
(iv) Transactions under paragraph (a)(3). For purposes of
determining
[[Page 69]]
compliance with the concentration limits set forth in this section,
securities transferred to a customer segregated account pursuant to
paragraphs (a)(3)(i) or (a)(3)(ii) of this section shall be combined
with securities held by the futures commission merchant as direct
investments.
(v) Treatment of securities issued by affiliates. For purposes of
determining compliance with the concentration limits set forth in this
section, securities issued by entities that are affiliated, as defined
in paragraph (b)(6) of this section, shall be aggregated and deemed the
securities of a single issuer. An interest in a permitted money market
mutual fund is not deemed to be a security issued by its sponsoring
entity.
(vi) Treatment of customer-owned securities. For purposes of
determining compliance with the concentration limits set forth in this
section, securities owned by the customers of a futures commission
merchant and posted as margin collateral are not included in total
assets held in segregation by the futures commission merchant, and
securities posted by a futures commission merchant with a derivatives
clearing organization are not included in total assets held in
segregation by the derivatives clearing organization.
(5) Time-to-maturity. (i) Except for investments in money market
mutual funds, the dollar-weighted average of the time-to-maturity of the
portfolio, as that average is computed pursuant to Sec. 270.2a-7 of
this title, may not exceed 24 months.
(ii) For purposes of determining the time-to-maturity of the
portfolio, an instrument that is set forth in paragraphs (a)(1)(i)
through (vii) of this section may be treated as having a one-day time-
to-maturity if the following terms and conditions are satisfied:
(A) The instrument is deposited solely on an overnight basis with a
derivatives clearing organization pursuant to the terms and conditions
of a collateral management program that has become effective in
accordance with Sec. 39.4 of this chapter;
(B) The instrument is one that the futures commission merchant owns
or has an unqualified right to pledge, is not subject to any lien, and
is deposited by the futures commission merchant into a segregated
account at a derivatives clearing organization;
(C) The derivatives clearing organization prices the instrument each
day based on the current mark-to-market value; and
(D) The derivatives clearing organization reduces the assigned value
of the instrument each day by a haircut of at least 2 percent.
(6) Investments in instruments issued by affiliates. (i) A futures
commission merchant shall not invest customer funds in obligations of an
entity affiliated with the futures commission merchant, and a
derivatives clearing organization shall not invest customer funds in
obligations of an entity affiliated with the derivatives clearing
organization. An affiliate includes parent companies, including all
entities through the ultimate holding company, subsidiaries to the
lowest level, and companies under common ownership of such parent
company or affiliates.
(ii) A futures commission merchant or derivatives clearing
organization may invest customer funds in a fund affiliated with that
futures commission merchant or derivatives clearing organization.
(7) Recordkeeping. A futures commission merchant and a derivatives
clearing organization shall prepare and maintain a record that will show
for each business day with respect to each type of investment made
pursuant to this section, the following information:
(i) The type of instruments in which customer funds have been
invested;
(ii) The original cost of the instruments; and
(iii) The current market value of the instruments.
(c) Money market mutual funds. The following provisions will apply
to the investment of customer funds in money market mutual funds (the
fund).
(1) The fund must be an investment company that is registered under
the Investment Company Act of 1940 with the Securities and Exchange
Commission and that holds itself out to investors as a money market
fund, in accordance with Sec. 270.2a-7 of this title.
(2) The fund must be sponsored by a federally-regulated financial
institution, a bank as defined in section
[[Page 70]]
3(a)(6) of the Securities Exchange Act of 1934, an investment adviser
registered under the Investment Advisers Act of 1940, or a domestic
branch of a foreign bank insured by the Federal Deposit Insurance
Corporation.
(3) A futures commission merchant or derivatives clearing
organization shall maintain the confirmation relating to the purchase in
its records in accordance with Sec. 1.31 and note the ownership of fund
shares (by book-entry or otherwise) in a custody account of the futures
commission merchant or derivatives clearing organization in accordance
with Sec. 1.26(a). If the futures commission merchant or the
derivatives clearing organization holds its shares of the fund with the
fund's shareholder servicing agent, the sponsor of the fund and the fund
itself are required to provide the acknowledgment letter required by
Sec. 1.26.
(4) The net asset value of the fund must be computed by 9 a.m. of
the business day following each business day and made available to the
futures commission merchant or derivatives clearing organization by that
time.
(5) (i) General requirement for redemption of interests. A fund
shall be legally obligated to redeem an interest and to make payment in
satisfaction thereof by the business day following a redemption request,
and the futures commission merchant or derivatives clearing organization
shall retain documentation demonstrating compliance with this
requirement.
(ii) Exception. A fund may provide for the postponement of
redemption and payment due to any of the following circumstances:
(A) Non-routine closure of the Fedwire or applicable Federal Reserve
Banks;
(B) Non-routine closure of the New York Stock Exchange or general
market conditions leading to a broad restriction of trading on the New
York Stock Exchange;
(C) Declaration of a market emergency by the Securities and Exchange
Commission; or
(D) Emergency conditions set forth in section 22(e) of the
Investment Company Act of 1940.
(6) The agreement pursuant to which the futures commission merchant
or derivatives clearing organization has acquired and is holding its
interest in a fund must contain no provision that would prevent the
pledging or transferring of shares.
(d) Repurchase and reverse repurchase agreements. A futures
commission merchant or derivatives clearing organization may buy and
sell the permitted investments listed in paragraphs (a)(1)(i) through
(viii) of this section pursuant to agreements for resale or repurchase
of the securities (agreements to repurchase or resell), provided the
agreements to repurchase or resell conform to the following
requirements:
(1) The securities are specifically identified by coupon rate, par
amount, market value, maturity date, and CUSIP or ISIN number.
(2) Counterparties are limited to a bank as defined in section
3(a)(6) of the Securities Exchange Act of 1934, a domestic branch of a
foreign bank insured by the Federal Deposit Insurance Corporation, a
securities broker or dealer, or a government securities broker or
government securities dealer registered with the Securities and Exchange
Commission or which has filed notice pursuant to section 15C(a) of the
Government Securities Act of 1986.
(3) The transaction is executed in compliance with the concentration
limit requirements applicable to the securities transferred to the
customer segregated custodial account in connection with the agreements
to repurchase referred to in paragraphs (b)(4)(ii) and (iii) of this
section.
(4) The transaction is made pursuant to a written agreement signed
by the parties to the agreement, which is consistent with the conditions
set forth in paragraphs (d)(1) through (d)(12) of this section and which
states that the parties thereto intend the transaction to be treated as
a purchase and sale of securities.
(5) The term of the agreement is no more than one business day, or
reversal of the transaction is possible on demand.
(6) Securities transferred to the futures commission merchant or
derivatives clearing organization under the agreement are held in a
safekeeping account with a bank as referred to in
[[Page 71]]
paragraph (d)(2) of this section, a derivatives clearing organization,
or the Depository Trust Company in an account that complies with the
requirements of Sec. 1.26.
(7) The futures commission merchant or the derivatives clearing
organization may not use securities received under the agreement in
another similar transaction and may not otherwise hypothecate or pledge
such securities, except securities may be pledged on behalf of customers
at another futures commission merchant or derivatives clearing
organization. Substitution of securities is allowed, provided, however,
that:
(i) The qualifying securities being substituted and original
securities are specifically identified by date of substitution, market
values substituted, coupon rates, par amounts, maturity dates and CUSIP
or ISIN numbers;
(ii) Substitution is made on a ``delivery versus delivery'' basis;
and
(iii) The market value of the substituted securities is at least
equal to that of the original securities.
(8) The transfer of securities to the customer segregated custodial
account is made on a delivery versus payment basis in immediately
available funds. The transfer of funds to the customer segregated cash
account is made on a payment versus delivery basis. The transfer is not
recognized as accomplished until the funds and/or securities are
actually received by the custodian of the futures commission merchant's
or derivatives clearing organization's customer funds or securities
purchased on behalf of customers. The transfer or credit of securities
covered by the agreement to the futures commission merchant's or
derivatives clearing organization's customer segregated custodial
account is made simultaneously with the disbursement of funds from the
futures commission merchant's or derivatives clearing organization's
customer segregated cash account at the custodian bank. On the sale or
resale of securities, the futures commission merchant's or derivatives
clearing organization's customer segregated cash account at the
custodian bank must receive same-day funds credited to such segregated
account simultaneously with the delivery or transfer of securities from
the customer segregated custodial account.
(9) A written confirmation to the futures commission merchant or
derivatives clearing organization specifying the terms of the agreement
and a safekeeping receipt are issued immediately upon entering into the
transaction and a confirmation to the futures commission merchant or
derivatives clearing organization is issued once the transaction is
reversed.
(10) The transactions effecting the agreement are recorded in the
record required to be maintained under Sec. 1.27 of investments of
customer funds, and the securities subject to such transactions are
specifically identified in such record as described in paragraph (d)(1)
of this section and further identified in such record as being subject
to repurchase and reverse repurchase agreements.
(11) An actual transfer of securities to the customer segregated
custodial account by book entry is made consistent with Federal or State
commercial law, as applicable. At all times, securities received subject
to an agreement are reflected as ``customer property.''
(12) The agreement makes clear that, in the event of the bankruptcy
of the futures commission merchant or derivatives clearing organization,
any securities purchased with customer funds that are subject to an
agreement may be immediately transferred. The agreement also makes clear
that, in the event of a futures commission merchant or derivatives
clearing organization bankruptcy, the counterparty has no right to
compel liquidation of securities subject to an agreement or to make a
priority claim for the difference between current market value of the
securities and the price agreed upon for resale of the securities to the
counterparty, if the former exceeds the latter.
(e) Transactions by futures commission merchants that are also
registered securities brokers or dealers. A futures commission merchant
that is also registered with the Securities and Exchange Commission as a
securities broker or dealer pursuant to section 15(b)(1) of the
Securities Exchange Act of 1934 may enter into transactions
[[Page 72]]
pursuant to paragraph (a)(3) of this section, subject to the following
requirements:
(1) The futures commission merchant, in connection with its
securities broker or dealer activities, owns or has the unqualified
right to pledge the securities that are exchanged for customer money or
securities held in the customer segregated account.
(2) The transaction can be reversed within one business day or upon
demand.
(3) Securities transferred from the customer segregated account and
securities transferred to the customer segregated account as a result of
the transaction are specifically identified by coupon rate, par amount,
market value, maturity date, and CUSIP or ISIN number.
(4) Securities deposited by customers as margin and transferred from
the customer segregated account as a result of the transaction are
subject to the following requirements:
(i) The securities are ``readily marketable'' as defined in Sec.
240.15c3-1 of this title.
(ii) The securities are not ``specifically identifiable property''
as defined in Sec. 190.01(kk) of this chapter.
(5) Securities transferred to the customer segregated account as a
result of the transaction are subject to the following requirements:
(i) The securities are priced each day based on the current mark-to-
market value.
(ii) The securities are subject to the concentration limit
requirements set forth in paragraph (b)(4)(iv) of this section.
(iii) The securities are held in a safekeeping account with a bank,
as referred to in paragraph (d)(2) of this section, a derivatives
clearing organization, or the Depository Trust Company in an account
that complies with the requirements of Sec. 1.26.
(iv) The securities may not be used in another similar transaction
and may not otherwise be hypothecated or pledged, except such securities
may be pledged on behalf of customers at another futures commission
merchant or derivatives clearing organization. Substitution of
securities is allowed, provided, however, that:
(A) The qualifying securities being substituted and original
securities are specifically identified by date of substitution, market
values substituted, coupon rates, par amounts, maturity dates and CUSIP
or ISIN numbers;
(B) Substitution is made on a ``delivery versus delivery'' basis;
and
(C) The market value of the substituted securities is at least equal
to that of the original securities.
(6) The transactions are carried out in accordance with the
following procedures:
(i) With respect to transactions under paragraph (a)(3)(i) of this
section, the transfer of securities to the customer segregated custodial
account shall be made simultaneously with the transfer of money from the
customer segregated cash account. In no event shall money held in the
customer segregated cash account be disbursed prior to the transfer of
securities to the customer segregated custodial account. Any transfer of
securities to the customer segregated custodial account shall not be
recognized as accomplished until the securities are actually received by
the custodian of such account. Upon unwinding of the transaction, the
customer segregated cash account shall receive same-day funds credited
to such account simultaneously with the delivery or transfer of
securities from the customer segregated custodial account.
(ii) With respect to transactions under paragraph (a)(3)(ii) of this
section, the transfer of securities to the customer segregated custodial
account shall be made simultaneously with the transfer of securities
from the customer segregated custodial account. In no event shall
securities held in the customer segregated custodial account be released
prior to the transfer of securities to that account. Any transfer of
securities to the customer segregated custodial account shall not be
recognized as accomplished until the securities are actually received by
the custodian of the customer segregated custodial account. Upon
unwinding of the transaction, the customer segregated custodial account
shall receive the securities simultaneously with the delivery or
transfer of securities from
[[Page 73]]
the customer segregated custodial account.
(iii) With respect to transactions under paragraph (a)(3)(iii) of
this section, the transfer of money to the customer segregated cash
account shall be made simultaneously with the transfer of securities
from the customer segregated custodial account. In no event shall
securities held in the customer segregated custodial account be released
prior to the transfer of money to the customer segregated cash account.
Any transfer of money to the customer segregated cash account shall not
be recognized as accomplished until the money is actually received by
the custodian of the customer segregated cash account. Upon unwinding of
the transaction, the customer segregated custodial account shall receive
the securities simultaneously with the disbursement of money from the
customer segregated cash account.
(7) The futures commission merchant maintains all books and records
with respect to the transactions in accordance with Sec. Sec. 1.25,
1.27, 1.31, and 1.36 and the applicable rules and regulations of the
Securities and Exchange Commission.
(8) An actual transfer of securities by book entry is made
consistent with Federal or State commercial law, as applicable. At all
times, securities transferred to the customer segregated account are
reflected as ``customer property.''
(9) For purposes of Sec. Sec. 1.25, 1.26, 1.27, 1.28 and 1.29,
securities transferred to the customer segregated account are considered
to be customer funds until the customer money or securities for which
they were exchanged are transferred back to the customer segregated
account. In the event of the bankruptcy of the futures commission
merchant, any securities exchanged for customer funds and held in the
customer segregated account may be immediately transferred.
(10) In the event the futures commission merchant is unable to
return to the customer any customer-deposited securities exchanged
pursuant to paragraphs (a)(3)(ii) or (a)(3)(iii) of this section, the
futures commission merchant shall act promptly to ensure that such
inability does not result in any direct or indirect cost or expense to
the customer.
(f) Deposit of firm-owned securities into segregation. A futures
commission merchant shall not be prohibited from directly depositing
unencumbered securities of the type specified in this section, which it
owns for its own account, into a segregated safekeeping account or from
transferring any such securities from a segregated account to its own
account, up to the extent of its residual financial interest in
customers' segregated funds; provided, however, that such investments,
transfers of securities, and disposition of proceeds from the sale or
maturity of such securities are recorded in the record of investments
required to be maintained by Sec. 1.27. All such securities may be
segregated in safekeeping only with a bank, trust company, derivatives
clearing organization, or other registered futures commission merchant.
Furthermore, for purposes of Sec. Sec. 1.25, 1.26, 1.27, 1.28 and 1.29,
investments permitted by Sec. 1.25 that are owned by the futures
commission merchant and deposited into such a segregated account shall
be considered customer funds until such investments are withdrawn from
segregation.
[70 FR 28200, May 17, 2005; 70 FR 32866, June 6, 2005]
Sec. 1.26 Deposit of instruments purchased with customer funds.
(a) Each futures commission merchant who invests customer funds in
instruments described in Sec. 1.25 shall separately account for such
instruments and segregate such instruments as belonging to such
commodity or option customers. Such instruments, when deposited with a
bank, trust company, clearing organization or another futures commission
merchant, shall be deposited under an account name which clearly shows
that they belong to commodity or option customers and are segregated as
required by the Act and this part. Each futures commission merchant upon
opening such an account shall obtain and retain in its files an
acknowledgment from such bank, trust company, clearing organization or
other futures commission merchant that it was informed that the
instruments belong to commodity or
[[Page 74]]
option customers and are being held in accordance with the provisions of
the Act and this part. Provided, however, that an acknowledgment need
not be obtained from a clearing organization that has adopted and
submitted to the Commission rules that provide for the segregation as
customer funds, in accordance with all relevant provisions of the Act
and the rules and orders promulgated thereunder, of all funds held on
behalf of customers and all instruments purchased with customer funds.
Such acknowledgment shall be retained in accordance with Sec. 1.31.
Such bank, trust company, clearing organization or other futures
commission merchant shall allow inspection of such obligations at any
reasonable time by representatives of the Commission.
(b) Each clearing organization which invests money belonging or
accruing to commodity or option customers of its clearing members in
instruments described in Sec. 1.25 shall separately account for such
instruments and segregate such instruments as belonging to such
commodity or option customers. Such instruments, when deposited with a
bank or trust company, shall be deposited under an account name which
will clearly show that they belong to commodity or option customers and
are segregated as required by the Act and this part. Each clearing
organization upon opening such an account shall obtain and retain in its
files a written acknowledgment from such bank or trust company that it
was informed that the instruments belong to commodity or option
customers of clearing members and are being held in accordance with the
provisions of the Act and this part. Such acknowledgment shall be
retained in accordance with Sec. 1.31. Such bank or trust company shall
allow inspection of such instruments at any reasonable time by
representatives of the Commission.
[65 FR 78012, Dec. 13, 2000]
Sec. 1.27 Record of investments.
(a) Each futures commission merchant which invests customer funds,
and each derivatives clearing organization which invests customer funds
of its clearing members' customers or option customers, shall keep a
record showing the following:
(1) The date on which such investments were made;
(2) The name of the person through whom such investments were made;
(3) The amount of money or current market value of securities so
invested;
(4) A description of the instruments in which such investments were
made, including the CUSIP or ISIN numbers;
(5) The identity of the depositories or other places where such
instruments are segregated;
(6) The date on which such investments were liquidated or otherwise
disposed of and the amount of money or current market value of
securities received of such disposition, if any;
(7) The name of the person to or through whom such investments were
disposed of; and
(8) Daily valuation for each instrument and readily available
documentation supporting the daily valuation for each instrument. Such
supporting documentation must be sufficient to enable auditors to verify
the valuations and the accuracy of any information from external sources
used in those valuations.
(b) Each derivatives clearing organization which receives documents
from its clearing members representing investment of customer funds
shall keep a record showing separately for each clearing member the
following:
(1) The date on which such documents were received from the clearing
member;
(2) A description of such documents, including the CUSIP or ISIN
numbers; and
(3) The date on which such documents were returned to the clearing
member or the details of disposition by other means.
(c) Such records shall be retained in accordance with Sec. 1.31. No
such investments shall be made except in instruments described in Sec.
1.25.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0024)
[46 FR 54520, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 62
FR 42401, Aug. 7, 1997; 65 FR 78013, Dec. 13, 2000; 70 FR 28204, May 17,
2005]
[[Page 75]]
Sec. 1.28 Appraisal of instruments purchased with customer funds.
Futures commission merchants who invest customer funds in
instruments described in Sec. 1.25 of this part shall include such
instruments in segregated account records and reports at values which at
no time exceed current market value, determined as of the close of the
market on the date for which such computation is made.
[58 FR 10953, Feb. 23, 1993, as amended at 65 FR 78013, Dec. 13, 2000]
Sec. 1.29 Increment or interest resulting from investment of
customer funds.
The investment of customer funds in instruments described in Sec.
1.25 shall not prevent the futures commission merchant or clearing
organization so investing such funds from receiving and retaining as its
own any increment or interest resulting therefrom.
[46 FR 54520, Nov. 3, 1981, as amended at 65 FR 78013, Dec. 13, 2000]
Sec. 1.30 Loans by futures commission merchants; treatment of proceeds.
Nothing in these regulations shall prevent a futures commission
merchant from lending its own funds to commodity or option customers on
securities and property pledged by such commodity or option customers,
or from repledging or selling such securities and property pursuant to
specific written agreement with such commodity or option customers. The
proceeds of such loans used to purchase, margin, guarantee, or secure
the trades, contracts, or commodity options of commodity or option
customers shall be treated and dealt with by a futures commission
merchant as belonging to such commodity or option customers, in
accordance with and subject to the provisions of section 4d(a)(2) of the
Act and these regulations.
[46 FR 54520, Nov. 3, 1981, as amended at 69 FR 41426, July 9, 2004]
Recordkeeping
Sec. 1.31 Books and records; keeping and inspection.
(a)(1) All books and records required to be kept by the Act or by
these regulations shall be kept for a period of five years from the date
thereof and shall be readily accessible during the first 2 years of the
5-year period. All such books and records shall be open to inspection by
any representative of the Commission or the United States Department of
Justice.
(2) A copy of any book or record required to be kept by the Act or
by these regulations shall be provided, at the expense of the person
required to keep the book or record, to a Commission representative upon
the representative's request. Instead of furnishing a copy, such person
may provide the original book or record for reproduction, which the
representative may temporarily remove from such person's premises for
this purpose. All copies or originals shall be provided promptly. Upon
request, the Commission representative shall issue a receipt provided by
such person for any copy or original book or record received. At the
request of the Commission representative, such person shall, upon the
return thereof, issue a receipt for any copy or original book or record
returned by the representative.
(b) Except as provided in paragraph (d) of this section, immediate
reproductions on either ``micrographic media'' (as defined in paragraph
(b)(1)(i) of this section) or ``electronic storage media'' (as defined
in paragraph (b)(1)(ii) this section) may be kept in that form for the
required time period under the conditions set forth in this paragraph
(b).
(1) For purposes of this section:
(i) The term ``micrographic media'' means microfilm or microfiche or
any similar medium.
(ii) The term ``electronic storage media'' means any digital storage
medium or system that:
(A) Preserves the records exclusively in a non-rewritable, non-
erasable format;
(B) Verifies automatically the quality and accuracy of the storage
media recording process;
(C) Serializes the original and, if applicable, duplicate units of
storage media and creates a time-date record for the required period of
retention for the information placed on such electronic storage media;
and
(D) Permits the immediate downloading of indexes and records
[[Page 76]]
preserved on the electronic storage media onto paper, microfilm,
microfiche or other medium acceptable under this paragraph upon the
request of representatives of the Commission or the Department of
Justice.
(2) Persons who use either micrographic media or electronic storage
media to maintain records in accordance with this section must:
(i) Have available at all times, for examination by representatives
of the Commission or the Department of Justice, facilities for
immediate, easily readable projection or production of micrographic
media or electronic storage media images;
(ii) Be ready at all times to provide, and immediately provide at
the expense of the person required to keep such records, any easily
readable hard-copy image that representatives of the Commission or
Department of Justice may request;
(iii) Keep only Commission-require records on the individual medium
employed (e.g., a disk or sheets of microfiche);
(iv) Store a duplicate of the record, in any medium acceptable under
this regulation, at a location separate from the original for the period
of time required for maintenance of the original; and
(v) Organize and maintain an accurate index of all information
maintained on both the original and duplicate storage media such that:
(A) The location of any particular record stored on the media may be
immediately ascertained;
(B) The index is available at all times for immediate examination by
representatives of the Commission or the Department of Justice;
(C) A duplicate of the index is stored at a location separate from
the original index; and
(D) Both the original index and the duplicate index are preserved
for the time period required for the records included in the index.
(3) In addition to the foregoing conditions, persons using
electronic storage media must:
(i) Be ready at all times to provide, and immediately provide at the
expense of the person required to keep such records, copies of such
records on such approved machine-readable media as defined in Sec.
15.00(1) of this chapter which any representative of the Commission or
the Department of Justice may request. Records must use a format and
coding structure specified in the request.
(ii) Develop and maintain written operational procedures and
controls (an ``audit system'') designed to provide accountability over
both the initial entry of required records to the electronic storage
media and the entry of each change made to any original or duplicate
record maintained on the electronic storage media such that:
(A) The results of such audit system are available at all times for
immediate examination by representatives of the Commission or the
Department of Justice;
(B) The results of such audit system are preserved for the time
period required for the records maintained on the electronic storage
media; and
(C) The written operational procedures and controls are available at
all times for immediate examination by representatives of the Commission
or the Department of Justice.
(iii) Either
(A) Maintain, keep current, and make available at all times for
immediate examination by representatives of the Commission or Department
of Justice all information necessary to access records and indexes
maintained on the electronic storage media; or
(B) Place in escrow and keep current a copy of the physical and
logical format of the electronic storage media, the file format of all
different information types maintained on the electronic storage media
and the source code, documentation, and information necessary to access
the records and indexes maintained on the electronic storage media.
(4) In addition to the foregoing conditions, any person who uses
only electronic storage media to preserve some or all of its required
records (``Electronic Recordkeeper'') shall, prior to the media's use,
enter into an arrangement with at least one third party technical
consultant (``Technical Consultant'') who has the technical and
financial capability to perform the undertakings described in this
paragraph
[[Page 77]]
(b)(4). The arrangement shall provide that the Technical Consultant will
have access to, and the ability to download, information from the
Electronic Recordkeeper's electronic storage media to any medium
acceptable under this regulation.
(i) The Technical Consultant must file with the Commission an
undertaking in a form acceptable to the Commission, signed by the
Technical Consultant or a person duly authorized by the Technical
Consultant. An acceptable undertaking must include the following
provision with respect to the Electronic Recordkeeper:
With respect to any books and records maintained or preserved on
behalf of the Electronic Recordkeeper, the undersigned hereby undertakes
to furnish promptly to any representative of the United States Commodity
Futures Trading Commission or the United States Department of Justice
(the ``Representative''), upon reasonable request, such information as
is deemed necessary by the Representative to download information kept
on the Electronic Recordkeeper's electronic storage media to any medium
acceptable under 17 CFR 1.31. The undersigned also undertakes to take
reasonable steps to provide access to information contained on the
Electronic Recordkeeper's electronic storage media, including, as
appropriate, arrangements for the downloading of any record required to
be maintained under the Commodity Exchange Act or the rules,
regulations, or orders of the United States Commodity Futures Trading
Commission, in a format acceptable to the Representative. In the event
the Electronic Recordkeeper fails to download a record into a readable
format and after reasonable notice to the Electronic Recordkeeper, upon
being provided with the appropriate electronic storage medium, the
undersigned will undertake to do so, at no charge to the United States,
as the Representative may request.
(ii) [Reserved]
(c) Persons employing an electronic storage system shall provide a
representation to the Commission prior to the initial use of the system.
The representation shall be made by the person required to maintain the
records, the storage system vendor, or another third party with
appropriate expertise and shall state that the selected electronic
storage system meets the requirements set forth in paragraph (b)(1)(ii)
of this section. Persons employing an electronic storage system using
media other than optical disk or CD-ROM technology shall so state. The
representation shall be accompanied by the type of oath or affirmation
described in Sec. 1.10(d)(4).
(d) Trading cards, documents on which trade information is
originally recorded in writing, written orders required to be kept
pursuant to Sec. 1.35(a), (a-1)(1), (a-1)(2) and (d), and paper copies
of electronically filed certified Forms 1-FR and FOCUS Reports with the
original manually signed certification must be retained in hard-copy for
the required time period.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0022)
[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 22, Jan. 2, 1981; 46 FR
63035, Dec. 30, 1981; 58 FR 27464, 27467, May 10, 1993; 62 FR 24031, May
2, 1997; 64 FR 28742, May 27, 1999; 71 FR 67465, Nov. 22, 2006]
Sec. 1.32 Segregated account; daily computation and record.
(a) Each futures commission merchant must compute as of the close of
each business day, on a currency-by-currency basis:
(1) The total amount of customer funds on deposit in segregated
accounts on behalf of commodity and option customers;
(2) the amount of such customer funds required by the Act and these
regulations to be on deposit in segregated accounts on behalf of such
commodity and option customers; and
(3) the amount of the futures commission merchant's residual
interest in such customer funds.
(b) In computing the amount of funds required to be in segregated
accounts, a futures commission merchant may offset any net deficit in a
particular customer's account against the current market value of
readily marketable securities, less applicable percentage deductions
(i.e., ``securities haircuts'') as set forth in Rule 15c3-1(c)(2)(vi) of
the Securities and Exchange Commission (17 CFR 241.15c3-1(c)(2)(vi)),
held for the same customer's account. The futures commission merchant
must maintain a security interest in the securities, including a written
authorization to liquidate the securities at the futures commission
merchant's discretion, and
[[Page 78]]
must segregate the securities in a safekeeping account with a bank,
trust company, clearing organization of a contract market, or another
futures commission merchant. For purposes of this section, a security
will be considered readily marketable if it is traded on a ``ready
market'' as defined in Rule 15c3-1(c)(11)(i) of the Securities and
Exchange Commission (17 CFR 240.15c3-1(c)(11)(i)).
(c) The daily computations required by this section must be
completed by the futures commission merchant prior to noon on the next
business day and must be kept, together with all supporting data, in
accordance with the requirements of Sec. 1.31.
[66 FR 41133, Aug. 7, 2001, as amended at 68 FR 5551, Feb. 4, 2003]
Sec. 1.33 Monthly and confirmation statements.
(a) Monthly statements. Each futures commission merchant must
promptly furnish in writing to each commodity customer and to each
option customer and to each foreign futures and foreign options
customer, as of the close of the last business day of each month or as
of any regular monthly date selected, except for accounts in which there
are neither open positions at the end of the statement period nor any
changes to the account balance since the prior statement period, but in
any event not less frequently than once every three months, a statement
which clearly shows:
(1) For each commodity customer and foreign futures customer--
(i) The open contracts with prices at which acquired;
(ii) The net unrealized profits or losses in all open contracts
marked to the market; and
(iii) Any customer funds carried with the futures commission
merchant; and
(iv) A detailed accounting of all financial charges and credits to
such customer accounts during the monthly reporting period, including
all customer funds and funds on deposit with respect to foreign futures
transactions in accordance with Sec. 30.7 of this chapter received from
or disbursed to such customer and realized profits and losses; and
(2) For each option customer and foreign options customer--
(i) All commodity options and foreign options purchased, sold,
exercised, or expired during the monthly reporting period, identified by
underlying futures contract or underlying physical, strike price,
transaction date, and expiration date;
(ii) The open commodity option and foreign option positions carried
for such customer as of the end of the monthly reporting period,
identified by underlying futures contract or underlying physical, strike
price, transaction date, and expiration date;
(iii) All open commodity option and foreign option positions marked
to the market and the amount each position is in the money, if any;
(iv) Any customer funds carried in such customer's account(s); and
(v) A detailed accounting of all financial charges and credits to
such customer's account(s) during the monthly reporting period,
including all customer funds and funds on deposit with respect to
foreign options transactions received from or disbursed to such
customer, premiums charged and received, and realized profits and
losses.
(b) Confirmation statement. Each futures commission merchant must,
not later than the next business day after any commodity futures or
commodity option transaction, including any foreign futures or foreign
options transactions, furnish:
(1) To each commodity customer, a written confirmation of each
commodity futures transaction caused to be executed by it for the
customer.
(2) To each option customer, a written confirmation of each
commodity option transaction, containing at least the following
information:
(i) The option customer's account identification number;
(ii) A separate listing of the actual amount of the premium, as well
as each mark-up thereon, if applicable, and all other commissions,
costs, fees and other charges incurred in connection with the commodity
option transaction;
(iii) The strike price;
(iv) The underlying futures contract or underlying physical;
[[Page 79]]
(v) The final exercise date of the commodity option purchased or
sold; and
(vi) The date the commodity option transaction was executed.
(3) To each option customer, upon the expiration or exercise of any
commodity option, a written confirmation statement thereof, which
statement shall include the date of such occurrence, a description of
the option involved, and, in the case of exercise, the details of the
futures or physical position which resulted therefrom including, if
applicable, the final trading date of the contract for future delivery
underlying the option.
(4) Notwithstanding the provisions of paragraphs (b)(1) through
(b)(3) of this section, a commodity futures or commodity option
transaction that is caused to be executed for a commodity pool need be
confirmed only to the operator of the commodity pool.
(c) Exemptions. The requirements of paragraphs (a)(1)(i),
(a)(1)(ii), and (b)(1) of this section shall not apply to the following:
(1) Any account carried for a person who is a member of any contract
market;
(2) Any omnibus account carried for another futures commission
merchant; and
(3) Any account containing only bona fide hedge positions, except
that confirmations must be furnished to accounts containing only bona
fide hedge positions.
(d) Controlled accounts. With respect to any account controlled by
any person other than the commodity customer or option customer for whom
such account is carried, each futures commission merchant shall:
(1) Promptly furnish in writing to such other person the information
required by paragraphs (a) and (b) of this section;
(2) [Reserved]
(3) Promptly furnish in writing to such other person a copy of the
statement required by Sec. 1.46: Provided, however, That the provisions
of this paragraph (d) shall not apply to an account controlled by the
spouse, parent or child of the customer for whom such account is
carried.
(e) Recordkeeping. Each futures commission merchant shall retain, in
accordance with Sec. 1.31, a copy of each monthly statement and
confirmation required by this section.
(f) Introduced accounts. Each statement provided pursuant to the
provisions of this section must, if applicable, show that the account
for which the futures commission merchant is providing the statement was
introduced by an introducing broker and the names of the futures
commission merchant and introducing broker.
(g) Electronic transmission of statements. (1) The statements
required by this section, and by Sec. 1.46, may be furnished to any
customer by means of electronic media if the customer so consents,
Provided, however, that a futures commission merchant must, prior to the
transmission of any statement by means of electronic media, disclose the
electronic medium or source through which statements will be delivered,
the duration, whether indefinite or not, of the period during which
consent will be effective, any charges for such service, the information
that will be delivered by such means, and that consent to electronic
delivery may be revoked at any time.
(2) In the case of a customer who does not qualify as an
``institutional customer'' as defined in Sec. 1.3(g), a futures
commission merchant must obtain the customer's signed consent
acknowledging disclosure of the information set forth in paragraph
(g)(1) of this section prior to the transmission of any statement by
means of electronic media.
(3) Any statement required to be furnished to a person other than a
customer in accordance with paragraph (d) of this section may be
furnished by electronic media.
(4) A futures commission merchant who furnishes statements to any
customer by means of electronic media must retain a daily confirmation
statement for such customer as of the end of the trading session,
reflecting all transactions made during that session
[[Page 80]]
for the customer, in accordance with Sec. 1.31.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0024; the information collection requirements in
paragraph (c) were approved under control number 3038-0005)
[46 FR 54520, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47
FR 57008, Dec. 22, 1982; 48 FR 1185, Jan. 11, 1983; 48 FR 35289, Aug. 3,
1983; 52 FR 28997, Aug. 5, 1987; 66 FR 53517, Oct. 23, 2001]
Sec. 1.34 Monthly record, ``point balance''.
(a) Each futures commission merchant shall prepare, and retain in
accordance with the requirements of Sec. 1.31, a statement commonly
known as a ``point balance,'' which accrues or brings to the official
closing price, or settlement price fixed by the clearing organization,
all open contracts of customers as of the last business day of each
month or of any regular monthly date selected: Provided, however, That a
futures commission merchant who carries part or all of customers' open
contracts with other futures commission merchants on an ``instruct
basis'' will be deemed to have met the requirements of this section as
to open contracts so carried if a monthly statement is prepared which
shows that the prices and amounts of such contracts long and short in
the customers' accounts are in balance with those in the carrying
futures commission merchants' accounts, and such statements are retained
in accordance with the requirements of Sec. 1.31.
(b) Each futures commission merchant shall prepare, and retain in
accordance with the requirements of Sec. 1.31, a listing in which all
open commodity option positions carried for option customers are marked
to the market. Such listing shall be prepared as of the last business
day of each month, or as of any regular monthly date selected, and shall
be by put or by call, by underlying contract for future delivery (by
delivery month) or underlying physical (by option expiration date), and
by strike price.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0024)
[46 FR 54521, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47
FR 57008, Dec. 22, 1982]
Sec. 1.35 Records of cash commodity, futures, and option transactions.
(a) Futures commission merchants, introducing brokers, and members
of contract markets. Each futures commission merchant, introducing
broker, and member of a contract market shall keep full, complete, and
systematic records, together with all pertinent data and memoranda, of
all transactions relating to its business of dealing in commodity
futures, commodity options, and cash commodities. Each futures
commission merchant, introducing broker, and member of a contract market
shall retain the required records, data, and memoranda in accordance
with the requirements of Sec. 1.31, and produce them for inspection and
furnish true and correct information and reports as to the contents or
the meaning thereof, when and as requested by an authorized
representative of the Commission or the United States Department of
Justice. Included among such records shall be all orders (filled,
unfilled, or canceled), trading cards, signature cards, street books,
journals, ledgers, canceled checks, copies of confirmations, copies of
statements of purchase and sale, and all other records, data and
memoranda, which have been prepared in the course of its business of
dealing in commodity futures, commodity options, and cash commodities.
Among such records each member of a contract market must retain and
produce for inspection are all documents on which trade information is
originally recorded, whether or not such documents must be prepared
pursuant to the rules or regulations of either the Commission or the
contract market. For purposes of this section, such documents are
referred to as ``original source documents.''
(a-1) Futures commission merchants, introducing brokers, and members
of contract markets: Recording of customers'
[[Page 81]]
and option customers' orders. (1) Each futures commission merchant and
each introducing broker receiving a customer's or option customer's
order shall immediately upon receipt thereof prepare a written record of
the order including the account identification, except as provided in
paragraph (a-1)(5) of this section, and order number, and shall record
thereon, by timestamp or other timing device, the date and time, to the
nearest minute, the order is received, and in addition, for option
customers' orders, the time, to the nearest minute, the order is
transmitted for execution.
(2)(i) Each member of a contract market who on the floor of such
contract market receives a customer's or option customer's order which
is not in the form of a written record including the account
identification, order number, and the date and time, to the nearest
minute, the order was transmitted or received on the floor of such
contract market, shall immediately upon receipt thereof prepare a
written record of the order in nonerasable ink, including the account
identification, except as provided in paragraph (a-1)(5) of this section
or appendix C to this part, and order number and shall record thereon,
by timestamp or other timing device, the date and time, to the nearest
minute, the order is received.
(ii) Except as provided in paragraph (a-1)(3) of this section:
(A) Each contract market member who on the floor of such contract
market receives an order from another member present on the floor which
is not in the form of a written record shall, immediately upon receipt
of such order, prepare a written record of the order or obtain from the
member who placed the order a written record of the order, in non-
erasable ink including the account identification and order number and
shall record thereon, by time-stamp or other timing device, the date and
time, to the nearest minute, the order is received; or
(B) When a contract market member present on the floor places an
order, which is not in the form of a written record, for his own account
or an account over which he has control, with another member of such
contract market for execution:
(1) The member placing such order immediately upon placement of the
order shall record the order and time of placement to the nearest minute
on a sequentially-numbered trading card maintained in accordance with
the requirements of paragraph (d) of this section;
(2) The member receiving and executing such order immediately upon
execution of the order shall record the time of execution to the nearest
minute on a trading card or other record maintained pursuant to the
requirements of paragraph (d) of this section; and
(3) The member receiving and executing the order shall return such
trading card or other record to the member placing the order. The member
placing the order then must submit together both of the trading cards or
other records documenting such trade to contract market personnel or the
clearing member, in accordance with contract market rules adopted
pursuant to paragraph (j)(1) of this section.
(iii) Each contract market may adopt rules, which must be submitted
to the Commission pursuant to section 5a(a)(12)(A) of the Act and
Commission Regulation 1.41, that provide alternative requirements to
those contained in paragraph (a-1)(2)(ii) of this section. Such rules
shall, at a minimum, require that the contemporaneous written records:
(A) Contain the terms of the order;
(B) Include reliable timing data for the initiation and execution of
the order which would permit complete and effective reconstruction of
the order placement and execution; and
(C) Be submitted to contract market personnel or clearing members in
accordance with contract market rules adopted pursuant to paragraph
(j)(1) of this section.
(3)(i) The requirements of paragraph (a-1)(2)(ii) of this section
will not apply if a contract market maintains in effect rules which have
been submitted to the Commission pursuant to section 5a(a)(12)(A) of the
Act and Commission Regulation 1.41, which provide for an exemption
where:
[[Page 82]]
(A) A contract market member places with another member of such
contract market an order that is part of a spread transaction;
(B) The member placing the order personally executes one or more
legs of the spread; and
(C) The member receiving and executing such order immediately upon
execution of the order records the time of execution to the nearest
minute on his trading card or other record maintained in accordance with
the requirements of paragraph (d) of this section.
(ii) Each contract market shall, as part of its trade practice
surveillance program, conduct surveillance for compliance with the
recordkeeping and other requirements under paragraphs (a-1) (2) and (3)
of this section, and for trading abuses related to the execution of
orders for members present on the floor of the contract market.
(4) Each member of a contract market reporting the execution from
the floor of the contract market of a customer's or option customer's
order or the order of another member of the contract market received in
accordance with paragraphs (a-1)(2)(i) or (a-1)(2)(ii)(A) of this
section, shall record on a written record of the order, including the
account identification, except as provided in paragraph (a-1)(5) of this
section, and order number, by timestamp or other timing device, the date
and time to the nearest minute such report of execution is made. Each
member of a contract market shall submit the written records of customer
orders or orders from other contract market members to contract market
personnel or to the clearing member responsible for the collection of
orders prepared pursuant to this paragraph as required by contract
market rules adopted in accordance with paragraph (j)(1) of this
section. The execution price and other information reported on the order
tickets must be written in nonerasable ink.
(5) Post-execution allocation of bunched orders. Specific customer
account identifiers for accounts included in bunched orders need not be
recorded at time of order placement or upon report of execution if the
requirements of paragraphs (a-1)(5)(i)-(iv) of this section are met.
(i) Eligible account managers. The person placing and directing the
allocation of an order eligible for post-execution allocation must have
been granted written investment discretion with regard to participating
customer accounts. The following persons shall qualify as eligible
account managers:
(A) A commodity trading advisor registered with the Commission
pursuant to the Act or excluded or exempt from registration under the
Act or the Commission's rules, except for entities exempt under Sec.
4.14(a)(3) or Sec. 4.14(a)(6) of this chapter;
(B) An investment adviser registered with the Securities and
Exchange
Commission pursuant to the Investment Advisers Act of 1940 or with a
state pursuant to applicable state law or excluded or exempt from
registration under such Act or applicable state law or rule;
(C) A bank, insurance company, trust company, or savings and loan
association subject to federal or state regulation; or
(D) A foreign adviser that exercises discretionary trading authority
solely over the accounts of non-U.S. persons, as defined in Sec.
4.7(a)(1)(iv) of this chapter.
(ii) Information. Eligible account managers shall make the following
information available to customers upon request:
(A) The general nature of the allocation methodology the account
manager will use;
(B) Whether accounts in which the account manager may have any
interest may be included with customer accounts in bunched orders
eligible for post-execution allocation; and
(C) Summary or composite data sufficient for that customer to
compare its results with those of other comparable customers and, if
applicable, any account in which the account manager has an interest.
(iii) Allocation. Orders eligible for post-execution allocation must
be allocated by an eligible account manager in accordance with the
following:
[[Page 83]]
(A) Allocations must be made as soon as practicable after the entire
transaction is executed, but in any event account managers must provide
allocation information to futures commission merchants no later than a
time sufficiently before the end of the day the order is executed to
ensure that clearing records identify the ultimate customer for each
trade.
(B) Allocations must be fair and equitable. No account or group of
accounts may receive consistently favorable or unfavorable treatment.
(C) The allocation methodology must be sufficiently objective and
specific to permit independent verification of the fairness of the
allocations using that methodology by appropriate regulatory and self-
regulatory authorities and by outside auditors.
(iv) Records. (A) Eligible account managers shall keep and must make
available upon request of any representative of the Commission, the
United States Department of Justice, or other appropriate regulatory
agency, the information specified in paragraph (a-1)(5)(ii) of this
section.
(B) Eligible account managers shall keep and must make available
upon request of any representative of the Commission, the United States
Department of Justice, or other appropriate regulatory agency, records
sufficient to demonstrate that all allocations meet the standards of
paragraph (a-1)(5)(iii) of this section and to permit the reconstruction
of the handling of the order from the time of placement by the account
manager to the allocation to individual accounts.
(C) Futures commission merchants that execute orders or that carry
accounts eligible for post-execution allocation, and members of contract
markets that execute such orders, must maintain records that, as
applicable, identify each order subject to post-execution allocation and
the accounts to which contracts executed for such order are allocated.
(D) In addition to any other remedies that may be available under
the Act or otherwise, if the Commission has reason to believe that an
account manager has failed to provide information requested pursuant to
paragraph (a-1)(5)(iv)(A) or (a-1)(5)(iv)(B) of this section, the
Commission may inform in writing any designated contract market or
derivatives transaction execution facility and that designated contract
market or derivatives transaction execution facility shall prohibit the
account manager from submitting orders for execution except for
liquidation of open positions and no futures commission merchants shall
accept orders for execution on any designated contract market or
derivatives transaction execution facility from the account manager
except for liquidation of open positions.
(E) Any account manager that believes he or she is or may be
adversely affected or aggrieved by action taken by the Commission under
paragraph (a-1)(5)(iv)(D) of this section shall have the opportunity for
a prompt hearing in accordance with the provisions of Sec. 21.03(g) of
this chapter.
(a-2)(1) Futures commission merchants, introducing brokers, and
members of contract markets. Upon request of the contract market, the
Commission, or the United States Department of Justice, each futures
commission merchant, introducing broker, and member of a contract market
shall request from its customers and, upon receipt thereof, provide to
the requesting body documentation of cash transactions underlying
exchanges of futures for cash commodities or exchanges of futures in
connection with cash commodity transactions.
(2) Customers. Each customer of a futures commission merchant,
introducing broker, or member of a contract market shall create, retain,
and produce upon request of the contract market, the Commission, or the
United States Department of Justice documentation of cash transactions
underlying exchanges of futures for cash commodities or exchanges of
futures in connection with cash commodity transactions.
(3) Contract markets. Every contract market shall adopt rules which
require its members to provide documentation of cash transactions
underlying exchanges of futures for cash commodities or exchanges of
futures in connection with cash commodity transactions upon request of
the contract market.
[[Page 84]]
(4) Documentation. For the purposes of this paragraph, documentation
means those documents customarily generated in accordance with cash
market practices which demonstrate the existence and nature of the
underlying cash transactions, including, but not limited to, contracts,
confirmation statements, telex printouts, invoices, and warehouse
receipts or other documents of title.
(b) Futures commission merchants, introducing brokers, and clearing
members of contract markets. Each futures commission merchant and each
clearing member of a contract market and, for purposes of paragraph
(b)(3) of this section, each introducing broker, shall, as a minimum
requirement, prepare regularly and promptly, and keep systematically and
in permanent form, the following:
(1) A financial ledger record which will show separately for each
customer or option customer all charges against and credits to such
customer's or option customer's account, including but not limited to
customer funds deposited, withdrawn, or transferred, and charges or
credits resulting from losses or gains on closed transactions;
(2) A record of transactions which will show separately for each
account (including proprietary accounts):
(i) All commodity futures transactions executed for such account,
including the date, price, quantity, market, commodity and future; and
(ii) All commodity option transactions executed for such account,
including the date, whether the transaction involved a put or call,
expiration date, quantity, underlying contract for future delivery or
underlying physical, strike price, and details of the purchase price of
the option, including premium, mark-up, commission and fees; and
(3) A record or journal which will separately show for each business
day complete details of:
(i) All commodity futures transactions executed on that day,
including the date, price, quantity, market, commodity, future and the
person for whom such transaction was made;
(ii) All commodity option transactions executed on that day,
including the date, whether the transaction involved a put or call, the
expiration date, quantity, underlying contract for future delivery, or
underlying physical, strike price, details of the purchase price of the
option, including premium, mark-up, commission and fees and the person
for whom the transaction was made; and
(iii) In the case of an introducing broker, the record or journal
required by this paragraph (b)(3) shall also include the futures
commission merchant carrying the account for which each commodity
futures and commodity option transaction was executed on that day.
Provided, however, that where reproductions on microfilm, microfiche or
optical disk are substituted for hard copy in accordance with the
provisions of Sec. 1.31(b) of this part, the requirements of paragraphs
(b)(1) and (b)(2) of this section will be considered met if the person
required to keep such records is ready at all times to provide, and
immediately provides in the same city as that in which such person's
commodity or commodity option books and records are maintained, at the
expense of such person, reproduced copies which show the records as
specified in paragraphs (b)(1) and (b)(2) of this section, on request of
any representatives of the Commission or the U.S. Department of Justice.
(c) Clearing members of contract markets. In the daily record or
journal required to be kept under paragraph (b)(3) of this section, each
clearing member of a contract market shall also show the floor broker or
floor trader executing each transaction, the opposite floor broker or
floor trader, and the opposite clearing member with whom it was made.
(d) Members of contract markets. (1) Each member of a contract
market who, in the place provided by the contract market for the meeting
of persons similarly engaged, executes purchases or sales of any
commodity for future delivery or commodity option on or subject to the
rules of such contract market, shall prepare regularly and promptly a
trading card or other record showing such purchases and sales. Such
trading card or record shall show the member's name, the name of the
clearing member, transaction date,
[[Page 85]]
time (as specified in rules of the contract market which comply with the
requirements of this section), quantity, and, as applicable, underlying
commodity, contract for future delivery or physical, price or premium,
delivery month or expiration date, whether the transaction involved a
put or a call and strike price. Such trading card or other record shall
also clearly identify the opposite floor broker or floor trader with
whom the transaction was executed, and the opposite clearing member (if,
in accordance with the rules or practice of the contract market, such
opposite clearing member is made known to the member).
(2) Each member of a contract market recording purchases and sales
on trading cards must record such purchases and sales in exact
chronological order of execution on sequential lines of the trading card
without skipping lines between trades; Provided, however; That if lines
remain after the last execution recorded on a trading card, the
remaining lines must be marked through.
(3) Each member of a contract market must identify on his trading
cards in the manner prescribed by the rules of the contract market the
purchases and sales executed during the opening and closing periods
designated by the contract market pursuant to paragraph (j)(7) of this
section.
(4) Trading cards prepared by a member of a contract market pursuant
to contract market rules must contain:
(i) Pre-printed member identification or other unique identifying
information which would permit the trading cards of one member to be
distinguished from those of all other members;
(ii) Pre-printed sequence numbers to permit the intra-day sequencing
of the cards; and
(iii) Unique and pre-printed identifying information which would
distinguish each of the trading cards prepared by the member from other
such trading cards for no less than a one-week period.
(5) Trading cards prepared by a member of a contract market and
collected pursuant to paragraph (j)(1) of this section must be
timestamped promptly to the nearest minute upon collection by either the
contract market or the relevant clearing member.
(6) Each member of a contract market shall be accountable for all
trading cards prepared pursuant to contract market rules in exact
numerical sequence, whether or not such trading cards are relied on as
original source documents.
(7) Trading records prepared by a member of a contract market
pursuant to contract market rules must:
(i) Be submitted in accordance with contract market rules adopted
pursuant to paragraph (j)(1) of this section; and
(ii) Be completed in non-erasable ink. A member may correct any
errors by crossing out erroneous information without obliterating or
otherwise making illegible any of the originally recorded information.
With regard to trading cards only, a member may correct erroneous
information by rewriting the trading card; provided, however, that the
member must submit a ply of the trading card, or in the absence of plies
the original trading card, that is subsequently rewritten in accordance
with contract market rules which set forth the required collection
schedule for trading cards and provided further that the member is
accountable for any trading card that subsequently is rewritten pursuant
to paragraph (d)(6) of this section.
(8) Each member of a contract market must use a new trading card at
the beginning of each designated 30-minute interval required by
paragraph (j)(1) of this section (or such lesser interval as may be
determined appropriate by the applicable contract market) or as may be
required pursuant hereto.
(e) Contract markets. Each contract market shall maintain or cause
to be maintained by its clearing organization a single record which
shall show for each futures or option trade: the transaction date, time
(as described in paragraph (g) of this section), quantity, and, as
applicable, underlying commodity, contract for future delivery or
physical, price or premium, delivery month or expiration date, whether
the transaction involved a put or a call, strike price, floor broker or
floor trader buying, clearing member buying, floor broker or floor
trader selling,
[[Page 86]]
clearing member selling, and symbols indicating the buying and selling
customer or option customer types. The customer and option customer type
indicators shall show, with respect to each person executing the trade,
whether such person:
(1) Was trading for his own account, or an account for which he has
discretion;
(2) Was trading for his clearing member's house account;
(3) Was trading for another member present on the exchange floor, or
an account controlled by such other member; or
(4) Was trading for any other type of customer or option customer.
The record required by this paragraph (e) shall also show, by
appropriate and uniform symbols, any transaction which is made non-
competitively in accordance with written rules of the contract market
which have been submitted to and approved by the Commission in
accordance with the provisions of Sec. 1.38, and trades cleared on
dates other than the date of execution. Except as otherwise approved by
the Commission for good cause shown, the record required by this
paragraph (e) shall be maintained in a format and coding structure
approved by the Commission (i) in hard copy or on microfilm as specified
in Sec. 1.31 and (ii) for 60 days in computer-readable form on
compatible magnetic tapes or discs.
(f) Each contract market shall provide for the identification of
floor brokers, floor traders, and clearing members, in the records
required to be kept under paragraphs (c), (d), and (e) of this section,
by the use of a distinctive, nonvariable designation for each such floor
broker, floor trader, and clearing member.
(g) Time of trade execution. For purposes of paragraph (e) of this
section: (1) The actual time of the execution of each side of a
transaction must be obtained, or (2) if a contract market identifies and
records the time of a transaction, a single actual time of execution for
both sides of the transaction may be obtained. Actual times of execution
shall be stated in increments of no more than one minute in length. If a
contract market submits rules to the Commission, in accordance with the
provisions of section 5a(a)(12)(A) of the Act and Sec. 1.41, defining
and separately identifying opening and closing time periods, the
contract market may, for purposes of paragraph (e) of this section, use
those time periods for trades occurring during the opening and closing
periods. Contract market rules in effect prior to the effective date of
this paragraph (g) upon which a contract market intends to rely in
complying herewith must be submitted for this purpose to the Commission
in accordance with the provisions of section 5a(a)(12)(A) of the Act and
Sec. 1.41.
(h) Contract market price change register. Each contract market
shall establish and maintain a record of all changes in the price of
futures or option transactions executed on the floor of the contract
market. This record shall include the time of all changes in price to
the nearest ten seconds.
(i) Contract markets. A contract market, in order to demonstrate
that it is exercising due diligence in maintaining the continuing
affirmative action program required by the Act and Sec. 1.51, shall, at
a minimum:
(1) Demonstrate effective use in its continuing affirmative action
program of the information required to be obtained by paragraph (e) of
this section to reconstruct rapidly and accurately transactions executed
on or subject to the rules of such contract market; and
(2) Submit to the Commission such reports as the Commission or the
Director of the Division of Trading and Markets, or such persons under
the supervision of the Director as may be specified from time to time,
may require concerning the accuracy of all information recorded under
paragraph (e) of this section and the use of such information in the
contract market's affirmative action program.
(j) Contract markets. Each contract market must maintain in effect
rules which require that:
(1) Trading records prepared by a member of the contract market
pursuant to paragraphs (a-1) and (d) of this section be submitted to
contract market personnel or the clearing member within 15 minutes of
designated intervals not to exceed 30 minutes, commencing with the
beginning of each
[[Page 87]]
trading session. The time period permitted for the submission of trading
records after the close of trading in each market shall not exceed 15
minutes from the close. Such documents should nevertheless be collected
as often as is practicable by the contract market or relevant clearing
member. Such contract market rules need not, however, require that those
original source documents which cannot be relied upon by the contract
market or clearing member for clearing purposes be submitted pursuant to
this paragraph. Each contract market shall submit a written report to
the Commission no later than nine months after the effective date of
this paragraph describing with particularity the contract market's
system(s) in place to comply with this paragraph and the level of
compliance achieved to date.
(2) Trading cards collected pursuant to this paragraph must be
timestamped promptly to the nearest minute upon collection by either the
contract market or relevant clearing member.
(3) A member of the contract market must use a new trading card at
the beginning of each designated 30-minute interval required by
paragraph (j)(1) of this section.
(4) A member of the contract market must record trades in the manner
prescribed by paragraph (d)(2) of this section.
(5) Trading cards prepared by a member of the contract market must
contain the identifying information prescribed by paragraph (d)(4) of
this section.
(6) A member of the contract market must be accountable for all
trading cards prepared pursuant to contract market rules in exact
numerical sequence, whether or not such trading cards are relied on as
original source documents.
(7) A member of the contract market must identify on his trading
cards trades executed during opening and closing periods either by
drawing a line on the trading card to separate those trades from others
recorded thereon or by some other method. Each contract market must
designate as opening and closing periods for this purpose those periods
upon which the opening and closing trading ranges are based for each of
its markets.
(8) A member of the contract market must complete trades in non-
erasable ink in the manner prescribed by paragraph (d)(7)(ii) of this
section.
(k) Collection of trading cards in intervals not to exceed 15
minutes. The Commission, in its discretion, may publish a schedule in
the Federal Register no earlier than 11 months after paragraph (j)(1) of
this section becomes effective, indicating when the records required to
be submitted pursuant to that paragraph must be submitted to contract
market personnel or the clearing member within 15 minutes of designated
intervals not to exceed 15 minutes, commencing with the beginning of
each trading session.
(l) A contract market which can demonstrate that it currently has
available hand-held terminals or such other automated means for the
recordation of trades which can eliminate the opportunity for improper
alteration or fabrication of trading records, may petition the
Commission for an exemption from Regulations 1.35(a-1) (2) and (4), (d),
(j) or (k), as appropriate.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0022)
[41 FR 3194, Jan. 21, 1976]
Editorial Note: For Federal Register citations affecting Sec. 1.35,
see the List of CFR Sections Affected, which appears in the Finding Aids
sections of the printed volume and on GPO Access.
Sec. 1.36 Record of securities and property received from customers
and option customers.
(a) Each futures commission merchant shall maintain, as provided in
Sec. 1.31, a record of all securities and property received from
customers or option customers in lieu of money to margin, purchase,
guarantee, or secure the commodity or commodity option transactions of
such customers or option customers. Such record shall show separately
for each customer or option customer: a description of the securities or
property received; the name and address of such customer or option
customer; the dates when the securities or property were received; the
identity of the depositories or other places where
[[Page 88]]
such securities or property are segregated; the dates of deposits and
withdrawals from such depositories; and the dates of return of such
securities or property to such customer or option customer, or other
disposition thereof, together with the facts and circumstances of such
other disposition. In the event any futures commission merchant deposits
with the clearing organization of a contract market, directly or with a
bank or trust company acting as custodian for such clearing
organization, securities and/or property which belong to a particular
customer or option customer, such futures commission merchant shall
obtain written acknowledgment from such clearing organization that it
was informed that such securities or property belong to customers or
option customers of the futures commission merchant making the deposit.
Such acknowledgment shall be retained as provided in Sec. 1.31.
(b) Each clearing organization of a contract market which receives
from members securities or property belonging to particular customers or
option customers of such members in lieu of money to margin, purchase,
guarantee, or secure the commodity or commodity option transactions of
such customers or option customers, or receives notice that any such
securities or property have been received by a bank or trust company
acting as custodian for such clearing organization, shall maintain, as
provided in Sec. 1.31, a record which will show separately for each
member, the dates when such securities or property were received, the
identity of the depositories or other places where such securities or
property are segregated, the dates such securities or property were
returned to the member, or otherwise disposed of, together with the
facts and circumstances of such other disposition including the
authorization therefor.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0024)
[46 FR 54522, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 48
FR 8435, Mar. 1, 1983]
Sec. 1.37 Customer's or option customer's name, address, and
occupation recorded; record of guarantor or controller of
account.
(a)(1) Each futures commission merchant, introducing broker, and
member of a contract market shall keep a record in permanent form which
shall show for each commodity futures or option account carried or
introduced by it the true name and address of the person for whom such
account is carried or introduced and the principal occupation or
business of such person as well as the name of any other person
guaranteeing such account or exercising any trading control with respect
to such account. For each such commodity option account, the records
kept by such futures commission merchant, introducing broker, and member
of a contract market must also show the name of the person who has
solicited and is responsible for each option customer's account or
assign account numbers in such a manner to identify that person.
(2) Each futures commission merchant who receives a customer's
election not to have the customer's funds separately accounted for and
segregated, in accordance with Sec. 1.68, shall keep a record in
permanent form that indicates such customer's election. The record of
such a customer election may be indicated on the record required by
paragraph (a)(1) of this section.
(b) As of the close of the market each day, each futures commission
merchant which carries an account for another futures commission
merchant, foreign broker (as defined in Sec. 15.00 of this chapter),
member of a contract market, or other person, on an omnibus basis shall
maintain a daily record for each such omnibus account of the total open
long contracts and the total open short contracts in each future and,
for commodity option transactions, the total open put options purchased,
the total open put options granted, the total open call options
purchased, and the total open call options granted for each commodity
option expiration date.
(c) Each designated contract market shall keep a record in permanent
form,
[[Page 89]]
which shall show the true name, address, and principal occupation or
business of any foreign trader executing transactions on the facility or
exchange. In addition, upon request, a designated contract market shall
provide to the Commission information regarding the name of any person
guaranteeing such transactions or exercising any control over the
trading of such foreign trader.
(d) Paragraph (c) of this section shall not apply to a designated
contract market on which transactions in futures or option contracts of
foreign traders are executed through, or the resulting transactions are
maintained in, accounts carried by a registered futures commission
merchant or introduced by a registered introducing broker subject to the
provisions of paragraph (a) of this section.
(The information collection requirements contained in Sec. 1.37 were
approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0024; and in paragraph (b) under control number 3038-
0009)
[46 FR 54523, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 48
FR 35289, Aug. 3, 1983; 58 FR 28501, May 14, 1993; 66 FR 20744, Apr. 25,
2001; 66 FR 42269, Aug. 10, 2001]
Sec. 1.38 Execution of transactions.
(a) Competitive execution required; exceptions. All purchases and
sales of any commodity for future delivery, and of any commodity option,
on or subject to the rules of a contract market shall be executed openly
and competitively by open outcry or posting of bids and offers or by
other equally open and competitive methods, in the trading pit or ring
or similar place provided by the contract market, during the regular
hours prescribed by the contract market for trading in such commodity or
commodity option: Provided, however, That this requirement shall not
apply to transactions which are executed non-competitively in accordance
with written rules of the contract market which have been submitted to
and approved by the Commission, specifically providing for the non-
competitive execution of such transactions.
(b) Noncompetitive trades; exchange of futures, etc.; requirements.
Every person handling, executing, clearing, or carrying trades,
transactions or positions which are not competitively executed,
including transfer trades or office trades, or trades involving the
exchange of futures for cash commodities or the exchange of futures in
connection with cash commodity transactions, shall identify and mark by
appropriate symbol or designation all such transactions or contracts and
all orders, records, and memoranda pertaining thereto.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0022)
[46 FR 54523, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981]
Sec. 1.39 Simultaneous buying and selling orders of different
principals; execution of, for and between principals.
(a) Conditions and requirements. A member of a contract market who
shall have in hand at the same time both buying and selling orders of
different principals for the same commodity for future delivery in the
same delivery month or the same option (both puts or both calls, with
the same underlying contract for future delivery or the same underlying
physical, expiration date and strike price) may execute such orders for
and directly between such principals at the market price, if in
conformity with written rules of such contract market which have been
approved by the Commission, and:
(1)(i) When trading is conducted in a trading pit or ring, such
orders are first offered openly and competitively by open outcry in such
trading pit or ring (A) by both bidding and offering at the same price,
and neither such bid nor offer is accepted, or (B) by bidding and
offering to a point where such offer is higher than such bid by not more
than the minimum permissible price fluctuation applicable to such
futures contract or commodity option on such contract market, and
neither such bid nor offer is accepted; or
(ii) When in nonpit trading in contracts of sale for future
delivery, bids and offers are posted on a board, such member (A)
pursuant to such buying order posts a bid on the board and, incident to
the execution of such selling order, accepts such bid and all other
[[Page 90]]
bids posted at prices equal to or higher than the bid posted by him, or
(B) pursuant to such selling order posts an offer on the board and,
incident to the execution of such buying order, accepts such offer and
all other offers posted at prices equal to or lower than the offer
posted by him;
(2) Such member executes such orders in the presence of an official
representative of such contract market designated to observe such
transactions and, by appropriate descriptive words or symbol, clearly
identifies all such transactions on his trading card or other similar
record, made at the time of execution, and notes thereon the exact time
of execution and promptly presents said record to such official
representative for verification and initialing;
(3) Such contract market keeps a record in permanent form of each
such transaction showing the transaction date, by whom executed, the
exact time of execution, quantity, and, as applicable, underlying
commodity, contract for future delivery or physical, price or premium,
whether a put or a call, and strike price; and
(4) Neither the futures commission merchant receiving nor the member
executing such orders has any interest therein, directly or indirectly,
except as a fiduciary.
(b) Large Order Execution Procedures. A member of a contract market
may execute simultaneous buying and selling orders of different
principals directly between the principals in compliance with large
order execution procedures established by written rules of the contract
market that have been approved by the Commission: Provided, That, to the
extent such large order execution procedures do not meet the conditions
and requirements of paragraph (a) of this section, the contract market
has petitioned the Commission for, and the Commission has granted, an
exemption from the conditions and requirements of paragraph (a) of this
section. Any such petition must be accompanied by proposed contract
market rules to implement the large order execution procedures. The
petition shall include:
(1) An explanation of why the proposed large order execution rules
do not comply with paragraph (a) of this section; and
(2) A description of a special surveillance program that would be
followed by the contract market in monitoring the large order execution
procedures.
The Commission may, in its discretion and upon such terms and conditions
as it deems appropriate, grant such petition for exemption 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
shall be considered concurrently with the proposed large order execution
rules.
(c) Not deemed filling orders by offset nor cross trades. The
execution of orders in compliance with the conditions herein set forth
will not be deemed to constitute the filling of orders by offset within
the meaning of paragraph (iv) of section 4b(a) of the Act, nor to
constitute cross trades within the meaning of paragraph (A) of section
4c(a) of the Act.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0022)
[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 63035, Dec. 30, 1981; 47
FR 57008, Dec. 22, 1982; 56 FR 12344, Mar. 25, 1991; 59 FR 5525, Feb. 7,
1994]
Miscellaneous
Sec. 1.40 Crop, market information letters, reports; copies required.
Each futures commission merchant and each member of a contract
market shall, upon request, furnish or cause to be furnished to the
Commission a true copy of any letter, circular, telegram, or report
published or given general circulation by such futures commission
merchant or member which concerns crop or market information or
conditions that affect or tend to affect the price of any commodity, and
the true source of or authority for the information contained therein.
(Approved by the Office of Management and Budget under control number
3038-0015)
[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 63035, Dec. 30, 1981]
[[Page 91]]
Sec. Sec. 1.41-1.43 [Reserved]
Sec. 1.44 Records and reports of warehouses, depositories, and other
similar entities; visitation of premises.
Each contract market shall require the operators of warehouses,
depositories and other similar entities whose receipts are deliverable
in satisfaction of commodity futures contracts or options on physicals
made on or subject to the rules of such contract market:
(a) To keep records showing the stocks of each commodity traded for
future delivery or upon which option contracts are traded on such
contract market in store in such warehouses, depositories and other
similar entities by kinds, by classes, and by grades, if stored under
conditions requiring such designation or identification, and including
also lots and parcels stored specially or separately or in specially
leased space of the warehouse, depository or other similar entity;
(b) Upon call from the Commission, to report the stocks of
commodities in such warehouses, depositories and other similar entities
and to furnish information concerning stocks of each commodity traded
for future delivery or upon which option contracts are traded on such
contract market about to be transferred or in the process of being
transferred or otherwise moved into or out of such warehouses,
depositories and other similar entities, as well as any other
information concerning commodities stored in such warehouse,
depositories and other similar entities and which are or may be
available for delivery on futures contracts or options on physicals; and
(c) To permit visitation of the premises and inspection of the books
and records of such warehouses, depositories and other similar entities
by duly authorized representatives of the Commission or the Department
of Justice, and to keep all books, records, papers, and memoranda
relating to the storage and warehousing of commodities in such
warehouse, depository or other similar entity for a period of 5 years
from the date thereof.
(Approved by the Office of Management and Budget under control number
3038-0019)
(Sec. 5a, 49 Stat. 1497; 7 U.S.C. 7a)
[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 63035, Dec. 30, 1981; 47
FR 57009, Dec. 22, 1982]
Sec. 1.45 [Reserved]
Sec. 1.46 Application and closing out of offsetting long and short
positions.
(a) Application of purchases and sales. Except with respect to
purchases or sales which are for omnibus accounts, or where the customer
or account controller has instructed otherwise, any futures commission
merchant who, on or subject to the rules of a designated contract market
or registered derivatives transaction execution facility:
(1) Purchases any commodity for future delivery for the account of
any customer when the account of such customer at the time of such
purchase has a short position in the same future of the same commodity
on the same market;
(2) Sells any commodity for future delivery for the account of any
customer when the account of such customer at the time of such sale has
a long position in the same future of the same commodity on the same
market;
(3) Purchases a put or call option for the account of any option
customer when the account of such option customer at the time of such
purchase has a short put or call option position with the same
underlying futures contract or same underlying physical, strike price,
expiration date and contract market as that purchased; or
(4) Sells a put or call option for the account of any option
customer when the account of such option customer at the time of such
sale has a long put or call option position with the same underlying
futures contract or same underlying physical, strike price, expiration
date and contract market as that sold shall on the same day apply such
purchase or sale against such previously held short or long futures or
option position, as the case may be, and shall, for futures
transactions, promptly furnish such customer a statement showing the
financial result
[[Page 92]]
of the transactions involved and, if applicable, that the account was
introduced to the futures commission merchant by an introducing broker
and the names of the futures commission merchant and introducing broker.
(b) Close-out against oldest open position. In all instances wherein
the short or long futures or option position in such customer's or
option customer's account immediately prior to such offsetting purchase
or sale is greater than the quantity purchased or sold, the futures
commission merchant shall apply such offsetting purchase or sale to the
oldest portion of the previously held short or long position: Provided,
That upon specific instructions from the customer or option customer the
offsetting transaction shall be applied as specified by the customer or
option customer without regard to the date of acquisition of the
previously held position. Such instructions may also be accepted from
any person who, by power of attorney or otherwise, actually directs
trading in the customer's or option customer's account unless the person
directing the trading is the futures commission merchant (including any
partner thereof), or is an officer, employee, or agent of the futures
commission merchant. With respect to every such offsetting transaction
that, in accordance with such specific instructions, is not applied to
the oldest portion of the previously held position, the futures
commission merchant shall clearly show on the statement issued to the
customer or option customer in connection with the transaction, that
because of the specific instructions given by or on behalf of the
customer or option customer the transaction was not applied in the usual
manner, i.e., against the oldest portion of the previously held
position. However, no such showing need be made if the futures
commission merchant has received such specific instructions in writing
from the customer or option customer for whom such account is carried.
(c) In-and-out trades; day trades. Notwithstanding the provisions of
paragraphs (a) and (b) of this section shall not be deemed to require
the application of purchases or sales closed out during the same day
(commonly known as ``in-and-out trades'' or ``day trades'') against
short or long positions carried forward from a prior date.
(d) Exceptions. The provisions of this section shall not apply to:
(1) Purchases or sales of commodity options constituting ``bona fide
hedging transactions'' pursuant to rules of the contract market which
have been adopted in accordance with the requirements of Sec. 1.61(b)
and approved by the Commission pursuant to; section 5a(a)(12)(A) of the
Act Provided, That no contract market or futures commission merchant
shall permit such option positions to be offset other than by open and
competitive execution in the trading pit or ring provided by the
contract market, during the regular hours prescribed by the contract
market for trading in such commodity option.
(2) Purchases or sales constituting ``bona fide hedging
transactions'' as defined in Sec. 1.3(z); nor
(3) Sales during a delivery period for the purpose of making
delivery during such delivery period if such sales are accompanied by
instructions to make delivery thereon, together with warehouse receipts
or other documents necessary to effectuate such delivery.
(4)-(7) [Reserved]
(8) Purchases or sales held in error accounts, including but not
limited to floor broker error accounts, and purchases or sales
identified as errors at the time they are assigned to an account that
contains other purchases or sales not identified as errors and held in
that account (``error trades''), provided that:
(i) Each error trade does not offset another error trade held in the
same account;
(ii) Each error trade is offset by open and competitive means on or
subject to the rules of a contract market by not later than the close of
business on the business day following the day the error trade is
discovered and assigned to an error account or identified as an error
trade, unless at the close of business on the business day following the
discovery of the error trade, the relevant market has reached a daily
price fluctuation limit and the trader is unable to offset the error
trade, in which case the error trade must be offset as soon as
practicable thereafter; and
[[Page 93]]
(iii) No error trade is closed out by transferring such an open
position to another account also controlled by that same trader.
(e) The statements required by paragraph (a) of this section may be
furnished to the customer or the person described in Sec. 1.33(d) by
means of electronic transmission, in accordance with Sec. 1.33(g).
(Approved by the Office of Management and Budget under control number
3038-0007)
(Secs. 4g, 5, 42 Stat. 1000, 49 Stat. 1496; 7 U.S.C. 6g, 7; secs. 4g, 5,
8a; 7 U.S.C. 6g, 7, 12a)
[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 54524, Nov. 3, 1981; 46
FR 63035, Dec. 30, 1981; 47 FR 57009, Dec. 22, 1982; 48 FR 35289, Aug.
3, 1983; 49 FR 19972, May 11, 1984; 50 FR 26, Jan. 2, 1985; 51 FR 17473,
May 13, 1986; 53 FR 614, Jan. 11, 1988; 56 FR 14314, Apr. 9, 1991; 57 FR
55085, Nov. 24, 1992; 59 FR 5526, Feb. 7, 1994; 66 FR 53517, Oct. 23,
2001; 69 FR 59545, Oct. 5, 2004]
Sec. 1.47 Requirements for classification of purchases or sales of
contracts for future delivery as bona fide hedging under
Sec. 1.3(z)(3) of the regulations.
(a) Any person who wishes to avail himself of the provisions of
Sec. 1.3(z)(3) of the regulations and to make purchases or sales of any
commodity for future delivery in any commodity in excess of trading and
position limits then in effect pursuant to section 4a of the Act shall
file statement with the Commission in conformity with the requirements
of this section. All or a specified portion of the transactions and
positions described in these statements shall not be considered as bona
fide hedging if such person is so notified by the Commission:
(1) Within 30 days after the Commission is furnished the information
required under paragraph (b) of this section, or
(2) Within 10 days after the Commission is furnished with the
information required under paragraph (c) of this section.
The Commission may request the person notified to file specific
additional information with the Commission to support a determination
that all, or the specified portion, of the transactions and positions be
considered as bona fide hedging transactions and positions. In such
cases, the Commission shall consider all information so filed and, by
notice to such person, shall specify the extent to which the Commission
has determined that the transactions and positions may be classified as
bona fide hedging. In no case shall transactions and positions described
be considered as bona fide hedging if they exceed the levels specified
in paragraph (d) of this section.
(b) Initial statement. Initial statements concerning the
classification of transactions and positions as bona fide hedging
pursuant to Sec. 1.3(z)(3) shall be filed with the Commission at least
30 days in advance of the date that such transactions or positions would
be in excess of limits then in effect pursuant to section 4a of the Act.
Such statements shall:
(1) Describe the transactions and positions for future delivery and
the offsetting cash positions;
(2) Set forth in detail information which will demonstrate that the
purchases and sales are economically appropriate to the reduction of
risk exposure attendant to the conduct and management of a commercial
enterprise;
(3) Contain, and upon request of the Commission be supplemented by,
such other information which is necessary to enable the Commission to
make a determination whether the particular purchases and sales for
future delivery fall within the scope of those described in section
1.3(z)(1) of the regulations;
(4) Include a statement concerning the maximum size of positions for
future delivery (both long and short) which will be acquired any time
during the next fiscal year or marketing season of the person filing or
on whose behalf the filing is made.
(5) In addition: statements filed by an agent, concerning a futures
position which would offset a cash position which the agent does not own
or has not contracted to buy or sell, shall contain information
describing all contractual arrangements between the agent filing and the
person who owns the commodity or holds the cash market commitment being
offset;
(6) Statements concerning futures positions to be acquired against
unsold
[[Page 94]]
anticipated production or unfilled anticipated requirements for
manufacturing, processing or feeding shall also include the information
required under Sec. 1.48 of the regulations.
(c) Supplemental reports. Whenever the purchases or sales which a
person wishes to classify as bona fide hedging shall exceed the amount
provided in the person's most recent filing pursuant to this section or
the amount previously specified by the Commission pursuant to paragraph
(a) of this section, such person shall file with the Commission a
statement which updates the information provided in the person's most
recent filing and provides the reasons for this change at least ten days
in advance of the date that person wishes to exceed those amounts.
(d) Maximum purchases and sales. Purchases and sales for future
delivery considered bona fide hedging pursuant to Sec. 1.3(z)(3) of the
regulations shall at no time exceed the lesser of:
(1) The value fluctuation equivalent (in terms of the commodity for
future delivery) of the current cash position described in the
information most recently filed pursuant to this section, or
(2) The maximum level of long or short open positions provided in
the information most recently filed pursuant to this section or most
recently specified by the Commission pursuant to paragraph (a) of this
section.
(e) Updated reports. Reports updating the information required
pursuant to this section also shall be filed with the Commission upon
specific request.
(Approved by the Office of Management and Budget under control number
3038-0013)
[42 FR 42751, Aug. 8, 1977, as amended at 46 FR 63035, Dec. 30, 1981]
Sec. 1.48 Requirements for classification of sales or purchases for
future delivery as bona fide hedging of unsold anticipated production
or unfilled anticipated requirements under Sec. 1.3(z)(2) (i)(B) or
(ii)(C) of the regulations.
(a) Any person who wishes to avail himself of the provisions of
Sec. 1.3(z)(2) (i)(B) or (ii)(C) of the regulations and to make sales
or purchases for future delivery in any commodity in excess of trading
and position limits then in effect pursuant to section 4a of the Act for
the purposes of bona fide hedging shall file statements with the
Commission in conformity with the requirements of this section. All or a
specified portion of the unsold anticipated production or unfilled
anticipated requirements described in these statements shall not be
considered as offsetting positions for bona fide hedging transactions
and positions if such person is so notified by the Commission within ten
days after the Commission is furnished with the information required
under paragraphs (b) or (c) of this section. The Commission may request
the person notified to file specific additional information with the
Commission to support a determination that the statement filed
accurately reflects unsold anticipated production or unfilled
anticipated requirements for manufacturing, processing or feeding. In
such cases, the Commission shall consider all additional information so
filed and, by notice to such person, shall specify its determination as
to what portion of the production or requirements described constitutes
unsold anticipated production or unfilled anticipated requirements for
the purposes of bona fide hedging. In no case shall such transactions
and positions which offset unsold anticipated production or unfilled
anticipated requirements be considered bona fide hedging if they exceed
the levels specified in paragraph (d) of this section of the
regulations.
(b) Initial statement. Initial statements concerning the
classification of transactions and positions as bona fide hedging
pursuant to Sec. 1.3(z)(2) (i)(B) or (ii)(C) shall be filed with the
Commission at least ten days in advance of the date that such
transactions or positions would be in excess of limits then in effect
pursuant to section 4a of the Act. Such statements shall set forth in
detail for a specified operating period not in excess of one year the
person's unsold anticipated production or unfilled anticipated
requirements for processing or manufacturing or feeding and explain the
method of determination thereof, including, but not limited to, the
following information:
(1) For unsold anticipated production:
[[Page 95]]
(i) Annual production of such commodity for the three complete
fiscal years preceding the current fiscal year;
(ii) Anticipated production of such commodity for a specified period
not in excess of one year;
(iii) Fixed-price forward sales of such commodity;
(iv) Unsold anticipated production of such commodity for a specified
period not in excess of one year.
(2) For unfilled anticipated requirements:
(i) Annual requirements of such commodity for processing or
manufacturing or feeding for the three complete fiscal years preceding
the current fiscal year;
(ii) Anticipated requirements of such commodity for processing or
manufacturing or feeding for a specified operating period not in excess
of one year;
(iii) Inventory and fixed-price forward purchases of such commodity,
including any quantity in process of manufacture and finished goods and
byproducts of manufacture or processing (in terms of such commodity);
(iv) Unfilled anticipated requirements of such commodity for
processing or manufacturing or feedings for a specified operating period
not in excess of one year.
(3) Additional information: Persons hedging unsold anticipated
production or unfilled anticipated requirements which are not the same
quantity or are not the same commodity as the commodity to be sold or
purchased for future delivery shall furnish this information both in
terms of the actual commodity produced or used and in terms of the
commodity to be sold or purchased for future delivery. In addition, such
persons shall explain the method for determining the ratio of conversion
between the amount of the actual unsold anticipated production or
unfilled anticipated requirements and the amount of commodity to be sold
or purchased for future delivery. Persons hedging unfilled annual
feeding requirements for livestock and poultry shall provide the number
of cattle, hogs, sheep, or poultry expected to be fed during the
specified period, not to exceed one year, and the derivation of their
annual requirements based upon these numbers. Persons filing as an agent
shall furnish this information on the basis of the fiscal or operating
year of the person on whose behalf the filing is made.
(c) Supplemental reports. Whenever the sales or purchases which a
person wishes to consider as bona fide hedging of unsold anticipated
production or unfilled anticipated requirements shall exceed the amounts
described by the figures for requirements furnished in the most recent
filing pursuant to this section or the amounts determined by the
Commission to constitute unsold anticipated production or unfilled
anticipated requirements pursuant to paragraph (a) of this section, such
person shall file with the Commission a statement which updates the
information provided in the person's most recent filing and supplies the
reason for this change at least ten days in advance of the date that
person wishes to exceed these amounts.
(d) Maximum sales and purchases. Sales or purchases for future
delivery considered as bona fide hedges pursuant to Sec. 1.3(z)(2)
(i)(B) or (ii)(C) shall at no time exceed the lesser of:
(1) A person's unsold anticipated production of unfilled anticipated
requirements as described by the information must recently filed
pursuant to this section or determined by the Commission pursuant to
paragraph (a) of this section; or
(2) A person's actual unsold anticipated production or current
unfilled anticipated requirements for the length of time specified in
the information most recently filed pursuant to this section.
(e) Updated reports. Reports updating the information required
pursuant to this section shall also be filed with the Commission upon
specific request.
(Approved by the Office of Management and Budget under control number
3038-0013)
[42 FR 42752, Aug. 8, 1977, as amended at 46 FR 63035, Dec. 30, 1981]
Sec. 1.49 Denomination of customer funds and location of depositories.
(a) Definitions. For purposes of this section:
(1) Money center country. This term means Canada, France, Italy,
Germany, Japan, and the United Kingdom.
[[Page 96]]
(2) Money center currency. This term means the currency of any money
center country and the Euro.
(b) Permissible denominations of obligations. (1) Subject to the
terms and conditions set forth in this section, a futures commission
merchant's obligations to a customer shall be denominated:
(i) In the United States dollar;
(ii) In a currency in which funds were deposited by the customer or
were converted at the request of the customer, to the extent of such
deposits and conversions; or
(iii) In a currency in which funds have accrued to the customer as a
result of trading conducted on a designated contract market or
registered derivatives transaction execution facility, to the extent of
such accruals.
(2)(i) A futures commission merchant shall prepare and maintain a
written record of each transaction converting customer funds from one
currency to another.
(ii) A written record prepared under paragraph (b)(2)(i) of this
section must include the date the transaction was executed, the
currencies converted, the amount converted, and the resulting amount.
(iii) The information required under paragraph (b)(2)(ii) of this
section must be provided to the customer upon the customer's request.
(c) Permissible locations of depositories. (1) Unless a customer
provides instructions to the contrary, a futures commission merchant or
a derivatives clearing organization may hold customer funds:
(i) In the United States;
(ii) In a money center country; or
(iii) In the country of origin of the currency.
(2) A futures commission merchant or derivatives clearing
organization may hold customer funds outside the United States, in a
jurisdiction that is not a money center country, or the country of
origin of the currency only to the extent authorized by the customer,
provided, that the futures commission merchant or derivatives clearing
organization must make and maintain a written record of such
authorization. Notwithstanding the foregoing, in no event shall a
futures commission merchant or a derivatives clearing organization hold
customer funds in a restricted country subject to sanctions by the
Office of Foreign Assets Control of the U.S. Department of Treasury.
(d) Qualifications for depositories. (1) To hold customer funds
required to be segregated pursuant to the Act and Sec. Sec. 1.20
through 1.30, 1.32 and 1.36, a depository must provide the depositing
futures commission merchant or derivatives clearing organization with
the appropriate written acknowledgment as required under Sec. Sec. 1.20
and 1.26.
(2) A depository, if located in the United States, must be:
(i) A bank or trust company;
(ii) A futures commission merchant registered as such with the
Commission; or
(iii) A derivatives clearing organization.
(3) A depository, if located outside the United States, must be:
(i) A bank or trust company:
(A) That has in excess of $1 billion of regulatory capital; or
(B) Whose commercial paper or long-term debt instrument or, if a
part of a holding company system, its holding company's commercial paper
or long-term debt instrument, is rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization;
(ii) A futures commission merchant that is registered as such with
the Commission; or
(iii) A derivatives clearing organization.
(e) Segregation requirements. (1) Each futures commission merchant
and each derivatives clearing organization must, as of the close of each
business day, hold in segregated accounts on behalf of commodity or
option customers:
(i) Sufficient United States dollars, held in the United States, to
meet all United States dollar obligations; and
(ii) Sufficient funds in each other currency to meet obligations in
such currency.
(2) Notwithstanding paragraph (e)(1)(ii) of this section, assets
denominated in one currency may be held to meet obligations denominated
in another currency as follows:
[[Page 97]]
(i) United States dollars may be held in the United States or in
money center countries to meet obligations denominated in any other
currency; and
(ii) Funds in money center currencies may be held in the United
States or in money center countries to meet obligations denominated in
currencies other than the United States dollar.
(3) Each futures commission merchant and each derivatives clearing
organization shall make and maintain records sufficient to demonstrate
compliance with this paragraph (e).
[68 FR 5551, Feb. 4, 2003]
Sec. Sec. 1.50-1.51 [Reserved]
Sec. 1.52 Self-regulatory organization adoption and surveillance
of minimum financial requirements.
(a) Each self-regulatory organization must adopt, and submit for
Commission approval, rules prescribing minimum financial and related
reporting requirements for all its members who are registered futures
commission merchants. Each self-regulatory organization other than a
contract market must adopt, and submit for Commission approval, rules
prescribing minimum financial and related reporting requirements for all
its members who are registered introducing brokers. Each contract market
which elects to have a category of membership for introducing brokers
must adopt, and submit for Commission approval, rules prescribing
minimum financial and related reporting requirements for all its members
who are registered introducing brokers. Each self-regulatory
organization shall submit for Commission approval any modification or
other amendments to such rules. Such requirements must be the same as,
or more stringent than, those contained in Sec. Sec. 1.10 and 1.17 and
the definition of adjusted net capital must be the same as that
prescribed in Sec. 1.17(c): Provided, however, A designated self-
regulatory organization may permit its member registrants which are
registered with the Securities and Exchange Commission as securities
brokers or dealers to file (in accordance with Sec. 1.10(h)) a copy of
their Financial and Operational Combined Uniform Single Report under the
Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE, in
lieu of Form 1-FR: And, provided further, A designated self-regulatory
organization may permit its member introducing brokers to file a Form 1-
FR-IB in lieu of a Form 1-FR-FCM.
(b) Each self-regulatory organization shall have in effect and
enforce rules submitted to the Commission pursuant to paragraph (a) of
this section and approved by the Commission.
(c) Any two or more self-regulatory organizations may file with the
Commission a plan for delegating to a designated self-regulatory
organization, for any registered futures commission merchant or any
registered introducing broker which is a member of more than one such
self-regulatory organization, the responsibility of:
(1) Monitoring and auditing for compliance with the minimum
financial and related reporting requirements adopted by such self-
regulatory organizations in accordance with paragraph (a) of this
section; and
(2) Receiving the financial reports necessitated by such minimum
financial and related reporting requirements.
Such plan may also delegate the responsibility of monitoring, and
examining the books and records kept by, such registered futures
commission merchant or registered introducing broker relating to its
business of dealing in commodity futures, commodity options, and cash
commodities, insofar as such business relates to its dealings on
contract markets, as required by Sec. 1.51(a)(3) and/or part 33 of this
chapter.
(d) Any plan filed under this section may contain provisions for the
allocation of expenses reasonably incurred by the designated self-
regulatory organization among the self-regulatory organizations
participating in such a plan.
(e) A plan's designated self-regulatory organization must report to
that plan's other self-regulatory organizations any violation of such
other self-regulatory organizations' rules and regulations for which the
responsibiity to monitor, audit or examine has been delegated to such
designated self-regulatory organization under this section.
[[Page 98]]
(f) The self-regulatory organizations may, among themselves,
establish programs to provide access to any necessary financial or
related information.
(g) After appropriate notice and opportunity for comment, the
Commission may, by written notice, approve such a plan, or any part of
the plan, if it finds that the plan, or any part of it:
(1) Is necessary or appropriate to serve the public interest;
(2) Is for the protection and in the interest of customers or option
customers;
(3) Reduces multiple monitoring and auditing for compliance with the
minimum financial rules of the self-regulatory organizations submitting
the plan for any futures commission merchant or introducing broker which
is a member of more than one self-regulatory organization;
(4) Reduces multiple reporting of the financial information
necessitated by such minimum financial and related reporting
requirements by any futures commission merchant or introducing broker
which is a member of more than one self-regulatory organization;
(5) Fosters cooperation and coordination among the contract markets;
and
(6) Does not hinder the development of a registered futures
association under section 17 of the Act.
(h)(1) Upon the approval of a plan or part of one under paragraph
(g) of this section, a self-regulatory organization which is included in
such a plan shall be considered to have met its affirmative action
responsibilities under Sec. 1.51 to the extent that such
responsibilities have been delegated to a designated self-regulatory
organization.
(2) After the Commission has approved a plan or part of one under
Sec. 1.52(g), a self-regulatory organization relieved of responsibility
must notify each of its members which is subject to such a plan: (i) Of
the limited nature of its responsibility for such a member's compliance
with its minimum financial and related reporting requirements; and (ii)
of the identity of the designated self-regulatory organization which has
been delegated responsibility for such a member.
(i) The Commission may at any time, after appropriate notice and
opportunity for hearing, withdraw its approval of any plan or part of
one established under this section, if such plan or part of one ceases
to effectuate adequately the purposes of section 4(f)(b) of the Act or
of this section.
(j) Whenever a registered futures commission merchant or a
registered introducing broker holding membership in a self-regulatory
organization ceases to be a member in good standing of that self-
regulatory organization, such self-regulatory organization must, on the
same day that event takes place, give telegraphic notice of that event
to the principal office of the Commission in Washington, DC and send a
copy of that notification to such futures commission merchant or such
introducing broker.
(k) Nothing in this section shall preclude the Commission from
examining any futures commission merchant or introducing broker for
compliance with the minimum financial and related reporting requirements
to which such futures commission merchant or introducing broker is
subject.
(l) In the event a plan is not filed and/or approved for each
registered futures commission merchant or for each registered
introducing broker which is a member of more than one self-regulatory
organization, the Commission may design and, after notice and
opportunity for comment, approve a plan for those futures commission
merchants or introducing brokers which are not the subject of an
approved plan (under paragraph (g) of this section), delegating to a
designated self-regulatory organization the responsibilities described
in paragraph (c) of this section.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0022)
(7 U.S.C. 6c, 6d, 6f, 6g, 7a, 12a, 19, and 21; 5 U.S.C. 552, 5 U.S.C.
552b, and secs. 2(a)(11), 4b, 4f, 4g, 5a, 8a, and 17 of the Commodity
Exchange Act, 7 U.S.C. 4a(j), 6b, 6f, 6g, 7a, 12a, and 21, as amended,
92 Stat 865 et seq.)
[43 FR 39981, Sept. 8, 1978, as amended at 46 FR 63035, Dec. 30, 1981;
48 FR 35290, Aug. 3, 1983; 53 FR 4612, Feb. 17, 1988; 59 FR 5526, Feb.
7, 1994; 62 FR 4641, Jan. 31, 1997; 71 FR 5595, Feb. 2, 2006]
[[Page 99]]
Sec. 1.53 Enforcement of contract market bylaws, rules, regulations,
and resolutions.
Each contract market shall enforce each bylaw, rule, regulation, and
resolution, made or issued by it or by the governing board thereof or
any committee thereof, which is in effect as of July 18, 1975, and which
relates to terms and conditions in contracts of sale to be executed on
or subject to the rules of such contract market or relates to other
trading requirements, unless such bylaw, rule, regulation, or resolution
has been disapproved by the Commission pursuant to section 5a(a)(12)(A)
of the Act, or the amendment or revocation of such bylaw, rule,
regulation or resolution has been approved by the Commission pursuant to
section 5a(a)(12)(A) of the Act.
(Secs. 5, 5a, 6, 6b; 42 Stat. 1000, 1001, 49 Stat. 1497, 1498, 82 Stat.
29, 30, 31, 88 Stat. 1392, 1400, 1401, 1402; 7 U.S.C. 7, 7a, 8, 13a)
[41 FR 3194, Jan. 21, 1976, as amended at 59 FR 5526, Feb. 7, 1994]
Sec. 1.54 Contract market rules submitted to and approved or not
disapproved by the Secretary of Agriculture.
Notwithstanding any provision of these rules, any bylaw, rule,
regulation, or resolution of a contract market that was submitted to the
Secretary of Agriculture pursuant or Sec. 1.38(a) or Sec. 1.39(a) of
these rules, and was either approved by the Secretary or not disapproved
by him, as of April 21, 1975, shall continue in full force and effect
unless and until disapproved, altered or supplemented by or with the
approval of the Commission. The adoption of this rule does not
constitute approval by the Commission of any contract market bylaw,
rule, regulation or resolution.
(Sec. 411, Pub. L. 93-463, 88 Stat. 1414; 7 U.S.C. 4a note)
[45 FR 2314, Jan. 11, 1980]
Sec. 1.55 Distribution of ``Risk Disclosure Statement'' by futures
commission merchants and introducing brokers.
(a)(1) Except as provided in 1.65, no futures commission merchant,
or in the case of an introduced account no introducing broker, may open
a commodity futures account for a customer, other than for a customer
specified in paragraph (f) of this section, unless the futures
commission merchant or introducing broker first:
(i) Furnishes the customer with a separate written disclosure
statement containing only the language set forth in paragraph (b) of
this section (except for nonsubstantive additions such as captions) or
as otherwise approved under paragraph (c) of this section; Provided,
however, that the disclosure statement may be attached to other
documents as the cover page or the first page of such documents and as
the only material on such page; and
(ii) Receives from the customer an acknowledgment signed and dated
by the customer that he received and understood the disclosure
statement.
(b) The language set forth in the written disclosure document
required by paragraph (a) of this section shall be as follows:
Risk Disclosure Statement
The risk of loss in trading commodity futures contracts can be
substantial. You should, therefore, carefully consider whether such
trading is suitable for you in light of your circumstances and financial
resources. You should be aware of the following points:
(1) You may sustain a total loss of the funds that you deposit with
your broker to establish or maintain a position in the commodity futures
market, and you may incur losses beyond these amounts. If the market
moves against your position, you may be called upon by your broker to
deposit a substantial amount of additional margin funds, on short
notice, in order to maintain your position. If you do not provide the
required funds within the time required by your broker, your position
may be liquidated at a loss, and you will be liable for any resulting
deficit in your account.
(2) Under certain market conditions, you may find it difficult or
impossible to liquidate a position. This can occur, for example, when
the market reaches a daily price fluctuation limit (``limit move'').
(3) Placing contingent orders, such as ``stop-loss'' or ``stop-
limit'' orders, will not necessarily limit your losses to the intended
amounts, since market conditions on the exchange where the order is
placed may make it impossible to execute such orders.
(4) All futures positions involve risk, and a ``spread'' position
may not be less risky than an outright ``long'' or ``short'' position.
(5) The high degree of leverage (gearing) that is often obtainable
in futures trading because of the small margin requirements
[[Page 100]]
can work against you as well as for you. Leverage (gearing) can lead to
large losses as well as gains.
(6) You should consult your broker concerning the nature of the
protections available to safeguard funds or property deposited for your
account.
ALL OF THE POINTS NOTED ABOVE APPLY TO ALL FUTURES TRADING WHETHER
FOREIGN OR DOMESTIC. IN ADDITION, IF YOU ARE CONTEMPLATING TRADING
FOREIGN FUTURES OR OPTIONS CONTRACTS, YOU SHOULD BE AWARE OF THE
FOLLOWING ADDITIONAL RISKS:
(7) Foreign futures transactions involve executing and clearing
trades on a foreign exchange. This is the case even if the foreign
exchange is formally ``linked'' to a domestic exchange, whereby a trade
executed on one exchange liquidates or establishes a position on the
other exchange. No domestic organization regulates the activities of a
foreign exchange, including the execution, delivery, and clearing of
transactions on such an exchange, and no domestic regulator has the
power to compel enforcement of the rules of the foreign exchange or the
laws of the foreign country. Moreover, such laws or regulations will
vary depending on the foreign country in which the transaction occurs.
For these reasons, customers who trade on foreign exchanges may not be
afforded certain of the protections which apply to domestic
transactions, including the right to use domestic alternative dispute
resolution procedures. In particular, funds received from customers to
margin foreign futures transactions may not be provided the same
protections as funds received to margin futures transactions on domestic
exchanges. Before you trade, you should familiarize yourself with the
foreign rules which will apply to your particular transaction.
(8) Finally, you should be aware that the price of any foreign
futures or option contract and, therefore, the potential profit and loss
resulting therefrom, may be affected by any fluctuation in the foreign
exchange rate between the time the order is placed and the foreign
futures contract is liquidated or the foreign option contract is
liquidated or exercised.
THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER
ASPECTS OF THE COMMODITY MARKETS
I hereby acknowledge that I have received and understood this risk
disclosure statement.
________________________________________________________________________
Date
________________________________________________________________________
Signature of Customer
(c) The Commission may approve for use in lieu of the risk
disclosure document required by paragraph (b) of this section a risk
disclosure statement approved by one or more foreign regulatory agencies
or self-regulatory organizations if the Commission determines that such
risk disclosure statement is reasonably calculated to provide the
disclosure required by paragraph (b) of this section. Notice of risk
disclosure statements that may be used to satisfy Commission disclosure
requirements, what requirements such statements meet and the
jurisdictions which accept each format will be set forth in appendix A
to this section.
(d) Any futures commission merchant, or in the case of an introduced
account any introducing broker, may open a commodity futures account for
a customer without obtaining the separate acknowledgments of disclosure
and elections required by this section and by Sec. 1.33(g), and by
Sec. Sec. 33.7 and 190.06 of this chapter, provided that:
(1) Prior to the opening of such account, the futures commission
merchant or introducing broker obtains an acknowledgement from the
customer, which may consist of a single signature at the end of the
futures commission merchant's or introducing broker's customer account
agreement, or on a separate page, of the disclosure statements, consents
and elections specified in this section and Sec. 1.33(g), and in
Sec. Sec. 33.7, Sec. 155.3(b)(2), Sec. 155.4(b)(2), and Sec. 190.06
of this chapter, and which may include authorization for the transfer of
funds from a segregated customer account to another account of such
customer, as listed directly above the signature line, provided the
customer has acknowledged by check or other indication next to a
description of each specified disclosure statement, consent or election
that the customer has received and understood such disclosure statement
or made such consent or election; and
(2) The acknowledgment referred to in paragraph (d)(1) of this
section is accompanied by and executed contemporaneously with delivery
of the disclosures and elective provisions required by this section and
Sec. 1.33(g), and by Sec. Sec. 33.7 and 190.06 of this chapter.
[[Page 101]]
(e) The acknowledgment required by paragraph (a) of this section
must be retained by the futures commission merchant or introducing
broker in accordance with Sec. 1.31.
(f) A futures commission merchant or, in the case of an introduced
account, an introducing broker, may open a commodity futures account for
an ``institutional customer'' as defined in Sec. 1.3(g) without
furnishing such institutional customer the disclosure statements or
obtaining the acknowledgments required under paragraph (a) of this
section Sec. Sec. 1.33(g) and 1.65(a)(3), and Sec. Sec. 30.6(a),
33.7(a), 155.3(b)(2), 155.4(b)(2) and 190.10(c) of this chapter.
(g) This section does not relieve a futures commission merchant or
introducing broker from any other disclosure obligation it may have
under applicable law.
(h) Notwithstanding any other provision of this section or Sec.
1.65, a person registered or required to be registered with the
Commission as a futures commission merchant pursuant to sections
4f(a)(1) or 4f(a)(2) of the Commodity Exchange Act and registered or
required to be registered with the Securities and Exchange Commission as
a broker or dealer pursuant to sections 15(b)(1) or 15(b)(11) of the
Securities Exchange Act of 1934 and rules thereunder must provide to a
customer or prospective customer, prior to the acceptance of any order
for, or otherwise handling any transaction in or in connection with, a
security futures product for a customer, the disclosures set forth in
Sec. 41.41(b)(1) of this chapter.
(Approved by the Office of Management and Budget under control number
3038-0022)
(Secs. 4b, 4c(b), 4g(1), 4l, 4o, and 8a(5), Commodity Exchange Act, 7
U.S.C. 6b, 6c(b), 6g(1), 6l, 6o, and 12a(5)(1976), and sec. 217,
Commodity Futures Trading Act of 1974, 88 Stat. 1405; secs. 2(a)(1), 4b,
4c, 4d, 4f and 8a, Commodity Exchange Act, as amended (7 U.S.C. 2, 6b,
6c, 6f and 12a))
[[Page 102]]
[GRAPHIC] [TIFF OMITTED] TC05OC91.028
[[Page 103]]
[GRAPHIC] [TIFF OMITTED] TC05OC91.029
* * * * *
[The following language should be printed on a page other than the pages
containing the disclosure language above and may be omitted from the
required disclosure statement]
This disclosure document meets the risk disclosure requirements in
the jurisdictions
[[Page 104]]
identified below ONLY for those instruments which are specified.
United States: Commodity futures, options on commodity futures and
options on commodities subject to the Commodity Exchange Act.
United Kingdom: Futures, options on futures, options on commodities and
options on equities traded by members of the United Kingdom Securities
and Futures Authority pursuant to the Financial Services Act, 1986.
Ireland: Financial futures and options on financial futures traded by
members of futures exchanges on exchanges whose rules have been approved
by the Central Bank of Ireland under Chapter VIII of the Central Bank
Act, 1989.
[43 FR 31890, July 24, 1978, as amended at 46 FR 63035, Dec. 30, 1981;
48 FR 35290, Aug. 3, 1983; 50 FR 5383, Feb. 5, 1985; 58 FR 17503, Apr.
5, 1993; 59 FR 34380, July 5, 1994; 59 FR 38119, July 27, 1994; 60 FR
38182, July 25, 1995; 63 FR 8570, Feb. 20, 1998; 63 FR 52157, Sept. 30,
1998; 66 FR 53518, Oct. 23, 2001; 67 FR 58297, Sept. 13, 2002; 70 FR
5924, Feb. 4, 2005; 72 FR 63979, Nov. 14, 2007]
Sec. 1.56 Prohibition of guarantees against loss.
(a) [Reserved]
(b) No futures commission merchant or introducing broker may in any
way represent that it will, with respect to any commodity interest in
any account carried by the futures commission merchant for or on behalf
of any person:
(1) Guarantee such person against loss;
(2) Limit the loss of such person; or
(3) Not call for or attempt to collect initial and maintenance
margin as established by the rules of the applicable board of trade.
(c) No person may in any way represent that a futures commission
merchant or introducing broker will engage in any of the acts or
practices described in paragraph (b) of this section.
(d) This section shall not be construed to prevent a futures
commission merchant or introducing broker from:
(1) Assuming or sharing in the losses resulting from an error or
mishandling of an order; or
(2) Participating as a general partner in a commodity pool which is
a limited partnership.
(e) This section shall not affect any guarantee entered into prior
to January 28, 1982, but this section shall apply to any extension,
modification or renewal thereof entered into after such date.
[46 FR 62844, Dec. 29, 1981, as amended at 48 FR 35291, Aug. 3, 1983]
Sec. 1.57 Operations and activities of introducing brokers.
(a) Each introducing broker must:
(1) Open and carry each customer's and option customer's account
with a carrying futures commission merchant on a fully-disclosed basis:
Provided, however, That an introducing broker which has entered into a
guarantee agreement with a futures commission merchant in accordance
with the provisions of Sec. 1.10(j) of this part must open and carry
such customer's and option customer's account with such guarantor
futures commission merchant on a fully-disclosed basis; and
(2) Transmit promptly for execution all customer and option customer
orders to:
(i) A carrying futures commission merchant; or
(ii) a floor broker, if the introducing broker identifies its
carrying futures commission merchant and that carrying futures
commission merchant is also the clearing member with respect to the
customer's or option customer's order.
(b) An introducing broker may not carry proprietary accounts, nor
may an introducing broker carry accounts in foreign futures.
(c) An introducing broker may not accept any money, securities or
property (or extend credit in lieu thereof) to margin, guarantee or
secure any trades or contracts of customers or option customers, or any
money, securities or property accruing as a result of such trades or
contracts: Provided, however, That an introducing broker may deposit a
check in a qualifying account or forward a check drawn by a customer or
option customer if:
(1) The futures commission merchant carrying the customer's or
option customer's account authorizes the introducing broker, in writing,
to receive a check in the name of the futures commission merchant, and
the introducing broker retains such written authorization in its files
in accordance with Sec. 1.31;
[[Page 105]]
(2) The check is payable to the futures commission merchant carrying
the customer's or option customer's account;
(3) The check is deposited by the introducing broker, on the same
day upon which it is received, in a bank or trust company located in the
United States in a qualifying account, or the check is mailed or
otherwise transmitted by the introducing broker to the futures
commission merchant on the same day upon which it is received;
(4) For purposes of this paragraph (c), a qualifying account shall
be deemed to be an account:
(i) Which is maintained in an account name which clearly identifies
the funds therein as belonging to commodity or option customers of the
futures commission merchant carrying the customer's or option customer's
account;
(ii) For which the bank or trust company restricts withdrawals to
withdrawals by the carrying futures commission merchant;
(iii) For which the bank or trust company prohibits the introducing
broker or anyone acting upon its behalf from withdrawing funds; and
(iv) For which the bank or trust company provides the futures
commission merchant carrying the customer's or option customer's account
with a written acknowledgment, which the futures commission merchant
must retain in its files in accordance with Sec. 1.31, that it was
informed that the funds deposited therein are those of commodity or
option customers and are being held in accordance with the provisions of
the Act and these regulations.
[48 FR 35291, Aug. 3, 1983, as amended at 57 FR 23143, June 2, 1992]
Sec. 1.58 Gross collection of exchange-set margins.
(a) Each futures commission merchant which carries a commodity
futures or commodity option position for another futures commission
merchant or for a foreign broker on an omnibus basis must collect, and
each futures commission merchant and foreign broker for which an omnibus
account is being carried must deposit, initial and maintenance margin on
each position reported in accordance with Sec. 17.04 of this chapter at
a level no less than that established for customer accounts by the rules
of the applicable contract market.
(b) If the futures commission merchant which carries a commodity
futures or commodity option position for another futures commission
merchant or for a foreign broker on an omnibus basis allows a position
to be margined as a spread position or as a hedged position in
accordance with the rules of the applicable contract market, the
carrying futures commission merchant must obtain and retain a written
representation from the futures commission merchant or from the foreign
broker for which the omnibus account is being carried that each such
position is entitled to be so margined.
[61 FR 19187, May 1, 1996]
Sec. 1.59 Activities of self-regulatory organization employees,
governing board members, committee members, and consultants.
(a) Definitions. For purposes of this section:
(1) Self-regulatory organization means ``self-regulatory
organization,'' as defined in Commission regulation 1.3(ee), and
includes the term ``clearing organization,'' as defined in Commission
regulation 1.3(d).
(2) Governing board member means a member, or functional equivalent
thereof, of the board of governors of a self-regulatory organization.
(3) Committee member means a member, or functional equivalent
thereof, of any committee of a self-regulatory organization.
(4) Employee means any person hired or otherwise employed on a
salaried or contract basis by a self-regulatory organization, but does
not include:
(i) Any governing board member compensated by a self-regulatory
organization solely for governing board activities; or
(ii) Any committee member compensated by a self-regulatory
organization solely for committee activities; or
(iii) Any consultant hired by a self-regulatory organization.
(5) Material information means information which, if such
information were publicly known, would be considered important by a
reasonable person in deciding whether to trade a particular
[[Page 106]]
commodity interest on a contract market. As used in this section,
``material information'' includes, but is not limited to, information
relating to present or anticipated cash, futures, or option positions,
trading strategies, the financial condition of members of self-
regulatory organizations or members of linked exchanges or their
customers or option customers, or the regulatory actions or proposed
regulatory actions of a self-regulatory organization or a linked
exchange.
(6) Non-public information means information which has not been
disseminated in a manner which makes it generally available to the
trading public.
(7) Linked exchange means: (i) any board of trade, exchange or
market outside the United States, its territories or possessions, which
has an agreement with a contract market in the United States that
permits positions in a commodity interest which have been established on
one of the two markets to be liquidated on the other market; (ii) any
board of trade, exchange or market outside the United States, its
territories or possessions, the products of which are listed on a United
States contract market or a trading facility thereof; (iii) any
securities exchange, the products of which are held as margin in a
commodity account or cleared by a securities clearing organization
pursuant to a cross-margining arrangement with a futures clearing
organization; or (iv) any clearing organization which clears the
products of any of the foregoing markets.
(8) Commodity interest means any commodity futures or commodity
option contract traded on or subject to the rules of a contract market
or linked exchange, or cash commodities traded on or subject to the
rules of a board of trade which has been designated as a contract
market.
(9) Related commodity interest means any commodity interest which is
traded on or subject to the rules of a contract market, linked exchange,
or other board of trade, exchange or market, other than the self-
regulatory organization by which a person is employed, and with respect
to which:
(i) Such employing self-regulatory organization has recognized or
established intermarket spread margins or other special margin treatment
between that other commodity interest and a commodity interest which is
traded on or subject to the rules of the employing self-regulatory
organization; or
(ii) Such other self-regulatory organization has recognized or
established intermarket spread margins or other special margin treatment
with another commodity interest as to which the person has access to
material, nonpublic information.
(10) Pooled investment vehicle means a trading vehicle organized and
operated as a commodity pool within regulation 4.10(d), and whose units
of participation have been registered under the Securities Act of 1933,
or a trading vehicle for which regulation 4.5 makes available relief
from regulation as a commodity pool operator, i.e., registered
investment companies, insurance company separate accounts, bank trust
funds, and certain pension plans.
(b) Employees of self-regulatory organizations; Self-regulatory
organization rules. (1) Each self-regulatory organization must maintain
in effect rules which have been submitted to the Commission pursuant to
Section 5a(a)(12)(A) of the Act and Sec. 1.41 (or, pursuant to section
17(j) of the Act in the case of a registered futures association) that,
at a minimum, prohibit:
(i) Employees of the self-regulatory organization from:
(A) Trading, directly or indirectly, in any commodity interest
traded on or cleared by the employing contract market or clearing
organization;
(B) Trading, directly or indirectly, in any related commodity
interest;
(C) Trading, directly or indirectly, in a commodity interest traded
on or cleared by contract markets or clearing organizations other than
the employing self-regulatory organization if the employee has access to
material, non-public information concerning such commodity interest;
(D) Trading, directly or indirectly, in a commodity interest traded
on or cleared by a linked exchange if the employee has access to
material, non-public information concerning such commodity interest; and
(ii) Employees of the self-regulatory organization from disclosing
to any
[[Page 107]]
other person any material, non-public information which such employee
obtains as a result of his or her employment at the self-regulatory
organization where such employee has or should have a reasonable
expectation that the information disclosed may assist another person in
trading any commodity interest; Provided, however, That such rules shall
not prohibit disclosures made in the course of an employee's duties, or
disclosures made to another self-regulatory organization, linked
exchange, court of competent jurisdiction or representative of any
agency or department of the federal or state government acting in his or
her official capacity.
(2) Each self-regulatory organization may adopt rules, which must be
submitted to the Commission pursuant to section 5a(a)(12)(A) of the Act
and Commission regulation 1.41 (or, pursuant to section 17(j) of the Act
in the case of a registered futures association), which set forth
circumstances under which exemptions from the trading prohibition
contained in paragraph (b)(1)(i) of this section may be granted; such
exemptions are to be administered by the self-regulatory organization on
a case-by-case basis. Specifically, such circumstances may include:
(i) Participation by an employee in pooled investment vehicles where
the employee has no direct or indirect control with respect to
transactions executed for or on behalf of such vehicles; and
(ii) Trading by an employee under circumstances enumerated by the
self-regulatory organization in rules which the self-regulatory
organization determines are not contrary to the purposes of this
regulation, the Commodity Exchange Act, the public interest, or just and
equitable principles of trade.
(c) Governing board members, committee members, and consultants;
Self-regulatory organization rules. Each self-regulatory organization
must maintain in effect rules which have been submitted to the
Commission pursuant to Section 5a(a)(12)(A) of the Act and Sec. 1.41
(or, pursuant to Section 17(j) of the Act in the case of a registered
futures association) which provide that no governing board member,
committee member, or consultant shall use or disclose--for any purpose
other than the performance of official duties as a governing board
member, committee member, or consultant--material, non-public
information obtained as a result of the performance of such person's
official duties.
(d) Prohibited conduct. (1) No employee, governing board member,
committee member, or consultant shall:
(i) Trade for such person's own account, or for or on behalf of any
other account, in any commodity interest, on the basis of any material,
non-public information obtained through special access related to the
performance of such person's official duties as an employee, governing
board member, committee member, or consultant; or
(ii) Disclose for any purpose inconsistent with the performance of
such person's official duties as an employee, governing board member,
committee member, or consultant any material, non-public information
obtained through special access related to the performance of such
duties.
(2) No person shall trade for such person's own account, or for or
on behalf of any other account, in any commodity interest, on the basis
of any material, non-public information that such person knows was
obtained in violation of paragraph (d)(1) of this section from an
employee, governing board member, committee member, or consultant.
[58 FR 54973, Oct. 25, 1993, as amended at 65 FR 47847, Aug. 4, 2000]
Sec. 1.60 Pending legal proceedings.
(a) Every contract market shall submit to the Commission copies of
the complaint, any dispositive or partially dispositive decision, any
notice of appeal filed concerning such decisions and such further
documents as the Commission may thereafter request filed in any material
legal proceeding to which the contract market is a party or its property
or assets is subject.
(b) Every futures commission merchant shall sumit to the Commission
copies of any dispositive or partially dispositive decision for which a
notice of appeal has been filed, the notice of appeal and such further
documents as
[[Page 108]]
the Commission may thereafter request filed in any material legal
proceeding to which the futures commission merchant is a party or its
property or assets is subjects.
(c) Every contract market shall submit to the Commission copies of
the complaint, any dispositive or partially dispositive decision, any
notice of appeal filed concerning such decisions and such further
documents as the Commission may thereafter request filed in any material
legal proceeding instituted against any officer, director, or other
official of the contract market arising from conduct in such person's
capacity as a contract market official and alleging violations of:
(1) The act or any rule, regulation, or order thereunder;
(2) the constitution, bylaws or rules of the contract market; or
(3) the applicable provisions of state law relating to the duties of
officers, directors, or other officials of business organizations.
(d) Every futures commission merchant shall submit to the Commission
copies of any dispositive or partially dispositive decision concerning
which a notice of appeal has been filed, the notice of appeal, and such
further documents as the Commission may thereafter request filed in any
material legal proceeding instituted against any person who is a
principal of the futures commission merchant (as that term is defined in
Sec. 3.1(a) of this chapter) arising from conduct in such person's
capacity as a principal of the futures commission merchant and alleging
violations of: (1) The Act or any rule, regulation, or order thereunder;
or (2) provisions of state law relating to a duty or obligation owed by
such a principal.
(e) All documents required by this section to be submitted to the
Commission shall be mailed via first-class or submitted by other more
expeditious means to the Commission's headquarters office in Washington,
DC, Attention: Office of the General Counsel. All documents required by
this section to be submitted to the Commission as to matters pending on
the effective date of the section (May 25, 1984), shall be mailed to the
Commission within 45 days of that effective date. Thereafter, all
complaints required by this section to be submitted to the Commission by
contract markets shall be mailed to the Commission within 10 days after
the initiation of the legal proceedings to which they relate, all
decisions required to be submitted by contract markets shall be mailed
within 10 days of their date of issuance, all notices of appeal required
to be submitted by contract markets shall be mailed within 10 days of
the filing or receipt by the contract market of the notice of appeal,
and all decisions and notices of appeal required to be submitted by
futures commission merchants shall be mailed within 10 days of the
filing or receipt by the futures commission merchant of the relevant
notice of appeal. For purposes of paragraph (a), (b), (c) and (d) of
this rule, a ``material legal proceeding'' includes but is not limited
to actions involving alleged violations of the Commodity Exchange Act or
the Commission's regulations. However, a legal proceeding is not
``material'' for the purposes of this rule if the proceeding is not in a
federal or state court or if the Commission is a party.
[49 FR 17750, Apr. 25, 1984]
Sec. 1.61 [Reserved]
Sec. 1.62 Contract market requirement for floor broker and floor
trader registration.
(a)(1) Each contract market shall adopt, maintain in effect, and
enforce rules which have become effective pursuant to section
5a(a)(12)(A) of the Act and Sec. 1.41 and which provide that no person
in or surrounding any pit, ring, post, or other place provided by such
contract market for the meeting of persons similarly engaged may:
(i) Purchase or sell for any other person any commodity for future
delivery, or any commodity option, on or subject to the rules of that
contract market, unless such person is registered or has been granted a
temporary license as a floor broker; or
(ii) Purchase or sell solely for such person's own account, any
commodity for future delivery, or any commodity option, on or subject to
the rules of that contract market, unless such person is registered or
has been granted a temporary license as a floor trader, or has been
granted a temporary license
[[Page 109]]
as a floor broker to act as a floor trader, in accordance with section
4f of the Act and Sec. 3.11 or Sec. 3.40 of this chapter, and such
temporary license or registration has not been terminated, revoked or
withdrawn: Provided, however, That such contract market rules must
provide that a floor broker or floor trader will be prohibited from
engaging in activities requiring registration under the Act or from
representing himself to be a registrant under the Act or the
representative or agent of any registrant during the pendency of any
suspension of such person's registration or the suspension by a contract
market of access of such person to any pit, ring, post or other place
provided by such contract market for the meeting of persons engaged in
purchasing and selling any commodity for future delivery or commodity
option on or subject to the rules of that contract market.
(2) Each contract market shall also adopt, maintain in effect and
enforce rules which have become effective pursuant to section
5a(a)(12)(A) of the Act and Sec. 1.41 which provide for requests for
withdrawal of floor broker or floor trader registration using Form 8-W
in accordance with Sec. 3.33 of this chapter, which require training of
floor brokers and floor traders in accordance with Sec. 3.34 of this
chapter and which require review of registration information by floor
brokers and by floor traders every three years in accordance with Sec.
3.11(d) of this chapter.
(b) Each contract market must notify the Commission of any facts
regarding a floor broker or floor trader or an applicant for
registration as a floor broker or floor trader, or a floor trader whose
name appears on a list submitted in accordance with Sec. 1.66 in order
to qualify for a temporary no-action position thereunder, who has been
granted trading privileges at the contract market, which are set forth
as statutory disqualifications in section 8a(2) of the Act (unless such
facts result from an enforcement action filed by the Commission or a
disciplinary action taken by another contract market) or which are
terminations of floor trading privileges for cause under Sec. 9.11(c)
of this chapter within ten business days of the date upon which the
contract market first knows of such facts. Notice to the Commission
shall be sufficient if the contract market gives notice to the Director
of the Division of Clearing and Intermediary Oversight or the Director's
designee by facsimile transmission and/or first class mail or equivalent
means to the Commission at its Washington, DC office (Attn: Division of
Clearing and Intermediary Oversight, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581).
[58 FR 19589, Apr. 15, 1993; 59 FR 5700, Feb. 8, 1994, as amended at 60
FR 49334, Sept. 25, 1995; 67 FR 62351, Oct. 7, 2002]
Sec. 1.63 Service on self-regulatory organization governing boards
or committees by persons with disciplinary histories.
(a) Definitions. For purposes of this section:
(1) Self-regulatory organization means a ``self-regulatory
organization'' as defined in Commission regulation 1.3(ee) (Sec.
1.3(ee)), and includes a ``clearing organization'' as defined in
Commission regulation 1.3(d) (Sec. 1.3(d)), except as defined in
paragraph (b)(6) of this section.
(2) Disciplinary committee means any person or committee of persons,
or any subcommittee thereof, that is authorized by a self-regulatory
organization to issue disciplinary charges, to conduct disciplinary
proceedings, to settle disciplinary charges, to impose disciplinary
sanctions or to hear appeals thereof.
(3) Arbitration panel means any person or panel empowered by a self-
regulatory organization to arbitrate disputes involving such
organization's members or their customers.
(4) Oversight panel means any panel authorized by a self-regulatory
organization to review, recommend or establish policies or procedures
with respect to the self-regulatory organization's surveillance,
compliance, rule enforcement or disciplinary responsibilities.
(5) Final decision means:
(i) A decision of a self-regulatory organization which cannot be
further appealed within the self-regulatory organization, is not subject
to the stay of the Commission or a court of competent jurisdiction, and
has not been
[[Page 110]]
reversed by the Commission or any court of competent jurisdiction; or,
(ii) Any decision by an administrative law judge, a court of
competent jurisdiction or the Commission which has not been stayed or
reversed.
(6) Disciplinary offense means:
(i) Any violation of the rules of a self-regulatory organization
except those rules related to
(A) Decorum or attire,
(B) Financial requirements, or
(C) Reporting or recordkeeping unless resulting in fines aggregating
more than $5,000 within any calendar year;
(ii) Any rule violation described in subparagraphs (a)(6)(i) (A)
through (C) of this regulation which involves fraud, deceit or
conversion or results in a suspension or expulsion;
(iii) Any violation of the Act or the regulations promulgated
thereunder; or,
(iv) Any failure to exercise supervisory responsibility with respect
to acts described in paragraphs (a)(6) (i) through (iii) of this section
when such failure is itself a violation of either the rules of a self-
regulatory organization, the Act or the regulations promulgated
thereunder.
(v) A disciplinary offense must arise out of a proceeding or action
which is brought by a self-regulatory organization, the Commission, any
federal or state agency, or other governmental body.
(7) Settlement agreement means any agreement consenting to the
imposition of sanctions by a self-regulatory organization, a court of
competent jurisdiction or the Commission.
(b) Each self-regulatory organization must maintain in effect rules
which have been submitted to the Commission pursuant to section
5a(a)(12)(A) of the Act and Sec. 1.41 or, in the case of a registered
futures association, pursuant to section 17(j) of the Act, that render a
person ineligible to serve on its disciplinary committees, arbitration
panels, oversight panels or governing board who:
(1) Was found within the prior three years by a final decision of a
self-regulatory organization, an administrative law judge, a court of
competent jurisdiction or the Commission to have committed a
disciplinary offense;
(2) Entered into a settlement agreement within the prior three years
in which any of the findings or, in the absence of such findings, any of
the acts charged included a disciplinary offense;
(3) Currently is suspended from trading on any contract market, is
suspended or expelled from membership with any self-regulatory
organization, is serving any sentence of probation or owes any portion
of a fine imposed pursuant to either:
(i) A finding by a final decision of a self-regulatory organization,
an administrative law judge, a court of competent jurisdiction or the
Commission that such person committed a disciplinary offense; or,
(ii) A settlement agreement in which any of the findings or, in the
absence of such findings, any of the acts charged included a
disciplinary offense.
(4) Currently is subject to an agreement with the Commission or any
self-regulatory organization not to apply for registration with the
Commission or membership in any self-regulatory organization;
(5) Currently is subject to or has had imposed on him within the
prior three years a Commission registration revocation or suspension in
any capacity for any reason, or has been convicted within the prior
three years of any of the felonies listed in section 8a(2)(D) (ii)
through (iv) of the Act;
(6) Currently is subject to a denial, suspension or disqualification
from serving on the disciplinary committee, arbitration panel or
governing board of any self-regulatory organization as that term is
defined in section 3(a)(26) of the Securities Exchange Act of 1934.
(c) No person may serve on a disciplinary committee, arbitration
panel, oversight panel or governing board of a self-regulatory
organization if such person is subject to any of the conditions listed
in paragraphs (b) (1) through (6) of this section.
(d) Each self-regulatory organization shall submit to the Commission
a schedule listing all those rule violations which constitute
disciplinary offenses as defined in paragraph (a)(6) (i) of this section
and to the extent necessary to reflect revisions shall submit an amended
schedule within thirty days of the end of each calendar year.
[[Page 111]]
Each self-regulatory organization must maintain and keep current the
schedule required by this section, post the schedule in a public place
designed to provide notice to members and otherwise ensure its
availability to the general public.
(e) Each self-regulatory organization shall submit to the Commission
within thirty days of the end of each calendar year a certified list of
any persons who have been removed from its disciplinary committees,
arbitration panels, oversight panels or governing board pursuant to the
requirements of this regulation during the prior year.
(f) Whenever a self-regulatory organization finds by final decision
that a person has committed a disciplinary offense and such finding
makes such person ineligible to serve on that self-regulatory
organization's disciplinary committees, arbitration panels, oversight
panels or governing board, the self-regulatory organization shall inform
the Commission of that finding and the length of the ineligibility in
any notice it is required to provide to the Commission pursuant to
either section 17(h)(1) of the Act or Commission regulation 9.11.
[55 FR 7890, Mar. 6, 1990, as amended at 58 FR 37653, July 13, 1993; 64
FR 23, Jan. 4, 1999]
Sec. 1.64 Composition of various self-regulatory organization governing
boards and major disciplinary committees.
(a) Definitions. For purposes of this section:
(1) Self-regulatory organization means ``self-regulatory
organization'' as defined in Sec. 1.3(ee), not including a ``clearing
organization'' as defined in Sec. 1.3(d).
(2) Major disciplinary committee means a committee of persons who
are authorized by a self-regulatory organization to conduct disciplinary
hearings, to settle disciplinary charges, to impose disciplinary
sanctions or to hear appeals thereof in cases involving any violation of
the rules of the self-regulatory organization except those which:
(i) Are related to:
(A) Decorum or attire,
(B) Financial requirements, or
(C) Reporting or recordkeeping; and,
(ii) Do not involve fraud, deceit or conversion.
(3) Regular voting member of a governing board means any person who
is eligible to vote routinely on matters being considered by the board
and excludes those members who are only eligible to vote in the case of
a tie vote by the board.
(4) Membership interest (i) In the case of a contract market, each
of the following will be considered a different membership interest:
(A) Floor brokers,
(B) Floor traders,
(C) Futures commission merchants,
(D) Producers, consumers, processors, distributors, and
merchandisers of commodities traded on the particular contract market,
(E) Participants in a variety of pits or principal groups of
commodities traded on the particular contract market; and,
(F) Other market users or participants; except that with respect to
paragraph (c)(2) of this section, a contract market may define
membership interests according to the different pits or principal groups
of commodities traded on the contract market.
(ii) In the case of a registered futures association, each of the
following will be considered a different membership interest:
(A) Futures commission merchants,
(B) Introducing brokers,
(C) Commodity pool operators,
(D) Commodity trading advisors; and,
(E) Associated persons, except that under paragraph (c)(3) of this
section an associated person will be deemed to represent the same
membership interest as its sponsor.
(b) Each self-regulatory organization must maintain in effect
standards and procedures with respect to its governing board which have
been submitted to the Commission pursuant to section 5a(a)(12)(A) of the
Act and Sec. 1.41 or, when applicable to a registered futures
association, pursuant to section 17(j) of the Act, that ensure:
(1) That twenty percent or more of the regular voting members of the
board are persons who:
[[Page 112]]
(i) Are knowledgeable of futures trading or financial regulation or
are otherwise capable of contributing to governing board deliberations;
and,
(ii) (A) Are not members of the self-regulatory organization,
(B) Are not currently salaried employees of the self-regulatory
organization,
(C) Are not primarily performing services for the self-regulatory
organization in a capacity other than as a member of the self-regulatory
organization's governing board, or
(D) Are not officers, principals or employees of a firm which holds
a membership at the self-regulatory organization either in its own name
or through an employee on behalf of the firm;
(2) In the case of a contract market, that ten percent or more of
the regular voting members of the governing board be comprised where
applicable of persons representing farmers, producers, merchants or
exporters of principal commodities underlying a commodity futures or
commodity option traded on the contract market; and
(3) That the board's membership includes a diversity of membership
interests. The self-regulatory organization must be able to demonstrate
that the board membership fairly represents the diversity of interests
at such self-regulatory organization and is otherwise consistent with
this regulation's composition requirements;
(c) Each self-regulatory organization must maintain in effect rules
with respect to its major disciplinary committees which have been
submitted to the Commission pursuant to section 5a(a)(12)(A) of the Act
and Sec. 1.41 or, when applicable to a registered futures association,
pursuant to section 17(j) of the Act, that ensure:
(1) That at least one member of each major disciplinary committee or
hearing panel thereof be a person who is not a member of the self-
regulatory organization whenever such committee or panel is acting with
respect to a disciplinary action in which:
(i) The subject of the action is a member of the self-regulatory
organization's:
(A) Governing board, or
(B) Major disciplinary committee; or,
(ii) Any of the charged, alleged or adjudicated contract market rule
violations involve:
(A) Manipulation or attempted manipulation of the price of a
commodity, a futures contract or an option on a futures contract, or
(B) Conduct which directly results in financial harm to a non-member
of the contract market;
(2) In the case of a contract market, that more than fifty percent
of each major disciplinary committee or hearing panel thereof include
persons representing membership interests other than that of the subject
of the disciplinary proceeding being considered;
(3) In the case of a registered futures association, that each major
disciplinary committee or hearing panel thereof include persons
representing membership interests other than that of the subject of the
disciplinary proceeding being considered; and,
(4) That each major disciplinary committee or hearing panel thereof
include sufficient different membership interests so as to ensure
fairness and to prevent special treatment or preference for any person
in the conduct of a committee's or the panel's responsibilities.
(d) Each self-regulatory organization must submit to the Commission
within thirty days after each governing board election a list of the
governing board's members, the membership interests they represent and
how the composition of the governing board otherwise meets the
requirements of Sec. 1.64(b) and the self-regulatory organization's
implementing standards and procedures.
[58 FR 37654, July 13, 1993; 59 FR 5082, Feb. 3, 1994]
Sec. 1.65 Notice of bulk transfers and disclosure obligations to
customers.
(a) Notice and Disclosure to Customers. (1) Prior to transferring a
customer account to another futures commission merchant or introducing
broker other than at the request of the customer, a futures commission
merchant or introducing broker must obtain the customer's specific
consent to the transfer.
(2) If the customer account agreement contains a valid consent by
the customer to prospective transfers of the account, the transferor
futures
[[Page 113]]
commission merchant or introducing broker may transfer the account if
the customer is provided with written notice of, and a reasonable
opportunity to object to, the transfer and the customer has not asserted
an objection to the transfer or given other instructions as to the
disposition of the account. The notice to the customer must include:
(i) A clear statement of the reason(s) for the transfer, the name,
address and telephone number of the proposed transferee firm and other
information material to the transfer;
(ii) A statement that the customer is not required to accept the
proposed transfer and may direct the transfer or firm to liquidate the
account or ransfer the account to a firm of the customer's selection;
(iii) The name, telephone number and address of a contact person at
the transferor firm to whom the customer may give instructions as to the
disposition of the account;
(iv) Notice that a failure to respond to the letter within a
specified time period, which must be a reasonable period in the
circumstances, will be deemed consent to the transfer; and
(v) A clear statement as to the means by which the customer may
object to or otherwise respond to the notice of proposed transfer.
(3) Where customer accounts are transferred to a futures commission
merchant or introducing broker, other than at the customer's request,
the transferee introducing broker or futures commission merchant must
provide each customer whose account is transferred with the risk
disclosure statements and acknowledgments required by Sec. 1.55
(domestic futures and foreign futures and options trading), and
Sec. Sec. 33.7 (domestic exchange-traded commodity options) and
190.10(c) (non-cash margin--to be furnished by futures commission
merchants only) of this chapter and receive the required acknowledgments
within sixty days of the transfer of accounts. This requirement shall
not apply:
(i) As to customers owning transferred accounts for which the
transferee futures commission merchant or introducing broker has clear
written evidence that the customer has received and acknowledged the
required disclosure documents; or
(ii) As to customers for which the transferee futures commission
merchant or introducing broker has clear evidence that such customer was
at the time the account was opened by the transferring futures
commission merchant or introducing broker, or is at the time the account
is being transferred, a customer listed in Sec. 1.55(f); or
(iii) If the transfer of accounts is made from one introducing
broker to another introducing broker guaranteed by the same futures
commission merchant pursuant to a guarantee agreement in accordance with
the requirements of Sec. 1.10(j) and such futures commission merchant
maintains the relevant acknowledgments required by Sec. 1.55(a)(1)(ii)
and Sec. 33.7(a)(1)(ii) of this chapter and can establish compliance
with Sec. 190.10(c) of this chapter.
(b) Notice to the Commission. Each futures commission merchant or
introducing broker shall file with the Commission, at least five
business days in advance of the transfer, notice of any transfer of
customer accounts carried or introduced by such futures commission
merchant or introducing broker that is not initiated at the request of
the customer, where the transfer involves the lesser of:
(1) 25 percent of the total number of customer accounts carried or
introduced by such firm if that percentage represents at least 100
accounts; or
(2) 50 percent or more of the total number of customer accounts
carried or introduced by such firm. The computation of the percentage
and number of accounts must be based on the total number of accounts
carried by the transferor futures commission merchant or introduced by
the introducing broker, irrespective of whether such accounts are
transferred to a single or multiple transferees.
(c) The notice required by paragraph (b) of this section shall
include:
(1) The name, principal business address and telephone number of the
transferor futures commission merchant or introducing broker;
(2) The name, principal business address and telephone number of
each transferee futures commission merchant or introducing broker;
[[Page 114]]
(3) The designated self-regulatory organization for the transferor
and transferee firms;
(4) A brief statement as to the reasons for the transfer;
(5) A copy of the notice to customers informing them of the proposed
transfer and providing an opportunity to object to such transfer; and
(6) A statement of the number of accounts to be transferred and the
estimated liquidating equity of the accounts to be transferred.
(d) The notice required by paragraph (b) of this section shall be
filed with the Deputy Director, Compliance and Registration Section,
Division of Clearing and Intermediary Oversight, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581; the National Futures Association Attn: Vice
President-Compliance; and the designated self-regulatory organization
for the transferor firm.
(e) In the event that the notice required by paragraph (b) of this
section cannot be filed with the Commission at least five days prior to
the account transfer, the transferee futures commission merchant or
introducing broker shall file such notice as soon as practicable and no
later than the day of the transfer. Such notice shall include a brief
statement explaining the circumstances necessitating the delay in
filing.
(f) The requirements of this section shall not affect the
obligations of a futures commission merchant or introducing broker under
the rules of a self-regulatory organization or applicable customer
account agreement with respect to transfer of accounts.
(g) If a proposed transfer is not completed in accordance with the
notice required to be filed by paragraph (b) of this section, a
corrective notice shall be filed within five business days of the date
such proposed transfer was to occur explaining why the proposed transfer
was not completed.
[58 FR 17504, Apr. 5, 1993, as amended at 60 FR 49334, Sept. 25, 1995;
63 FR 8571, Feb. 20, 1998; 67 FR 62351, Oct. 7, 2002]
Sec. 1.66 No-action positions with respect to floor traders.
(a) Notwithstanding any other provision of law, if a contract market
submits to the National Futures Association by April 26, 1993 a list of
floor traders who were granted trading privileges on that contract
market on or before April 26, 1993, and whose floor trading privileges
remain in effect, which includes the name, date of birth and social
security number of such floor traders, as well as facts regarding such
floor traders which are set forth as statutory disqualifications in
section 8a(2) of the Act if the contract market knows of such facts, and
such list is signed by the chief operating officer of the contract
market, the Commission will not commence an enforcement proceeding
against a floor trader on that list based solely upon the floor trader's
failure to register or receive a temporary license under section 4f of
the Act and Sec. 3.11 of this chapter, nor will the Commission commence
an enforcement proceeding against the contract market under Sec. 1.62
for failing to bar such floor trader from operating as such: Provided,
however, That for those floor traders listed as to whom the contract
market knows of facts set forth as statutory disqualifications in
section 8a(2) of the Act, the no-action position contained in paragraph
(a) of this section will only apply if the contract market submits a
supplemental statement signed by the chief operating officer of the
contract market stating that, in light of the Congressional mandate
requiring registration of floor traders under the Act, the contract
market acknowledges its responsibility to take affirmative action to
conduct appropriate surveillance of such floor traders. These no-action
positions shall expire upon the floor's trader being granted or denied
registration under the Act, or on June 11, 1993, whichever comes
earliest: Provided, however, That if the floor trader files an
application for registration in accordance with Sec. 3.11 of this
chapter with the National Futures Association by June 11, 1993, the no-
action positions for the floor trader and the contract market as to the
registration of such floor trader will be extended until the floor
trader is granted or denied
[[Page 115]]
registration under the Act, unless an Administrative Law Judge issues an
interim order suspending the no-action position as to such floor trader
in accordance with paragraph (b) of this section or the application for
registration is withdrawn.
(b) Suspension of no-action position under paragraph (a) of this
section pursuant to section 8a(2) of the Act--(1) Notice. On the basis
of information obtained by the Commission, the Commission may at any
time serve notice upon a floor trader whose name appears on a list
submitted in accordance with paragraph (a) of this section that:
(i) The Commission alleges and is prepared to prove that such floor
trader is subject to one or more of the statutory disqualifications set
forth in section 8a(2) of the Act;
(ii) An Administrative Law Judge shall make a determination, based
upon written evidence, as to whether the floor trader is subject to such
statutory disqualification; and
(iii) If the floor trader is found to be subject to a statutory
disqualification, the no-action status of the floor trader under
paragraph (a) of this section may be suspended and the floor trader
ordered to show cause why registration should not be denied.
(2) Written submission. If the floor trader wishes to challenge the
accuracy of the allegations set forth in the notice, the floor trader
may submit written evidence limited to the type described in Sec.
3.60(b)(1) of this chapter. Such written submission must be served upon
the Division of Enforcement and filed with the Proceedings Clerk within
twenty days of the date of service of notice to the floor trader.
(3) Reply. Within ten days of receipt of any written submission
filed by the floor trader, the Division of Enforcement may serve upon
the floor trader and file with the Proceedings Clerk a reply.
(4) Determination by Administrative Law Judge. A determination by
the Administrative Law Judge as to whether the floor trader is subject
to a statutory disqualification must be based upon the evidence of the
statutory disqualification, notice with proof of service, the written
submission, if any, filed by the floor trader in response thereto, any
written reply submitted by the Division of Enforcement and such other
papers as the Administrative Law Judge may require or permit.
(5) Suspension and order to show cause. (i) If the floor trader is
found to be subject to a statutory disqualification, the Administrative
Law Judge, within thirty days after receipt of the floor trader's
written submission, if any, and any reply thereto, shall issue an
interim order suspending the no-action status of the floor trader under
paragraph (a) of this section and requiring the floor trader to show
cause within twenty days of the date of the order why, notwithstanding
the existence of the statutory disqualification, the registration of the
floor trader should not be denied. The no-action status of the floor
trader shall be suspended, effective five days after the order to show
cause is served upon the floor trader in accordance with Sec. 3.50(a)
of this chapter, until a final order with respect to the order to show
cause has been issued: Provided, That if the sole basis upon which the
floor trader is subject to statutory disqualification is the existence
of a temporary order, judgment or decree of the type described in
section 8a(2)(C) of the Act, the order to show cause shall not be issued
and the floor trader shall be suspended until such time as the temporary
order, judgment or decree shall have expired: Provided, however, That in
no event shall the floor trader's no-action status be suspended for a
period to exceed six months.
(ii) If the floor trader is found not to be subject to a statutory
disqualification, the Administrative Law Judge shall issue an order to
that effect and the Proceedings Clerk shall promptly serve a copy of
such order on the floor trader, the Division of Clearing and
Intermediary Oversight and the Division of Enforcement. Such order shall
be effective as a final order of the Commission fifteen days after the
date it is served upon the floor trader in accordance with the
provisions of Sec. 3.50(a) of this chapter unless a timely application
for review is filed in accordance with Sec. 10.102 of this chapter. The
appellate procedures set forth in Sec. Sec. 10.102, 10.103, 10.104,
10.106, 10.107 and 10.109 of this chapter shall apply to any appeal
[[Page 116]]
brought under paragraph (c)(5)(ii) of this section.
(6) Further proceedings. If an order to show cause is issued
pursuant to paragraph (c)(5)(i) of this section, further proceedings on
such order shall be conducted in accordance with the provisions of Sec.
3.60(b) through (j) of this chapter.
[58 FR 19589, Apr. 15, 1993; 58 FR 21776, Apr. 23, 1993, as amended at
60 FR 54801, Oct. 26, 1995; 67 FR 62351, Oct. 7, 2002]
Sec. 1.67 Notification of final disciplinary action involving
financial harm to a customer.
(a) Definitions. For purposes of this section:
(1) Final disciplinary action means any decision by or settlement
with a contract market in a disciplinary matter which cannot be further
appealed at the contract market, is not subject to the stay of the
Commission or a court of competent jurisdiction, and has not been
reversed by the Commission or any court of competent jurisdiction.
(2) [Reserved]
(b) Upon any final disciplinary action in which a contract market
finds that a member has committed a rule violation that involved a
transaction for a customer, whether executed or not, and that resulted
in financial harm to the customer:
(1)(i) the contract market shall promptly provide written notice of
the disciplinary action to the futures commission merchant that cleared
the transaction; and,
(ii) a futures commission merchant that receives a notice, under
paragraph (b)(1)(i) of this section shall promptly provide written
notice of the disciplinary action to the customer as disclosed on its
books and records. If the customer is another futures commission
merchant, such futures commission merchant shall promptly provide the
notice to the customer.
(2) A written notice required by paragraph (b)(1) of this section
must include the principal facts of the disciplinary action and a
statement that the contract market has found that the member has
committed a rule violation that involved a transaction for the customer,
whether executed or not, and that resulted in financial harm to the
customer. For the purposes of this paragraph, a notice which includes
the information listed in Sec. 9.11(b) shall be deemed to include the
principal facts of the disciplinary action thereof.
[58 FR 37655, July 13, 1993]
Sec. 1.68 Customer election not to have funds, carried by a futures
commission merchant for trading on a registered derivatives
transaction execution facility, separately accounted for and segregated.
(a) A futures commission merchant shall not separately account for
and segregate, in accordance with the provisions of section 4d of the
Act and Sec. Sec. 1.20-1.30, 1.32 and 1.36, funds received from a
customer if:
(1) The customer is an eligible contract participant as defined in
section 1a(12) of the Act;
(2) The customer's funds are being carried by the futures commission
merchant for the purpose of trading on or through the facilities of a
derivatives transaction execution facility registered under section
5a(c) of the Act;
(3) The registered derivatives transaction execution facility has
authorized, in accordance with Sec. 37.7 of this chapter, futures
commission merchants to offer eligible contract participants the right
to elect not to have funds that are being carried for purposes of
trading on or through the facilities of the registered derivatives
transaction execution facility, separately accounted for and segregated
by the futures commission merchant; and
(4) The futures commission merchant and the customer have entered
into a written agreement, signed by a person with the authority to bind
the customer, in which the customer:
(i) Represents and warrants that the customer is an eligible
contract participant as defined in section 1a(12) of the Act;
(ii) Elects not to have its funds separately accounted for and
segregated in accordance with the provisions of section 4d of the Act
and Sec. Sec. 1.20-1.30, 1.32 and 1.36 with respect to agreements,
contracts or transactions traded on or subject to the rules of any
registered derivatives transaction execution facility that has
authorized such treatment
[[Page 117]]
in accordance with Sec. 37.7 of this chapter;
(iii) Acknowledges that it has been informed, and by making this
election agrees that:
(A) The customer's funds, related to agreements, contracts or
transactions on any registered derivatives transaction execution
facility that authorizes the opting out of segregation will not be
segregated from the funds of the futures commission merchant in
accordance with the provisions of section 4d of the Act and Sec. Sec.
1.20-1.30, 1.32 and 1.36;
(B) The futures commission merchant may use such funds in the course
of the futures commission merchant's business without the prior consent
of the customer or any third party;
(C) In the event the futures commission merchant files, or has a
petition filed against it, for bankruptcy, the customer, as to those
funds that the customer has elected not to have separately accounted for
and segregated by the futures commission merchant in accordance with the
provisions of section 4d of the Act and Sec. Sec. 1.20-1.30, 1.32 and
1.36, will not be entitled to the priority for customer claims provided
for under the Bankruptcy Code and part 190 of this chapter;
(D) The customer may not retain a security interest in assets
excluded from segregation in accordance with this section;
(E) The customer may not enter into any agreement or other
understanding with the futures commission merchant relating to the
manner in which the customer's assets will be held at the futures
commission merchant, that directly or indirectly gives the customer a
priority in bankruptcy that is equal or superior to the priority
afforded public customers under the Bankruptcy Code and part 190 of this
chapter; and
(iv) Acknowledges that the agreement shall remain in effect unless
and until the customer abrogates the agreement in accordance with
paragraph (c) of this section.
(b) In no event may money, securities or property representing those
funds that customers have elected not to have separately accounted for
and segregated by the futures commission merchant, in accordance with
this section, be held or commingled and deposited with customer funds in
the same account or accounts required to be separately accounted for and
segregated pursuant to section 4d of the Act and Sec. Sec. 1.20-1.30,
1.32 and 1.36.
(c)(1) A customer that has entered into an agreement in accordance
with paragraph (a)(4) of this section may abrogate that agreement by so
informing the futures commission merchant in writing, signed by a person
with the authority to bind the customer. The effective date of the
abrogation shall not exceed five business days from the futures
commission merchant's receipt of the customer's abrogation. The
abrogation shall not become effective if the futures commission merchant
files, or has had filed against it, a petition for bankruptcy prior to
the effective date of the abrogation.
(2) Upon the effective date of the abrogation, permitted under
paragraph (c)(1) of this section, provided that the customer's positions
in the non-segregated account are fully margined and the customer is not
in default with respect to any of its obligations to the futures
commission merchant arising out of agreements, contracts or transactions
entered on, or subject to the rules of, a registered entity, as defined
in section 1a(29) of the Act, the futures commission merchant shall
transfer to a customer segregated account:
(i) All trades or positions of the customer with respect to which
the customer had previously elected to opt out of segregation; and
(ii) All money, securities, or property held in such account to
margin, guarantee or secure such trades or positions.
(d) Each futures commission merchant shall maintain any agreements
entered into with customers pursuant to paragraph (a) of this section
and any abrogations of such agreements, made pursuant to paragraph (c)
of this section, in accordance with Sec. 1.31.
[66 FR 20744, Apr. 25, 2001]
[[Page 118]]
Sec. 1.69 Voting by interested members of self-regulatory organization
governing boards and various committees.
(a) Definitions. For purposes of this section:
(1) Disciplinary committee means any person or committee of persons,
or any subcommittee thereof, that is authorized by a self-regulatory
organization to issue disciplinary charges, to conduct disciplinary
proceedings, to settle disciplinary charges, to impose disciplinary
sanctions, or to hear appeals thereof in cases involving any violation
of the rules of the self-regulatory organization except those cases
where the person or committee is authorized summarily to impose minor
penalties for violating rules regarding decorum, attire, the timely
submission of accurate records for clearing or verifying each day's
transactions or other similar activities.
(2) Family relationship of a person means the person's spouse,
former spouse, parent, stepparent, child, stepchild, sibling,
stepbrother, stepsister, grandparent, grandchild, uncle, aunt, nephew,
niece or in-law.
(3) Governing board means a self-regulatory organization's board of
directors, board of governors, board of managers, or similar body, or
any subcommittee thereof, duly authorized, pursuant to a rule of the
self-regulatory organization that has been approved by the Commission or
has become effective pursuant to either Section 5a(a)(12)(A) or 17(j) of
the Act to take action or to recommend the taking of action on behalf of
the self-regulatory organization.
(4) Oversight panel means any panel, or any subcommittee thereof,
authorized by a self-regulatory organization to recommend or establish
policies or procedures with respect to the self-regulatory
organization's surveillance, compliance, rule enforcement, or
disciplinary responsibilities.
(5) Member's affiliated firm is a firm in which the member is a
``principal,'' as defined in Sec. 3.1(a), or an employee.
(6) Named party in interest means a person or entity that is
identified by name as a subject of any matter being considered by a
governing board, disciplinary committee, or oversight panel.
(7) Self-regulatory organization means a ``self-regulatory
organization'' as defined in Sec. 1.3(ee) and includes a ``clearing
organization'' as defined in Sec. 1.3(d), but excludes registered
futures associations for the purposes of paragraph (b)(2) of this
section.
8) Significant action includes any of the following types of self-
regulatory organization actions or rule changes that can be implemented
without the Commission's prior approval:
(i) Any actions or rule changes which address an ``emergency'' as
defined in Sec. 1.41(a)(4)(i) through (iv) and (vi) through (viii);
and,
(ii) Any changes in margin levels that are designed to respond to
extraordinary market conditions such as an actual or attempted corner,
squeeze, congestion or undue concentration of positions, or that
otherwise are likely to have a substantial effect on prices in any
contract traded or cleared at such self-regulatory organization; but
does not include any rule not submitted for prior Commission approval
because such rule is unrelated to the terms and conditions of any
contract traded at such self-regulatory organization.
(b) Self-regulatory organization rules. Each self-regulatory
organization shall maintain in effect rules that have been submitted to
the Commission pursuant to Section 5a(a)(12)(A) of the Act and Sec.
1.41 or, in the case of a registered futures association, pursuant to
Section 17(j) of the Act, to address the avoidance of conflicts of
interest in the execution of its self-regulatory functions. Such rules
must provide for the following:
(1) Relationship with named party in interest--(i) Nature of
relationship. A member of a self-regulatory organization's governing
board, disciplinary committee or oversight panel must abstain from such
body's deliberations and voting on any matter involving a named party in
interest where such member:
(A) Is a named party in interest;
(B) Is an employer, employee, or fellow employee of a named party in
interest;
[[Page 119]]
(C) Is associated with a named party in interest through a ``broker
association'' as defined in Sec. 156.1;
(D) Has any other significant, ongoing business relationship with a
named party in interest, not including relationships limited to
executing futures or option transactions opposite of each other or to
clearing futures or option transactions through the same clearing
member; or,
(E) Has a family relationship with a named party in interest.
(ii) Disclosure of relationship. Prior to the consideration of any
matter involving a named party in interest, each member of a self-
regulatory organization governing board, disciplinary committee or
oversight panel must disclose to the appropriate self-regulatory
organization staff whether he or she has one of the relationships listed
in paragraph (b)(1)(i) of this section with a named party in interest.
(iii) Procedure for determination. Each self-regulatory organization
must establish procedures for determining whether any member of its
governing board, disciplinary committees or oversight committees is
subject to a conflicts restriction in any matter involving a named party
in interest. Taking into consideration the exigency of the committee
action, such determinations should be based upon:
(A) Information provided by the member pursuant to paragraph
(b)(1)(ii) of this section; and
(B) Any other source of information that is held by and reasonably
available to the self-regulatory organization.
(2) Financial interest in a significant action--(i) Nature of
interest. A member of a self-regulatory organization's governing board,
disciplinary committee or oversight panel must abstain from such body's
deliberations and voting on any significant action if the member
knowingly has a direct and substantial financial interest in the result
of the vote based upon either exchange or non-exchange positions that
could reasonably be expected to be affected by the action.
(ii) Disclosure of interest. Prior to the consideration of any
significant action, each member of a self-regulatory organization
governing board, disciplinary committee or oversight panel must disclose
to the appropriate self-regulatory organization staff the position
information referred to in paragraph (b)(2)(iii) of this section that is
known to him or her. This requirement does not apply to members who
choose to abstain from deliberations and voting on the subject
significant action.
(iii) Procedure for determination. Each self-regulatory organization
must establish procedures for determining whether any member of its
governing board, disciplinary committees or oversight committees is
subject to a conflicts restriction under this section in any significant
action. Such determination must include a review of:
(A) Gross positions held at that self-regulatory organization in the
member's personal accounts or ``controlled accounts,'' as defined in
Sec. 1.3(j);
(B) Gross positions held at that self-regulatory organization in
proprietary accounts, as defined in Sec. 1.17(b)(3), at the member's
affiliated firm;
(C) Gross positions held at that self-regulatory organization in
accounts in which the member is a principal, as defined in Sec. 3.1(a);
(D) Net positions held at that self-regulatory organization in
``customer'' accounts, as defined in Sec. 1.17(b)(2), at the member's
affiliated firm; and,
(E) Any other types of positions, whether maintained at that self-
regulatory organization or elsewhere, held in the member's personal
accounts or the proprietary accounts of the member's affiliated firm
that the self-regulatory organization reasonably expects could be
affected by the significant action.
(iv) Bases for determination. Taking into consideration the exigency
of the significant action, such determinations should be based upon:
(A) The most recent large trader reports and clearing records
available to the self-regulatory organization;
(B) Information provided by the member with respect to positions
pursuant to paragraph (b)(2)(ii) of this section; and,
(C) Any other source of information that is held by and reasonably
available to the self-regulatory organization.
[[Page 120]]
(3) Participation in deliberations. (i) Under the rules required by
this section, a self-regulatory organization governing board,
disciplinary committee or oversight panel may permit a member to
participate in deliberations prior to a vote on a significant action for
which he or she otherwise would be required to abstain, pursuant to
paragraph (b)(2) of this section, if such participation would be
consistent with the public interest and the member recuses himself or
herself from voting on such action.
(ii) In making a determination as to whether to permit a member to
participate in deliberations on a significant action for which he or she
otherwise would be required to abstain, the deliberating body shall
consider the following factors:
(A) Wwhether the member's participation in deliberations is
necessary for the deliberating body to achieve a quorum in the matter;
and
(B) Whether the member has unique or special expertise, knowledge or
experience in the matter under consideration.
(iii) Prior to any determination pursuant to paragraph (b)(3)(i) of
this section, the deliberating body must fully consider the position
information which is the basis for the member's direct and substantial
financial interest in the result of a vote on a significant action
pursuant to paragraph (b)(2) of this section.
(4) Documentation of determination. Self-regulatory organization
governing boards, disciplinary committees, and oversight panels must
reflect in their minutes or otherwise document that the conflicts
determination procedures required by this section have been followed.
Such records also must include:
(i) The names of all members who attended the meeting in person or
who otherwise were present by electronic means;
(ii) The name of any member who voluntarily recused himself or
herself or was required to abstain from deliberations and/or voting on a
matter and the reason for the recusal or abstention, if stated; and
(iii) Information on the position information that was reviewed for
each member.
[64 FR 23, Jan. 4, 1999; 64 FR 3340, Jan. 21, 1999]
Sec. 1.70 Notification of State enforcement actions brought under
the Commodity Exchange Act.
(a) Immediately upon instituting any proceeding in any Federal
district court for violation of the Act or any rule, regulation or order
thereunder against any person who is subject to suit pursuant to
sections 6d(1)-(6) of the Act, the authorized State official of the
State instituting the proceeding shall submit to the Commission a copy
of the complaint filed in the proceeding, together with a written notice
which:
(1) Indicates the names of parties to the proceeding;
(2) Indicates the provision of the Act or the rule, regulation or
order thereunder which is alleged to have been violated.
The complaint and written notice must be sent by first-class U.S. mail
or personally delivered to the Secretary, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581.
(b) Prior to instituting any proceeding in a State court for the
alleged violation of any antifraud provisions of the Act or any
antifraud rule, regulation or order thereunder against any person
registered with the Commission who is subject to suit pursuant to the
provisions of section 6d(8) of the Act, the authorized State official of
the State intending to institute the proceeding shall submit to the
Commission written notice which:
(1) Indicates the names of parties to the proposed proceeding;
(2) Indicates the provision of the Act or the rule, regulation or
order thereunder which will be alleged to have been violated;
(3) Contains a brief statement of the facts on which the proposed
action will be based.
Except as provided in paragraph (c), this written notice must be sent by
first-class U.S. mail or personally delivered to the Secretary,
Commodity Futures Trading Commission, Three
[[Page 121]]
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581 not less
than 5 business days prior to instituting the proceeding in State court.
(c) Where it is impracticable to provide the Commission with written
notice within the time period specified in paragraph (b) of this
section, the authorized state official must inform the Secretary of the
Commission by telephone as soon as practicable to institute a proceeding
in state court and must send the written notice required in paragraph
(b)(1) through (b)(3) of this section by facsimile or other similarly
expeditious means of written communication to the Secretary of the
Commission, prior to instituting the proceeding in state court.
(d) Immediately upon instituting any proceeding in a State court
pursuant to the provisions of section 6d(8) of the Act for alleged
violation of any antifraud provisions of the Act or any antifraud rule,
regulation or order thereunder, the authorized State official
instituting the proceeding shall submit to the Commission a copy of the
complaint filed in the proceeding. The copy of the complaint must be
sent by first class U.S. mail or personally delivered to the Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
[48 FR 49503, Oct. 26, 1983, as amended at 60 FR 49334, Sept. 25, 1995]
Sec. Appendix A to Part 1 [Reserved]
Sec. Appendix B to Part 1--Fees for Contract Market Rule Enforcement
Reviews and Financial Reviews
(a) Within 60 days of the effective date of a final fee schedule for
each fiscal year, each board of trade which has been designated as a
contract market for at least one actively trading contract shall submit
a check or money order, made payable to the Commodity Futures Trading
Commission, to cover the Commission's actual costs in conducting
contract market rule enforcement reviews and financial reviews.
(b) The Commission determines fees changed fees charged to exchanges
based upon a formula which considers both actual costs and trading
volume.
(c) Checks should be sent to the attention of the Office of the
Secretariat, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581.
[50 FR 930, Jan. 8, 1985, as amended at 52 FR 46072, Dec. 4, 1987; 58 FR
42645, Aug. 11, 1993; 60 FR 49334, Sept. 25, 1995]
PART 2_OFFICIAL SEAL--Table of Contents
Sec.
2.1 Description.
2.2 Authority to affix seal.
2.3 Prohibitions against misuse of seal.
2.4 Employee Recreation Association's use of Commission seal.
Authority: 7 U.S.C. 2a(11).
Sec. 2.1 Description.
Pursuant to section 2(a)(10) of the Commodity Exchange Act, as
amended, 7 U.S.C. 4(i), the Commodity Futures Trading Commission has
adopted an official seal (the ``Seal''), the description of which is as
follows:
(a) An American bald eagle in black and white holding the scales of
balanced interests over a black and white wheel of commerce and a
farmer's plow, also in black and white. These symbols are enclosed with
an inner red octagon and a blue outer octagon representing traditional
futures contract trading pits. Around the outside of the octagons are
the words ``Commodity Futures Trading Commission'' separated by two
stars from the year ``1975,'' the first year of the Commission's
existence.
(b) The Seal of the Commodity Futures Trading Commission is
illustrated as follows:
[[Page 122]]
[GRAPHIC] [TIFF OMITTED] TC05OC91.030
Sec. 2.2 Authority to affix seal.
(a) The following officials of the Commodity Futures Trading
Commission are authorized to affix the Seal to appropriate documents and
other materials of the Commission for all purposes including those
authorized by 28 U.S.C. 1733(b) (relating to authenticated copies of
agency documents used as evidence): The Chairman and all Commissioners,
the General Counsel, the Executive Director, the Directors of Divisions,
and the Secretariat.
(b) The officials named in paragraph (a) of this section, may
redelegate, and authorize redelegation of this authority, except that
the Secretary may redelegate this authority only to the Deputy
Secretary.
[41 FR 9552, Mar. 5, 1976, as amended at 51 FR 37177, Oct. 20, 1986]
Sec. 2.3 Prohibitions against misuse of seal.
(a) Fraudulently or wrongfully affixing or impressing the Seal to or
upon any certificate, instrument, document or paper or with knowledge of
its fraudulent character, or with wrongful or fraudulent intent, using,
buying, procuring, selling or transferring to another any such paper is
punishable under section 1017 of title 18, U.S. Code.
(b) Falsely making, forging, counterfeiting, mutilating, or altering
the Seal, or knowingly using a fraudulent or altered Seal or possessing
any such Seal knowingly is punishable under section 506 of title 18,
U.S. Code.
Sec. 2.4 Employee Recreation Association's use of Commission seal.
(a) As a specific exception to the provisions of 17 CFR 2.2 and 2.3,
the Commodity Futures Trading Commission Employee Recreation Association
(``Association'') is hereby authorized to use the Commission seal as an
imprint upon sport apparel (e.g., hats, clothing, accessories, etc.) and
novelty items (e.g., office mugs, lanyards, badge holders, stationary
items, among other);
(b) The Association may sell or distribute above said items
imprinted with the Commission seal to members of the Association or
others to meet its fundraising goals and/or in conjunction with its
sports, social or similar events.
[72 FR 29247, May 25, 2007]
PART 3_REGISTRATION--Table of Contents
Subpart A_Registration
Sec.
3.1 Definitions.
3.2 Registration processing by the National Futures Association;
notification and duration of registration.
3.3 [Reserved]
3.4 Registration in one capacity not included in registration in any
other capacity.
3.5-3.9 [Reserved]
3.10 Registration of futures commission merchants, introducing brokers,
commodity trading advisors, commodity pool operators and
leverage transaction merchants.
3.11 Registration of floor brokers and floor traders.
3.12 Registration of associated persons of futures commission merchants,
introducing brokers, commodity trading advisors, commodity
pool operators and leverage transaction merchants.
3.13 Registration of agricultural trade option merchants and their
associated persons.
3.14-3.20 [Reserved]
3.21 Exemption from fingerprinting requirement in certain cases.
3.22 Supplemental filings.
3.23-3.29 [Reserved]
3.30 Current address for purpose of delivery of communications from the
Commission or the National Futures Association.
3.31 Deficiencies, inaccuracies, and changes, to be reported.
[[Page 123]]
3.33 Withdrawal from registration.
Subpart B_Temporary Licenses
3.40 Temporary licensing of applicants for associated person, floor
broker or floor trader registration.
3.42 Termination.
3.43 Relationship to registration.
3.44 Temporary licensing of applicants for guaranteed introducing broker
registration.
3.45 Restrictions upon activities.
3.46 Termination.
3.47 Relationship to registration.
Subpart C_Denial, Suspension or Revocation of Registration
3.50 Service.
3.51 Withdrawal of application for registration.
3.52-3.54 [Reserved]
3.55 Suspension and revocation of registration pursuant to section 8a(2)
of the Act.
3.56 Suspension or modification of registration pursuant to section
8a(11) of the Act.
3.57 Proceedings under section 8a(2)(E) of the Act.
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.
3.61 Extensions of time for proceedings brought under Sec. 3.55, Sec.
3.56 and Sec. 3.60 of this part.
3.62 [Reserved]
3.63 Service of order issued by an Administrative Law Judge or the
Commission.
3.64 Procedure to lift or modify conditions or restrictions.
Subpart D_Notice Under Section 4k(5) of the Act
3.70 Notification of certain information regarding associated persons.
Subpart E_Delegation and Reservation of Authority
3.75 Delegation and reservation of authority.
Appendix A to Part 3--Interpretive Statement with Respect to Section
8a(2)(C) and (E) and Section 8a(3)(J) and (M) of the Commodity
Exchange Act
Appendix B to Part 3--Statement of Acceptable Practices With Respect to
Ethics Training
Authority: 5 U.S.C. 522, 522b; 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d,
6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c,
16a, 18, 19, 21, 23.
Source: 45 FR 80491, Dec. 5, 1980, unless otherwise noted.
Subpart A_Registration
Sec. 3.1 Definitions.
(a) Principal. Principal means, with respect to an applicant for
registration, a registrant or a person required to be registered under
the Act or these regulations:
(1) If the entity is organized as a sole proprietorship, the
proprietor; if a partnership, any general partner; if a corporation, any
director, the president, chief executive officer, chief operating
officer, chief financial officer, and any person in charge of a
principal business unit, division or function subject to regulation by
the Commission; if a limited liability company or limited liability
partnership, any director, the president, chief executive officer, chief
operating officer, chief financial officer, the manager, managing member
or those members vested with the management authority for the entity,
and any person in charge of a principal business unit, division or
function subject to regulation by the Commission; and, in addition, any
person occupying a similar status or performing similar functions,
having the power, directly or indirectly, through agreement or
otherwise, to exercise a controlling influence over the entity's
activities that are subject to regulation by the Commission;
(2)(i) Any individual who directly or indirectly, through agreement,
holding company, nominee, trust or otherwise, is the owner of ten
percent or more of the outstanding shares of any class of stock, is
entitled to vote or has the power to sell or direct the sale of ten
percent or more of any class of voting securities, or is entitled to
receive ten percent or more of the profits; or
(ii) Any person other than an individual that is the direct owner of
ten percent or more of any class of securities; or
(3) Any person who has contributed ten percent or more of the
capital: Provided, however, That if such capital contribution consists
of subordinated debt contributed by an unaffiliated bank insured by the
Federal Deposit Insurance Corporation, United States branch or agency of
an unaffiliated foreign bank that is licensed under the
[[Page 124]]
laws of the United States and regulated, supervised and examined by
United States government authorities having regulatory responsibility
for such financial institutions, or insurance company subject to
regulation by any State, such bank, branch, agency 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.
(b) Current. As used in this subpart, a Form 8-R is current if,
subsequent to the filing of that form and continuously thereafter, the
registrant or principal has been either registered or affiliated with a
registrant as a principal.
(c) Sponsor. Sponsor means the futures commission merchant,
introducing broker, commodity trading advisor, commodity pool operator
or leverage transaction merchant which makes the certification required
by Sec. 3.12 of this part for the registration of an associated person
of such sponsor.
(d) Beneficial owner. Any person who, without limitation, 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 beneficial ownership
of a security or preventing the vesting of such beneficial ownership, or
of avoiding making a contribution of ten percent or more of the capital,
as part of a plan or scheme to evade being deemed a principal of an
applicant or registrant under paragraph (a) of this section shall be
deemed for purposes of such paragraph to be the beneficial owner or the
contributor of capital.
(e) Foreign futures authority. Foreign futures authority means any
foreign government, or any department, agency, governmental body, or
regulatory organization empowered by a foreign government to administer
or enforce a law, rule, or regulation as it relates to a futures or
options matter, or any department or agency of a political subdivision
of a foreign government empowered to administer or enforce a law, rule
or regulation as it relates to a futures or options matter.
(f) [Reserved]
[49 FR 5521, Feb. 13, 1984, and 49 FR 8217, Mar. 5, 1984, as amended at
49 FR 39530, Oct. 9, 1984; 57 FR 23144, June 2, 1992; 66 FR 53518, Oct.
23, 2001; 72 FR 63979, Nov. 14, 2007]
Sec. 3.2 Registration processing by the National Futures Association;
notification and duration of registration.
(a) Except as otherwise provided in any rule, regulation or order of
the Commission, the registration functions of the Commission set forth
in subpart A, subpart B and subpart C of this part shall be performed by
the National Futures Association, in accordance with such rules,
consistent with the provisions of the Act and this part, applicable to
registrations granted under the Act that the National Futures
Association may adopt and are approved by the Commission pursuant to
section 17(j) of the Act.
(b) Notwithstanding any other provision of this part, the original
of any registration form, any schedule or supplement thereto, any
fingerprint card or other document required by this part to be filed
with both the Commission and the National Futures Association, may be
filed with either the Commission or the National Futures Association if:
(1) A legible, accurate, and complete photocopy of that form,
schedule, supplement, fingerprint card, or other document is filed
simultaneously with the National Futures Association or the Commission,
respectively, and
(2) Such photocopy contains an original signature and date in each
place where such signature and date is required on the original form,
schedule, supplement, fingerprint card, or other document.
(c) The National Futures Association shall notify the registrant, or
the sponsor in the case of an applicant for registration as an
associated person, and each designated contract market or registered
derivatives trading execution facility that has granted the applicant
trading privileges in the case of an applicant for registration as a
floor broker or floor trader, if registration has been granted under the
Act.
[[Page 125]]
(1) If an applicant for registration as an associated person
receives a temporary license in accordance with Sec. 3.40, the National
Futures Association shall notify the sponsor that only a temporary
license has been granted.
(2) If an applicant for registration as a floor broker or floor
trader receives a temporary license in accordance with Sec. 3.40, the
National Futures Association shall notify the designated contract market
or registered derivatives trading execution facility that has granted
the applicant trading privileges that only a temporary license has been
granted.
(d) Any registration form, any schedule or supplement thereto, any
fingerprint card or other document required by this part or any rule of
the National Futures Assocation to be filed with the National Futures
Association shall be deemed for all purposes to have been filed with,
and to be the official record of, the Commission.
[49 FR 39530, Oct. 9, 1984, as amended at 53 FR 8431, Mar. 15, 1988; 54
FR 19558, May 8, 1989; 67 FR 38874, June 6, 2002]
Sec. 3.3 [Reserved]
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, floor broker, floor trader, associated person, commodity
trading advisor, commodity pool operator, introducing broker, and
leverage transaction merchant must register as such under the Act.
Registration in one capacity under the Act shall not include
registration in any other capacity: Provided, however, That a registered
floor broker need not also register as a floor trader in order to engage
in activity as a floor trader.
(b) Except as may be provided in any rule, regulation or order of
the Commission, registration as an associated person in one capacity
shall not include registration as an associated person in any other
capacity: Provided, however, That an associated person who is sponsored
by a registrant, which itself is registered in more than one capacity,
need register only once to act as an associated person of the
registrant, and shall be deemed to be an associated person of such
registrant, in each such capacity.
[49 FR 39530, Oct. 9, 1984, as amended at 58 FR 19590, Apr. 15, 1993]
Sec. Sec. 3.5-3.9 [Reserved]
Sec. 3.10 Registration of futures commission merchants, introducing
brokers, commodity trading advisors, commodity pool operators and
leverage transaction merchants.
(a) Application for registration. (1)(i) Except as provided in
paragraph (a)(3) of this section, application for registration as a
futures commission merchant, introducing broker, commodity trading
advisor, commodity pool operator or leverage transaction merchant must
be on Form 7-R, completed and filed with the National Futures
Association in accordance with the instructions thereto.
(ii) Applicants for registration as a futures commission merchant or
introducing broker must accompany their Form 7-R with a Form 1-FR-FCM or
Form 1-FR-IB, respectively, in accordance with the provisions of Sec.
1.10 of this chapter: Provided, however, That an applicant for
registration as a futures commission merchant or introducing broker
which is registered with the Securities and Exchange Commission as a
securities broker or dealer may accompany its Form 7-R with a copy of
its Financial and Operational Combined Uniform Single Report under the
Securities Exchange Act of 1934, Part II or Part II A, in accordance
with the provisions of Sec. 1.10(h) of this chapter.
(iii) Applicants for registration as a commodity pool operator must
accompany their Form 7-R with the financial statements described in
Sec. 4.13(c) of this chapter.
(iv) Applicants for registration as a leverage transaction merchant
must accompany their Form 7-R with a Form 2-FR in accordance with the
provisions of Sec. 31.13 of this chapter.
(2) Each Form 7-R filed in accordance with the requirements of
paragraph (a)(1)(i) of this section must be accompanied by a Form 8-R,
completed in accordance with the instructions thereto
[[Page 126]]
and executed by each natural person who is a principal of the applicant,
and must be accompanied by the fingerprints of that principal on a
fingerprint card provided by the National Futures Association for that
purpose: Provided, however, that if such principal is a director who
qualifies for the exemption from the fingerprint requirement pursuant to
Sec. 3.21(c) or has a current Form 8-R on file with the Commission or
the National Futures Association, the fingerprints of that principal do
not need to accompany the Form 7-R.
(3) Notice registration as a futures commission merchant or
introducing broker for certain securities brokers or dealers. (i) Any
broker or dealer that is registered with the Securities and Exchange
Commission may be registered as a futures commission merchant or
introducing broker, as applicable, by following such procedures for
notice registration as may be specified by the National Futures
Association, if--
(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 or
registered derivatives transaction execution facility, to security
futures products as defined in section 1a(32) of the Act;
(B) The registration of the broker or dealer is not suspended
pursuant to an order of the Securities and Exchange Commission; and
(C) The broker or dealer is a member of a national securities
association registered pursuant to section 15A(a) of the Securities
Exchange Act of 1934.
(ii) The registration will be effective upon the filing of the
notice prescribed by the National Futures Association in accordance with
the instructions thereto.
(b) Duration of registration. (1) A person registered as a futures
commission merchant, introducing broker, commodity trading advisor,
commodity pool operator or leverage transaction merchant in accordance
with paragraph (a) of this section will continue to be so registered
until the effective date of any revocation or withdrawal of such
registration. Such person will be prohibited from engaging in activities
requiring registration under the Act or from representing himself to be
a registrant under the Act or the representative or agent of any
registrant during the pendency of any suspension of such registration.
(2) A person registered as an introducing broker who was a party to
a guarantee agreement with a futures commission merchant in accordance
with Sec. 1.10(j) of this chapter will have its registration cease
thirty days after the termination of such guarantee agreement unless the
procedures set forth in Sec. 1.10(j)(8) of this chapter are followed.
(c) Exemption from registration for certain persons. (1) A person
trading solely for proprietary accounts, as defined in Sec. 1.3(y) of
this chapter, is not required to register as a futures commission
merchant: Provided, that such person remains subject to all other
provisions of the Act and of the rules, regulations and orders
thereunder.
(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 on or subject to
the rules of designated contract market or derivatives transaction
execution facility for clearing on an omnibus basis through a futures
commission merchant registered in accordance with section 4d of the Act.
(ii) A foreign broker acting in accordance with paragraph (c)(2)(i)
of this section is not required to comply with those provisions of the
Act and of the rules, regulations and orders thereunder applicable
solely to any registered futures commission merchant or any person
required to be so registered.
(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 made on or subject to the rules
of any designated contract market or derivatives transaction execution
facility only on behalf
[[Page 127]]
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 executed on or subject to
the rules of designated contract market or derivatives transaction
execution facility is submitted for clearing through a futures
commission merchant registered in accordance with section 4d of the Act.
(ii) A person acting in accordance with paragraph (c)(3)(i) of this
section remains subject to section 4o of the Act, but otherwise is not
required to comply with those provisions of the Act and of the rules,
regulations and orders thereunder applicable solely to any person
registered in such capacity, or any person required to be so registered.
(4) A person located outside the United States, its territories or
possessions that is exempt from registration as a futures commission
merchant in accordance with Sec. 30.10 of this chapter is not required
to register as an introducing broker in accordance with section 4d of
the Act if:
(i) Such a person is affiliated with a futures commission merchant
registered in accordance with section 4d of the Act;
(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 or derivatives execution facility;
(iii) Prior to a person located outside the United States, its
territories or possessions, that is exempt from registration as a
futures commission merchant pursuant to Sec. 30.10 of this chapter,
engaging in the introducing activities described in this paragraph, the
affiliated futures commission merchant has filed with the National
Futures Association (ATTN: Vice President, Compliance) an
acknowledgement that it 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
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 or derivatives transaction execution facility, 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 or derivatives transaction execution
facility.
(v) For the purposes of this paragraph, a person shall be affiliated
with a futures commission merchant if such a person:
(A) Owns 50 percent or more of the futures commission merchant;
(B) Is owned 50 percent or more by the futures commission merchant;
or
(C) Is owned 50 percent or more by a third person that also owns 50
percent or more of the futures commission merchant.
(d) On a date to be established by the National Futures Association,
and in accordance with procedures established by the National Futures
Association, each registrant as a futures commission merchant,
introducing broker, commodity trading advisor, commodity pool operator
or leverage transaction merchant shall, on an annual basis, review and
update registration information maintained with the National Futures
Association. The failure to complete the review and update within thirty
days following the date established by the National Futures Association
shall be deemed to be a request for withdrawal from registration, which
shall be processed in accordance with the provisions of Sec. 3.33(f).
(Approved by the Office of Management and Budget under control number
3038-0023)
[45 FR 80491, Dec. 5, 1980, as amended at 47 FR 27551, June 25, 1982; 49
FR 5522, Feb. 13, 1984; 49 FR 39530, Oct. 9, 1984; 57 FR 23144, June 2,
1992; 66 FR 43082, Aug. 17, 2001; 66 FR 53518, Oct. 23, 2001; 67 FR
38874, June 6, 2002; 67 FR 41166, June 17, 2002; 72 FR 35920, July 2,
2007; 72 FR 63979, Nov. 14, 2007; 73 FR 54071, Sept. 18, 2008]
[[Page 128]]
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, completed and
filed with the National Futures Association in accordance with the
instructions thereto. Each Form 8-R filed in accordance with paragraph
(a) of this section 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
derivatives transaction execution facility by the Commission.
(3) When the Commission or the National Futures Association
determines that an applicant for registration as a floor broker or floor
trader is not disqualified from such registration or temporary license,
the National Futures Association will notify the applicant and any
contract market or derivatives transaction execution facility that has
granted the applicant trading privileges that the applicant's
registration or temporary license as a floor broker or floor trader is
granted.
(b) Duration of registration. A person registered as a floor broker
or floor trader in accordance with paragraph (a) of this section, and
whose registration has neither been revoked nor withdrawn, will continue
to be so registered unless such person's trading privileges on all
contract markets or derivatives transaction execution facilities have
ceased: Provided, That if a floor broker or floor trader whose trading
privileges on all contract markets or derivatives transaction execution
facilities have ceased for reasons unrelated to any Commission action or
any contract market or derivatives transaction execution facility
disciplinary proceeding and whose registration is not revoked, suspended
or withdrawn is granted trading privileges as a floor broker or floor
trader, respectively, by any contract market or derivatives transaction
execution facility where he held such privileges within the preceding
sixty days, such registration as a floor broker or floor trader,
respectively, shall be deemed to continue and no new Form 8-R or Form 3-
R need be filed solely on the basis of the resumption of trading
privileges. A floor broker or floor trader is prohibited from engaging
in activities requiring registration under the Act or from representing
himself to be a registrant under the Act or the representative or agent
of any registrant during the pendency of any suspension of such
registration or of all such trading privileges. In accordance with Sec.
3.31(d), each contract market or derivatives transaction execution
facility that has granted trading privileges to a person who is
registered, or has applied for registration, as a floor broker or floor
trader, must notify the National Futures Association within sixty days
after such person's trading privileges on such contract market or
derivatives transaction execution facility have ceased.
[58 FR 19591, Apr. 15, 1993, as amended at 64 FR 1727, Jan. 12, 1999; 67
FR 38874, June 6, 2002]
Sec. 3.12 Registration of associated persons of futures commission
merchants, introducing brokers, commodity trading advisors, commodity
pool operators and leverage transaction merchants.
(a) Registration required. It shall be unlawful for any person to be
associated with a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator or leverage
transaction merchant as an associated person unless that person shall
have registered under the Act as an associated person of that sponsoring
futures commission merchant, introducing broker, commodity trading
advisor, commodity pool operator or leverage transaction merchant in
accordance with the procedures in paragraphs (c), (d), (f), (i), or (j)
of this section or is exempt from such registration pursuant to
paragraph (h) of this section.
[[Page 129]]
(b) Duration of registration. A person registered in accordance with
paragraphs (c), (d), (f), (i), or (j) 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 his sponsors. Such person will be prohibited
from engaging in activities requiring registration under the Act or from
representing himself to be a registrant under the Act or the
representative or agent of any registrant during the pendency of any
suspension of his or his sponsor's registration. In accordance with
Sec. 3.31(c), each of the registrant's sponsors must file a notice with
the National Futures Association on Form 8-T or on a Uniform Termination
Notice for Securities Industry Registration reporting the termination of
the association of the associated person within thirty days thereafter.
(c) Application for registration. Except as otherwise provided in
paragraphs (d), (f), (i), and (j) 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.
(1) No person will be registered as an associated person in
accordance with this paragraph (c) unless a person duly authorized by
the sponsor certifies that:
(i) It is the intention of the sponsor to hire or otherwise employ
the applicant as an associated person and that it will do so within
thirty days after the receipt of the notification provided in accordance
with paragraph (c)(4) of this section and that the applicant will not be
permitted to engage in any activity requiring registration as an
associated person until the applicant is registered as such in
accordance with this section;
(ii) The sponsor has verified the information supplied by the
applicant in response to the questions on Form 8-R which relate to the
applicant's education and employment history during the preceding three
years.
(iii) To the best of the sponsor's knowledge, information, and
belief, all of the publicly available information supplied by the
applicant on Form 8-R is accurate and complete: Provided, That it is
unlawful for the sponsor to make the certification required by this
paragraph (c)(1)(iii) if the sponsor knew or should have known that any
of that information is not accurate and complete; and
(2) The certification required by paragraph (c)(1) of this section
must be submitted concurrently with the Form 8-R.
(3) Each Form 8-R filed in accordance with the requirements of
paragraph (c) of this section must be accompanied by the fingerprints of
the applicant on a fingerprint card provided for that purpose by the
National Futures Association.
(4) When the Commission or the National Futures Association
determines that an applicant for registration as an associated person is
not unfit for such registration, it will notify the sponsor that has
made the certifications required by paragraph (c)(1) of this section
that the applicant's registration as an associated person is granted
contingent upon the sponsor hiring or otherwise employing the applicant
as such within thirty days.
(d) Special temporary licensing and registration procedures for
certain persons--(1) Registration terminated within the preceding 60
days. Except as otherwise provided in paragraphs (f) and (i) of this
section, any person whose registration as an associated person in any
capacity has terminated within the preceding 60 days and who becomes
associated with a new sponsor will be granted a temporary license to act
in the capacity of an associated person of such sponsor upon filing by
that sponsor with the National Futures Association a Form 8-R, completed
in accordance with the instructions thereto and, if applicable, a
Supplemental Sponsor Certification Statement filed on behalf of the new
sponsor (who must meet the requirements set forth in Sec.
3.60(b)(2)(i)(A) and (B)) stating that the new sponsor will supervise
the applicant in accordance with conditions identical to those agreed to
by the previous sponsor, which includes certifications stating:
(i) That such person has been hired or is otherwise employed by that
sponsor;
[[Page 130]]
(ii) That such person's registration as an associated person in any
capacity is not suspended or revoked;
(iii) That such person is eligible to be registered or temporarily
licensed in accordance with this paragraph (d);
(iv) Whether there is a pending adjudicatory proceeding under
sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Sec. Sec. 3.55, 3.56
or 3.60 or if, within the preceding 12 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.
(2) Any temporary license granted pursuant to paragraph (d)(1) of
this section shall be terminated immediately upon notice to the sponsor
of the person granted the temporary license that, within 20 days
following the date the temporary license was issued, the National
Futures Association has not received the applicant's fingerprints.
(3) A temporary license received in accordance with paragraph (d)(1)
of this section shall be subject to the provisions of Sec. Sec. 3.42
and 3.43.
(4) The certifications permitted by paragraphs (d)(1)(i) and (v) of
this section must be filed by a person duly authorized by the sponsor.
The certifications permitted by paragraphs (d)(1)(ii)-(iv) must be filed
by the applicant for registration as an associated person.
(e) Retention of records. The sponsor must retain in accordance with
Sec. 1.31 of this chapter such records as are necessary to support the
certifications required by this section.
(f) Reporting of dual and multiple associations. (1)(i) Except as
otherwise provided in paragraph (f)(4) of this section, a person who is
already registered as an associated person in any capacity whose
registration is not subject to conditions or restrictions may become
associated as an associated person with another sponsor if the new
sponsor (who must meet the requirements set forth in Sec. 3.60(b)(2)(i)
(A) and (B)) files with the National Futures Association a Form 8-R in
accordance with the instructions thereto.
(ii) NFA shall notify each sponsor of the associated person that the
associated person has applied to become associated with another sponsor.
(iii) Each sponsor of the associated person shall supervise that
associated person and each sponsor is jointly and severally responsible
for the conduct of the associated person with respect to the:
(A) Solicitation or acceptance of customers' orders,
(B) Solicitation of funds, securities, or property for a
participation in a commodity pool,
(C) Solicitation of a client's or prospective client's discretionary
account,
(D) Solicitation or acceptance of leverage customers' orders for
leverage transactions, and
(E) Associated person's supervision of any person or persons engaged
in any of the foregoing solicitations or acceptances, with respect to
any customers common to it and any other futures commission merchant,
introducing broker, commodity trading advisor, commodity pool operator,
or leverage transaction merchant with which the associated person is
associated.
(2) Upon receipt by the National Futures Association of a Form 8-R
filed in accordance with paragraph (f)(1) of this section from an
associated person, the associated person named therein shall be
registered as an associated person of the new sponsor.
(3) A person who is simultaneously associated with more than one
sponsor in accordance with the provisions of paragraphs (f)(1) and
(f)(2) of this section shall be required, upon receipt of notice from
the National Futures Association, to file with the National Futures
Association his fingerprints on a fingerprint card provided by the
National Futures Association for that
[[Page 131]]
purpose as well as such other information as the National Futures
Association may require. The National Futures Association may require
such a filing every two years, or at such greater period of time as the
National Futures Association may deem appropriate, after the associated
person has become associated with a new sponsor in accordance with the
requirements of paragraphs (f)(1) and (f)(2) of this section.
(4) If a person is associated with a futures commission merchant or
with an introducing broker and he directs customers seeking a managed
account to use the services of a commodity trading advisor(s) approved
by the futures commission merchant or introducing broker and all such
customers' accounts solicited or accepted by the associated person are
carried by the futures commission merchant or introduced by the
introducing broker with which the associated person is associated, such
a person shall be deemed to be associated solely with the futures
commission merchant or introducing broker and may not also register as
an associated person of the commodity trading advisor(s).
(g) Petitions for exemption. (1) 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.
(2)(i) Until such time as the Commission orders otherwise, the
Commission hereby delegates to the Director of the Division of Clearing
and Intermediary Oversight or his designee the authority to grant or
deny petitions filed pursuant to this paragraph (g).
(ii) The Director of the Division of Clearing and Intermediary
Oversight may submit to the Commission for its consideration any matter
which has been delegated to him pursuant to paragraph (g)(2)(i) of this
section.
(h) Exemption from registration. (1) A person is not required to
register as an associated person in any capacity if that person is:
(i) Registered under the Act as a futures commission merchant, 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 with the National
Association of Securities Dealers 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;
(iii) The chief operating officer, general partner or other person
in the supervisory chain-of-command, provided the futures commission
merchant, introducing broker, commodity trading advisor, commodity pool
operator, or leverage transaction merchant engages in commodity interest
related activity for customers as no more than ten percent of its total
revenue on an annual basis, the firm is not subject to a pending
proceeding brought by the Commission or a self-regulatory organization
alleging fraud or failure to supervise, and has not been found in such a
proceeding to have committed fraud or failed to supervise, as required
by the Act, the rules promulgated thereunder or the rules of a self-
regulatory organization, the person for whom exemption is sought and the
person designated in accordance with paragraphs (h)(1)(iii)(C) or
(h)(1)(iii)(D) of this section are listed as principals of the firm, the
fitness examination conducted by the National Futures Association with
respect to these persons discloses no derogatory information that would
disqualify any of such persons as a principal or as an associated
person, and
[[Page 132]]
the firm files with the National Futures Association corporate or
partnership resolutions stating that:
(A) Such supervisory person is not authorized to:
(1) Solicit or accept customers' or leverage customers' orders,
(2) Solicit a client's or prospective client's discretionary
account,
(3) Solicit funds, securities or property for a participation in a
commodity pool, or
(4) Exercise any line supervisory authority over those persons so
engaged;
(B) Such supervisory person has no authority with respect to hiring,
firing or other personnel matters involving persons engaged in
activities subject to regulation under the Act;
(C) Another person (or persons) designated therein, who is
registered as an associated person(s) or who has applied for
registration as an associated person(s) and is not subject to a pending
proceeding brought by the Commission or a self-regulatory organization
alleging fraud or failure to supervise, and has not been found in such a
proceeding to have committed fraud or failed to supervise, as required
by the Act, the rules promulgated thereunder or the rules of a self-
regulatory organization, holds and exercises full and final supervisory
authority, including authority to hire and fire personnel, over the
customer commodity interest related activities of the firm; and
(D) If the person (or persons) so designated in accordance with
paragraph (h)(1)(iii)(C) of this section ceases to have the authority
referred to therein, the firm will notify the National Futures
Association within twenty days of such occurrence by means of a
subsequent resolution which resolution must also include the name of
another associated person (or persons) who has been vested with full
supervisory authority, including authority to hire and fire personnel,
over the customer commodity interest related activities of the firm in
the event that all of those previously designated in accordance with
paragraph (h)(1)(iii)(C) of this section have been relieved of such
authority. Subsequent changes in supervisory authority shall be reported
in the same manner; or
(iv) Engaged in any activity as an associated person, as defined in
Sec. 1.3(aa) of this chapter, from a location outside the United
States, its territories or possessions, and limits such activities to
customers located outside the United States, its territories or
possessions.
(2) A person is not required to register as an associated person of
a commodity trading advisor if that person is:
(i) Registered as a commodity trading advisor, if that person is
associated with a commodity trading advisor; or
(ii) Exempt from registration as a commodity trading advisor
pursuant to the provisions of Sec. 4.14(a)(1), Sec. 4.14(a)(2) or
Sec. 4.14(a) (8) of this chapter or is associated with a person who is
so exempt from registration: Provided, That the provisions of paragraph
(h)(2)(ii) of this section shall not apply to the solicitation of a
client's or prospective client's discretionary account, or the
supervision of any person or persons so engaged, by, for or on behalf of
a commodity trading advisor which is:
(A) Not exempt from registration pursuant to the provisions of Sec.
4.14(a)(1), Sec. 4.14(a)(2) or Sec. 4.14(a)(8) of this chapter or
(B) Registered as a commodity trading advisor notwithstanding the
availability of that exemption.
(3) A person is not required to register as an associated person of
a commodity pool operator if that person is:
(i) Registered as a commodity pool operator, if that person is
associated with a commodity pool operator;
(ii) Exempt from registration as a commodity pool operator pursuant
to the provisions of Sec. 4.13 of this chapter or is associated with a
person who is so exempt from registration: Provided, That the provisions
of paragraph (h)(3)(ii) of this section shall not apply to the
solicitation of funds, securities, or property for a participation in a
commodity pool, or the supervision of any person or persons so engaged,
by, for, or on behalf of a commodity pool operator which is
(A) Not exempt from registration pursuant to the provisions of Sec.
4.13 of this chapter or
[[Page 133]]
(B) Registered as a commodity pool operator notwithstanding the
availability of that exemption; or
(iii) Where a commodity pool is operated or to be operated by two or
more commodity pool operators, registered as an associated person of one
of the pool operators of the commodity pool in accordance with the
provisions of paragraphs (c), (d), (f), or (i) of this section:
Provided, That each such commodity pool operator shall be jointly and
severally liable for the conduct of that associated person in the
solicitation of funds, securities, or property for participation in the
commodity pool, or the supervision of any person or persons so engaged,
regardless of whether that associated person is registered as an
associated person of each such commodity pool operator.
(i) Special registration or temporary licensing procedures when
previous sponsor's registration ceases. (1) Any person whose
registration as an associated person in any capacity was not subject to
conditions or restrictions, and was terminated within the preceding
sixty days because the previous sponsor's registration was revoked or
withdrawn, and who becomes associated with a new sponsor, will be
registered as an associated person of such new sponsor upon the mailing
by that new sponsor to the National Futures Association of written
certifications stating:
(i) That such person has been hired or is otherwise employed by that
sponsor;
(ii) That such person's registration as an associated person in any
capacity is not suspended or revoked;
(iii) That such person is eligible to be registered in accordance
with paragraph (i) of this section;
(iv) Whether there is a pending adjudicatory proceeding under
sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Sec. 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;
(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
(vi) That the new sponsor will be responsible for supervising all
activities of the person in connection with the sponsor's business as a
registrant under the Act. Provided, however, That if such person's prior
registration as an associated person was subject to conditions or
restrictions, the new sponsor (who must meet the requirements set forth
in Sec. 3.60(b)(2)(i) (A) and (B) of this part) must also file a signed
Supplemental Sponsor Certification Statement that contains conditions
identical to those agreed to by the original sponsor and, in such case,
the person will be granted a temporary license, subject to the
provisions of Sec. Sec. 3.41, 3.42 and 3.43 of this part.
(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.
(3) A person who is registered in accordance with the provisions of
paragraph (i)(1) of this section shall be required, upon receipt of
notice from the National Futures Association, to file with the National
Futures Association his fingerprints on a fingerprint card provided by
the National Futures Association for that purpose as well as such other
information as the National Futures Association may require. The
National Futures Association may require such a filing every two years,
or at such greater period of time as the National Futures Association
may deem appropriate, after the associated person has become associated
with a new sponsor in connection with the requirements of paragraph
(i)(1) of this section.
(j) Special temporary licensing and registration procedures for
associated persons
[[Page 134]]
of futures commission merchants and introducing brokers involved only
with certain commodity interests. Notwithstanding any other provision of
law, any person associated with a futures commission merchant or an
introducing broker may be granted a temporary license or registration to
act in the capacity of an associated person of such sponsor if such
person restricts his activities only to those commodity interests listed
in appendix B to this part and if such person and his sponsor comply
with any special temporary licensing or registration procedures
applicable to persons involved solely with such commodity interests that
have been adopted by the National Futures Association and approved by
the Commission.
(Approved by the Office of Management and Budget under control number
3038-0023)
[45 FR 80491, Dec. 5, 1980, as amended at 47 FR 27551, June 25, 1982; 48
FR 35292, Aug. 3, 1983; 49 FR 5522, Feb. 13, 1984; 49 FR 8218, Mar. 5,
1984; 49 FR 39531, Oct. 9, 1984; 53 FR 8431, Mar. 15, 1988; 57 FR 23145,
June 2, 1992; 58 FR 19592, Apr. 15, 1993; 64 FR 1727, Jan. 12, 1999; 67
FR 38874, June 6, 2002; 67 FR 62351, Oct. 7, 2002; 69 FR 16792, Mar. 31,
2004; 72 FR 63979, Nov. 14, 2007; 72 FR 63103, Nov. 8, 2007]
Sec. 3.13 Registration of agricultural trade option merchants and
their associated persons.
(a) Definitions--(1) Agricultural trade option merchant.
``Agricultural trade option merchant'' means any person that is in the
business of soliciting, offering to enter into, entering into,
confirming the execution of, or maintaining a position in, transactions
or agreements in interstate commerce which are not conducted or executed
on or subject to the rules of a contract market, and which are or are
held out to be of the character of, or are commonly known to the trade
as, an ``option,'' ``privilege,'' ``indemnity,'' ``bid,'' ``offer,''
``put,'' ``call,'' ``advance guarantee,'' or ``decline guarantee,''
involving wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain
sorghums, mill feeds, butter, eggs, solanum tuberosum (Irish potatoes),
wool, wool tops, fats and oils (including lard, tallow, cottonseed oil,
peanut oil, soybean oil and all other fats and oils), cottonseed meal,
cottonseed, peanuts, soybeans, soybean meal, livestock, livestock
products, and frozen concentrated orange juice. Provided, however, that
any person entering into such transactions solely for the purpose of
managing the risk arising from the conduct of his or her own commercial
enterprise is not considered to be in the business described in this
paragraph.
(2) Associated person of an agricultural trade option merchant.
``Associated person of an agricultural trade option merchant'' means a
partner, employee, or agent (or any person occupying a similar status or
performing similar functions) that:
(i) Solicits or accepts customers' orders (other than in a clerical
capacity) or
(ii) Supervises directly any person or persons so engaged.
(b) Registration required. It shall be unlawful for any person in
the business of soliciting, offering or selling the instruments listed
in Sec. 32.2 of this chapter to solicit, to offer to enter into, or to
enter into, to confirm the execution of, or to maintain transactions in
such instruments or to supervise directly persons so engaged except if
registered as an agricultural trade option merchant or as an associated
person of such a registered agricultural trade option merchant under
this section.
(c) Duration of registration. (1) A person registered in accordance
with the provisions of this section shall continue to be registered
until the revocation or withdrawal of registration.
(2) Agricultural trade option merchants must notify the National
Futures Association within forty five days when an associated person has
ceased to be so associated.
(3) An associated person who ceases to be associated with a
registered agricultural trade option merchant is prohibited from
engaging in activities requiring registration under Sec. 32.13 of this
chapter or representing himself or herself to be a registrant until:
(i) A registered agricultural trade option merchant notifies the
National Futures Association of the person's association; and
(ii) The associated person certifies to the National Futures
Association that he or she is not disqualified from registration for the
reasons listed in section 8a (2) and (3) of the Act; provided,
[[Page 135]]
however, no such certification is required when the associated person
becomes associated with the new agricultural trade option merchant
within ninety days from when the associated person ceased the previous
association.
(d) Conditions for registration. (1) Applicants for registration as
an agricultural trade option merchant must meet the following
conditions:
(i) The agricultural trade option merchant must have and maintain at
all times net worth of at least $50,000 computed in accordance with
generally accepted accounting principles;
(ii) The agricultural trade option merchant must identify each of
the natural persons who controls or directs the offer or sale of trade
options or associated trading activity by the agricultural trade option
merchant and any associated person of the agricultural trade option
merchant and each such natural person must certify that he or she is not
disqualified from registration for the reasons listed in sections 8a(2)
and (3) of the Act; and
(iii) The agricultural trade option merchant must provide access to
any representative of the Commission or the United States Department of
Justice for the purpose of inspecting books and records.
(2) Applicants for registration as an associated person of an must
meet the following conditions. Such persons must:
(i) Identify the agricultural trade option merchant with whom the
person is associated or to be associated within thirty days of the
person's registration; and
(ii) Certify that he or she is not disqualified from registration
for the reasons listed in sections 8a(2) and (3) of the Act.
(e) Applications for registration. (1) The agricultural trade option
merchant, including its principals, and associated persons of an
agricultural trade option merchant must apply for registration on the
appropriate forms specified by the National Futures Association and
approved by the Commission, in accordance with the instructions thereto,
including the separate certifications from each natural person that he
or she is not disqualified for any of the reasons listed in sections
8a(2) and (3) of the Act and such other identifying background
information as may be specified.
(2) The agricultural trade option merchant's application must also
include its most recent annual financial statements certified by an
independent certified public accountant in accordance with generally
accepted auditing standards prepared within the prior 12 months.
(3) These applications must be supplemented to include any changes
in the information required to be provided thereon on a form specified
by the National Futures Association and approved by the Commission.
(f) Withdrawal of application for registration; denial, suspension
and revocation of registration. The provisions of Sec. Sec. 3.51, 3.55,
3.56 and 3.60 shall apply to applicants for registration and registrants
as agricultural trade options merchants and their associated persons
under this part 3 as though they were an applicant or registrant in any
capacity under the Act.
(g) Withdrawal from registration. An agricultural trade option
merchant that has ceased or has not commenced engaging in activities
requiring registration may withdraw from registration 30 days after
notifying the National Futures Association on the specified form of its
intent to do so, unless otherwise notified by the Commission. Such a
withdrawal notification must include information identifying the
location of, and the custodian authorized to release, the agricultural
trade option merchant's records, a statement of the disposition of
customer positions, cash balances, securities or other property and a
statement that no obligations to customers arising from agricultural
trade options remain outstanding.
(h) Dual registration of associated persons. An associated person of
an agricultural trade option merchant may be associated with other
registrants subject to the provision of Sec. 3.12(f).
[64 FR 68016, Dec. 6, 1999]
[[Page 136]]
Sec. Sec. 3.14-3.20 [Reserved]
Sec. 3.21 Exemption from fingerprinting requirement in certain cases.
(a) Any person who is required by this part to submit a fingerprint
card may file, or cause to be filed, in lieu of such card:
(1) A legible, accurate and complete photocopy of a fingerprint card
which 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; or
(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 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.
(b) Each photocopy and statement filed in accordance with the
provisions of paragraph (a)(1) or (a)(2) of this section must be signed
and dated. Such signature shall constitute a certification by that
individual that the photocopy or statement is accurate and complete and
must be made by:
(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 floor trader.
The applicant for registration; or
(3) With respect to the fingerprints of a principal. An officer, if
the futures commission merchant, commodity trading advisor, commodity
pool operator, introducing broker, 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.
(c) Outside directors. Any futures commission merchant, introducing
broker, commodity trading advisor, commodity pool operator 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. Sec.
3.10(a)(2) and 3.31(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:
(1) Is not engaged in:
(i) The solicitation or acceptance of customers' orders,
(ii) The solicitation of funds, securities or property for a
participation in a commodity pool,
(iii) The solicitation of a client's or prospective client's
discretionary account,
(iv) The solicitation or acceptance of leverage customers' orders
for leverage transactions;
(2) Does not regularly have access to the keeping, handling or
processing of:
(i) Commodity interest transactions;
(ii) Customer funds, leverage customer funds, foreign futures or
foreign options secured amount, or adjusted net capital; or
(iii) The original books and records relating to the items described
in paragraphs (c)(2)(i) and (c)(2)(ii) of this section; and
(3) Does not have direct supervisory responsibility over persons
engaged in the activities referred to in paragraphs (c)(1) and (c)(2) of
this section; and
(4) The Notice Pursuant to Rule 3.21(c) shall also include:
(i) The name of the futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, leverage transaction
merchant, or applicant for registration in any of these capacities of
which the person is an outside director;
(ii) The nature of the duties of the outside director for whom
exemption under paragraph (c) of this section is sought;
(iii) The internal controls used to ensure that the outside director
for whom exemption under paragraph (c) of this section is sought does
not have access to the keeping, handling or processing
[[Page 137]]
of the items described in paragraphs (c)(2)(i), (c)(2)(ii), and
(c)(2)(iii) of this section; and
(iv) The reasons why the outside director believes he should be
exempted from the fingerprint requirement and why such an exemption
would not be contrary to the public interest and the purposes of the
provision from which exemption is sought.
(d) A firm that has filed a Notice Pursuant to Rule 3.21(c) with
respect to an outside director described therein must file with the
National Futures Association on behalf of such outside director a Form
8-R, completed in accordance with the instructions thereto and executed
by the outside director. The exemption provided for in paragraph (c) of
this section is limited solely to the outside director's fingerprint
requirement and does not affect any other duties or responsibilities of
the firm or the outside director under the Act or the rules set forth in
this chapter. In appropriate cases, the Commission and the National
Futures Association may require further information from the firm with
respect to any outside director referred to in a Notice Pursuant to Rule
3.21(c).
[48 FR 35297, Aug. 3, 1983, as amended at 49 FR 5525, Feb. 13, 1984; 54
FR 19558, May 8, 1989; 57 FR 23148, June 2, 1992; 58 FR 19592, Apr. 15,
1993; 66 FR 53518, Oct. 23, 2001]
Sec. 3.22 Supplemental filings.
Notwithstanding any other provision of this chapter, the Commission,
the Directors of the Division of Clearing and Intermediary Oversight or
Division of Enforcement or either Director's designee, or the National
Futures Association may, at any time, give written notice to any
registrant, applicant for registration, or person required to be
registered:
(a)(1) That derogatory information has come to the attention of the
staff of the Commission or the National Futures Association which, if
true, could constitute grounds upon which to base a determination that
the person is unfit to become, or to remain, registered or temporarily
licensed in accordance with the Act or the regulations thereunder and
setting forth such information in the notice and requesting the person
to provide evidence mitigating the seriousness of the statutory
disqualification set forth in the notice and evidence that the person
has undergone rehabilitation, or
(2) That the Commission or the National Futures Association has
undertaken a routine or periodic review of the registrant's fitness to
remain registered or temporarily licensed; and
(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. A Form 8-R must
be accompanied by that individual's fingerprints on a fingerprint card
provided by the Commission or the National Futures Association for that
purpose.
(c) Failure to provide the information required under paragraph (b)
of this section is a violation of the Commission's regulations which
itself constitutes grounds upon which to base a determination that the
person is unfit to become or to remain so registered.
(Approved by the Office of Management and Budget under control number
3038-0023)
[45 FR 8049, Dec. 5, 1980, as amended by 47 FR 27551, June 25, 1982; 49
FR 39532, Oct. 9, 1984; 53 FR 8433, Mar. 15, 1988; 57 FR 23148, June 2,
1992; 67 FR 62351, Oct. 7, 2002]
Sec. Sec. 3.23-3.29 [Reserved]
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
[[Page 138]]
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, commodity
trading advisor, commodity pool operator, introducing broker, or
leverage transaction merchant with which the principal is affiliated and
may address any correspondence relating to the registration of an
associated person to the futures commission merchant, commodity trading
advisor, commodity pool operator, introducing broker, 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 an 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 which 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 proceeding, including a
reparation proceeding brought under part 12 of this chapter.
[57 FR 23149, June 2, 1992]
Sec. 3.31 Deficiencies, inaccuracies, and changes, to be reported.
(a)(1) Each applicant or registrant as a futures commission
merchant, commodity trading advisor, commodity pool operator,
introducing broker, or leverage transaction merchant shall, in
accordance with the instructions thereto, promptly correct any
deficiency or inaccuracy in Form 7-R or Form 8-R which no longer renders
accurate and current the information contained therein. Each such
correction shall be made on Form 3-R and shall be prepared and filed in
accordance with the instructions thereto. Provided, however, that where
a registrant is reporting a change in the form of organization from or
to a sole proprietorship, the registrant must file a Form 7-W regarding
the pre-existing organization and a Form 7-R regarding the newly formed
organization.
(2) If a registrant files a Form 3-R, pursuant to this section, to
report a change in the form of the organization of the registrant, the
registrant shall be liable for all obligations of the pre-existing
organization under the Act, as it may be amended from time to time, and
the rules, regulations, or orders which have been or may be promulgated
thereunder.
(3) Where the deficiency or inaccuracy is created by the addition of
a new principal not listed on the registrant's application for
registration (or amendment of such application prior to the granting of
registration), and the new principal is not a natural person, the
registrant shall file a Form 3-R filed in accordance with the
requirements of paragraph (a)(1) of this section. Provided, however,
that if the new principal is a natural person, the registrant shall file
a Form 8-R, completed in accordance with the instructions thereto and
executed by such person who is a principal of the registrant and who was
not listed on the registrant's initial application for registration or
any amendment thereto. The Form 8-R for each such principal shall be
accompanied by the fingerprints of that principal on a fingerprint card
provided by the National Futures Association for that purpose, unless
such principal is a director who qualifies for the exemption
[[Page 139]]
from the fingerprint requirement pursuant to Sec. 3.21(c) or such
principal has a current Form 8-R on file with the Commission or the
National Futures Association.
(b) Each applicant or registrant as a floor broker, floor trader or
associated person, each person who qualifies for the temporary no-action
position under Sec. 1.66 of this chapter, and each principal of a
futures commission merchant, commodity trading advisor, commodity pool
operator, introducing broker, 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 which renders no longer accurate and current the information
contained in the Form 8-R or supplemental statement. Each such
correction must be made on Form 3-R and must be prepared and filed in
accordance with the instructions thereto.
(c)(1) After the filing of a Form 8-R or a Form 3-R by or on behalf
of any person for the purpose of permitting that person to be an
associated person of a futures commission merchant, commodity trading
advisor, commodity pool operator, introducing broker, or a leverage
transaction merchant, that futures commission merchant, 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:
(i) The failure of that person to become associated with the futures
commission merchant, commodity trading advisor, commodity pool operator,
introducing broker, or leverage transaction merchant, and the reasons
therefor; or
(ii) The termination of the association of the associated person
with the futures commission merchant, commodity trading advisor,
commodity pool operator, introducing broker, or leverage transaction
merchant, and the reasons therefor.
(2) Each person registered as, or applying for registration as, a
futures commission merchant, commodity trading advisor, commodity pool
operator, introducing broker 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.
(3) Any notice required by paragraph (c) of this section must be
filed on Form 8-T or on a Uniform Termination Notice for Securities
Industry Registration.
(d) Each contract market or derivatives transaction 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, or whose name appears on
a list of floor traders submitted in accordance with Sec. 1.66(a) of
this chapter in order to qualify for the temporary no-action position
thereunder, must notify the National Futures Association within sixty
days after such person has ceased having trading privileges on such
contract market or derivatives transaction execution facility.
(Approved by the Office of Management and Budget under control number
3038-0023)
[45 FR 80491, Dec. 5, 1980, as amended at 47 FR 27551, June 25, 1982; 48
FR 35297, Aug. 3, 1983; 49 FR 5525, Feb. 13, 1984; 49 FR 39533, Oct. 9,
1984; 51 FR 34460, Sept. 29, 1986; 53 FR 8433, Mar. 15, 1988; 54 FR
19558, May 8, 1989; 58 FR 19592, Apr. 15, 1993; 66 FR 53518, Oct. 23,
2001; 67 FR 38875, June 6, 2002; 72 FR 63104, Nov. 8, 2007]
Sec. 3.33 Withdrawal from registration.
(a) A futures commission merchant, 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:
(1) The registrant has ceased, or has not commenced, engaging in
activities requiring registration in such capacity;
(2) The registrant is exempt from registration in such capacity; or
(3) The registrant is excluded from the persons or any class of
persons required to be registered in such capacity: Provided, That the
National Futures Association or the Commission,
[[Page 140]]
as appropriate, may consider separately each capacity for which
withdrawal is requested in acting upon such a request.
(b) A request for withdrawal from registration as a futures
commission merchant, introducing broker, commodity trading advisor,
commodity pool operator, or leverage transaction merchant must be made
on Form 7-W, and a request for withdrawal from registration as a floor
broker or floor trader must be made on Form 8-W, completed and filed
with 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:
(1) The name of the registrant for which withdrawal is being
requested;
(2) The registration capacities for which withdrawal is being
requested;
(3) The name, address, and telephone number of the person who will
have custody of the books and records of the registrant; the address
where such books and records will be located; and a statement that such
person is authorized to make them available in accordance with the
requirements of Sec. 1.31 of this chapter;
(4) The applicable basis under paragraph (a) of this section for
requesting withdrawal for each capacity for which withdrawal is
requested.
(5) If withdrawal is requested under paragraph (a)(2) or (a)(3) of
this section, then, with respect to each capacity for which withdrawal
is requested, the section of the Act, regulations, or other authority
permitting the exemption or exclusion, and the circumstances which
entitle the registrant to claim such exemption or exclusion.
(6) If a basis for withdrawal from registration under paragraph
(a)(1) of this section is that the registrant has ceased engaging in
activities requiring registration, then, with respect to each capacity
for which the registrant has ceased such activities:
(i) That all customer or option customer agreements, if any, have
been terminated;
(ii) That all customer or option customer positions, if any, have
been transferred on behalf of customers or option customers or closed;
(iii) That all customer or option customer cash balances,
securities, or other property, if any, have been transferred on behalf
of customers or option customers or returned, and that there are no
obligations to customers or option customers outstanding;
(iv) In the case of a commodity pool operator, that all interests
in, and assets of, any commodity pool have been redeemed, distributed,
or transferred, on behalf of the participants therein, and that there
are no obligations to such participants outstanding;
(v) In the case of a leverage transaction merchant: (A) Either that
all leverage customer agreements, if any, and all leverage contracts
have been terminated, and that all leverage customer cash balances,
securities or other property, if any, have been returned, or (B)
alternatively, that pursuant to Commission approval, the leverage
contract obligations of the leverage transaction merchant have been
assumed by another leverage transaction merchant and all leverage
customer cash balances, securities or other property, if any, have been
transferred to such leverage transaction merchant on behalf of leverage
customers or returned, and that there are no obligations to leverage
customers outstanding;
(vi) The nature and extent of any pending customer, option customer,
leverage customer, or commodity pool participant claims against the
registrant, and, to the best of the registrant's knowledge and belief,
the nature and extent of any anticipated or threatened customer, option
customer, leverage customer, or commodity pool participant claims
against the registrant; and
(vii) In the case of a futures commission merchant which is a party
to a guarantee agreement, that all such agreements have been or will be
terminated in accordance with the provisions of Sec. 1.10(j) of this
chapter not more than thirty days after the filing of the request for
withdrawal from registration.
(c) Where a leverage transaction merchant is requesting withdrawal
from registration in that capacity and the
[[Page 141]]
basis for withdrawal under paragraph (a)(1) of this section is that it
has ceased engaging in activities requiring registration, the request
for withdrawal must be accompanied by a form 2-FR which contains the
information specified in Sec. 31.13(f) of this chapter as of a date not
more than 30 days prior to the date of the withdrawal request.
(d) [Reserved]
(e) A request for withdrawal from registration as a futures
commission merchant, introducing broker, commodity trading advisor,
commodity pool operator, leverage transaction merchant on Form 7-W, and
a request for withdrawal from registration as a floor broker or 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
Clearing and Intermediary Oversight, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581. In addition, any floor broker or
floor trader requesting withdrawal from registration must file a copy of
his Form 8-W with each contract market that has granted him 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.
(f) A request for withdrawal from registration will become effective
on the thirtieth day after receipt of such request by the National
Futures Association, or earlier upon written notice from the National
Futures Association (with the written concurrence of the Commission) of
the granting of such request, unless prior to the effective date:
(1) The Commission or the National Futures Association has
instituted a proceeding to suspend or revoke such registration;
(2) The Commission or the National Futures Association imposes, or
gives notice by mail which notice shall be complete upon mailing, that
it intends to impose terms or conditions upon such withdrawal from
registration;
(3) The Commission or the National Futures Association notifies the
registrant by mail, which notice shall be complete upon mailing, or the
registrant otherwise is notified that it is the subject of an
investigation to determine, among other things, whether such registrant
has violated, is violating, or is about to violate the Act, rules,
regulations or orders adopted thereunder;
(4) The Commission or the National Futures Association requests from
the registrant further information pertaining to its request for
withdrawal from registration; or
(5) The Commission or National Futures Association determines that
it would be contrary to the requirements of the Act, or of any rule,
regulation or order thereunder, or to the public interest to permit such
withdrawal from registration.
(g) Withdrawal from registration in one capacity does not constitute
withdrawal from registration in any other capacity.
(h) Withdrawal from registration does not constitute a release from
liability for any violation of the Act or of any rule, regulation, or
order thereunder.
(Approved by the Office of Management and Budget under control number
3038-0008)
[46 FR 48917, Oct. 5, 1981]
Editorial Note: For Federal Register citations affecting Sec. 3.33,
see the List of CFR Sections Affected, which appears in the Finding Aids
sections of the printed volume and on GPO Access.
Subpart B_Temporary Licenses
Sec. 3.40 Temporary licensing of applicants for associated person,
floor broker or floor trader registration.
(a) Notwithstanding any other provision of these regulations and
pursuant to the terms and conditions of this subpart:
(1) The National Futures Association may grant a temporary license
to any applicant for registration as an associated person upon the
contemporaneous filing with the National Futures Association of:
[[Page 142]]
(i) A Form 8-R, properly completed in accordance with the
instructions thereto; and
(ii) The sponsor's certification required by Sec. 3.12(c):
Provided, however, that the fingerprints of the applicant on a
fingerprint card provided by the National Futures Association for that
purpose must be filed with the National Futures Association within 20
days following the date the temporary license is issued; and, provided
further, that failure to file the fingerprints within this period will
result in the termination of the temporary license immediately upon
notice to the applicant's sponsor that the National Futures Association
has not received the applicant's fingerprints.
(2) The National Futures Association may grant a temporary license
to any applicant for registration as a floor broker or floor trader upon
the contemporaneous filing with the National Futures Association of:
(i) A Form 8-R, properly completed in accordance with the
instructions thereto;
(ii) The fingerprints of the applicant on a fingerprint card
provided by the National Futures Association for that purpose;
(iii) A Supplemental Sponsor Certification Statement executed by a
sponsor meeting the requirements under Sec. 3.60(b)(2)(i), if the
applicant is subject to an order imposing conditions on the applicant's
registration; and
(iv) Evidence that the applicant has been granted trading privileges
by a contract market or derivatives transaction execution facility that
has filed with the National Futures Association a certification signed
by its chief operating officer with respect to the review of an
applicant's employment, credit and other history in connection with the
granting of trading privileges.
(b) The failure of an applicant or the applicant's sponsor to
respond to a request by the Commission or the National Futures
Association for clarification of any information set forth in the
application of the applicant or for the resubmission of fingerprints in
accordance with such request will be deemed to constitute a withdrawal
of the applicant's registration application and shall result in the
immediate termination of the applicant's temporary license.
(c) Subject to the provisions of Sec. 3.42 and all of the
obligations imposed on such registrants under the Act (in particular,
section 14 thereof) and the rules, regulations, and orders thereunder,
an applicant for registration as an associated person who has received
notification that a temporary license has been granted may act in the
capacity of an associated person, an applicant for registration as a
floor trader who has received written notification that a temporary
license has been granted may act in the capacity of a floor trader, and
an applicant for registration as a floor broker who has received written
notification that a temporary license has been granted may act in the
capacity of a floor broker.
[67 FR 38876, June 6, 2002]
Sec. 3.42 Termination.
(a) A temporary license shall terminate:
(1) Five days after service upon the applicant of a notice by the
Commission or the National Futures Association pursuant to Sec. 3.60 of
this part that the applicant for registration may be found subject to a
statutory disqualification from registration;
(2) Immediately upon termination of the association of the applicant
for registration as an associated person with the registrant which filed
the sponsorship certification, or immediately upon loss of trading
privileges by an applicant for registration as a floor broker or floor
trader on all contract markets which filed the certification described
in Sec. 3.40;
(3) Immediately upon the withdrawal of the registration application
pursuant to Sec. 3.40;
(4) Immediately upon failure to comply with an order to pay a civil
monetary penalty, restitution, or disgorgement within the time permitted
under sections 6(e), 6b, or 6c(d) of the Act;
(5) Immediately upon failure to pay the full amount of a reparation
order within the time permitted under section 14(f) of the Act;
(6) Immediately upon failure to comply with an award in an
arbitration proceeding conducted pursuant to the
[[Page 143]]
rules of a designated contract market, registered derivatives
transaction execution facility, or registered futures association within
the time specified in section 10(g) of the National Futures
Association's Code of Arbitration or the comparable time period
specified in the rules of a contract market, registered derivatives
transaction execution facility, or other appropriate arbitration forum.
(7) Immediately upon the revocation or withdrawal of the
registration of the applicant's sponsor; or
(8) Immediately upon notice to the applicant and the applicant's
sponsor or the contract market that has granted the applicant trading
privileges that:
(i) The applicant failed to disclose relevant disciplinary history
information in response to items 14 through 18 on the applicant's Form
8-R; or
(ii) An event has occurred leading to an affirmative response to any
of items 14 through 18 on the applicant's Form 8-R.
(b) Upon termination, the applicant may not engage in any activity
which requires registration with the Commission as an associated person,
floor broker or floor trader.
[49 FR 8219, Mar. 5, 1984, as amended at 57 FR 23151, June 2, 1992; 58
FR 19594, Apr. 15, 1993; 67 FR 38876, June 6, 2002]
Sec. 3.43 Relationship to registration.
(a) A temporary license shall not be deemed to be a registration or
to confer any right to such registration.
(b) Unless a temporary license has terminated pursuant to Sec.
3.42, a temporary license shall become a registration with the
Commission upon the earlier of:
(1) A determination by the National Futures Association that the
applicant is qualified for registration as an associated person, floor
broker or floor trader; or
(2) The expiration of six months from the date of issuance unless a
notice has been issued under Sec. 3.60 of the initiation of a
proceeding to deny registration under section 8a(2) or 8a(3) of the Act.
[49 FR 8219, Mar. 5, 1984, as amended at 49 FR 39534, Oct. 9, 1984; 54
FR 19559, May 8, 1989; 58 FR 19595, Apr. 15, 1993]
Sec. 3.44 Temporary licensing of applicants for guaranteed introducing
broker registration.
(a) Notwithstanding any other provisions of these regulations, and
pursuant to the terms and conditions of this subpart, the National
Futures Association may grant a temporary license to any applicant for
registration as an introducing broker upon the contemporaneous filing
with the National Futures Association of:
(1) A properly completed guarantee agreement (Form 1-FR part B) from
a futures commission merchant which is eligible to enter into such an
agreement pursuant to Sec. 1.10(j)(2) of this chapter;
(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.
(4) A certification executed by a person duly authorized by the
futures commission merchant that has executed the guarantee agreement
required by paragraph (a)(1) of this section, stating that:
(i) The futures commission merchant has verified the information on
the Forms 8-R filed pursuant to paragraph (a)(3) of this section which
relate to education and employment history of the applicant's principals
(including each branch office manager) thereof during the preceding
three years; and
(ii) To the best of the futures commission merchant's knowledge,
information, and belief, all of the publicly available information
supplied by the applicant and its principals and each branch office
manager of the applicant on the Form 7-R and Forms 8-R, as appropriate,
is accurate and complete; and
(5) The fingerprints of the applicant, if a sole proprietor, and of
each principal (including each branch office manager) thereof on
fingerprint cards provided by the National Futures Association for that
purpose: Provided, that a principal who has a current Form 8-
[[Page 144]]
R on file with the National Futures Association or the Commission is not
required to submit a fingerprint card.
(b) The effective date of a guarantee agreement filed in accordance
with paragraph (a)(1) of this section is the date upon which the
temporary license is granted by the National Futures Association.
(c) An applicant that fails to respond in accordance with a written
request by the Commission or the National Futures Association for
clarification of any information set forth in the application of the
applicant or any principal (including any branch office manager) thereof
or for the resubmission of a fingerprint card will be deemed to have
withdrawn its registration application and the temporary license issued
to such applicant and any associated person thereof shall terminate
immediately.
[51 FR 45760, Dec. 22, 1986, as amended at 53 FR 8435, Mar. 15, 1988; 57
FR 23151, June 2, 1992; 64 FR 1728, Jan. 12, 1999; 67 FR 38876, June 6,
2002]
Sec. 3.45 Restrictions upon activities.
(a) Subject to the provisions of Sec. 3.46 of this subpart and all
of the obligations imposed on such registrants under the Act (in
particular, section 14 thereof) and the rules, regulations and orders
thereunder, an applicant for registration as an introducing broker who
has received written notification that a temporary license has been
granted may act in the capacity of a guaranteed introducing broker.
(b) An applicant for registration as an introducing broker who has
received a temporary license may be guaranteed by a futures commission
merchant other than the futures commission merchant which provided the
initial guarantee agreement described in Sec. 3.44(a)(1) of this
subpart: Provided, That, at least 10 days prior to the effective date of
the termination of the existing guarantee agreement in accordance with
the provisions of Sec. 1.10 (j)(4)(ii) or (j)(5) of this chapter, or
such other period of time as the National Futures Association may allow
for good cause shown, the applicant files with the National Futures
Association (1) written notice of such termination and (2) a new
guarantee agreement with another futures commission merchant effective
the day following the last effective date of the existing guarantee
agreement.
[51 FR 45761, Dec. 22, 1986]
Sec. 3.46 Termination.
(a) A temporary license shall terminate:
(1) Five days after service upon the applicant of a notice by the
National Futures Association that the applicant for registration may be
found subject to a statutory disqualification from registration;
(2) Immediately upon termination of the applicant's guarantee
agreement in accordance with Sec. 1.10(j)(4)(ii) or (j)(5) of this
chapter, unless a new guarantee agreement is filed in accordance with
Sec. 3.45(b);
(3) Immediately upon the failure of an applicant to respond to a
written request by the Commission or the National Futures Association
for clarification of information set forth in the application of the
applicant or any principal (including any branch office manager) thereof
or for the resubmission of a fingerprint card pursuant to Sec. 3.44(c)
in accordance with such request;
(4) Immediately upon the revocation or withdrawal of the guarantor
futures commission merchant's registration;
(5) Immediately upon the withdrawal of the registration application
pursuant to Sec. 3.44(c);
(6) Immediately upon failure to comply with an order to pay a civil
monetary penalty, restitution, or disgorgement within the time permitted
unders sections 6(e), 6b, or 6c(d) of the Act;
(7) Immediately upon failure to pay the full amount of a reparation
order within the time permitted under section 14(f) of the Act;
(8) Immediately upon failure to comply with an award in an
arbitration proceeding conducted pursuant to the rules of a designated
contract market, registered derivatives transaction execution facility,
or registered futures association within the time specified in section
10(g) of the National Futures Association's Code of Arbitration or the
comparable time period specified in
[[Page 145]]
the rules of a contract market, registered derivatives transaction
execution facility, or other appropriate arbitration forum.
(9) Whenever a person not listed as a principal on the applicant's
initial registration application becomes a principal under Sec. 3.1(a);
or
(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 in
response to items 11 through 15 on the applicant's Form 7-R or items 14
through 18 on a principal's Form 8-R; or
(ii) An event has occurred leading to an affirmative response to any
of items 11 through 15 on the applicant's Form 7-R or items 14 through
18 on a principal's Form 8-R.
(b) Upon termination, the applicant may not engage in any activity
which requires registration as an introducing broker.
[51 FR 45761, Dec. 22, 1986, as amended at 53 FR 8435, Mar. 15, 1988; 58
FR 19595, Apr. 15, 1993; 67 FR 38876, June 6, 2002]
Sec. 3.47 Relationship to registration.
(a) A temporary license shall not be deemed to be a registration or
to confer any right to such registration.
(b) Unless a temporary license has terminated, a temporary license
shall become a registration upon the earlier of:
(1) A determination by the National Futures Association that the
applicant is qualified for registration as an introducing broker; or
(2) The expiration of six months from the date of issuance unless a
notice has been issued under Sec. 3.60 of the initiation of a
proceeding to deny registration under sections 8a(2) or 8a(3) of the
Act.
[51 FR 45761, Dec. 22, 1986, as amended at 58 FR 19595, Apr. 15, 1993]
Subpart C_Denial, Suspension or Revocation of Registration
Source: 49 FR 8220, Mar. 5, 1984, unless otherwise noted.
Sec. 3.50 Service.
(a) For purposes of this subpart, service upon an applicant or
registrant will be sufficient if mailed by registered mail or certified
mail return receipt requested properly addressed to the applicant or
registrant at the address shown on his application or any amendment
thereto, and will be complete upon mailing. Where a party effects
service by mail, the time within which the person served may respond
thereto shall be increased by three days.
(b) A copy of any notice served in accordance with paragraph (a) of
this section shall also be served upon:
(1) Any registrant sponsoring the applicant or registrant pursuant
to the provisions of Sec. 3.12 of this part if the applicant or
registrant is an individual registered as or applying for registration
as an associated person; or
(2) Any futures commission merchant which has entered into a
guarantee agreement in accordance with Sec. 1.10(j) of this chapter, if
the applicant or registrant is registered as or applying for
registration as an introducing broker.
(c) Documents served upon the Division of Clearing and Intermediary
Oversight or upon the Division of Enforcement or filed with the
Commission under this subpart shall be considered served or filed only
upon actual receipt at the Commission's Washington, DC office, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
(d) Except for the documents which may be served under Sec. 3.51,
any documents served upon an applicant or registrant or upon the
Division of Clearing and Intermediary Oversight or the Division of
Enforcement or filed with the Commission under this subpart shall be
concurrently filed with the Proceedings Clerk, together with proof of
service, in accordance with the provisions of Sec. 10.12 (d) and (e) of
this chapter.
[49 FR 8220, Mar. 5, 1984, as amended at 57 FR 23151, June 2, 1992; 60
FR 49334, Sept. 25, 1995; 60 FR 54801, Oct. 26, 1995; 67 FR 62351, Oct.
7, 2002]
[[Page 146]]
Sec. 3.51 Withdrawal of application for registration.
(a) Notice. Whenever information comes to the attention of the
Commission that an applicant for initial registration in any capacity
under the Act may be found subject to a statutory disqualification under
sections 8a(2) or 8a(3) of the Act, the Commission may serve written
notice upon the applicant, which notice shall specify the statutory
disqualifications to which the applicant may be subject and advise the
applicant that:
(1) The information, if true, is a basis upon which the applicant's
registration may be denied;
(2) Unless the applicant voluntarily withdraws the application, it
may be necessary to institute the denial procedures described in this
subpart; and
(3) If the applicant does not confirm in writing that the applicant
wishes to have the application given further consideration, the
application of the applicant will be deemed to have been withdrawn.
(b) The applicant must serve the written confirmation referred to in
paragraph (a)(3) of this section upon the Secretary of the Commission on
or before twenty days after the date the notice described in paragraph
(a) of this section is served.
[49 FR 8220, Mar. 5, 1984, as amended at 57 FR 23151, June 2, 1992]
Sec. Sec. 3.52-3.54 [Reserved]
Sec. 3.55 Suspension and revocation of registration pursuant to
section 8a(2) of the Act.
(a) Notice. On the basis of information obtained by the Commission,
the Commission may at any time serve notice upon a registrant in any
capacity under the Act that:
(1) The Commission alleges and is prepared to prove that the
registrant is subject to one or more of the statutory disqualifications
set forth in section 8a(2) of the Act;
(2) An Administrative Law Judge shall make a determination, based
upon written evidence, as to whether the registrant is subject to such
statutory disqualification; and
(3) If the registrant is found to be subject to a statutory
disqualification, the registration of the registrant may be suspended
and the registrant ordered to show cause why such registration should
not be revoked.
(b) Written submission. If the registrant wishes to challenge the
accuracy of the allegations set forth in the notice, the registrant may
submit written evidence limited to the type described in Sec.
3.60(b)(1) of this part. Such written submission must be served upon the
Division of Enforcement and filed with the Proceedings Clerk within
twenty days of the date of service of notice to the registrant.
(c) Reply. Within ten days of receipt of any written submission
filed by the registrant, the Division of Enforcement may serve upon the
registrant and file with the Proceedings Clerk a reply.
(d) Determination by Administrative Law Judge. A determination by
the Administrative Law Judge as to whether the registrant is subject to
a statutory disqualification must be based upon the evidence of the
statutory disqualification, notice with proof of service, the written
submission, if any, filed by the registrant in response thereto, any
written reply submitted by the Division of Enforcement and such other
papers as the Administrative Law Judge may require or permit.
(e) Suspension and order to show cause. (1) If the registrant is
found to be subject to a statutory disqualification, the Administrative
Law Judge, within thirty days after receipt of the registrant's written
submission, if any, and any reply thereto, shall issue an interim order
suspending the registration of the registrant and requiring the
registrant to show cause within twenty days of the date of the order
why, notwithstanding the existence of the statutory disqualification,
the registration of the registrant should not be revoked. The
registration of the registrant shall be suspended, effective five days
after the order to show cause is served upon the registrant in
accordance with Sec. 3.50(a), until a final order with respect to the
order to show cause has been issued: Provided, That if the sole basis
upon which the registrant is subject to statutory disqualification is
the existence of a temporary order, judgment or decree of the type
described in section 8a(2)(C) of the Act,
[[Page 147]]
the order to show cause shall not be issued and the registrant shall be
suspended until such time as the temporary order, judgment or decree
shall have expired: Provided, however, That in no event shall the
registrant be suspended for a period to exceed six months.
(2) If the registrant is found not to be subject to a statutory
disqualification, the Administrative Law Judge shall issue an order to
that effect and the Proceedings Clerk shall promptly serve a copy of
such order on the registrant, the Division of Clearing and Intermediary
Oversight and the Division of Enforcement. Such order shall be effective
as a final order of the Commission fifteen days after the date it is
served upon the registrant in accordance with the provisions of Sec.
3.50(a) of this part unless a timely application for review is filed in
accordance with Sec. 10.102 of this chapter. The appellate procedures
set forth in Sec. Sec. 10.102, 10.103, 10.104, 10.106, 10.107 and
10.109 of this chapter shall apply to any appeal brought under paragraph
(e)(2) of this section.
(f) Further proceedings. If an order to show cause is issued
pursuant to paragraph (e)(1) of this section, further proceedings on
such order shall be conducted in accordance with the provisions of Sec.
3.60(b)-(j) of this part.
[49 FR 8220, Mar. 5, 1984, as amended at 57 FR 23151, June 2, 1992; 58
FR 19595, Apr. 15, 1993; 60 FR 54801, Oct. 26, 1995; 67 FR 62351, Oct.
7, 2002]
Sec. 3.56 Suspension or modification of registration pursuant to
section 8a(11) of the Act.
(a) Notice. (1) On the basis of information obtained by the
Commission, the Commission may at any time serve written notice upon a
registrant in any capacity under the Act that:
(i) The Commission alleges and is prepared to prove, by reference to
an information, indictment or complaint authorized by a United States
Attorney or an appropriate official of any State that the registrant is
charged with the commission of or participation in a crime involving a
violation of the Act or a violation of any other provision of Federal or
State law that would reflect on the honesty or the fitness of the person
to act as a fiduciary that is punishable by imprisonment for a term
exceeding one year, and that continued registration of the person may
pose a threat to the public interest or may threaten to impair public
confidence in any market regulated by the Commission;
(ii) An Administrative Law Judge shall make a determination, based
upon written evidence and any oral hearing granted, as to whether the
registrant is charged with the Commission of or participation in such a
crime and whether the continued registration of the person may pose a
threat to the public interest or may threaten to impair public
confidence in any market regulated by the Commission; and
(iii) If the registrant is found to be charged with the commission
of or participation in such a crime and it is found that the continued
registration of the person may pose a threat to the public interest or
may threaten to impair public confidence in any market regulated by the
Commission, the registration of the registrant shall be suspended or
modified.
(2) The notice referred to in paragraph (a) of this section shall
include a short and plain statement that the continued registration of
the registrant may pose a threat to the public interest or may threaten
to impair public confidence in any market regulated by the Commission.
(b) Response. (1) If the registrant wishes to challenge the accuracy
of the allegations in the notice, the registrant may submit written
evidence as to:
(i) The registrant's identity;
(ii) The existence of a clerical error in any record documenting the
information, indictment or complaint;
(iii) The nature of the information, indictment or complaint; or
(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 or contract
market, as appropriate for the registrant in accordance with Sec.
3.60(b)(2)(i) and
[[Page 148]]
who meets the standard set forth in Sec. 3.60(b)(2)(i)(A) and (C).
(2) The registrant may also request an oral hearing, which shall
include a statement of the issues to be addressed, a list of any
witnesses to be called, a summary of the testimony to be elicited and
copies of any documents to be introduced. An oral hearing shall be
granted upon request.
(3) Such written submissions must be served upon the Division of
Enforcement and filed with the Proceedings Clerk within twenty days of
the date of service of notice to the registrant under paragraph (a) of
this section.
(c) Reply. Within ten days of receipt of any written submission
filed by the registrant, the Division of Enforcement may serve upon the
registrant and file with the Proceedings Clerk a reply.
(d) Oral hearing. An oral hearing shall be conducted pursuant to
such sections of the Commission's Rules of Practice, 17 CFR part 10, as
the Administrative Law Judge deems necessary and in a manner which shall
ensure that the proceeding is resolved expeditiously.
(e) Determination by Administrative Law Judge. (1) A determination
by the Administrative Law Judge as to whether the Division of
Enforcement has shown by a preponderance of the evidence that the
registrant is charged with the commission of or participation in a crime
as set forth in the notice and that the continued registration of the
registrant may pose a threat to the public interest or may threaten to
impair public confidence in any market regulated by the Commission must
be based upon the evidence of service, the response, if any, filed by
the registrant, any written reply submitted by the Division of
Enforcement and such other papers as the Administrative Law Judge may
require or permit, and the oral hearing, if any. If the Division of
Enforcement has made the required showings, the Administrative Law
Judge, within thirty days after the last written submission or the oral
hearing, shall issue an order suspending or modifying the registration
of the registrant. If the Division of Enforcement has not made the
required showings, the Administrative Law Judge, within thirty days
after the last written submission or the oral hearing, shall issue an
order to that effect. The Administrative Law Judge's order shall include
a written determination setting forth the basis for his ruling.
(2) The Proceedings Clerk shall promptly serve a copy of such order
on the registrant, the Division of Clearing and Intermediary Oversight
and the Division of Enforcement. Such Order shall be effective as a
final order of the Commission fifteen days after the date it is served
upon the registrant in accordance with the provisions of Sec. 3.50(a)
unless a timely application for review is filed in accordance with Sec.
10.102 of this chapter. The appellate procedures set forth in Sec. Sec.
10.102, 10.103, 10.104, 10.106, 10.107 and 10.109 of this chapter shall
apply to any appeal brought under paragraph (e)(2) of this section.
(f) Any order of suspension or modification issued under this
section shall remain in effect until such information, indictment, or
complaint is disposed of or until terminated by the Commission.
(g) On disposition of such information, indictment, or complaint,
the Commission may issue and serve on such registrant a notice under
Sec. 3.55 or Sec. 3.60 to suspend, restrict, or revoke the
registration of such person.
(h) A finding of not guilty or other disposition of the charge shall
not preclude the Commission from thereafter instituting any other
proceedings under the Act or its rules.
(i) A person aggrieved by an order issued under this section may
obtain review of such order in the same manner and on the same terms and
conditions as are provided in section 6(c) of the Act.
[58 FR 19595, Apr. 15, 1993, as amended at 60 FR 54801, Oct. 26, 1995;
67 FR 62351, Oct. 7, 2002]
Sec. 3.57 Proceedings under section 8a(2)(E) of the Act.
The Commission will not initiate a proceeding under section 8a(2)(E)
of the Act, if respondeat superior is the sole basis upon which the
registrant may be found subject to a statutory disqualification.
[[Page 149]]
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.
(a) Notice. On the basis of information obtained by the Commission,
the Commission may at any time give written notice to any applicant for
registration or any registrant in any capacity under the Act that:
(1) The Commission alleges and is prepared to prove that the
registrant or applicant is subject to one or more of the statutory
disqualifications set forth in section 8a(2), 8a(3) or 8a(4) of the Act;
(2) The allegations set forth in the notice, if true, constitute a
basis upon which registration may be denied, granted upon conditions,
suspended, revoked or restricted;
(3) The applicant or registrant is entitled to file a response
within thirty days of the date of service of the notice to challenge the
evidentiary basis of the statutory disqualification set forth in the
notice or show cause why, notwithstanding the accuracy of those
allegations, registration should nevertheless be granted, or granted
upon condition, or should not be conditioned, suspended, revoked or
restricted; and
(4) If the applicant or registrant does not file a timely response
to the notice:
(i) The applicant or registrant will be deemed to have waived his
right to a hearing on all issues and the facts stated in the notice
shall be deemed to be true and conclusive for the purpose of finding
that the applicant or registrant is subject to a statutory
disqualification under sections 8a(2), 8a(3) or 8a(4) of the Act; and
(ii) A presiding officer may thereafter decide whether to issue an
order of default in accordance with paragraph (g) of this section to
deny, condition, suspend, revoke, or place restrictions upon
registration based solely upon the facts set forth in the notice.
(b) Response. Within thirty days after service upon the applicant or
registrant of a notice issued in accordance with the provisions of
paragraph (a) of this section, the applicant or registrant shall file a
response with the Proceedings Clerk and serve a copy of the response on
the Division of Enforcement.
(1) In the response, the applicant or registrant shall state whether
he challenges the evidentiary basis of the statutory disqualification
set forth in the notice. The grounds for such a challenge shall include
evidence as to:
(i) The applicant's or registrant's identity,
(ii) The existence of a clerical error in any record documenting the
statutory disqualification,
(iii) The nature or date of the statutory disqualification,
(iv) The post-conviction modification of any record of conviction,
or
(v) The favorable disposition of any appeal.
The applicant or registrant shall state the nature of each challenge and
submit a verified statement or affidavit to support facts material to
each challenge raised in the response.
(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 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 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 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
[[Page 150]]
registration in either capacity and intends to make such a showing, he
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 has
no employer by another floor broker or, in the case of a floor trader or
applicant for registration 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 that has granted trading
privileges, whereby the employer or floor broker, appropriate
registrant, principal or contract market chief operating officer (on
behalf of the contract market) 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:
(A) An adjudicatory proceeding pursuant to the provisions of
sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act is not pending; and
(B) In the case of a sponsor which is a futures commission merchant
or a leverage transaction merchant, the sponsor is not subject to the
reporting requirements of Sec. 1.12(b) or Sec. 31.7(b) of this
chapter, respectively; and
(C) Such person is not barred from service on self-regulatory
organization governing boards or committees based on disciplinary
history in accordance with Sec. 1.63 of this chapter.
(ii) If, in the response, the applicant or registrant states that he
intends to make the showing referred to in paragraph (b)(2)(i) of this
section, he shall also, within fifteen days after filing his initial
response under paragraph (b) of this section, file with the Proceedings
Clerk and serve a copy on the Division of Enforcement a submission which
includes a statement of the applicant, registrant or his attorney
identifying and summarizing the testimony of each witness whom the
applicant or registrant intends to have testify in support of facts
material to his showing, and copies of all documents which the applicant
or registrant intends to introduce to support facts material to his
showing. The factors forming the basis for a disqualified applicant's or
registrant's showing referred to in paragraph (b)(2)(i) of this section
may include:
(A) Evidence mitigating the seriousness of the wrongdoing underlying
the statutory disqualification set forth in the notice;
(B) Evidence that the applicant or registrant has undergone
rehabilitation since the time of the wrongdoing underlying the statutory
disqualification; and
(C) If the person is an associated person, floor broker or 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 the applicant's or
registrant's future wrongdoing, including proposed conditions or
restrictions.
(c) Reply. Within thirty days after the latter of the date the
applicant or registrant serves a copy of the response on the Division of
Enforcement (if no further submission is to be made in accordance with
paragraph (b)(2)(ii) of this section), or the date the applicant or
registrant serves a copy of the further submission made in accordance
with paragraph (b)(2)(ii) of this section on the Division of
Enforcement, the Division of Enforcement shall file a reply thereto with
the Proceedings Clerk and serve a copy of the reply on the applicant or
registrant. The Division of Enforcement's reply shall include either:
(1) A motion for summary disposition stating that there are no
genuine issues of material fact to be determined and that registration
should be denied or revoked, based upon the applicant's or registrant's
response and further submission, if any, and any other materials which
are attached to the reply and would be admissible under Sec. 10.91 of
this chapter; or
(2) A description of factual issues raised in the applicant's or
registrant's response and further submission, if
[[Page 151]]
any, that the Division of Enforcement regards as material and disputed.
Such a reply shall also include the identity and a summary of the
expected testimony of each witness whom the Division intends to have
testify, and copies of all documents which the Division intends to
introduce.
(d) Oral Presentation. Within thirty days of the date the Division
of Enforcement files its reply in accordance with the provisions of
paragraph (c) of this section to the applicant's or registrant's
response and further submission, if any, the Administrative Law Judge
shall issue an order:
(1) If the Administrative Law Judge finds, based on the motion for
summary disposition, that a party is entitled to judgment as a matter of
law, granting, denying, suspending, or revoking the registration of an
applicant or registrant, or dismissing the notice issued in accordance
with paragraph (a) of this section, and such order shall be made in
accordance with the standards set forth in paragraphs (e) and (f) of
this section; or
(2) Notifying the parties of a time and place of hearing. At such
hearing, the parties shall be limited to presentation of witnesses and
documents listed in previous filings except, for good cause shown, the
parties may request that the witness and document lists be supplemented
for purposes of rebuttal. Such oral hearing shall be conducted in
accordance with Sec. Sec. 10.61-10.81 and 10.83 of this chapter. The
Administrative Law Judge shall file an initial decision after completion
of the oral hearing in accordance with the standards set forth in
paragraphs (e) and (f) of this section.
(3) Upon notice that the Administrative Law Judge has concluded that
an oral presentation is appropriate, the parties may elect to
participate by telephone in accordance with the terms set forth in Sec.
12.209(b) of this chapter. To effect such an election, the party shall
file a notice with the Proceedings Clerk and serve a copy on all
opposing parties within fifteen days of the date the Administrative Law
Judge's notice is served. The filing of an election to participate by
telephone will be deemed a waiver of the party's right to a full oral
hearing on the parties' material disputes of fact. The Administrative
Law Judge shall schedule a telephonic hearing only if all parties to the
proceeding elect such a procedure. The Administrative Law Judge shall
conduct such a hearing in accordance with Sec. 12.209(b) of this
chapter. Following the hearing, the Administrative Law Judge shall issue
a written decision in accordance with the standards set forth in
paragraphs (e) and (f) of this section.
(e) Determination by Administrative Law Judge--Standards of Proof.
The Administrative Law Judge's written determination shall specifically
consider whether the Division of Enforcement has shown by a
preponderance of the evidence that the applicant or registrant is
subject to the statutory disqualification set forth in the notice issued
by the Commission and, where appropriate:
(1) In actions involving statutory disqualifications set forth in
section 8a(2) of the Act, whether the applicant or registrant has made a
clear and convincing showing that full, conditioned or restricted
registration would not pose a substantial risk to the public despite the
existence of the statutory disqualification; or
(2) In actions involving statutory disqualifications set forth in
sections 8a(3) or 8a(4) of the Act, whether the applicant or registrant
has shown by a preponderance of the evidence that full, conditioned or
restricted registration would not pose a substantial risk to the public
despite the existence of the statutory disqualification.
(f) Determination of Administrative Law Judge--Findings. In making
his written determination, the Administrative Law Judge shall set forth
the facts material to his conclusion and provide an explanation of his
decision in light of the statutory disqualification set forth in the
notice and, where appropriate, his findings regarding:
(1) Evidence mitigating the seriousness of the wrongdoing underlying
the applicant's or registrant's statutory disqualification;
(2) Evidence that the applicant or registrant has undergone
rehabilitation since the time of the wrongdoing underlying the statutory
disqualification; and
[[Page 152]]
(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 sponsor, supervising employer or floor broker, or
supervising registrant, principal or contract market may petition to
lift or modify the conditions or restrictions in accordance with Sec.
3.64.
(g) Default. The procedures for obtaining a default order and the
setting aside of a default order in a proceeding instituted under this
section shall follow the procedures set forth in Sec. Sec. 10.93 and
10.94 of this chapter.
(h) Settlements--(1) When offers may be made. Parties may, at any
time during the course of the proceeding, propose offers of settlement.
All offers of settlement shall be in writing.
(2) Content of offer. Each offer of settlement made by a respondent
shall:
(i) Acknowledge service of the notice;
(ii) Admit the jurisdiction of the Commission with respect to the
matters set forth in the notice;
(iii) Include a waiver of:
(A) A hearing,
(B) All post-hearing procedures,
(C) Judicial review, and
(D) Any objection to the staff's participation in the Commission's
consideration of the offer;
(iv) Stipulate the record basis on which an order may be entered,
which may consist solely of the notice and any findings contained in the
offer of settlement; and
(v) Consent to the entry of an order reflecting the terms of
settlement agreed upon, including, where appropriate:
(A) Findings that the respondent is subject to statutory
disqualification under sections 8a(2), 8a(3), or 8a(4) of the Act, and
(B) The revocation, suspension, denial or granting of full
registration or imposition of conditioned or restricted registration.
(3) Submission of offer. Offers of settlement made by a respondent
shall be submitted in writing to the Division of Enforcement, which
shall present them to the Commission with the Division's recommendation.
The respondent will be informed if the recommendation will be
unfavorable, in which event the offer shall not be presented to the
Commission unless the respondent so requests. Any offer of settlement
not presented to the Commission shall be null and void with respect to
any acknowledgment, admission, waiver, stipulation or consent contained
in the offer and shall not be used in any manner in the proceeding by
any party thereto.
(4) Acceptance of offer. The offer of settlement will only be deemed
accepted upon issuance by the Commission of an opinion and order based
on the offer. Upon issuance of the opinion and order, the proceeding
shall be terminated as to the respondent involved and so noted on the
docket by the Proceedings Clerk.
(5) Rejection of offer. When an offer of settlement is rejected, the
party making the offer shall be notified by the Division of Enforcement
and the offer of settlement shall be deemed withdrawn. A rejected offer
of settlement and any documents relating thereto shall not constitute a
part of the record in the proceeding; and the offer will be null and
void with respect to any acknowledgment, admission, waiver, stipulation
or consent contained in the offer and shall not be used in any manner in
the proceeding by any party thereto.
(i) Effect of the Administrative Law Judge's Determination. The
Administrative Law Judge's written determination shall become the final
decision of the Commission thirty days following the date the
Proceedings Clerk serves the determination on the parties unless:
(1) One or more of the parties files and serves a timely notice of
appeal in accordance with Sec. 10.102 of this chapter; or
[[Page 153]]
(2) The Commission issues an order staying the effective date of the
determination and notifying the parties of its intention to undertake
sua sponte review in accordance with Sec. 10.105 of this chapter.
(j) Appeal. Following the filing of a notice of appeal, the rules of
appellate procedure set forth in Sec. Sec. 10.102, 10.103, 10.104,
10.106, 10.107 and 10.109 of this chapter shall apply to any proceeding
brought under this section.
(k) With the exception of Sec. Sec. 10.2 through 10.5, 10.7 through
10.12(a) (1), 10.12(a) (3) through 10.12(g), 10.26(a)-(d), 10.34, 10.43,
10.44 and 10.84 of this chapter, or unless otherwise provided in
Sec. Sec. 3.50 through 3.64 of this part, the provisions of the
Commission's Rules of Practice in part 10 of this chapter shall not
apply in any proceeding brought under this part to deny, suspend,
revoke, restrict or condition registration pursuant to sections 8a(2),
8a(3) or 8a(4) of the Commodity Exchange Act.
(l) The failure of any sponsor, supervising employer or floor
broker, or supervising registrant, principal or contract market 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.
[57 FR 23152, June 2, 1992, as amended at 58 FR 19596, Apr. 15, 1993; 60
FR 54801, Oct. 26, 1995]
Sec. 3.61 Extensions of time for proceedings brought under Sec. 3.55,
Sec. 3.56, and Sec. 3.60 of this part.
(a) In general. Except as otherwise provided by law or by these
rules, for good cause shown, the Commission or an Administrative Law
Judge before whom a proceeding brought under Sec. 3.55, Sec. 3.56 or
Sec. 3.60 is then pending, on their own motion or the motion of a
party, may at any time extend or shorten the time limit prescribed by
those rules for filing any document. In any instance in which a time
limit is not prescribed for an action to be taken concerning any matter,
the Commission or the Administrative Law Judge may set a time limit for
that action.
(b) Motions for extension of time. Absent extraordinary
circumstances, in any instance in which a time limit that has been
prescribed for an action to be taken concerning any matter exceeds seven
days from the date of the order establishing the time limit, requests
for extension of time shall be filed at least five (5) days prior to the
expiration of the time limit and shall explain why an extension of time
is necessary.
[57 FR 23154, June 2, 1992, as amended at 58 FR 19597, Apr. 15, 1993]
Sec. 3.62 [Reserved]
Sec. 3.63 Service of order issued by an Administrative Law Judge or
the Commission.
A copy of any order issued pursuant to Sec. 3.60 of this part shall
be served promptly upon the applicant or registrant, the Division of
Clearing and Intermediary Oversight, the Division of Enforcement, the
National Futures Association, and any contract markets where the
applicant or registrant is a member or has trading privileges in
accordance with the provisions of Sec. 3.50(a) of this part.
[57 FR 23154, June 2, 1992, as amended at 67 FR 62351, Oct. 7, 2002]
Sec. 3.64 Procedure to lift or modify conditions or restrictions.
(a) Petition. The registrant and his sponsor or supervising floor
broker may file a petition with the Proceedings Clerk and serve a copy
of the petition on the Division of Enforcement to lift or modify
conditions or restrictions on the registrant's registration.
(1) The petition may be filed after the period specified in the
order imposing the conditioned or restricted registration.
(2) In the petition, the registrant and his sponsor, supervising
employer or floor broker, or supervising registrant, principal or
contract market 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
[[Page 154]]
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 or contract market.
(b) Response. (1) Within thirty days of receipt of the petition,
pursuant to paragraph (a) of this section, the Division of Enforcement
shall file a response with the Proceedings Clerk. The response must
include a recommendation by the Division of Enforcement as to whether to
continue the conditions or restrictions, modify the conditions or
restrictions, or to allow for a full registration.
(2) If the Division of Enforcement agrees with the petitioner's
request to lift or modify conditions or restrictions on the petitioner's
registration, it shall so recommend to the Commission. Such
recommendation will only be deemed accepted upon issuance by the
Commission of an order lifting or modifying conditions or restrictions
on the petitioner's registration. Such order shall be so noted on the
docket by the Proceedings Clerk.
(c) Oral presentation. If the Division of Enforcement requests a
continuation, or a modification other than in accordance with the terms
of the petition, of the restrictions or conditions on the registration,
the Administrative Law Judge shall, within thirty days of the date that
the response is filed pursuant to paragraph (b) of this section,
determine whether an oral presentation is appropriate to the reliable
resolution of the registrant's petition.
(1) If the Administrative Law Judge determines that an oral
presentation is appropriate, he shall notify the parties of his
determination and shall schedule and conduct an oral hearing in
accordance with Sec. Sec. 10.61 through 10.81 of this chapter.
Following the hearing, the Administrative Law Judge shall issue a
written decision or an order.
(2) If the Administrative Law Judge concludes that an oral
presentation is unnecessary, he shall notify the parties and issue a
written decision or an order.
(d) Effect of the Administrative Law Judge's determination. The
Administrative Law Judge's written determination shall become the final
decision of the Commission thirty days following the date the
Proceedings Clerk serves the determination on the registrant, the
registrant's sponsor, supervising employer or floor broker, or
supervising registrant, principal or contract market, and the Division
of Enforcement unless one or more of the parties files a timely notice
of appeal in accordance with Sec. 10.102 of this chapter.
(e) Appeal. Following the filing of a notice of appeal, the rules of
appellate procedure set forth in Sec. Sec. 10.102, 10.103, 10.104,
10.106, 10.107 and 10.109 of this chapter shall apply to any proceeding
brought under this section.
[57 FR 23154, June 2, 1992, as amended at 58 FR 19597, Apr. 15, 1993; 60
FR 54801, Oct. 26, 1995]
Subpart D_Notice Under Section 4k(5) of the Act
Sec. 3.70 Notification of certain information regarding associated
persons.
(a) Notice. A registrant must notify the Commission under section
4k(5) of the Act of any facts regarding an associated person of the
registrant or an applicant for registration as an associated person whom
it has sponsored pursuant to the provisions of Sec. 3.12 of this part
or whom it intends to hire or otherwise employ as an associated person
which are set forth as statutory disqualifications in section 8a(2) of
the Act within ten business days of the date upon which the registrant
first knows or should have known such facts. Notice to the Commission
shall be sufficient if the registrant gives notice to the Director of
the Division of Clearing and Intermediary Oversight or the Director's
designee by telephone and confirms such notice in writing by certified
or registered mail or equivalent means to the Commission at its
Washington, DC office (Attn: Deputy Director, Compliance and
Registration Section, Division of Clearing and Intermediary Oversight,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581).
(b) Unlawful to act as an associated person. Upon the earlier of
notification to the Commission by the registrant pursuant to paragraph
(a) of this section, or actual receipt of notice to the
[[Page 155]]
registrant pursuant to Sec. 3.50(b)(1) of this part, that an associated
person of the registrant or an applicant for registration as an
associated person may be subject to a statutory disqualification as set
forth in section 8a(2) of the Act, it shall be unlawful for the
registrant to permit such person to act in the capacity of an associated
person of the registrant until the Commission determines that such
person should nonetheless be registered.
(c) Proceedings under subpart C. Upon notification to the Commission
by the registrant under paragraph (a) of this section, the Commission
may promptly issue notice under Sec. 3.55 or Sec. 3.60 of this part,
as appropriate, to suspend and revoke the registration of the associated
person of the registrant or to deny the registration of the applicant
for registration as an associated person of the registrant.
[49 FR 8223, Mar. 5, 1984, as amended at 57 FR 23155, June 2, 1992; 60
FR 49334, Sept. 25, 1995; 67 FR 62351, 62352, Oct. 7, 2002]
Subpart E_Delegation and Reservation of Authority
Sec. 3.75 Delegation and reservation of authority.
(a) The Commission hereby delegates, until such time as it orders
otherwise, the authority to perform all functions specified in subparts
B through D to the persons authorized to perform them thereunder.
(b) Nothing in this subpart shall prevent the Commission from
exercising the authority delegated therein.
(c) The Commission reserves to itself the decision in any case to
proceed by order, upon notice and hearing, to deny, suspend, condition
or restrict the registration of any person pursuant to sections 8a(2),
8a(3) and 8a(4) of the Act.
(d) Nothing in this part shall affect the authority of the
Commission to institute a proceeding pursuant to section 6(c) of the
Act.
(e) The Commission may, by order of delegation, authorize a futures
association registered pursuant to section 17 of the Act to perform all
or any portion of the registration functions under subparts B through D
in accordance with rules or procedures adopted by such futures
association and submitted to the Commission pursuant to section 17(j) of
the Act and subject to the applicable provisions of the Act.
[49 FR 8224, Mar. 5, 1984, as amended at 57 FR 23155, June 2, 1992; 59
FR 5315, Feb. 4, 1994]
Sec. Appendix A to Part 3--Interpretative Statement With Respect to
Section 8a(2)(C) and (E) and Section 8a(3)(J) and (M) of the Commodity
Exchange Act
Section 8a(2) (C) and (E)
The provisions of sections 8a(2)-8a(4) of the Commodity Exchange Act
(``Act'') establish a system of statutory disqualifications pursuant to
which the Commission may find an applicant or registrant unfit for
registration and vest the Commission with wide discretion to deny,
condition, suspend, restrict or revoke the registration of any person
subject to one or more of the disqualifications set forth therein. The
Commission recognizes that the full exercise of its authority under
these provisions of the Act may have unintended results. In particular,
the exercise of such authority may, in certain cases, impede the
efficient enforcement of the Act and the various federal and state
securities acts.
At this time, the Commission cannot anticipate all of the
circumstances under which it may elect not to exercise its authority
under sections 8a(2)-8a(4). Until the Commission has gained experience
with these provisions of the Act, such determinations generally must be
made on a case-by-case basis. Nonetheless, the Commission has identified
two paragraphs of section 8a(2) of the Act which it has determined to
interpret more narrowly than required.
Section 8a(2)(C). Section 8a(2) of the Act authorizes the Commission
to deny, condition, suspend or restrict the registration of any person
``upon notice, but without a hearing'' and to revoke the registration of
any person ``with such hearing as may be appropriate,'' if such person
is subject to one or more of the disqualifications described in
paragraphs (A)-(H). Section 8a(2)(C) authorizes the Commission to affect
the registration of any person:
``if such person is permanently or temporarily enjoined by order,
judgment, or decree of any court of competent jurisdiction * * * ,
including an order entered pursuant to an agreement of settlement to
which the Commission or any Federal or State agency or other
governmental body is a party, from (i) acting as a futures commission
merchant, introducing broker, floor broker, floor trader, commodity
trading advisor, commodity pool operator, associated person of any
registrant under the Act, securities broker, securities
[[Page 156]]
dealer, municipal securities broker, municipal securities dealer,
transfer agent, clearing agency, securities information processor,
investment advisor, investment company, or affiliated person or employee
of any of the foregoing or (ii) engaging in or continuing any activity
involving any transaction in or advice concerning contracts of sale of a
commodity for future delivery, concerning matters subject to Commission
regulation under section 4c or 19 of the Act, or concerning
securities;''
The Commission believes that a person enjoined from acting in a
certain capacity as described in section 8a(2)(C)(i), even if the order
of injunction is entered into pursuant to an agreement of settlement,
similarly should be prohibited from acting in any other capacity which
requires registration with the Commission. Therefore, the Commission
does not intend to limit its authority under section 8a(2)(C)(i) of the
Act.
However, the Commission is also aware that it has often initiated
proceedings in which the sole relief sought was an injunction from
engaging in certain conduct. In such circumstances, the Commission has
accepted offers of settlement which provide that the findings set forth
in the settlement will not form the sole basis for the denial,
suspension or revocation of such person's registration with the
Commission. The Commission does not wish to impede the resolution by
negotiated settlement of such proceedings. Therefore, the Commission has
determined that it will not exercise its authority under section
8a(2)(C)(ii) of the Act with respect to any person temporarily or
permanently enjoined by agreement of settlement from engaging in any
conduct described in that paragraph, if the agreement of settlement
clearly restricts the use of such order of injunction or any findings
set forth therein in subsequent or collateral proceedings.
Thus, a provision in the agreement of settlement to the effect,
inter alia, that the findings set forth in the agreement will not form
the sole basis upon which the registration of such person may be
affected will preclude a collateral proceeding under section
8a(2)(C)(ii) where the sole basis for such proceeding is the agreement
of settlement. Unless otherwise precluded in the agreement of
settlement, however, the person will be collaterally estopped from
denying the findings set forth therein, whether or not admitted, in any
other subsequent or collateral proceeding and such findings may, in
conjunction with the findings in such subsequent or collateral
proceeding, form a basis for affecting the registration of that person
or imposing such other sanctions as may be deemed appropriate.
Section 8a(2)(E) of the Act authorizes the Commission to affect the
registration of any person:
If such person, within ten years preceding the filing of the
application or at any time thereafter, has been found in a proceeding
brought by the Commission or any Federal or State agency or other
governmental body, or by agreement of settlement to which the Commission
or any Federal or State agency or other governmental body is a party,
(i) to have violated any provision of this Act, [the securities acts],
chapter 96 of title 18 of the United States Code, or any similar statute
of a State or foreign jurisdiction, or any rule, regulation, or order
under any such statutes, or the rules of the Municipal Securities
Rulemaking Board where such violation involves embezzlement, theft,
extortion, fraud, fraudulent conversion, misappropriation of funds,
securities or property, forgery, counterfeiting, false pretenses,
bribery, or gambling, or (ii) to have willfully aided, abetted,
counseled, commanded, induced, or procured such violation by any other
person;
As in section 8a(2)(C)(ii), the Commission will not exercise its
authority under section 8a(2)(E) of the Act with respect to any person
subject to a statutory disqualification thereunder, if the findings are
part of an agreement of settlement which clearly restricts the use of
such findings by inclusion of a provision to the effect, inter alia,
that the findings set forth in the agreement will not form the sole
basis upon which the registration of such person may be affected.
Section 2(a)(1)(A) of the Act, inter alia, codifies the legal
concept of respondant superior by providing that a futures commission
merchant, introducing broker, commodity trading advisor, commodity pool
operator or leverage transaction merchant may be held liable for the
conduct of an associated person sponsored by such registrant. \*\ Thus,
findings of the type described in paragraph (E) may be entered against a
registrant solely because such registrant is responsible, under section
2(a)(1)(A) of the Act, for the conduct of its associated persons. As
prescribed in Sec. 3.57 of the Commission's regulations, however, the
Commission will not exercise its authority under section 8a(2)(E) to
affect the registration of such registrant, if respondant superior is
the sole basis for finding that the registrant is subject to a statutory
disqualification.
---------------------------------------------------------------------------
\*\ Specifically, section 2(a)(1)(A)(iii) of the Act provides in
part, that the ``act, omission or failure of any official, agent, or
other person acting for any individual, association, partnership,
corporation, or trust within the scope of his employment or office shall
be deemed the act, omission, or failure of such individual, association,
partnership, corporation, or trust as well as of such official, agent,
or other person.'' 7 U.S.C. 4 (1982).
---------------------------------------------------------------------------
The Commission notes that section 8a(3)(C) and 8a(4) authorize the
Commission to affect
[[Page 157]]
the registration of a person if it is found, after notice and
opportunity for a hearing, that such person ``failed reasonably to
supervise another person, who is subject to such person's supervision,
with a view to preventing violations of this Act or [the securities
acts], or of any of the rules, regulation or orders thereunder, and the
person subject to supervision committed such a violation * * *'' In this
connection, the Commission believes that any proceeding to affect the
registration of a registrant against which findings have been made
solely pursuant to section 2(a)(1)(A) of the Act is more appropriately
initiated under the provisions of section 8a(3)(C) and 8a(4).
Section 8a(2)(E) may also be interpreted to authorize the Commission
to affect the registration of any person if the findings described
therein are made in a proceeding initiated by a private party either in
a court of law or in a reparations proceeding under section 14 of the
Act. At the present time, however, the Commission does not intend to
exercise its authority under section 8a(2)(E) on the basis of such
findings. The Commission believes that such proceedings are intended
primarily to provide restitution to the customer and are not intended to
be punitive in nature. Therefore, it may not be appropriate to use
findings in such proceedings to affect the registration of any person
under section 8a(2)(E).
At the same time, however, such findings may form the basis of a
proceeding against a person under the provisions of section 8a(3)(M) and
8a(4), which authorize the Commission, after notice and opportunity for
a hearing, to deny, condition, suspend, restrict or revoke the
registration of any person if ``there is other good cause.'' Similarly,
such findings may form the basis for a proceeding against a registrant
under sections 8a(3)(C) and 8a(4) for the failure of such registrant
``reasonably to supervise another person, who is subject to such
person's supervision, with a view to preventing violations of this Act *
* * or of any of the rules, regulations or orders thereunder * * *''
Moreover, because the Commission views actions by private parties as an
important adjunct to the Commission's own enforcement proceedings, the
Commission intends to monitor carefully decisions in such proceedings
and may amend this interpretation if deemed appropriate.
Section 8a(3) (J) and (M)
Section 8a(3) authorizes the Commission to refuse to register an
applicant for registration if, after notice and opportunity for a
hearing, the applicant is found subject to one or more of the
disqualifications described in paragraphs (A)-(M). Section 8a(4)
authorizes the Commission, after notice and opportunity for a hearing,
to condition, suspend, restrict, or revoke the registration of any
person subject to a disqualification under section 8a(3).
Section 8a(3)(J) authorizes the Commission to affect the
registration of any person if:
such person is subject to an outstanding order denying, suspending,
or expelling such person from membership in a contract market, a
registered futures association, any other self-regulatory organization
or any foreign regulatory body that the Commission recognizes as having
a comparable regulatory program, or barring or suspending such person
from being associated with any member or members of such contract
market, association, self-regulatory organization, or foreign regulatory
body.
The Commission interprets the term ``self-regulatory organization''
to include, in addition to a contract market and a registered futures
association, any self-regulatory organization as defined in section
3(a)(26) of the Securities Exchange Act of 1934. Thus, a self-regulatory
organization includes any national securities exchange, any registered
securities association, any registered clearing agency and the Municipal
Securities Rulemaking Board.
Section 8a(3)(M). Section 8a(3)(M) authorizes the Commission to
affect the registration of any person if ``there is other good cause''.
Specifically, the Commission interprets paragraph (M) to authorize the
Commission to refuse to register such person in any new capacity, if
such person, or any principal of such person, is the subject of an
administrative proceeding brought by the Commission to revoke the
existing registration of such person in any other capacity, pending a
final decision in such administrative proceeding. The Commission
believes it would be inconsistent to register a person in a new
capacity, thereby determining that such person is qualified to be
registered, while simultaneously seeking to revoke such person's
registration in a different capacity because such person's conduct
disqualifies him from registration.
Similarly, the Commission interprets paragraph (M) to authorize the
Commission to refuse to register, register conditionally or otherwise
affect the registration of any person if such person has consented, in
connection with an agreement of settlement with a contract market, a
registered futures association, or any other self-regulatory
organization, to comply with an undertaking to withdraw all forms of
existing or pending registration and/or not to apply for registration
with the National Futures Association or the Commission in any capacity.
Such person's effort to violate his or her prior undertaking to withdraw
from and/or not to apply for registration shall be considered to
[[Page 158]]
constitute ``other good cause'' under paragraph (M). The Commission
believes that allowing such a person to be registered would be
inappropriate and inconsistent with the intention of parties to the
prior settlement agreement. The failure to withdraw or the attempt to
register in the face of such an undertaking would indicate the lack of
fair and honest dealing which the Commission believes constitutes
``other good cause'' for denying, revoking or conditioning registration
under the Act. The Commission also believes that allowing registration
in such a situation would be inconsistent with both Section 8a(2)(A),
which authorizes the Commission to refuse to register, to register
conditionally, or to revoke, suspend or place restrictions upon the
registration of any person if such person's prior registration has been
suspended (and the period of such suspension has not expired) or has
been revoked, and Section 8a(3)(J), which authorizes the Commission to
refuse to register or to register conditionally any person if he or she
is subject to an outstanding order denying, suspending, or expelling
such person from membership in a contract market, a registered futures
association, or any other self-regulatory organization.
Good cause to affect a person's registration also exists: (1) If the
operations of such person disrupt or would tend to disrupt orderly
market conditions, or cause or would tend to cause sudden or
unreasonable fluctuations or unwarranted changes in the price of
commodities or contracts for future delivery of commodities or commodity
options; (2) if such person has used or is using in its name a term such
as ``board of trade'', ``clearing corporation'' or ``exchange'' in a
misleading context, or uses any terms in its representations to the
public which may indicate that the person is a contract market or a
member of a contract market when such is not the case, or has used or is
using a misleading name which would tend to suggest to the public that
the person is affiliated with another person when that is not the case
or that the person is engaged in a commodity-related business when the
person is not in fact substantially so engaged, or has failed to
disclose to the public an agency relationship with another person when
such failure could mislead the public; (3) if such person is subject to
an outstanding order denying, suspending or revoking the license of such
person by a licensing authority, such as a state real estate or
insurance commission; and (4) if such person has failed to answer the
inquiries or requests for further information concerning an application
for registration filed with the Commission.
This listing, of course, is not exclusive. In general, the
Commission interprets paragraph (M) to authorize the Commission to
affect the registration of any person if, as a result of any act or
pattern of conduct attributable to such person, although never the
subject of formal action or proceeding before either a court or
governmental agency, such person's potential disregard of or inability
to comply with the requirements of the Act or the rules, regulations or
order thereunder, or such person's moral turpitude, or lack of honesty
or financial responsibility is demonstrated to the Commission.
Any inability to deal fairly with the public and consistent with
just and equitable principles of trade may render an applicant or
registrant unfit for registration, given the high ethical standards
which must prevail in the industry.
The Commission has further addressed ``other good cause'' under
Section 8a(3)(M) of the Act in issuing guidance letters on assessing the
fitness of floor brokers, floor traders or applicants in either
category:
[First guidance letter]
December 4, 1997
Robert K. Wilmouth, President, National Futures Association, 200 West
Madison Street, Chicago, IL 60606-3447
Re: Adverse Registration Actions with Respect to Floor Brokers, Floor
Traders and Applicants for Registration in Either Category
Dear Mr. Wilmouth: As you know, the Commission on June 26, 1997,
approved for publication in the Federal Register a Notice and Order
concerning adverse registration actions by the National Futures
Association (``NFA'') with respect to registered floor brokers
(``FBs''), registered floor traders (``FTs'') and applicants for
registration in either category. 62 Fed. Reg. 36050 (July 3, 1997). The
Notice and Order authorized NFA to grant or to maintain, either with or
without conditions or restrictions, FB or FT registration where NFA
previously would have forwarded the case to the Commission for review of
disciplinary history. The Commission has worked with its staff to
determine which of the pending matters could efficiently be returned to
NFA for handling, and such matters have been forwarded to NFA. The
Commission will continue to accept or to act upon requests for
exemption, and the Commission staff will consider requests for ``no-
action'' opinions with respect to applicable registration requirements.
By this correspondence, the Commission is issuing guidance that
provides NFA further direction on how it expects NFA to exercise its
delegated power, based upon the experience of the Commission and the
staff with the registration review process during the past three years.
This guidance will help ensure that NFA exercises its delegated power in
a manner consistent with Commission precedent.
In exercising its delegated authority, NFA, of course, needs to
apply all of the provisions
[[Page 159]]
of Sections 8a(2) and (3) of the Commodity Exchange Act (``Act''). \1\
In that regard, NFA should consider the matters in which the Commission
has taken action in the past and endeavor to seek similar registration
restrictions, conditions, suspensions, denials, or revocations under
similar circumstances.
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\1\ 7 U.S.C. 12a(2) and (3) (1994). The letter is intended to
supplement, not to supersede, other guidance provided in the past to
NFA. In this regard, the NFA should continue to follow other guidance
provided by the Commission or its staff.
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One of the areas in which NFA appears to have had the most
uncertainty is with regard to previous self-regulatory organization
(``SRO'') disciplinary actions. Commission Rule 1.63 \2\ provides clear
guidelines for determining whether a person's history of ``disciplinary
offenses'' should preclude service on SRO governing boards or
committees. \3\ In determining whether to grant or to maintain, either
with or without conditions or restrictions, FB or FT registration, NFA
should, as an initial matter, apply the Rule 1.63(a)(6) criteria to
those registered FBs, registered FTs and applicants for registration in
either category. However, NFA should be acting based upon any such
offenses that occurred within the previous five years, rather than the
three years provided for in Rule 1.63(c). NFA should consider
disciplinary actions taken by an SRO as that term is defined in Section
3(a)(26) of the Securities Exchange Act of 1934 no differently from
disciplinary actions taken by an SRO in the futures industry as defined
in Rule 1.3(ee). \4\ Application of the Rule 1.63 criteria, as modified,
to these matters will aid NFA in making registration determinations that
are reasonably consonant with Commission views. \5\ NFA should focus on
the nature of the underlying conduct rather than the sanction imposed by
an SRO. Thus, if a disciplinary action would not come within the
coverage of Rule 1.63 but for the imposition of a short suspension of
trading privileges (such as for a matter involving fighting, use of
profane language or minor recordkeeping violations), NFA could exercise
discretion, as has the Commission, not to institute a statutory
disqualification case. On the other hand, conduct that falls clearly
within the terms of Rule 1.63, such as violations of rules involving
potential harm to customers of the exchange, should not be exempt from
review simply because the exchange imposed a relatively minor sanction.
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\2\ Commission rules referred to herein are found at 17 CFR Ch. I.
\3\ Rule 1.63(c) provides that a person is ineligible from serving
on an SRO's disciplinary committees, arbitration panels, oversight
panels or governing board if, as provided in Rule 1.63(b), the person,
inter alia: (1) within the past three years has been found by a final
decision of an SRO, an administrative law judge, a court of competent
jurisdiction or the Commission to have committed a disciplinary offense;
or (2) within the past three years has entered into a settlement
agreement in which any of the findings or, in the absence of such
findings, any of the acts charged included a disciplinary offense.
Rule 1.63(a)(6) provides that a ``disciplinary offense'' includes:
(i) any violation of the rules of an SRO except those rules related to
(A) decorum or attire, (B) financial requirements, or (C) reporting or
record-keeping unless resulting in fines aggregating more than $5,000
within any calendar year; (ii) any rule violation described in
subparagraphs (A) through (C) above that involves fraud, deceit or
conversion or results in a suspension or expulsion; (iii) any violation
of the Act or the regulations promulgated thereunder; or (iv) any
failure to exercise supervisory responsibility with respect to an act
described in paragraphs (i) through (iii) above when such failure is
itself a violation of either the rules of an SRO, the Act or the
regulations promulgated thereunder.
\4\ Thus, for example, a disciplinary action taken by the Chicago
Board Options Exchange or the National Association of Securities
Dealers, Inc. should be considered in a manner similar to a disciplinary
action of the Chicago Board of Trade or NFA.
\5\ In reviewing these matters, the NFA should bear in mind recent
Commission precedent which allows for reliance on settled disciplinary
proceedings in some circumstances. See In the Matter of Michael J.
Clark, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 27,032
(Apr. 22, 1997) (``other good cause'' under Section 8a(3)(M) of the Act
exists based upon a pattern of exchange disciplinary actions resulting
in significant sanctions for serious rule violations--whether
settlements or adjudications), aff'd sub nom., Clark v. Commodity
Futures Trading Commission, No. 97-4228 (2d Cir. June 4, 1999)
(unpublished).
---------------------------------------------------------------------------
The Commission has treated the registration process and the SRO
disciplinary process as separate matters involving separate
considerations. The fact that the Commission has not pursued its own
enforcement case in a particular situation does not necessarily mean
that the Commission considers the situation to be a minor matter for
which no registration sanctions are appropriate. Further, the Commission
believes that it and NFA, entities with industry-wide perspective and
responsibilities, are the appropriate bodies, rather than any individual
exchange, to decide issues relating to registration status, which can
affect a person's ability to function in the industry well beyond the
jurisdiction of a particular exchange. Thus, NFA's
[[Page 160]]
role is in no way related to review of exchange sanctions for particular
conduct, but rather it is the entirely separate task of determining
whether an FB's or FT's conduct should impact his or her registration.
NFA also should look to Commission precedent in selecting conditions
or restrictions to be imposed, such as a dual trading ban where a person
has been involved in disciplinary offenses involving customer abuse.
Where conditions or restrictions are imposed, or agreed upon, NFA also
should follow Commission precedent, under which such conditions or
restrictions generally have been imposed for a two-year period.
The Commission has required sponsorship for conditioned FBs and FTs
when their disciplinary offenses have involved noncompetitive trading
and fraud irrespective of the level of sanctions imposed by an SRO.
Indeed, but for a sponsorship requirement there would be no one
routinely watching and responsible for the activities of these
registrants. Absent sponsorship, such FBs and FTs would only be subject
to routine Commission and exchange surveillance. The Commission's rules
are premised upon the judgment that requiring FTs and FBs to have
sponsors to ensure their compliance with conditions is both appropriate
and useful. See Rule 3.60(b)(2)(i).
A question has arisen whether, if NFA is required to prove up the
underlying facts of an SRO disciplinary action, the exchanges can
provide information on exchange disciplinary proceedings directly to
NFA. Although Section 8c(a)(2) of the Act states that an exchange shall
not disclose the evidence for a disciplinary action except to the person
disciplined and to the Commission, Section 8a(10) of the Act allows the
Commission to authorize any person to perform any portion of the
registration functions under the Act, notwithstanding any other
provision of law. The effective discharge of the delegated registration
function requires NFA to have access to the exchange evidence. Thus, the
Commission believes that Section 8a(10) may reasonably be interpreted to
allow the disclosure of information from exchange disciplinary
proceedings directly to NFA despite the provisions of Section 8c(a)(2).
Nothing in the Notice and Order affects the Commission's authority
to review the granting of a registration application by NFA in the
performance of Commission registration functions, including review of
the sufficiency of conditions or restrictions imposed by NFA, to review
the determination by NFA not to take action to affect an existing
registration, or to take its own action to address a statutory
disqualification. Moreover, the Commission Order contemplates that to
allow for appropriate Commission oversight of NFA's exercise of this
delegated authority, NFA will provide for the Commission's review
quarterly schedules of all applicants cleared for registration and all
registrants whose registrations are maintained without adverse action by
NFA's Registration, Compliance, Legal Committee despite potential
statutory disqualifications.
The Commission will continue to monitor NFA activities through
periodic rule enforcement reviews, and NFA remains subject to the
present requirement that it monitor compliance with the conditions and
restrictions imposed on conditioned and restricted registrants.
Sincerely,
Jean A. Webb, Secretary of the Commission
[Second guidance letter]
April 13, 2000
Robert K. Wilmouth, President, National Futures Association, 200 West
Madison Street, Chicago, IL 60606-3447
Re: Use of Exchange Disciplinary Actions as ``Other Good Cause'' to
Affect Floor Broker/Floor Trader Registration
Dear Mr. Wilmouth:
I. Introduction and Background
In July 1997, the Commission issued a Notice and Order authorizing
the National Futures Association (``NFA'') to grant or to maintain,
either with or without conditions or restrictions, floor broker (``FB'')
or floor trader (``FT'') registration where NFA previously would have
forwarded the case to the Commission for review of disciplinary history.
\1\ By letter dated December 4, 1997 (``Guidance Letter''), the
Commission provided further direction on how the Commission expected NFA
to exercise its delegated power and to ensure that NFA exercised its
delegated power in a manner consistent with Commission precedent.
---------------------------------------------------------------------------
\1\ Registration Actions by National Futures Association With
Respect to Floor Brokers, Floor Traders and Applicants for Registration
in Either Category, 62 FR 36050 (July 3, 1997).
---------------------------------------------------------------------------
The Commission has determined to revise the Guidance Letter.
Specifically, the Commission is revising the portion of the Guidance
Letter that addresses the use of exchange disciplinary actions as
``other good cause'' to affect FB and FT registrations. The Commission
has made this determination following its own reconsideration of the
issue and at the urging of industry members. \2\
---------------------------------------------------------------------------
\2\ See letters submitted by James Bowe, former president of the New
York Board of Trade (``NYBOT''), dated October 13, 1999, Christopher
Bowen, general counsel of the New York Mercantile Exchange (``NYMEX''),
dated October 18, 1999, and the Joint Compliance Committee (``JCC''),
dated February 2, 2000. The JCC consists of senior compliance officials
from all domestic futures exchanges and the NFA (i.e., the domestic
self-regulatory organizations (``SROs'')). In addition, staff from the
Contract Markets Section of the Commission's Division of Clearing and
Intermediary Oversight attend the JCC meetings as observers. The JCC was
established to aid in the development of improved compliance systems
through joint efforts and information-sharing among the SROs. Commission
staff have also discussed this issue with SRO staff.
---------------------------------------------------------------------------
[[Page 161]]
The Guidance Letter pointed out that, in exercising its delegated
authority, NFA must apply all of the provisions of Sections 8a(2) and
(3) of the Commodity Exchange Act (``Act''). \3\ In particular, Section
8a(3)(M) of the Act authorizes the Commission to refuse to register or
to register conditionally any person if it is found, after opportunity
for hearing, that there is other good cause for statutory
disqualification from registration beyond the specifically listed
grounds in Sections 8a(2) and 8a(3) of the Act. The Commission held in
In the Matter of Clark that statutory disqualification under the ``other
good cause'' provision of Section 8a(3)(M) may arise on the basis of,
among other things, a pattern of exchange disciplinary actions alleging
serious rule violations that result in significant sanctions, and that
it is immaterial whether the sanctions imposed resulted from a fully-
adjudicated disciplinary action or an action that was taken following a
settlement. \4\
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\3\ 7 U.S.C. 12a(2) and (3) (1994).
\4\ In the Matter of Clark, [1996-1998 Transfer Binder] Comm. Fut.
L. Rep. (CCH) ] 27,032 (Apr. 22, 1997), aff'd sub nom., Clark v.
Commodity Futures Trading Commission, No. 97-4228 (2d Cir. June 4, 1999)
(unpublished).
---------------------------------------------------------------------------
The Guidance Letter recommended the application of the provisions of
Commission Rule 1.63 \5\ as criteria to aid in assessing the impact of
an FB or FT applicant's or registrant's previous disciplinary history on
the person's fitness to be registered, with the exception that NFA
should be acting based on disciplinary history from the previous five
years, rather than the three years provided for in Rule 1.63. \6\ The
Guidance Letter also noted that NFA should consider disciplinary actions
taken not only by futures industry SROs but also those taken by SROs as
defined in Section 3(a)(26) of the Securities Exchange Act of 1934
(``1934 Act''), including settled disciplinary actions.
---------------------------------------------------------------------------
\5\ Commission rules referred to in this letter are found at 17 CFR
Ch. 1.
\6\ Rule 1.63 provides, among other things, that a person is
ineligible from serving on SRO disciplinary committees, arbitration
panels, oversight panels or governing boards if that person, inter alia,
entered into a settlement agreement within the past three years in which
any of the findings or, in the absence of such findings, any of the acts
charged included a disciplinary offense.
Rule 1.63(a)(6) defines a ``disciplinary offense'' to include:
(i) any violation of the rules of an SRO except those rules related
to (A) decorum or attire, (B) financial requirements, or (C) reporting
or record-keeping unless resulting in fines aggregating more than $5,000
within any calendar year; (ii) any rule violation described in
subparagraphs (A) through (C) above that involves fraud, deceit or
conversion or results in a suspension or expulsion; (iii) any violation
of the Act or the regulations promulgated thereunder; or (iv) any
failure to exercise supervisory responsibility with respect to an act
described in paragraphs (i) through (iii) above when such failure is
itself a violation of either the rules of an SRO, the Act or the
regulations promulgated thereunder.
---------------------------------------------------------------------------
II. Revised Guidance
As stated above, the Commission has determined to revise the
Guidance Letter. From this point forward, NFA should cease using Rule
1.63 as the basis to evaluate the impact of an FB or FT applicant's or
registrant's disciplinary history on his or her fitness to be
registered. Instead, as Clark stated, when reviewing disciplinary
history to assess the fitness to be registered of an FB, FT, or
applicant in either category, a pattern of exchange disciplinary actions
alleging serious rule violations that result in significant sanctions
will trigger the ``other good cause'' provision of Section 8a(3)(M). The
``pattern'' should consist of at least two final exchange disciplinary
actions, whether settled or adjudicated.
NFA also should consider initiating proceedings to affect the
registration of the FB or FT, even if there is only a single exchange
action against the FB or FT, if the exchange action was based on
allegations of particularly egregious misconduct or involved numerous
instances of misconduct occurring over a long period of time. If,
however, a proceeding is initiated based on a single exchange action
that was disposed of by settlement, NFA may have to prove up the
underlying misconduct. Furthermore, traditional principles of collateral
estoppel apply to adjudicated actions, whether they are being considered
individually or as part of a pattern. \7\
---------------------------------------------------------------------------
\7\ Clark at 44,929.
---------------------------------------------------------------------------
As provided by the Guidance Letter, ``exchange disciplinary
actions'' would continue to include disciplinary actions taken by both
futures industry SROs and SROs as defined in Section 3(a)(26) of the
1934 Exchange Act. Furthermore, NFA should review an applicant's or
registrant's disciplinary history for
[[Page 162]]
the past five years. \8\ At least one of the actions forming the
pattern, however, must have become final after Clark was decided by the
Commission on April 22, 1997. Finally, ``serious rule violations''
consist of, or are substantially related to, charges of fraud, customer
abuse, other illicit trading practices, or the obstruction of an
exchange investigation.
---------------------------------------------------------------------------
\8\ The Commission generally looked at a five-year period of
disciplinary history. On occasion, however, the Commission examined a
longer period of an applicant's or registrant's disciplinary history.
For example, the Commission revoked the registration of one FB on the
basis of exchange disciplinary cases that extended back six years, see
Clark, 2 Comm. Fut. L. Rep. (CCH) ] 27,032, and denied an application
for registration as an FT on the basis of exchange disciplinary cases
that extended back seven years, see In the Matter of Castellano, [1987-
1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 24,360 (Nov. 23, 1988),
summarily aff'd (May 29, 1990), reh. denied [1990-1992 Transfer Binder]
Comm. Fut. L. Rep. ] 24,870 (June 26, 1990), aff'd sub nom. Castellano
v. CFTC, Docket No. 90-2298 (7th Cir. Nov. 20, 1991).
---------------------------------------------------------------------------
Congress, the courts and the Commission have indicated the
importance of considering an applicant's history of exchange
disciplinary actions in assessing that person's fitness to register. \9\
Furthermore, NFA's review of exchange disciplinary actions within the
context of the registration process should not simply mirror the
disciplinary actions undertaken by the exchanges. The two processes are
separate matters that involve separate considerations. As part of their
ongoing self-regulatory obligations, exchanges must take disciplinary
action \10\ and such disciplinary matters necessarily focus on the
specific misconduct that forms the allegation. In a statutory
disqualification action, however, NFA must determine whether the
disciplinary history of an FB, FT or applicant over the preceding five
years should impact his or her registration. Additionally, NFA possesses
industry-wide perspective and responsibilities. As such, NFA, rather
than an individual exchange, should decide registration status issues,
since those issues affect an individual's status within the industry as
a whole, well beyond the jurisdiction of a particular exchange.
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\9\ Letter dated July 14, 1995, from Mary L. Schapiro to R. Patrick
Thompson, President, New York Mercantile Exchange (unpublished). See
also Castellano, supra note 8.
\10\ See Rule 1.51(a)(7).
---------------------------------------------------------------------------
The Commission also wants to clarify to the fullest extent possible
that its power to delegate the authority to deny or condition the
registration of an FB, FT, or an applicant for registration in either
category permits exchanges to disclose to NFA all evidence underlying
exchange disciplinary actions, notwithstanding the language of Section
8c(a)(2) of the Act. \11\ The Commission's power to delegate stems from
Section 8a(10) of the Act, which permits delegation of registration
functions, including statutory disqualification actions, to any person
in accordance with rules adopted by such person and submitted to the
Commission for approval or for review under Section 17(j) of the Act,
``notwithstanding any other provision of law.'' Certainly, Section
8c(a)(2) qualifies as ``any other provision of law.'' Furthermore, the
effective discharge of the delegated function requires NFA to have
access to the exchange evidence. Thus, the exercise of the delegated
authority pursuant to Section 8a(10) permits the exchanges to disclose
all evidence underlying disciplinary actions to NFA. \12\
---------------------------------------------------------------------------
\11\ Section 8c(a)(2) states, in relevant part, that ``[A]n exchange
* * * shall not disclose the evidence therefor, except to the person who
is suspended, expelled, disciplined, or denied access, and to the
Commission.''
\12\ Of course, the Commission could request records from the
exchange and forward them to NFA. The Commission believes that this is
an unnecessary administrative process and that NFA should obtain the
records it needs to carry out the delegated function of conducting
disciplinary history reviews directly from the exchanges. In this
context and pursuant to Commission orders authorizing NFA to institute
adverse registration actions, NFA should be viewed as standing in the
shoes of the Commission.
---------------------------------------------------------------------------
This letter supersedes the Guidance Letter to the extent discussed
above. In all other aspects, the Guidance Letter and other guidance
provided by the Commission or its staff remain in effect. Therefore, NFA
should continue to follow Commission precedent when selecting conditions
or restrictions to be imposed. For example, NFA should impose a dual
trading ban where customer abuse is involved and any conditions or
restrictions imposed should be for a two-year period. Furthermore, NFA
should require sponsorship for conditioned FBs or FTs when their
disciplinary offenses involve noncompetitive trading and fraud.
Nothing in the Notice and Order or this letter affects the
Commission's authority to review the granting of a registration
application by NFA in the performance of Commission registration
functions, including review of the sufficiency of conditions or
restrictions imposed by NFA, to review the determination by NFA not to
take action to affect an existing registration, or to take its own
action to address a statutory disqualification. Moreover, the Commission
Order contemplates that to allow for appropriate
[[Page 163]]
Commission oversight of NFA's exercise of this delegated authority, NFA
will provide for the Commission's review quarterly schedules of all
applicants cleared for registration and all registrants whose
registrations are maintained without adverse action by NFA's
Registration, Compliance, Legal Committee despite potential statutory
disqualifications.
The Commission will continue to monitor NFA activities through
periodic rule enforcement reviews, and NFA remains subject to the
present requirement that it monitor compliance with the conditions and
restrictions imposed on conditioned and restricted registrants.
Sincerely,
Jean A. Webb,
Secretary of the Commission.
[49 FR 8224, Mar. 5, 1984, as amended at 58 FR 19597, Apr. 15, 1993; 59
FR 5315, Feb. 4, 1994; 61 FR 58628, Nov. 18, 1996; 66 FR 53518, Oct. 23,
2001; 67 FR 62352, Oct. 7, 2002]
Sec. Appendix B to Part 3--Statement of Acceptable Practices With
Respect to Ethics Training
(a) The provisions of Section 4p(b) of the Act (7 U.S.C. 6p(b)
(1994)) set forth requirements regarding training of registrants as to
their responsibilities to the public. This section requires the
Commission to issue regulations requiring new registrants to attend
ethics training sessions within six months of registration, and all
registrants to attend such training on a periodic basis. The awareness
and maintenance of professional ethical standards are essential elements
of a registrant's fitness. Further, the use of ethics training programs
is relevant to a registrant's maintenance of adequate supervision, a
requirement under Rule 166.3.
(b)(1) The Commission recognizes that technology has provided new,
faster means of sharing and distributing information. In view of the
foregoing, the Commission has chosen to allow registrants to develop
their own ethics training programs. Nevertheless, futures industry
professionals may want guidance as to the role of ethics training.
Registrants may wish to consider what ethics training should be
retained, its format, and how it might best be implemented. Therefore,
the Commission finds it appropriate to issue this Statement of
Acceptable Practices regarding appropriate training for registrants, as
interpretative guidance for intermediaries on fitness and supervision.
Commission registrants may look to this Statement of Acceptable
Practices as a ``safe harbor'' concerning acceptable procedures in this
area.
(2) The Commission believes that section 4p(b) of the Act reflects
an intent by Congress that industry professionals be aware, and remain
abreast, of their continuing obligations to the public under the Act and
the regulations thereunder. The text of the Act provides guidance as to
the nature of these responsibilities. As expressed in section 4p(b) of
the Act, personnel in the industry have an obligation to the public to
observe the Act, the rules of the Commission, the rules of any
appropriate self-regulatory organizations or contract markets (which
would also include registered derivatives transaction execution
facilities), or other applicable federal or state laws or regulations.
Further, section 4p(b) acknowledges that registrants have an obligation
to the public to observe ``just and equitable principles of trade.''
(3) Additionally, section 4p(b) reflects Congress' intent that
registrants and their personnel retain an up-to-date knowledge of these
requirements. The Act requires that registrants receive training on a
periodic basis. Thus, it is the intent of Congress that Commission
registrants remain current with regard to the ethical ramifications of
new technology, commercial practices, regulations, or other changes.
(c) The Commission believes that training should be focused to some
extent on a person's registration category, although there will
obviously be certain principles and issues common to all registrants and
certain general subjects that should be taught. Topics to be addressed
include:
(1) An explanation of the applicable laws and regulations, and the
rules of self-regulatory organizations or contract markets and
registered derivatives transaction execution facilities;
(2) The registrant's obligation to the public to observe just and
equitable principles of trade;
(3) How to act honestly and fairly and with due skill, care and
diligence in the best interests of customers and the integrity of the
market;
(4) How to establish effective supervisory systems and internal
controls;
(5) Obtaining and assessing the financial situation and investment
experience of customers;
(6) Disclosure of material information to customers; and
(7) Avoidance, proper disclosure and handling of conflicts of
interest.
(d) An acceptable ethics training program would apply to all of a
firm's associated persons and its principals to the extent they are
required to register as associated persons. Additionally, personnel of
firms that rely on their registration with other regulators, such as the
Securities and Exchange Commission, should be provided with ethics
training to the extent the Act and the Commission's regulations apply to
their business.
(e) As to the providers of such training, the Commission believes
that classes sponsored by independent persons, firms, or industry
associations would be acceptable. It would
[[Page 164]]
also be permissible to conduct in-house training programs. Further,
registrants should ascertain the credentials of any ethics training
providers they retain. Thus, persons who provide ethics training should
be required to provide proof of satisfactory completion of the
proficiency testing requirements applicable to the registrant and
evidence of three years of relevant industry or pedagogical experience
in the field. This industry experience might include the practice of law
in the fields of futures or securities, or employment as a trader or
risk manager at a brokerage or end-user firm. Likewise, the Commission
believes that registrants should employ as ethics training providers
only those persons they reasonably believe in good faith are not subject
to any investigations or to bars to registration or to service on a
self-regulatory organization governing board or disciplinary panel.
(f)(1) With regard to the frequency and duration of ethics training,
it is permissible for a firm to require training on whatever periodic
basis and duration the registrant (and relevant self-regulatory
organizations) deems appropriate. It may even be appropriate not to
require any such specific requirements as, for example, where ethics
training could be termed ongoing. For instance, a small entity, sole
proprietorship, or even a small section in an otherwise large firm,
might satisfy its obligation to remain current with regard to ethics
obligations by distribution of periodicals, legal cases, or advisories.
Use of the latest information technology, such as Internet websites, can
be useful in this regard. In such a context, there would be no
structured classes, but the goal should be a continuous awareness of
changing industry standards. A corporate culture to maintain high
ethical standards should be established on a continuing basis.
(2) On the other hand, larger firms which transact business with a
larger segment of the public may wish to implement a training program
that requires periodic classwork. In such a situation, the Commission
believes it appropriate for registrants to maintain such records as
evidence of attendance and of the materials used for training. In the
case of a floor broker or floor trader, the applicable contract market
or registered derivatives transaction execution facility should maintain
such evidence on behalf of its member. This evidence of ethics training
could be offered to demonstrate fitness and overall compliance during
audits by self-regulatory organizations, and during reviews of contract
market or registered derivatives transaction execution facility
operations.
(g) The methodology of such training may also be flexible. Recent
innovations in information technology have made possible new, fast, and
cost-efficient ways for registrants to maintain their awareness of
events and changes in the commodity interest markets. In this regard,
the Commission recognizes that the needs of a firm will vary according
to its size, personnel, and activities. No format of classes will be
required. Rather, such training could be in the form of formal class
lectures, video presentation, Internet transmission, or by simple
distribution of written materials. These options should provide
sufficiently flexible means for adherence to Congressional intent in
this area.
(h) Finally, it should be noted that self-regulatory organizations
and industry associations will have a significant role in this area.
Such organizations may have separate ethics and proficiency standards,
including ethics training and testing programs, for their own members.
[66 FR 53521, Oct. 23, 2001]
PART 4_COMMODITY POOL OPERATORS AND COMMODITY TRADING
ADVISORS--Table of Contents
Subpart A_General Provisions, Definitions and Exemptions
Sec.
4.1 Requirements as to form.
4.2-4.4 [Reserved]
4.5 Exclusion for certain otherwise regulated persons from the
definition of the term ``commodity pool operator.''
4.6 Exclusion for certain otherwise regulated persons from the
definition of the term ``commodity trading advisor.''
4.7 Exemption from certain part 4 requirements for commodity pool
operators with respect to offerings to qualified eligible
persons and for commodity trading advisors with respect to
advising qualified eligible persons.
4.8 Exemption from certain requirements of rule 4.26 with respect to
pools offered or sold in certain offerings exempt from
registration under the Securities Act.
4.9 [Reserved]
4.10 Definitions.
4.11 Exemption from section 4n(3)(B).
4.12 Exemption from provisions of part 4.
4.13 Exemption from registration as a commodity pool operator.
4.14 Exemption from registration as a commodity trading advisor.
4.15 Continued applicability of antifraud section.
4.16 Prohibited representations.
Subpart B_Commodity Pool Operators
4.20 Prohibited activities.
4.21 Required delivery of pool Disclosure Document.
4.22 Reporting to pool participants.
4.23 Recordkeeping.
4.24 General disclosures required.
[[Page 165]]
4.25 Performance disclosures.
4.26 Use, amendment and filing of Disclosure Document.
Subpart C_Commodity Trading Advisors
4.30 Prohibited activities.
4.31 Required delivery of Disclosure Document to prospective clients.
4.32 Trading on a Registered Derivatives Transaction Execution Facility
for Non-Institutional Customers.
4.33 Recordkeeping.
4.34 General disclosures required.
4.35 Performance disclosures.
4.36 Use, amendment and filing of Disclosure Document.
Subpart D_Advertising
4.40 [Reserved]
4.41 Advertising by commodity pool operators, commodity trading
advisors, and the principals thereof.
Appendix A to Part 4--Guidance on the Application of Rule 4.13(a)(3) in
the Fund-of-Funds Context
Appendix B to Part 4--Adjustments for Additions and Withdrawals in the
Computation of Rate of Return
Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m, 6n, 6o, 12a, and 23.
Source: 46 FR 26013, May 8, 1981, unless otherwise noted.
Subpart A_General Provisions, Definitions and Exemptions
Sec. 4.1 Requirements as to form.
(a) Each document distributed pursuant to this part 4 must be:
(1) Clear and legible;
(2) Paginated; and
(3) Fastened in a secure manner.
(b) Information that is required to be ``prominently'' disclosed
under this part 4 must be displayed in capital letters and in boldface
type.
(c) Where a document is distributed through an electronic medium:
(1) The requirements of paragraphs (a) of this section shall mean
that required information must be presented in a format that is readily
communicated to the recipient. For purposes of this paragraph (c),
information is readily communicated to the recipient if it is accessible
to the ordinary user by means of commonly available hardware and
software and if the electronically delivered document is organized in
substantially the same manner as would be required for a paper document
with respect to the order of presentation and the relative prominence of
information. Where a table of contents is required, the electronic
document must either include page numbers in the text or employ a
substantially equivalent cross-reference or indexing method or tool;
(2) The requirements of paragraph (b) of this section shall mean
that such information must be presented in capital letters and boldface
type or, as warranted in the context, another manner reasonably
calculated to draw the recipient's attention to the information and
accord it greater prominence than the surrounding text; and
(3) A complete paper version of the document that complies with the
applicable provisions of this part 4 must be provided to the recipient
upon request.
(d) If graphic, image or audio material is included in a document
delivered to a prospective or existing client or pool participant, and
such material cannot be reproduced in an electronic filing, a fair and
accurate narrative description, tabular representation or transcript of
the omitted material must be included in the filed version of the
document. Inclusion of such material in a Disclosure Document shall be
subject to the requirements of Sec. 4.24(v) in the case of pool
Disclosure Documents, and Sec. 4.34(n) in the case of commodity trading
advisor Disclosure Documents.
(Approved by the Office of Management and Budget under control number
3038-0005)
[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 62
FR 39115, July 22, 1997]
Sec. Sec. 4.2-4.4 [Reserved]
Sec. 4.5 Exclusion for certain otherwise regulated persons from the
definition of the term ``commodity pool operator.''
(a) Subject to compliance with the provisions of this section, the
following persons, and any principal or employee thereof, shall be
excluded from the definition of the term ``commodity pool operator''
with respect to the operation of a qualifying entity specified in
paragraph (b) of this section:
[[Page 166]]
(1) An investment company registered as such under the Investment
Company Act of 1940;
(2) An insurance company subject to regulation by any State;
(3) A bank, trust company or any other such financial depository
institution subject to regulation by any State or the United States; and
(4) A trustee of, a named fiduciary of (or a person designated or
acting as a fiduciary pursuant to a written delegation from or other
written agreement with the named fiduciary) or an employer maintaining a
pension plan that is subject to title I of the Employee Retirement
Income Security Act of 1974; Provided, however, That for purposes of
this Sec. 4.5 the following employee benefit plans shall not be
construed to be pools:
(i) A noncontributory plan, whether defined benefit or defined
contribution, covered under title I of the Employee Retirement Income
Security Act of 1974;
(ii) A contributory defined benefit plan covered under title IV of
the Employee Retirement Income Security Act of 1974; Provided, however,
That with respect to any such plan to which an employee may voluntarily
contribute, no portion of an employee's contribution is committed as
margin or premiums for futures or options contracts;
(iii) A plan defined as a governmental plan in section 3(32) of
title I of the Employee Retirement Income Security Act of 1974;
(iv) Any employee welfare benefit plan that is subject to the
fiduciary responsibility provisions of the Employee Retirement Income
Security Act of 1974; and
(v) A plan defined as a church plan in Section 3(33) of title I of
the Employee Retirement Income Security Act of 1974 with respect to
which no election has been made under 26 U.S.C. 410(d).
(b) For the purposes of this section, the term ``qualifying entity''
means:
(1) With respect to any person specified in paragraph (a)(1) of this
section, an investment company registered as such under the Investment
Company Act of 1940;
(2) With respect to any person specified in paragraph (a)(2) of this
section, a separate account established and maintained or offered by an
insurance company pursuant to the laws of any State or territory of the
United States, under which income gains and losses, whether or not
realized, from assets allocated to such account, are, in accordance with
the applicable contract, credited to or charged against such account,
without regard to other income, gains, or losses of the insurance
company;
(3) With respect to any person specified in paragraph (a)(3) of this
section, the assets of any trust, custodial account or other separate
unit of investment for which it is acting as a fiduciary and for which
it is vested with investment authority; and
(4) With respect to any person specified in paragraph (a)(4) of this
section, and subject to the proviso thereof, a pension plan that is
subject to title I of the Employee Retirement Income Security Act of
1974; Provided, however, That such entity will be operated in the manner
specified in paragraph (c)(2) of this section.
(c) Any person who desires to claim the exclusion provided by this
section shall file electronically a notice of eligibility with the
National Futures Association through its electronic exemption filing
system; Provided, however, That a plan fiduciary who is not a named
fiduciary as described in paragraph (a)(4) of this section may claim the
exclusion through the notice filed by the named fiduciary.
(1) The notice of eligibility must contain the following
information:
(i) The name of such person;
(ii) The applicable subparagraph of paragraph (a) of this section
pursuant to which such person is claiming exclusion;
(iii) The name of the qualifying entity which such person intends to
operate pursuant to the exclusion; and
(iv) The applicable subparagraph of paragraph (b) of this section
pursuant to which such entity is a qualifying entity.
(2) The notice of eligibility must contain representations that such
person will operate the qualifying entity specified therein in a manner
such that the qualifying entity:
[[Page 167]]
(i) Will disclose in writing to each participant, whether existing
or prospective, that the qualifying entity is operated by a person who
has claimed an exclusion from the definition of the term ``commodity
pool operator'' under the Act and, therefore, who is not subject to
registration or regulation as a pool operator under the Act; Provided,
that such disclosure is made in accordance with the requirements of any
other federal or state regulatory authority to which the qualifying
entity is subject. The qualifying entity may make such disclosure by
including the information in any document that its other federal or
state regulator requires to be furnished routinely to participants or,
if no such document is furnished routinely, the information may be
disclosed in any instrument establishing the entity's investment
policies and objectives that the other regulator requires to be made
available to the entity's participants; and
(ii) Will submit to such special calls as the Commission may make to
require the qualifying entity to demonstrate compliance with the
provisions of this Sec. 4.5(c);
Provided, however, That the making of such representations shall not be
deemed a substitute for compliance with any criteria applicable to
commodity futures or commodity options trading established by any
regulator to which such person or qualifying entity is subject.
(3) The notice of eligibility must be filed with the National
Futures Association prior to the date upon which such person intends to
operate the qualifying entity pursuant to the exclusion provided by this
section.
(4) The notice of eligibility shall be effective upon filing.
(d)(1) Each person who has claimed an exclusion hereunder must, in
the event that any of the information contained or representations made
in the notice of eligibility becomes inaccurate or incomplete, amend the
notice electronically through National Futures Association's electronic
exemption filing system as may be necessary to render the notice of
eligibility accurate and complete.
(2) This amendment required by paragraph (d)(1) of this section
shall be filed within fifteen business days after the occurrence of such
event.
(e) An exclusion claimed hereunder shall cease to be effective upon
any change which would render:
(1) A person as to whom such exclusion has been claimed ineligible
under paragraph (a) of this section;
(2) The entity for which such exclusion has been claimed ineligible
under paragraph (b) of this section; or
(3) Either the representations made pursuant to paragraph (c)(2) of
this section inaccurate or the continuation of such representations
false or misleading.
(f) Any notice required to be filed hereunder must be filed by a
representative duly authorized to bind the person specified in paragraph
(a) of this section.
(g) The filing of a notice of eligibility or the application of
``non-pool status'' under this section will not affect the ability of a
person to qualify for an exemption from registration as a commodity pool
operator under Sec. 4.13 in connection with the operation of another
trading vehicle that is not covered under this Sec. 4.5.
[50 FR 15882, Apr. 23, 1985; 50 FR 18859, May 3, 1985, as amended at 58
FR 6374, Jan. 28, 1993; 58 FR 43793, Aug. 18, 1993; 65 FR 24128, Apr.
25, 2000; 65 FR 25980, May 4, 2000; 67 FR 77410, Dec. 18, 2002; 68 FR
47230, Aug. 8, 2003; 72 FR 1662, Jan. 16, 2007]
Sec. 4.6 Exclusion for certain otherwise regulated persons from the
definition of the term ``commodity trading advisor.''
(a) Subject to compliance with the provisions of this section, the
following persons, and any principal or employee thereof, shall be
excluded from the definition of the term ``commodity trading advisor:''
(1) An insurance company subject to regulation by any State, or any
wholly-owned subsidiary or employee thereof; Provided, however, That its
commodity interest advisory activities are solely incidental to the
conduct of the insurance business of the insurance company as such; and
(2) A person who is excluded from the definition of the term
``commodity pool operator'' by Sec. 4.5; Provided, however, That:
[[Page 168]]
(i) Its commodity interest advisory activities are solely incidental
to its operation of those trading vehicles for which Sec. 4.5 provides
relief; and
(ii) Where necessary, prior to providing any commodity interest
trading advice to any such trading vehicle the person files a notice of
eligibility as specified in Sec. 4.5 to claim the relief available
under that section.
(b) Any person who has claimed an exclusion under this Sec. 4.6
must submit to such special calls as the Commission may make to require
the person to demonstrate compliance with the provisions of paragraph
(a) of this section.
(c) An exclusion claimed under this Sec. 4.6 shall cease to be
effective upon any change which would render the person claiming the
exclusion ineligible under paragraph (a) of this section.
[52 FR 41984, Nov. 2, 1987]
Sec. 4.7 Exemption from certain part 4 requirements for commodity
pool operators with respect to offerings to qualified eligible
persons and for commodity trading advisors with respect to advising
qualified eligible persons.
This section is organized as follows: Paragraph (a) contains
definitions for the purposes of Sec. 4.7; paragraph (b) contains the
relief available to commodity pool operators under Sec. 4.7; paragraph
(c) contains the relief available to commodity trading advisors under
Sec. 4.7; paragraph (d) concerns the Notice of Claim for Exemption
under Sec. 4.7; and paragraph (e) addresses the effect of an
insignificant deviation from a term, condition or requirement of Sec.
4.7.
(a) Definitions. Paragraph (a)(1) of this section contains general
definitions, paragraph (a)(2) of this section contains the definition of
the term qualified eligible person with respect to those persons who do
not need to satisfy the Portfolio Requirement and paragraph (a)(3) of
this section contains the definition of the term qualified eligible
person with respect to those persons who must satisfy the Portfolio
Requirement. For the purposes of this section:
(1) In general--(i) Affiliate of, or a person affiliated with, a
specified person means a person that directly or indirectly through one
or more persons, controls, is controlled by, or is under common control
with the specified person.
(ii) Exempt account means the account of a qualified eligible person
that is directed or guided by a commodity trading advisor pursuant to an
effective claim for exemption under Sec. 4.7.
(iii) Exempt pool means a pool that is operated pursuant to an
effective claim for exemption under Sec. 4.7.
(iv) Non-United States person means:
(A) A natural person who is not a resident of the United States;
(B) A partnership, corporation or other entity, other than an entity
organized principally for passive investment, organized under the laws
of a foreign jurisdiction and which has its principal place of business
in a foreign jurisdiction;
(C) An estate or trust, the income of which is not subject to United
States income tax regardless of source;
(D) An entity organized principally for passive investment such as a
pool, investment company or other similar entity; Provided, That units
of participation in the entity held by persons who do not qualify as
Non-United States persons or otherwise as qualified eligible persons
represent in the aggregate less than 10% of the beneficial interest in
the entity, and that such entity was not formed principally for the
purpose of facilitating investment by persons who do not qualify as Non-
United States persons in a pool with respect to which the operator is
exempt from certain requirements of part 4 of the Commission's
regulations by virtue of its participants being Non-United States
persons; and
(E) A pension plan for the employees, officers or principals of an
entity organized and with its principal place of business outside the
United States.
(v) Portfolio Requirement means that a person:
(A) Owns securities (including pool participations) of issuers not
affiliated with such person and other investments with an aggregate
market value of at least $2,000,000;
(B) Has had on deposit with a futures commission merchant, for its
own account at any time during the six-month period preceding either the
date
[[Page 169]]
of sale to that person of a pool participation in the exempt pool or the
date that the person opens an exempt account with the commodity trading
advisor, at least $200,000 in exchange-specified initial margin and
option premiums for commodity interest transactions; or
(C) Owns a portfolio comprised of a combination of the funds or
property specified in paragraphs (a)(1)(v)(A) and (B) of this section in
which the sum of the funds or property includable under paragraph
(a)(1)(v)(A), expressed as a percentage of the minimum amount required
thereunder, and the amount of futures margin and option premiums
includable under paragraph (a)(1)(v)(B), expressed as a percentage of
the minimum amount required thereunder, equals at least one hundred
percent. An example of a composite portfolio acceptable under this
paragraph (a)(1)(v)(C) would consist of $1,000,000 in securities and
other property (50% of paragraph (a)(1)(v)(A)) and $100,000 in exchange-
specified initial margin and option premiums (50% of paragraph
(a)(1)(v)(B)).
(vi) United States means the United States, its states, territories
or possessions, or an enclave of the United States government, its
agencies or instrumentalities.
(2) Persons who do not need to satisfy the Portfolio Requirement to
be qualified eligible persons. Qualified eligible person means any
person, acting for its own account or for the account of a qualified
eligible person, who the commodity pool operator reasonably believes, at
the time of the sale to that person of a pool participation in the
exempt pool, or who the commodity trading advisor reasonably believes,
at the time that person opens an exempt account, is:
(i) A futures commission merchant registered pursuant to section 4d
of the Act, or a principal thereof;
(ii) A broker or dealer registered pursuant to section 15 of the
Securities Exchange Act of 1934, or a principal thereof;
(iii) A commodity pool operator registered pursuant to section 4m of
the Act, or a principal thereof; Provided, That the pool operator:
(A) Has been registered and active as such for two years; or
(B) Operates pools which, in the aggregate, have total assets in
excess of $5,000,000;
(iv) A commodity trading advisor registered pursuant to section 4m
of the Act, or a principal thereof; Provided, That the trading advisor:
(A) Has been registered and active as such for two years; or
(B) Provides commodity interest trading advice to commodity accounts
which, in the aggregate, have total assets in excess of $5,000,000
deposited at one or more futures commission merchants;
(v) An investment adviser registered pursuant to section 203 of the
Investment Advisers Act of 1940 (``Investment Advisers Act'') or
pursuant to the laws of any state, or a principal thereof; Provided,
That the investment adviser:
(A) Has been registered and active as such for two years; or
(B) Provides securities investment advice to securities accounts
which, in the aggregate, have total assets in excess of $5,000,000
deposited at one or more registered securities brokers;
(vi) A ``qualified purchaser'' as defined in section 2(a)(51)(A) of
the Investment Company Act of 1940 (the ``Investment Company Act'');
(vii) A ``knowledgeable employee'' as defined in Sec. 270.3c-5 of
this title;
(viii)(A) With respect to an exempt pool:
(1) The commodity pool operator, commodity trading advisor or
investment adviser of the exempt pool offered or sold, or an affiliate
of any of the foregoing;
(2) A principal of the exempt pool or the commodity pool operator,
commodity trading advisor or investment adviser of the exempt pool, or
of an affiliate of any of the foregoing;
(3) An employee of the exempt pool or the commodity pool operator,
commodity trading advisor or investment adviser of the exempt pool, or
of an affiliate of any of the foregoing (other than an employee
performing solely clerical, secretarial or administrative functions with
regard to such person or its investments) who, in connection
[[Page 170]]
with his or her regular functions or duties, participates in the
investment activities of the exempt pool, other commodity pools operated
by the pool operator of the exempt pool or other accounts advised by the
trading advisor or the investment adviser of the exempt pool, or by the
affiliate; Provided, That such employee has been performing such
functions and duties for or on behalf of the exempt pool, pool operator,
trading advisor, investment adviser or affiliate, or substantially
similar functions or duties for or on behalf of another person engaged
in providing commodity interest, securities or other financial services,
for at least 12 months;
(4) Any other employee of, or an agent engaged to perform legal,
accounting, auditing or other financial services for, the exempt pool or
the commodity pool operator, commodity trading advisor or investment
adviser of the exempt pool, or any other employee of, or agent so
engaged by, an affiliate of any of the foregoing (other than an employee
or agent performing solely clerical, secretarial or administrative
functions with regard to such person or its investments); Provided, That
such employee or agent:
(i) Is an accredited investor as defined in Sec. 230.501(a)(5) or
(6) of this title; and
(ii) Has been employed or engaged by the exempt pool, commodity pool
operator, commodity trading advisor, investment adviser or affiliate, or
by another person engaged in providing commodity interest, securities or
other financial services, for at least 24 months;
(5) The spouse, child, sibling or parent of a person who satisfies
the criteria of paragraph (a)(2)(viii)(A)(1), (2), (3) or (4) of this
section; Provided, That:
(i) An investment in the exempt pool by any such family member is
made with the knowledge and at the direction of the person; and
(ii) The family member is not a qualified eligible person for the
purposes of paragraph (a)(3)(xi) of this section;
(6)(i) Any person who acquires a participation in the exempt pool by
gift, bequest or pursuant to an agreement relating to a legal separation
or divorce from a person listed in paragraph (a)(2)(viii)(A)(1), (2),
(3), (4) or (5) of this section;
(ii) The estate of any person listed in paragraph
(a)(2)(viii)(A)(1), (2), (3), (4) or (5) of this section; or
(iii) A company established by any person listed in paragraph
(a)(2)(viii)(A)(1), (2), (3), (4) or (5) of this section exclusively for
the benefit of (or owned exclusively by) that person and any person
listed in paragraph (a)(2)(viii)(A)(6)(i) or (ii) of this section;
(B) With respect to an exempt account:
(1) An affiliate of the commodity trading advisor of the exempt
account;
(2) A principal of the commodity trading advisor of the exempt
account or of an affiliate of the trading advisor;
(3) An employee of the commodity trading advisor of the exempt
account or of an affiliate of the trading advisor (other than an
employee performing solely clerical, secretarial or administrative
functions with regard to such person or its investments) who, in
connection with his or her regular functions or duties, participates in
the investment activities of the trading advisor or the affiliate;
Provided, That such employee has been performing such functions and
duties for or on behalf of the trading advisor or the affiliate, or
substantially similar functions or duties for or on behalf of another
person engaged in providing commodity interest, securities or other
financial services, for at least 12 months;
(4) Any other employee of, or an agent engaged to perform legal,
accounting, auditing or other financial services for, the commodity
trading advisor of the exempt account or any other employee of, or agent
so engaged by, an affiliate of the trading advisor (other than an
employee or agent performing solely clerical, secretarial or
administrative functions with regard to such person or its investments);
Provided, That such employee or agent:
(i) Is an accredited investor as defined in Sec. 230.501(a)(5) or
(a)(6) of this title; and
(ii) Has been employed or engaged by the commodity trading advisor
or the affiliate, or by another person engaged in providing commodity
interest, securities or other financial services, for at least 24
months; or
[[Page 171]]
(5) The spouse, child, sibling or parent of the commodity trading
advisor of the exempt account or of a person who satisfies the criteria
of paragraph (a)(2)(viii)(B)(1), (2), (3) or (4) of this section;
Provided, That:
(i) The establishment of an exempt account by any such family member
is made with the knowledge and at the direction of the person; and
(ii) The family member is not a qualified eligible person for the
purposes of paragraph (a)(3)(xi) of this section;
(6)(i) Any person who acquires an interest in an exempt account by
gift, bequest or pursuant to an agreement relating to a legal separation
or divorce from a person listed in paragraph (a)(2)(viii)(B)(1), (2),
(3), (4) or (5) of this section;
(ii) The estate of any person listed in paragraph
(a)(2)(viii)(B)(1), (2), (3), (4) or (5) of this section; or
(iii) A company established by any person listed in paragraph
(a)(2)(viii)(B)(1), (2), (3), (4) or (5) of this section exclusively for
the benefit of (or owned exclusively by) that person and any person
listed in paragraph (a)(2)(viii)(B)(6)(i) or (ii) of this section;
(ix) A trust; Provided, That:
(A) The trust was not formed for the specific purpose of either
participating in the exempt pool or opening an exempt account; and
(B) The trustee or other person authorized to make investment
decisions with respect to the trust, and each settlor or other person
who has contributed assets to the trust, is a qualified eligible person;
(x) An organization described in section 501(c)(3) of the Internal
Revenue Code (the ``IRC''); Provided, That the trustee or other person
authorized to make investment decisions with respect to the
organization, and the person who has established the organization, is a
qualified eligible person;
(xi) A Non-United States person;
(xii)(A) An entity in which all of the unit owners or participants,
other than the commodity trading advisor claiming relief under this
section, are qualified eligible persons;
(B) An exempt pool; or
(C) Notwithstanding paragraph (a)(3) of this section, an entity as
to which a notice of eligibility has been filed pursuant to Sec. 4.5
which is operated in accordance with such rule and in which all unit
owners or participants, other than the commodity trading advisor
claiming relief under this section, are qualified eligible persons.
(3) Persons who must satisfy the Portfolio Requirement to be
qualified eligible persons. Qualified eligible person means any person
who the commodity pool operator reasonably believes, at the time of the
sale to that person of a pool participation in the exempt pool, or any
person who the commodity trading advisor reasonably believes, at the
time that person opens an exempt account, satisfies the Portfolio
Requirement and is:
(i) An investment company registered under the Investment Company
Act or a business development company as defined in section 2(a)(48) of
such Act not formed for the specific purpose of either investing in the
exempt pool or opening an exempt account;
(ii) A bank as defined in section 3(a)(2) of the Securities Act of
1933 (the ``Securities Act'') or any savings and loan association or
other institution as defined in section 3(a)(5)(A) of the Securities Act
acting for its own account or for the account of a qualified eligible
person;
(iii) An insurance company as defined in section 2(13) of the
Securities Act acting for its own account or for the account of a
qualified eligible person;
(iv) A plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such plan
has total assets in excess of $5,000,000;
(v) An employee benefit plan within the meaning of the Employee
Retirement Income Security Act of 1974; Provided, That the investment
decision is made by a plan fiduciary, as defined in section 3(21) of
such Act, which is a bank, savings and loan association, insurance
company, or registered investment adviser; or that the employee benefit
plan has total assets in excess of $5,000,000; or, if the plan is self-
directed, that investment decisions are made solely by persons that are
qualified eligible persons;
[[Page 172]]
(vi) A private business development company as defined in section
202(a)(22) of the Investment Advisers Act;
(vii) An organization described in section 501(c)(3) of the IRC,
with total assets in excess of $5,000,000;
(viii) A corporation, Massachusetts or similar business trust, or
partnership, limited liability company or similar business venture,
other than a pool, which has total assets in excess of $5,000,000, and
is not formed for the specific purpose of either participating in the
exempt pool or opening an exempt account;
(ix) A natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of either his purchase in the
exempt pool or his opening of an exempt account exceeds $1,000,000;
(x) A natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current
year;
(xi) A pool, trust, insurance company separate account or bank
collective trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of either participating in the exempt pool or
opening an exempt account, and whose participation in the exempt pool or
investment in the exempt account is directed by a qualified eligible
person; or
(xii) Except as provided for the governmental entities referenced in
paragraph (a)(3)(iv) of this section, if otherwise authorized by law to
engage in such transactions, a governmental entity (including the United
States, a state, or a foreign government) or political subdivision
thereof, or a multinational or supranational entity or an
instrumentality, agency, or department of any of the foregoing.
(b) Relief available to commodity pool operators. Upon filing the
notice required by paragraph (d) of this section, and subject to
compliance with the conditions specified in paragraph (d) of this
section, any registered commodity pool operator who offers or sells
participations in a pool solely to qualified eligible persons in an
offering which qualifies for exemption from the registration
requirements of the Securities Act pursuant to section 4(2) of that Act
or pursuant to Regulation S, 17 CFR 230.901 et seq., and any bank
registered as a commodity pool operator in connection with a pool that
is a collective trust fund whose securities are exempt from registration
under the Securities Act pursuant to section 3(a)(2) of that Act and are
offered or sold, without marketing to the public, solely to qualified
eligible persons, may claim any or all of the following relief with
respect to such pool:
(1) Disclosure relief. (i) Exemption from the specific requirements
of Sec. Sec. 4.21, 4.24, 4.25 and 4.26 with respect to each exempt
pool; Provided, That if an offering memorandum is distributed in
connection with soliciting prospective participants in the exempt pool,
such offering memorandum must include all disclosures necessary to make
the information contained therein, in the context in which it is
furnished, not misleading; and that the following statement is
prominently disclosed on the cover page of the offering memorandum, or,
if none is provided, immediately above the signature line on the
subscription agreement or other document that the prospective
participant must execute to become a participant in the pool:
``PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING
COMMISSION IN CONNECTION WITH POOLS WHOSE PARTICIPANTS ARE LIMITED TO
QUALIFIED ELIGIBLE PERSONS, AN OFFERING MEMORANDUM FOR THIS POOL IS NOT
REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE
COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF
PARTICIPATING IN A POOL OR UPON THE ADEQUACY OR ACCURACY OF AN OFFERING
MEMORANDUM. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS
NOT REVIEWED OR APPROVED THIS OFFERING OR ANY OFFERING MEMORANDUM FOR
THIS POOL.''
(ii) Exemption from disclosing the past performance of exempt pools
in the Disclosure Document of non-exempt pools except to the extent that
such past performance is material to the non-exempt pool being offered;
Provided, That a pool operator that has
[[Page 173]]
claimed exemption hereunder and elects not to disclose any such
performance in the Disclosure Document of non-exempt pools shall state
in a footnote to the performance disclosure therein that the operator is
operating or has operated exempt pools whose performance is not
disclosed in this Disclosure Document.
(2) Periodic reporting relief. Exemption from the specific
requirements of Sec. Sec. 4.22(a) and (b); Provided, That a statement
signed and affirmed in accordance with Sec. 4.22(h) is prepared and
distributed to pool participants no less frequently than quarterly
within 30 calendar days after the end of the reporting period. This
statement must be presented and computed in accordance with generally
accepted accounting principles and indicate:
(i) The net asset value of the exempt pool as of the end of the
reporting period;
(ii) The change in net asset value from the end of the previous
reporting period; and
(iii) The net asset value per outstanding unit of participation in
the exempt pool as of the end of the reporting period.
(A) Either the net asset value per outstanding participation unit in
the exempt pool as of the end of the reporting period, or
(B) The total value of the participant's interest or share in the
exempt pool as of the end of the reporting period.
(iv) Where the pool is comprised of more than one ownership class or
series, the net asset value of the series or class on which the account
statement is reporting, and the net asset value per unit or value of the
participant's share, also must be included in the statement required by
this paragraph (b)(2); except that, for a pool that is a series fund
structured with a limitation on liability among the different series,
the account statement required by this paragraph (b)(2) is not required
to include the consolidated net asset value of all series of the pool.
(v) A commodity pool operator of a pool that meets the conditions
specified in Sec. 4.22(d)(2)(i) of this part to present and compute the
commodity pool's financial statements contained in the Annual Report in
accordance with International Financial Reporting Standards issued by
the International Accounting Standards Board and has filed notice
pursuant to Sec. 4.22(d)(2)(ii) of this part also may use such
International Financial Reporting Standards in the computation and
presentation of the account statement.
(3) Annual report relief. (i) Exemption from the specific
requirements of Sec. 4.22(c) and (d) of this part; Provided, That
within 90 calendar days after the end of the exempt pool's fiscal year
or the permanent cessation of trading, whichever is earlier, the
commodity pool operator electronically files with the National Futures
Association and distributes to each participant in lieu of the financial
information and statements specified by those sections, an annual report
for the exempt pool, affirmed in accordance with Sec. 4.22(h) which
contains, at a minimum:
(A) A Statement of Financial Condition as of the close of the exempt
pool's fiscal year (elected in accordance with Sec. 4.22(g));
(B) A Statement of Operations for that year;
(C) Appropriate footnote disclosure and such further material
information as may be necessary to make the required statements not
misleading. For a pool that invests in other funds, this information
must include, but is not limited to, separately disclosing the amounts
of income, management and incentive fees associated with each investment
in an investee fund that exceeds five percent of the pool's net assets.
The income, management and incentive fees associated with an investment
in an investee fund that is less than five percent of the pool's net
assets may be combined and reported in the aggregate with the income,
management and incentive fees of other investee funds that,
individually, represent an investment of less than five percent of the
pool's net assets. If the commodity pool operator is not able to obtain
the specific amounts of management and incentive fees charged by an
investee fund, the commodity pool operator must disclose the percentage
amounts and computational basis for each such fee and include a
statement
[[Page 174]]
that the CPO is not able to obtain the specific fee amounts for this
fund;
(D) Where the pool is comprised of more than one ownership class or
series, information for the series or class on which the financial
statements are reporting should be presented in addition to the
information presented for the pool as a whole; except that, for a pool
that is a series fund structured with a limitation on liability among
the different series, the financial statements are not required to
include consolidated information for all series.
(ii) Except as provided in Sec. 4.22(d)(2) of this part, such
annual report must be presented and computed in accordance with
generally accepted accounting principles consistently applied and, if
certified by an independent public accountant, so certified in
accordance with Sec. 1.16 of this chapter as applicable.
(iii) Legend. (A) If a claim for exemption has been made pursuant to
this section, the commodity pool operator must make a statement to that
effect on the cover page of each annual report.
(B) If the annual report is not certified in accordance with Sec.
1.16, the pool operator must make a statement to that effect on the
cover page of each annual report and state that a certified audit will
be provided upon the request of the holders of a majority of the units
of participation in the pool who are unaffiliated with the commodity
pool operator.
(4) Recordkeeping relief. Exemption from the specific requirements
of Sec. 4.23; Provided, That the commodity pool operator must maintain
the reports referred to in paragraphs (b)(2) and (b)(3) of this section
and all books and records prepared in connection with his activities as
the pool operator of the exempt pool (including, without limitation,
records relating to the qualifications of qualified eligible persons and
substantiating any performance representations) at his main business
address and must make such books and records available to any
representative of the Commission, the National Futures Association and
the United States Department of Justice in accordance with the
provisions of Sec. 1.31.
(c) Relief available to commodity trading advisors. Upon filing the
notice required by paragraph (d) of this section, and subject to
compliance with the conditions specified in paragraph (d) of this
section, any registered commodity trading advisor who anticipates
directing or guiding the commodity interest accounts of qualified
eligible persons may claim any or all of the following relief with
respect to the accounts of qualified eligible persons who have given due
consent to their account being an exempt account under Sec. 4.7:
(1) Disclosure relief. (i) Exemption from the specific requirements
of Sec. Sec. 4.31, 4.34, 4.35 and 4.36; Provided, That if the commodity
trading advisor delivers a brochure or other disclosure statement to
such qualified eligible persons, such brochure or statement shall
include all additional disclosures necessary to make the information
contained therein, in the context in which it is furnished, not
misleading; and that the following statement is prominently displayed on
the cover page of the brochure or statement or, if none is provided,
immediately above the signature line of the agreement that the client
must execute before it opens an account with the commodity trading
advisor:
``PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING
COMMISSION IN CONNECTION WITH ACCOUNTS OF QUALIFIED ELIGIBLE PERSONS,
THIS BROCHURE OR ACCOUNT DOCUMENT IS NOT REQUIRED TO BE, AND HAS NOT
BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING
COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A TRADING
PROGRAM OR UPON THE ADEQUACY OR ACCURACY OF COMMODITY TRADING ADVISOR
DISCLOSURE. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS
NOT REVIEWED OR APPROVED THIS TRADING PROGRAM OR THIS BROCHURE OR
ACCOUNT DOCUMENT.''
(ii) Exemption from disclosing the past performance of exempt
accounts in the Disclosure Document for non-exempt accounts except to
the extent that such past performance is material to the non-exempt
account being offered; Provided, That a commodity trading advisor that
has claimed exemption hereunder and elects not to disclose any such
performance in the Disclosure Document for non-exempt
[[Page 175]]
accounts shall state in a footnote to the performance disclosure therein
that the advisor is advising or has advised exempt accounts for
qualified eligible persons whose performance is not disclosed in this
Disclosure Document.
(2) Recordkeeping relief. Exemption from the specific requirements
of Sec. 4.33; Provided, That the commodity trading advisor must
maintain, at its main business office, all books and records prepared in
connection with his activities as the commodity trading advisor of
qualified eligible persons (including, without limitation, records
relating to the qualifications of such qualified eligible persons and
substantiating any performance representations) and must make such books
and records available to any representative of the Commission, the
National Futures Association and the United States Department of Justice
in accordance with the provisions of Sec. 1.31.
(d) Notice of claim for exemption. (1) A notice of a claim for
exemption under this section must:
(i) Provide the name, main business address, main business telephone
number and the National Futures Association commodity pool operator or
commodity trading advisor identification number of the person claiming
the exemption;
(ii)(A) Where the claimant is a commodity pool operator, provide the
name(s) of the pool(s) for which the request is made; Provided, That a
single notice representing that the pool operator anticipates operating
single-investor pools may be filed to claim exemption for single-
investor pools and such notice need not name each such pool;
(B) Where the claimant is a commodity trading advisor, contain a
representation that the trading advisor anticipates providing commodity
interest trading advice to qualified eligible persons;
(iii) Contain representations that:
(A) Neither the commodity pool operator or commodity trading advisor
nor any of its principals is subject to any statutory disqualification
under section 8a(2) or 8a(3) of the Act unless such disqualification
arises from a matter which was previously disclosed in connection with a
previous application for registration if such registration was granted
or which was disclosed more than thirty days prior to the filing of the
notice under this paragraph (d);
(B) The commodity pool operator or commodity trading advisor will
comply with the applicable requirements of Sec. 4.7; and
(C) Where the claimant is a commodity pool operator, that the exempt
pool will be offered and operated in compliance with the applicable
requirements of Sec. 4.7;
(iv) Specify the relief claimed under Sec. 4.7;
(v) Where the claimant is a commodity pool operator, state the
closing date of the offering or that the offering will be continuous;
(vi) Be filed by a representative duly authorized to bind the
commodity pool operator or commodity trading advisor;
(vii) Be filed electronically with the National Futures Association
through its electronic exemption filing system; and
(viii)(A)(1) Where the claimant is a commodity pool operator, except
as provided in paragraph (d)(1)(ii)(A) of this section with respect to
single-investor pools and in paragraph (d)(1)(viii)(A)(2) of this
section, be received by the National Futures Association:
(i) Before the date the pool first enters into a commodity interest
transaction, if the relief claimed is limited to that provided under
paragraphs (b)(2), (3) and (4) of this section; or
(ii) Prior to any offer or sale of any participation in the exempt
pool if the claimed relief includes that provided under paragraph (b)(1)
of this section.
(2) Where participations in a pool have been offered or sold in full
compliance with part 4, the notice of a claim for exemption may be filed
with the National Futures Association at any time; Provided, That the
claim for exemption is otherwise consistent with the duties of the
commodity pool operator and the rights of pool participants and that the
commodity pool operator notifies the pool participants of his intention,
absent objection by the holders of a majority of the units of
participation in the pool who are unaffiliated with the commodity pool
operator
[[Page 176]]
within twenty-one days after the date of the notification, to file a
notice of claim for exemption under Sec. 4.7 and such holders have not
objected within such period. A commodity pool operator filing a notice
under this paragraph (d)(1)(viii)(A)(2) shall either provide disclosure
and reporting in accordance with the requirements of part 4 to those
participants objecting to the filing of such notice or allow such
participants to redeem their units of participation in the pool within
three months of the filing of such notice.
(B) Where the claimant is a commodity trading advisor, be received
by the Commission before the date the trading advisor first enters into
an agreement to direct or guide the commodity interest account of a
qualified eligible person pursuant to Sec. 4.7.
(2) The notice will be effective upon receipt by the National
Futures Association with respect to each pool for which it was made
where the claimant is a commodity pool operator and otherwise generally
where the claimant is a commodity trading advisor; Provided, That any
notice which does not include all the required information shall not be
effective, and that if at the time the National Futures Association
receives the notice an enforcement proceeding brought by the Commission
under the Act or the regulations is pending against the pool operator or
trading advisor or any of its principals, the exemption will not be
effective until twenty-one calendar days after receipt of the notice by
the National Futures Association and that in such case an exemption may
be denied by the Commission or the National Futures Association or made
subject to such conditions as the Commission or the National Futures
Association may impose.
(3) Any exemption claimed hereunder shall cease to be effective upon
any change which would cause the commodity pool operator of an exempt
pool to be ineligible for the relief claimed with respect to such pool
or which would cause a commodity trading advisor to be ineligible for
the relief claimed. The pool operator or trading advisor must promptly
file a notice advising the National Futures Association of such change.
(4)(i) Any exemption from the requirements of Sec. 4.21, 4.22,
4.23, 4.24, 4.25 or 4.26 claimed hereunder with respect to a pool shall
not affect the obligation of the commodity pool operator to comply with
all other applicable provisions of part 4, the Act and the Commission's
rules and regulations, with respect to the pool and any other pool the
pool operator operates or intends to operate.
(ii) Any exemption from the requirements of Sec. 4.31, 4.33, 4.34,
4.35 or 4.36 claimed hereunder shall not affect the obligation of the
commodity trading advisor to comply with all other applicable provisions
of part 4, the Act and the Commission's rules and regulations, with
respect to any qualified eligible person and any other client to which
the commodity trading advisor provides or intends to provide commodity
interest trading advice.
(e) Insignificant deviations from a term, condition or requirement
of Sec. 4.7. (1) A failure to comply with a term or condition of Sec.
4.7 will not result in the loss of the exemption with respect to a
particular pool or client if the commodity pool operator or the
commodity trading advisor relying on the exemption shows that:
(i) The failure to comply did not pertain to a term, condition or
requirement directly intended to protect that particular qualified
eligible person;
(ii) The failure to comply was insignificant with respect to the
exempt pool as a whole or to the particular exempt account; and
(iii) A good faith and reasonable attempt was made to comply with
all applicable terms, conditions and requirements of Sec. 4.7.
(2) A transaction made in reliance on Sec. 4.7 must comply with all
applicable terms, conditions and requirements of Sec. 4.7. Where an
exemption is established only through reliance upon paragraph (e)(1) of
this section, the failure to comply shall nonetheless be actionable by
the Commission.
[65 FR 47854, Aug. 4, 2000, as amended at 67 FR 77411, Dec. 18, 2002; 68
FR 47231, Aug. 8, 2003; 71 FR 8942, Feb. 22, 2006; 72 FR 1662, Jan. 16,
2007; 74 FR 57590, Nov. 9, 2009]
[[Page 177]]
Sec. 4.8 Exemption from certain requirements of rule 4.26 with respect
to pools offered or sold in certain offerings exempt from registration
under the Securities Act.
(a) Notwithstanding paragraph (d) of Sec. 4.26 and subject to the
conditions specified herein, the registered commodity pool operator of a
pool offered or sold solely to ``accredited investors'' as defined in 17
CFR 230.501 in an offering exempt from the registration requirements of
the Securities Act of 1933 pursuant to Rule 505 or 506 of Regulation D,
17 CFR 230.505 or 230.506, may solicit, accept and receive funds,
securities and other property from prospective participants in that pool
upon filing with the National Futures Association and providing to such
participants the Disclosure Document for the pool.
(b) Notwithstanding paragraph (d) of Sec. 4.26 and subject to the
conditions specified herein, the registered commodity pool operator of a
pool offered or sold in an offering exempt from the registration
requirements of the Securities Act of 1933 pursuant to Rule 505 or 506
of Regulation D, 17 CFR 230.505 or 230.506, that is operated in
compliance with, and has filed the notice required by Sec. 4.12(b) may
solicit, accept and receive funds, securities and other property from
prospective participants in that pool upon filing with the National
Futures Association and providing to such participants the Disclosure
Document for the pool.
(c) The relief provided under Sec. 4.8 is not available if an
enforcement proceeding brought by the Commission under the Act or the
regulations is pending against the commodity pool operator or any of its
principals or if the commodity pool operator or any of its principals is
subject to any statutory disqualification under Sec. Sec. 8a(2) or
8a(3) of the Act.
[57 FR 34865, Aug. 7, 1992; 57 FR 41173, Sept. 9, 1992, as amended at 60
FR 38182, July 25, 1995; 72 FR 1662, Jan. 16, 2007]
Sec. 4.9 [Reserved]
Sec. 4.10 Definitions.
For purposes of this part:
(a) [Reserved]
(b) Net asset value means total assets minus total liabilities,
determined in accord with generally accepted accounting principles, with
each position in a commodity interest accounted for at fair market
value.
(c) Participant means any person that has any direct financial
interest in a pool (e.g., a limited partner).
(d)(1) Pool means any investment trust, syndicate or similar form of
enterprise operated for the purpose of trading commodity interests.
(2) Multi-advisor pool means a pool in which:
(i) No commodity trading advisor is allocated or intended to be
allocated more than twenty-five percent of the pool's funds available
for commodity interest trading; and
(ii) No investee pool is allocated or intended to be allocated more
than twenty-five percent of the pool's net asset value.
(3) Principal-protected pool means a pool (commonly referred to as a
``guaranteed pool'') that is designed to limit the loss of the initial
investment of its participants.
(4) Investee pool means any pool in which another pool or account
participates or invests, e.g., as a limited partner thereof.
(5) Major investee pool means, with respect to a pool, any investee
pool that is allocated or intended to be allocated at least ten percent
of the net asset value of the pool.
(e)(1) Principal, when referring to a person that is a principal of
a particular entity, shall have the same meaning as the term
``principal'' under Sec. 3.1(a) of this chapter.
(2) Trading principal means:
(i) With respect to a commodity pool operator, a principal who
participates in making trading decisions for a pool, or who supervises,
or has authority to allocate pool assets to, persons so engaged; and
(ii) With respect to a commodity trading advisor, a principal who
participates in making trading decisions for the account of a client or
who supervises or selects persons so engaged.
(f) Direct, as used in the context of trading commodity interest
accounts, refers to agreements whereby a person is authorized to cause
transactions to
[[Page 178]]
be effected for a client's commodity interest account without the
client's specific authorization.
(g) Trading program refers to the program pursuant to which a person
(1) directs a client's commodity interest account, or (2) guides the
client's commodity interest trading by means of a systematic program
that recommends specific transactions.
(h) Trading manager means, with respect to a pool, any person, other
than the commodity pool operator of the pool, having sole or partial
authority to allocate pool assets to commodity trading advisors or
investee pools.
(i) Major commodity trading advisor means, with respect to a pool,
any commodity trading advisor that is allocated or is intended to be
allocated at least ten percent of the pool's funds available for
commodity interest trading. For this purpose, the percentage allocation
shall be the amount of funds allocated to the trading advisor by
agreement with the commodity pool operator (or trading manager) on
behalf of the pool, expressed as a percentage of the lesser of the
aggregate value of the assets allocated to the pool's trading advisors
or the net assets of the pool at the time of allocation.
(j) Break-even point--(1) Means the trading profit that a pool must
realize in the first year of a participant's investment to equal all
fees and expenses such that such participant will recoup its initial
investment, as calculated pursuant to rules promulgated by a registered
futures association pursuant to section 17(j) of the Act; and
(2) Must be expressed both as a dollar amount and as a percentage of
the minimum unit of initial investment and assume redemption of the
initial investment at the end of the first year of investment.
(k) Draw-down means losses experienced by a pool or account over a
specified period.
(l) Worst peak-to-valley draw-down means the greatest cumulative
percentage decline in month-end net asset value due to losses sustained
by a pool, account or trading program during any period in which the
initial month-end net asset value is not equaled or exceeded by a
subsequent month-end net asset value. Such decline must be expressed as
a percentage of the initial month-end net asset value, together with an
indication of the months and year(s) of such decline from the initial
month-end net asset value to the lowest month-end net asset value of
such decline. \1\ For purposes of Sec. Sec. 4.25 and 4.35, a peak-to-
valley draw-down which began prior to the beginning of the most recent
five calendar years is deemed to have occurred during such five-
calendar-year period.
---------------------------------------------------------------------------
\1\ For example, a worst peak-to-valley draw-down of ``4 to 8-92/
25%'' means that the peak-to-valley draw-down lasted from April to
August of 1992 and resulted in a twenty-five percent cumulative draw-
down.
---------------------------------------------------------------------------
(m) Partially-funded account means a client participation in the
program of a commodity trading advisor in which the amount of funds in
the client's commodity interest account over which such commodity
trading advisor has trading authority is less than the account size that
establishes the client's level of trading in a commodity trading
advisor's program.
[46 FR 26013, May 9, 1981, as amended at 49 FR 8225, Mar. 5, 1984; 60 FR
38182, July 25, 1995; 66 FR 53522, Oct. 23, 2001; 68 FR 42967, July 21,
2003; 72 FR 63979, Nov. 14, 2007]
Sec. 4.11 Exemption from section 4n(3)(B).
The provisions of section 4n(3)(B) of the Act shall not apply to any
commodity pool operator or commodity trading advisor that is registered
under the Act as such or that is exempt from such registration.
Sec. 4.12 Exemption from provisions of part 4.
(a) In general. (1) The Commission may exempt any person or any
class or classes of persons from any provision of this part 4 if it
finds that the exemption is not contrary to the public interest and the
purposes of the provisions from which the exemption is sought.
(2) The Commission may grant the exemption subject to such terms and
conditions as it may find appropriate.
(b) Exemption from subpart B for certain commodity pool operators.
(1) Any person who is registered as a commodity pool operator, or has
applied for such registration, may claim any or
[[Page 179]]
all of the relief available under paragraph (b)(2) of this section if:
(i) The pool for which it makes such claim:
(A) Will be offered and sold pursuant to the Securities Act of 1933
or pursuant to an exemption from said Act;
(B) Will generally and routinely engage in the buying and selling of
securities and securities derived instruments;
(C) Will not enter into commodity futures and commodity options
contracts for which the aggregate initial margin and premiums exceed 10
percent of the fair market value of the pool's assets, after taking into
account unrealized profits and unrealized losses on any such contracts
it has entered into; Provided, however, That in the case of an option
that is in-the-money at the time of purchase, the in-the-money amount as
defined in Sec. 190.01(x) may be excluded in computing such 10 percent;
and
(D) Will trade such commodity interests in a manner solely
incidental to its securities trading activities.
(ii) Each existing participant and prospective participant in the
pool for which it makes such request is informed in writing of the
restrictions set forth in paragraph (b)(1)(i) (C) and (D) of this
section prior to the date the pool commences trading commodity
interests. The pool operator may furnish this information by way of the
pool's Disclosure Document, Account Statement, a separate notice or
other similar means, including written communication delivered through
electronic transmission.
(2) The commodity pool operator of a pool which meets the criteria
of paragraph (b)(1) of this section may claim the following relief:
(i) In the case of Sec. 4.21, that the Commission accept in lieu
and in satisfaction of the Disclosure Document specified by that section
an offering memorandum for the pool which does not contain the
information required by Sec. Sec. 4.24(a), 4.24(b), and 4.24(n);
Provided, however, that the offering memorandum:
(A) Is prepared pursuant to the requirements of the Securities Act
of 1933, as amended, or the exemption from said Act pursuant to which
the pool is being offered and sold;
(B) Contains the information required by Sec. Sec. 4.24(c) through
(m) and (o) through (u); and
(C) Complies with the requirements of Sec. Sec. 4.24(v) and (w).
(ii) In the case of Sec. 4.22 (a) and (b), that the Commission
accept in lieu and in satisfaction of the Account Statement and
prescribed frequency respectively specified by those sections a
statement which indicates the net asset value of the pool as of the end
of the reporting period and the change in net asset value from the end
of the previous reporting period, to be prepared and distributed no less
frequently than quarterly; Provided, however, That each such statement
complies with the other requirements of Sec. 4.22 (a) and (b),
including the references in those sections to Sec. 4.22 (g) and (h).
(iii) In the case of Sec. 4.22 (c) through (e), that the Commission
accept in lieu and in satisfaction of the financial information and
statements in the Annual Report specified by those sections an annual
report for the pool which contains, at a minimum, a Statement of
Financial Condition as of the close of the pool's fiscal year and a
Statement of Income (Loss) for that year; Provided, however, That:
(A) Each such annual report complies with the other requirements of
Sec. 4.22(c), including the reference in that section to Sec. 4.22(h)
and the requirement in Sec. 4.22(c)(5) that the annual report must
contain appropriate footnote disclosure and further material
information; and
(B) The financial statements in such annual report must be presented
and computed in accordance with generally accepted accounting principles
consistently applied and must be certified by an independent public
accountant.
(iv) In the case of Sec. 4.23(a) (10) and (11), to exempt the pool
operator from the requirements of those sections with respect to the
pool.
(3) Any registered commodity pool operator who desires to claim the
relief available under this Sec. 4.12(b) must file electronically a
claim of exemption with National Futures Association through its
electronic exemption filing system. Such claim must:
(i) Provide the name, main business address and main business
telephone number of the registered commodity
[[Page 180]]
pool operator, or applicant for such registration, making the request;
(ii) Provide the name of the commodity pool for which the request is
being made;
(iii) Contain representations that the pool will be operated in
compliance with Sec. 4.12(b)(1)(i) and the pool operator will comply
with the requirements of Sec. 4.12(b)(1)(ii);
(iv) Specify the relief sought under Sec. 4.12(b)(2); and
(v) Be filed by a representative duly authorized to bind the pool
operator.
(4)(i) The claim of exemption must be filed before the date the
commodity pool first enters into a commodity interest transaction.
(ii) The claim of exemption shall be effective upon filing;
Provided, however, That any exemption claimed hereunder shall cease to
be effective upon any change which would render the representations made
pursuant to paragraph (b)(3)(iv) of this section inaccurate or the
continuation of such representations false or misleading.
(5)(i) If a claim of exemption has been made under Sec.
4.12(b)(2)(i), the commodity pool operator must make a statement to that
effect on the cover page of each offering memorandum, or amendment
thereto, that it is required to file with the National Futures
Association pursuant to Sec. 4.26.
(ii) If a claim of exemption has been made with respect to paragraph
(b)(2)(iii) of this section, the pool operator must make a statement to
that effect on the cover page of each annual report that it is required
to file with the National Futures Association pursuant to Sec. 4.22(c).
(6)(i) Any claim of exemption effective hereunder shall be effective
only with respect to the pool for which it has been made.
(ii) The effectiveness of such claim shall not affect the
obligations of the commodity pool operator to comply with all other
applicable provisions of this part 4, the Act and the Commission's rules
and regulations issued thereunder with respect to the pool and any other
pool the pool operator operates or intends to operate.
[52 FR 41984, Nov. 2, 1987, as amended at 60 FR 38183, July 25, 1995; 67
FR 77411, Dec. 18, 2002; 72 FR 1663, Jan. 16, 2007]
Sec. 4.13 Exemption from registration as a commodity pool operator.
This section is organized as follows: Paragraph (a) of this section
specifies the criteria that must be met to qualify for exemption from
registration under this section; paragraph (b) of this section governs
the notice that must be filed to claim exemption from registration;
paragraph (c) of this section sets forth the continuing obligations of a
person who has claimed exemption under this section; paragraph (d) of
this section specifies information certain persons must provide if they
subsequently register; paragraph (e) of this section specifies the
effect of registration on a person who has claimed an exemption from
registration under this section or who is eligible to claim an exemption
from registration hereunder; and paragraph (f) of this section specifies
the effect of this section on Sec. 4.5 of this chapter.
(a) A person is not required to register under the Act as a
commodity pool operator if:
(1)(i) It does not receive any compensation or other payment,
directly or indirectly, for operating the pool, except reimbursement for
the ordinary administrative expenses of operating the pool;
(ii) It operates only one commodity pool at any time;
(iii) It is not otherwise required to register with the Commission
and is not a business affiliate of any person required to register with
the Commission; and
(iv) Neither the person nor any other person involved with the pool
does any advertising in connection with the pool (for purposes of this
section, advertising includes the systematic solicitation of prospective
participants by telephone or seminar presentation);
(2)(i) None of the pools operated by it has more than 15
participants at any time; and
(ii) The total gross capital contributions it receives for units of
participation in all of the pools it operates or that it intends to
operate do not in the aggregate exceed $400,000.
(iii) For the purpose of determining eligibility for exemption under
paragraph (a)(2) of this section, the person
[[Page 181]]
may exclude the following participants and their contributions:
(A) The pool's operator, commodity trading advisor, and the
principals thereof;
(B) A child, sibling or parent of any of these participants;
(C) The spouse of any participant specified in paragraph
(a)(2)(iii)(A) or (B) of this section; and
(D) Any relative of a participant specified in paragraph
(a)(2)(iii)(A), (B) or (C) of this section, its spouse or a relative of
its spouse, who has the same principal residence as such participant;
(3) For each pool for which the person claims exemption from
registration under this paragraph (a)(3):
(i) Interests in the pool are exempt from registration under the
Securities Act of 1933, and such interests are offered and sold without
marketing to the public in the United States;
(ii) At all times, the pool meets one or the other of the following
tests with respect to its commodity interest positions, including
positions in security futures products, whether entered into for bona
fide hedging purposes or otherwise:
(A) The aggregate initial margin and premiums required to establish
such positions, determined at the time the most recent position was
established, will not exceed 5 percent of the liquidation value of the
pool's portfolio, after taking into account unrealized profits and
unrealized losses on any such positions it has entered into; Provided,
That in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount as defined in Sec. 190.01(x) of this
chapter may be excluded in computing such 5 percent; or
(B) The aggregate net notional value of such positions, determined
at the time the most recent position was established, does not exceed
100 percent of the liquidation value of the pool's portfolio, after
taking into account unrealized profits and unrealized losses on any such
positions it has entered into. For the purpose of this paragraph:
(1) The term ``notional value'' shall be calculated for each such
futures position by multiplying the number of contracts by the size of
the contract, in contract units (taking into account any multiplier
specified in the contract), by the current market price per unit, and
for each such option position by multiplying the number of contracts by
the size of the contract, adjusted by its delta, in contract units
(taking into account any multiplier specified in the contract), by the
strike price per unit; and
(2) The person may net contracts with the same underlying commodity
across designated contract markets, registered derivatives transaction
execution facilities and foreign boards of trade; and
(iii) The person reasonably believes, at the time of investment (or,
in the case of an existing pool, at the time of conversion to a pool
meeting the criteria of paragraph (a)(3) of this section), that each
person who participates in the pool is:
(A) An ``accredited investor,'' as that term is defined in Sec.
230.501 of this title;
(B) A trust that is not an accredited investor but that was formed
by an accredited investor for the benefit of a family member;
(C) A ``knowledgeable employee,'' as that term is defined in Sec.
270.3c-5 of this title;
(D) A ``qualified eligible person,'' as that term is defined in
Sec. 4.7(a)(2)(viii)(A) of this chapter; or
(E) A person eligible to participate in a pool for which the pool
operator can claim exemption from registration under paragraph (a)(4) of
this section; and
(iv) Participations in the pool are not marketed as or in a vehicle
for trading in the commodity futures or commodity options markets;
Provided, That nothing in paragraph (a)(3) of this section shall
prohibit the person from claiming an exemption under this section if it
additionally operates one or more pools for which it meets the criteria
of paragraph (a)(4) of this section; or
(4) For each pool for which the person claims exemption from
registration under this paragraph (a)(4):
(i) Interests in the pool are exempt from registration under the
Securities Act of 1933, and such interests are offered and sold without
marketing to the public in the United States;
(ii) The person reasonably believes, at the time of investment (or,
in the
[[Page 182]]
case of an existing pool, at the time of conversion to a pool meeting
the criteria of paragraph (a)(4) of this section), that:
(A) Each natural person participant (including such person's self-
directed employee benefit plan, if any), is a ``qualified eligible
person,'' as that term is defined in Sec. 4.7(a)(2); and
(B) Each non-natural person participant is a ``qualified eligible
person,'' as that term is defined in Sec. 4.7, or an ``accredited
investor,'' as that term is defined in Sec. 230.501(a)(1)-(3), (a)(7)
and (a)(8) of this title; Provided, That nothing in paragraph (a)(4) of
this section will prohibit the person from claiming an exemption under
this section if it additionally operates one or more pools that meet the
criteria of paragraph (a)(3) of this section.
(5)(i) Eligibility for exemption under this section is subject to
the person furnishing in written communication physically delivered or
delivered through electronic transmission to each prospective
participant in the pool:
(A) A statement that the person is exempt from registration with the
Commission as a commodity pool operator and that therefore, unlike a
registered commodity pool operator, it is not required to deliver a
Disclosure Document and a certified annual report to participants in the
pool; and
(B) A description of the criteria pursuant to which it qualifies for
such exemption from registration.
(ii) The person must make these disclosures by no later than the
time it delivers a subscription agreement for the pool to a prospective
participant in the pool.
(b)(1) Any person who desires to claim the relief from registration
provided by this section, must file electronically a notice of exemption
from commodity pool operator registration with the National Futures
Association through its electronic exemption filing system. The notice
must:
(i) Provide the name, main business address, main business telephone
number, main facsimile number and main email address of the person
claiming the exemption and the name of the pool for which it is claiming
exemption;
(ii) Contain the section number pursuant to which the operator is
filing the notice (i.e., Sec. 4.13(a)(1), (a)(2), (a)(3), or (a)(4), or
both (a)(3) and (a)(4)) and represent that the pool will be operated in
accordance with the criteria of that paragraph or paragraphs; and
(iii) Be filed by a representative duly authorized to bind the
person.
(2) The person must file the notice by no later than the time it
delivers a subscription agreement for the pool to a prospective
participant in the pool; Provided, That where a person registered with
the Commission as a commodity pool operator intends to withdraw from
registration in order to claim exemption hereunder, the person must
notify its pool's participants in written communication physically
delivered or delivered through electronic transmission that it intends
to withdraw from registration and claim the exemption, and it must
provide each such participant with a right to redeem its interest in the
pool prior to the person filing a notice of exemption from registration.
(3) The notice will be effective upon filing, provided the notice is
materially complete.
(4) Each person who has filed a notice of exemption from
registration under this section must, in the event that any of the
information contained or representations made in the notice becomes
inaccurate or incomplete, amend the notice through National Futures
Association's electronic exemption filing system as may be necessary to
render the notice accurate and complete. This amendment must be filed
electronically within 15 business days after the pool operator becomes
aware of the occurrence of such event.
(c)(1) Each person who has filed a notice of exemption from
registration under this section must:
(i) Make and keep all books and records prepared in connection with
its activities as a pool operator for a period of five years from the
date of preparation;
(ii) Keep such books and records readily accessible during the first
two years of the five-year period. All such books and records must be
available for inspection upon the request of any representative of the
Commission, the
[[Page 183]]
United States Department of Justice, or any other appropriate regulatory
agency; and
(iii) Submit to such special calls as the Commission may make to
demonstrate eligibility for and compliance with the applicable criteria
for exemption under this section.
(2) Each person who has filed a notice of exemption from
registration pursuant to paragraph (a)(1) or (a)(2) of this section
must:
(i) Promptly furnish to each participant in the pool a copy of each
monthly statement for the pool that the pool operator received from a
futures commission merchant pursuant to Sec. 1.33 of this chapter; and
(ii) Clearly show on such statement, or on an accompanying
supplemental statement, the net profit or loss on all commodity
interests closed since the date of the previous statement.
(d) Each person who applies for registration as a commodity pool
operator subsequent to claiming relief under paragraph (a)(1) or (a)(2)
of this section must include with its application the financial
statements and other information required by Sec. 4.22(c)(1) through
(5) for each pool that it has operated as an operator exempt from
registration. That information must be presented and computed in
accordance with generally accepted accounting principles consistently
applied. If the person is granted registration as a commodity pool
operator, it must comply with the provisions of this part with respect
to each such pool.
(e)(1) Subject to the provisions of paragraph (e)(2) of this
section, if a person who is eligible for exemption from registration as
a commodity pool operator under this section nonetheless registers as a
commodity pool operator, the person must comply with the provisions of
this part with respect to each commodity pool identified on its
registration application or supplement thereto.
(2) If a person operates one or more commodity pools described in
paragraph (a)(3) or (a)(4) of this section, and one or more commodity
pools for which it must be, and is, registered as a commodity pool
operator, the person is exempt from the requirements applicable to a
registered commodity pool operator with respect to the pool or pools
described in paragraph (a)(3) or (a)(4) of this section; Provided, That
the person:
(i) Furnishes in written communication physically delivered or
delivered through electronic transmission to each prospective
participant in a pool described in paragraph (a)(3) or (a)(4) of this
section that it operates:
(A) A statement that it will operate the pool as if the person was
exempt from registration as a commodity pool operator;
(B) A description of the criteria pursuant to which it will so
operate the pool;
(ii) Complies with paragraph (c) of this section; and
(iii) Provides to each existing participant in a pool that the
person elects to operate as described in paragraph (a)(3) or (a)(4) of
this section a right to redeem the participant's interest in the pool,
and informs each such participant of that right no later than the time
the person commences to operate the pool as described in paragraph
(a)(3) or (a)(4) of this section.
(f) The filing of a notice of exemption from registration under this
section will not affect the ability of a person to qualify for exclusion
from the definition of the term ``commodity pool operator'' under Sec.
4.5 in connection with its operation of another trading vehicle that is
not covered under this Sec. 4.13.
(Approved by the Office of Management and Budget under control number
3038-0005)
(Secs. 2(a)(1), 4c(a)-(d), 4d, 4f, 4g, 4k, 4m, 4n, 8a, 15 and 17,
Commodity Exchange Act (7 U.S.C. 2, 4, 6c(a)-(d), 6f, 6g, 6k, 6m, 6n,
12a, 19 and 21; 5 U.S.C. 552 and 552b))
[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47
FR 57011, Dec. 22, 1982; 50 FR 15883, Apr. 23, 1985; 67 FR 77411, Dec.
18, 2002; 68 FR 47231, Aug. 8, 2003; 68 FR 59113, Oct. 14, 2003; 69 FR
41426, July 9, 2004; 72 FR 1663, Jan. 16, 2007; 74 FR 57590, Nov. 9,
2009]
Sec. 4.14 Exemption from registration as a commodity trading advisor.
This section is organized as follows: Paragraph (a) of this section
specifies the criteria that must be met to qualify for exemption from
registration under this section, including the notice of exemption from
registration and continuing obligations of persons who
[[Page 184]]
have claimed exemption under paragraph (a)(8) of this section; paragraph
(b) of this section concerns ``cash market transactions''; and paragraph
(c) of this section specifies the effect of registration on a person who
has claimed an exemption from registration under this section or who is
eligible to claim an exemption from registration hereunder.
(a) A person is not required to register under the Act as a
commodity trading advisor if:
(1) It is a dealer, processor, broker, or seller in cash market
transactions of any commodity (or product thereof) and the person's
commodity trading advice is solely incidental to the conduct of its cash
market business;
(2) It is a non-profit, voluntary membership, trade association or
farm organization and the person's commodity trading advice is solely
incidental to the conduct of its business as such association or
organization;
(3) It is registered under the Act as an associated person and the
person's commodity trading advice is issued solely in connection with
its employment as an associated person;
(4) It is registered under the Act as a commodity pool operator and
the person's commodity trading advice is directed solely to, and for the
sole use of, the pool or pools for which it is so registered;
(5) It is exempt from registration as a commodity pool operator and
the person's commodity trading advice is directed solely to, and for the
sole use of, the pool or pools for which it is so exempt;
(6) It is registered under the Act as an introducing broker and the
person's trading advice is solely in connection with its business as an
introducing broker;
(7) It is registered under the Act as a leverage transaction
merchant and the person's trading advice is solely in connection with
its business as a leverage transaction merchant;
(8) It is registered as an investment adviser under the Investment
Advisers Act of 1940 or with the applicable securities regulatory agency
of any State, or it is exempt from such registration, or it is excluded
from the definition of the term ``investment adviser'' pursuant to the
provisions of sections 202(a)(2) and 202(a)(11) of the Investment
Advisers Act of 1940, Provided, That:
(i) The person's commodity interest trading advice is directed
solely to, and for the sole use of, one or more of the following:
(A) ``Qualifying entities,'' as that term is defined in Sec.
4.5(b), for which a notice of eligibility has been filed;
(B) Collective investment vehicles that are excluded from the
definition of the term commodity ``pool'' under Sec. 4.5(a)(4); and
(C) Commodity pools that are organized and operated outside of the
United States, its territories or possessions, where:
(1) The commodity pool operator of each such pool has not so
organized and is not so operating the pool for the purpose of avoiding
commodity pool operator registration;
(2) With the exception of the pool's operator, advisor and their
principals, solely ``Non-United States persons,'' as that term is
defined in Sec. 4.7(a)(1)(iv), will contribute funds or other capital
to, and will own beneficial interests in, the pool; Provided, That units
of participation in the pool held by persons who do not qualify as Non-
United States persons or otherwise as qualified eligible persons
represent in the aggregate less than 10 percent of the beneficial
interest of the pool;
(3) No person affiliated with the pool conducts any marketing
activity for the purpose of, or that could reasonably have the effect
of, soliciting participation from other than Non-United States persons;
and
(4) No person affiliated with the pool conducts any marketing
activity from within the United States, its territories or possessions;
and
(D) A commodity pool operator who has claimed an exemption from
registration under Sec. 4.13(a)(3) or 4.13(a)(4), or, if registered as
a commodity pool operator, who may treat each pool it operates that
meets the criteria of Sec. 4.13(a)(3) or 4.13(a)(4) as if it were not
so registered; and
(ii) The person:
(A) Provides commodity interest trading advice solely incidental to
its business of providing securities or
[[Page 185]]
other investment advice to qualifying entities, collective investment
vehicles and commodity pools as described in paragraph (a)(8)(i) of this
section; and
(B) Is not otherwise holding itself out as a commodity trading
advisor.
(iii)(A) A person who desires to claim the relief from registration
provided by this Sec. 4.14(a)(8) must file electronically a notice of
exemption from commodity trading advisor registration with the National
Futures Association through its electronic exemption filing system. The
notice must:
(1) Provide the name, main business address, main business telephone
number, main facsimile number and main email address of the trading
advisor claiming the exemption;
(2) Contain the section number pursuant to which the advisor is
filing the notice (i.e., under Sec. 4.14(a)(8)(i)) and represent that
it will provide commodity interest advice to its clients in accordance
with the criteria of that paragraph or paragraphs; and
(3) Be filed by a representative duly authorized to bind the person.
(B) The person must file the notice by no later than the time it
delivers an advisory agreement for the trading program pursuant to which
it will offer commodity interest advice to a client; Provided, That
where the advisor is registered with the Commission as a commodity
trading advisor, it must notify its clients in written communication
physically delivered or delivered through electronic transmission that
it intends to withdraw from registration and claim the exemption and
must provide each such client with a right to terminate its advisory
agreement prior to the person filing a notice of exemption from
registration.
(C) The notice will be effective upon filing, provided the notice is
materially complete.
(D) Each person who has filed a notice of exemption from
registration under this section must, in the event that any of the
information contained or representations made in the notice becomes
inaccurate or incomplete, amend the notice electronically through
National Futures Association's electronic exemption filing system as may
be necessary to render the notice accurate and complete. This amendment
must be filed within 15 business days after the trading advisor becomes
aware of the occurrence of such event.
(iv) Each person who has filed a notice of registration exemption
under this Sec. 4.14(a)(8) must:
(A)(1) Make and keep all books and records prepared in connection
with its activities as a trading advisor, including all books and
records demonstrating eligibility for and compliance with the applicable
criteria for exemption under this section, for a period of five years
from the date of preparation; and
(2) Keep such books and records readily accessible during the first
two years of the five-year period. All such books and records must be
available for inspection upon the request of any representative of the
Commission, the United States Department of Justice, or any other
appropriate regulatory agency; and
(B) Submit to such special calls as the Commission may make to
demonstrate eligibility for and compliance with the applicable criteria
for exemption under this section;
(9) It does not engage in any of the following activities:
(i) Directing client accounts; or
(ii) Providing commodity trading advice based on, or tailored to,
the commodity interest or cash market positions or other circumstances
or characteristics of particular clients; or
(10) If, as provided for in section 4m(1) of the Act, during the
course of the preceding 12 months, it has not furnished commodity
trading advice to more than 15 persons and it does not hold itself out
generally to the public as a commodity trading advisor.
(i) For the purpose of paragraph (a)(10) of this section, the
following are deemed a single person:
(A) A natural person, and:
(1) Any minor child of the natural person;
(2) Any relative, spouse, or relative of the spouse of the natural
person who has the same principal residence;
(3) All accounts of which the natural person and/or the persons
referred to in paragraph (a)(10)(i)(A) of this section are the only
primary beneficiaries; and
[[Page 186]]
(4) All trusts of which the natural person and/or the persons
referred to in paragraph (a)(10)(i)(A) of this section are the only
primary beneficiaries;
(B)(1) A corporation, general partnership, limited partnership,
limited liability company, trust (other than a trust referred to in
paragraph (a)(10)(i)(A)(4) of this section), or other legal organization
(any of which are referred to hereinafter as a ``legal organization'')
that receives commodity interest trading advice based on its investment
objectives rather than the individual investment objectives of its
shareholders, partners, limited partners, members, or beneficiaries (any
of which are referred to hereinafter as an ``owner''); and
(2) Two or more legal organizations referred to in paragraph
(a)(10)(i)(B)(1) of this section that have identical owners.
(ii) Special Rules. For the purpose of paragraph (a)(10) of this
section:
(A) An owner must be counted in its own capacity as a person if the
commodity trading advisor provides advisory services to the owner
separate and apart from the advisory services provided to the legal
organization; Provided, That the determination that an owner is a client
will not affect the applicability of paragraph (a)(10) of this section
with regard to any other owner;
(B)(1) A general partner of a limited partnership, or other person
acting as a commodity trading advisor to the partnership, may count the
limited partnership as one person; and
(2) A manager or managing member of a limited liability company, or
any other person acting as a commodity trading advisor to the company,
may count the limited liability company as one person.
(C) A commodity trading advisor that has its principal office and
place of business outside of the United States, its territories or
possessions must count only clients that are residents of the United
States, its territories and possessions; a commodity trading advisor
that has its principal office and place of business in the United States
or in any territory or possession thereof must count all clients.
(iii) Holding Out. Any commodity trading advisor relying on
paragraph (a)(10) of this section shall not be deemed to be holding
itself out generally to the public as a commodity trading advisor,
within the meaning of section 4m(1) of the Act, solely because it
participates in a non-public offering of interests in a collective
investment vehicle under the Securities Act of 1933.
(b) For purposes of this section, ``cash market transactions'' shall
not include transactions involving contracts for the purchase or sale of
a commodity for future delivery or transactions subject to Commission
regulation under section 4c or 19 of the Act.
(c)(1) Subject to the provisions of paragraph (c)(2) of this
section, if a person who is eligible for exemption from registration as
a commodity trading advisor under this section nonetheless registers as
a commodity trading advisor, the person must comply with the provisions
of this part with respect to those clients for which it could have
claimed an exemption from registration hereunder.
(2) If a person provides commodity interest trading advice to a
client described in paragraph (a) of this section and to a client for
which it must be, and is, registered as a commodity trading advisor, the
person is exempt from the requirements applicable to a registered
commodity trading advisor with respect to the clients so described;
Provided, That the person furnishes in writing to each prospective
client described in paragraph (a) of this section a statement that it
will provide commodity interest trading advice to the client as if it
was exempt from registration as a commodity trading advisor; Provided
Further, That the person provides to each existing client described in
paragraph (a) of this section a right to terminate its advisory
agreement, and informs such client of that right no later than the time
the person commences to provide commodity interest trading advice to the
client as if
[[Page 187]]
the person was exempt from registration.
(Secs. 8a(5) and 19 of the Commodity Exchange Act, as amended, 7 U.S.C.
12a(5) and 23 (1982); 5 U.S.C. 552 and 552b)
[46 FR 26013, May 8, 1981; 46 FR 26761, May 15, 1981; 48 FR 35298, Aug.
3, 1983; 49 FR 5526, Feb. 13, 1984; 52 FR 41985, Nov 2, 1987; 52 FR
43827, Nov 16, 1987; 65 FR 12943, Mar. 10, 2000; 67 FR 77411, Dec. 18,
2002; 68 FR 47233, Aug. 8, 2003; 68 FR 52837, Sept. 8, 2003; 68 FR
59114, Oct. 14, 2003; 72 FR 1664, Jan. 16, 2007]
Sec. 4.15 Continued applicability of antifraud section.
The provisions of section 4o of the Act shall apply to any person
even though such person is exempt from registration under this part 4,
and it shall continue to be unlawful for any such person to violate
section 4o of the Act.
[50 FR 15884, Apr. 23, 1985]
Sec. 4.16 Prohibited representations.
It shall be unlawful for any commodity pool operator, commodity
trading advisor, principal thereof or person who solicits therefor to
represent or imply in any manner whatsoever that such commodity pool
operator or commodity trading advisor has been sponsored, recommended or
approved, or that its abilities or qualifications have in any respect
been passed upon, by the Commission, the Federal government or any
agency thereof.
Subpart B_Commodity Pool Operators
Sec. 4.20 Prohibited activities.
(a)(1) Except as provided in paragraph (a)(2) of this section, a
commodity pool operator must operate its pool as an entity cognizable as
a legal entity separate from that of the pool operator.
(2) The Commission may exempt a corporation from the requirements of
paragraph (a)(1) of this section if;
(i) The corporation represents in writing to the Commission that
each participant in its pool will be issued stock or other evidences of
ownership in the corporation for all funds, securities or other property
that the participant contributes for the purchase of an ownership
interest in the pool;
(ii) The corporation demonstrates to the satisfaction of the
Commission that it has estabilshed procedures adequate to assure
compliance with paragraphs (b) and (c) of this section; and
(iii) The Commission finds that the exemption is not contrary to the
public interest and to the purposes of the provision from which the
exemption is sought.
(b) All funds, securities or other property received by a commodity
pool operator from an existing or prospective pool participant for the
purchase of an interest or as an assessment (whether voluntary or
involuntary) on an interest in a pool that it operates or that it
intends to operate must be received in the pool's name.
(c) No commodity pool operator may commingle the property of any
pool that it operates or that it intends to operate with the property of
any other person.
(Approved by the Office of Management and Budget under control number
3038-0005)
[46 FR 26013, May 8, 1981, as amended at 46 FR 34311, July 1, 1981; 46
FR 63035, Dec. 30, 1981]
Sec. 4.21 Required delivery of pool Disclosure Document.
(a)(1) Subject to the provisions of paragraph (a)(2) of this
section, each commodity pool operator registered or required to be
registered under the Act must deliver or cause to be delivered to a
prospective participant in a pool that it operates or intends to operate
a Disclosure Document for the pool prepared in accordance with
Sec. Sec. 4.24 and 4.25 by no later than the time it delivers to the
prospective participant a subscription agreement for the pool; Provided,
That any information distributed in advance of the delivery of the
Disclosure Document to a prospective participant is consistent with or
amended by the information contained in the Disclosure Document and with
the obligations of the commodity pool operator under the Act, the
Commission's regulations issued thereunder, and the laws of any other
applicable federal or state authority; Provided, further, That in the
event such previously distributed information is amended by the
Disclosure Document in any material respect, the
[[Page 188]]
prospective participant must be in receipt of the Disclosure Document at
least 48 hours prior to its subscription being accepted by the pool
operator.
(2) For the purpose of the Disclosure Document delivery requirement,
including any offering memorandum delivered pursuant to Sec. 4.7(b)(1)
or 4.12(b)(2)(i), the term ``prospective pool participant'' does not
include a commodity pool operated by a pool operator that is the same
as, or that controls, is controlled by, or is under common control with,
the pool operator of the offered pool.
(b) The commodity pool operator may not accept or receive funds,
securities or other property from a prospective participant unless the
pool operator first receives from the prospective participant an
acknowledgment signed and dated by the prospective participant stating
that the prospective participant received a Disclosure Document for the
pool. Where a Disclosure Document is delivered to a prospective pool
participant by electronic means, in lieu of a manually signed and dated
acknowledgment, the pool operator may establish receipt by electronic
means that use a unique identifier to confirm the identity of the
recipient of such Disclosure Document, Provided, however, That the
requirement of Sec. 4.23(a)(3) to retain the acknowledgment specified
in this paragraph (b) applies equally to such substitute evidence of
receipt, which must be retained either in hard copy form or in another
form approved by the Commission.
[60 FR 38183, July 25, 1995, as amended at 62 FR 39115, July 22, 1997;
65 FR 58649, Oct. 2, 2000; 68 FR 47234, Aug. 8, 2003]
Sec. 4.22 Reporting to pool participants.
(a) Except as provided in paragraph (a)(4) or (a)(6) of this
section, each commodity pool operator registered or required to be
registered under the Act must periodically distribute to each
participant in each pool that it operates, within 30 calendar days after
the last date of the reporting period prescribed in paragraph (b) of
this section, an Account Statement, which shall be presented in the form
of a Statement of Operations and a Statement of Changes in Net Assets,
for the prescribed period. These financial statements must be presented
and computed in accordance with generally accepted accounting principles
consistently applied. The Account Statement must be signed in accordance
with paragraph (h) of this section.
(1) The portion of the Account Statement which must be presented in
the form of a Statement of Operations must separately itemize the
following information:
(i) The total amount of realized net gain or loss on commodity
interest positions liquidated during the reporting period;
(ii) The change in unrealized net gain or loss on commodity interest
positions during the reporting period;
(iii) The total amount of net gain or loss from all other
transactions in which the pool engaged during the reporting period,
including interest and dividends earned on funds not paid as premiums or
used to margin the pool's commodity interest positions;
(iv) The total amount of all management fees during the reporting
period;
(v) The total amount of all advisory fees during the reporting
period;
(vi) The total amount of all brokerage commissions during the
reporting period;
(vii) The total amount of other fees for commodity interest and
other investment transactions during the reporting period; and
(viii) The total amount of all other expenses incurred or accrued by
the pool during the reporting period.
(2) The portion of the Account Statement that must be presented in
the form of a Statement of Changes in Net Assets must separately itemize
the following information:
(i) The net asset value of the pool as of the beginning of the
reporting period;
(ii) The total amount of additions to the pool, whether voluntary or
involuntary, made during the reporting period;
(iii) The total amount of withdrawals from and redemption of
participation units in the pool, whether voluntary or involuntary, for
the reporting period;
(iv) The total net income or loss of the pool during the reporting
period;
[[Page 189]]
(v) The net asset value of the pool as of the end of the reporting
period; and
(vi)(A) The net asset value per outstanding participation unit in
the pool as of the end of the reporting period, or
(B) The total value of the participant's interest or share in the
pool as of the end of the reporting period.
(3) The Account Statement must also disclose any material business
dealings between the pool, the pool's operator, commodity trading
advisor, futures commission merchant, or the principals thereof that
previously have not been disclosed in the pool's Disclosure Document or
any amendment thereto, other Account Statements or Annual Reports.
(4) For the purpose of the Account Statement delivery requirement,
including any Account Statement distributed pursuant to Sec. 4.7(b)(2)
or 4.12(b)(2)(ii), the term ``participant'' does not include a commodity
pool operated by a pool operator that is the same as, or that controls,
is controlled by, or is under common control with, the pool operator of
a pool in which the commodity pool has invested.
(5) Where the pool is comprised of more than one ownership class or
series, information for the series or class on which the account
statement is reporting should be presented in addition to the
information presented for the pool as a whole; except that, for a pool
that is a series fund structured with a limitation on liability among
the different series, the account statement is not required to include
consolidated information for all series.
(6) A commodity pool operator of a pool that meets the conditions
specified in paragraph (d)(2)(i) of this section and has filed notice
pursuant to paragraph (d)(2)(ii) of this section may elect to follow the
same accounting treatment with respect to the computation and
presentation of the account statement.
(b) The Account Statement must be distributed at least monthly in
the case of pools with net assets of more than $500,000 at the beginning
of the pool's fiscal year, and otherwise at least quarterly; Provided,
however, That an Account Statement for the last reporting period of the
pool's fiscal year need not be distributed if the Annual Report required
by paragraph (c) of this section is sent to pool participants within 45
calendar days after the end of the fiscal year. The requirement to
distribute an Account Statement shall commence as of the date the pool
is formed as specified in paragraph (g)(1) of this section.
(c) Except as provided in paragraph (c)(7) or (c)(8) of this
section, each commodity pool operator registered or required to be
registered under the Act must distribute an Annual Report to each
participant in each pool that it operates, and must electronically
submit a copy of the Report and key financial balances from the Report
to the National Futures Association pursuant to the electronic filing
procedures of the National Futures Association, within 90 calendar days
after the end of the pool's fiscal year or the permanent cessation of
trading, whichever is earlier; Provided, however, that if during any
calendar year the commodity pool operator did not operate a commodity
pool, the pool operator must so notify the National Futures Association
within 30 calendar days after the end of such calendar year. The Annual
Report must be affirmed pursuant to paragraph (h) of this section and
must contain the following:
(1) The net asset value of the pool as of the end of each of the
pool's two preceding fiscal years.
(2)(i) The net asset value per outstanding participation unit in the
pool as of the end of each of the pool's two preceding fiscal years, or
(ii) The total value of the participant's interest or share in the
pool as of the end of each of the pool's two preceding fiscal years.
(3) A Statement of Financial Condition as of the close of the pool's
fiscal year and preceding fiscal year.
(4) Statements of Operations, and Changes in Net Assets, for the
period between--
(i) The later of:
(A) The date of the most recent Statement of Financial Condition
delivered to the National Futures Association pursuant to this paragraph
(c); or
(B) The date of the formation of the pool; and
[[Page 190]]
(ii) The close of the pool's fiscal year, together with Statements
of Operations, and Changes in Net Assets for the corresponding period of
the previous fiscal year.
(5) Appropriate footnote disclosure and such further material
information as may be necessary to make the required statements not
misleading. For a pool that invests in other funds, this information
must include, but is not limited to, separately disclosing the amounts
of income, management and incentive fees associated with each investment
in an investee fund that exceeds five percent of the pool's net assets.
The management and incentive fees associated with an investment in an
investee fund that is less than five percent of the pool's net assets
may be combined and reported in the aggregate with the income,
management and incentive fees of other investee funds that,
individually, represent an investment of less than five percent of the
pool's net assets. If the commodity pool operator is not able to obtain
the specific amounts of management and incentive fees charged by an
investee fund, the commodity pool operator must disclose the percentage
amounts and computational basis for each such fee and include a
statement that the CPO is not able to obtain the specific fee amounts
for this fund;
(6) Where the pool is comprised of more than one ownership class or
series, information for the series or class on which the financial
statements are reporting should be presented in addition to the
information presented for the pool as a whole; except that, for a pool
that is a series fund structured with a limitation on liability among
the different series, the financial statements are not required to
include consolidated information for all series.
(7) For a pool that has ceased operation prior to, or as of, the end
of the fiscal year, the commodity pool operator may provide the
following, within 90 days of the permanent cessation of trading, in lieu
of the annual report that would otherwise be required by Sec. 4.22(c)
or Sec. 4.7(b)(3):
(i) Statements of Operations and Changes in Net Assets for the
period between--
(A) The later of:
(1) The date of the most recent Statement of Financial Condition
filed with the National Futures Association pursuant to this paragraph
(c); or
(2) The date of the formation of the pool; and
(B) The close of the pool's fiscal year or the date of the cessation
of trading, whichever is earlier; and
(ii)(A) An explanation of the winding down of the pool's operations
and written disclosure that all interests in, and assets of, the pool
have been redeemed, distributed or transferred on behalf of the
participants;
(B) If all funds have not been distributed or transferred to
participants by the time that the final report is issued, disclosure of
the value of assets remaining to be distributed and an approximate
timeframe of when the distribution will occur. If the commodity pool
operator does not distribute the remaining pool assets within the
timeframe specified, the commodity pool operator must provide written
notice to each participant and to the National Futures Association that
the distribution of the remaining assets of the pool has not been
completed, the value of assets remaining to be distributed, and a time
frame of when the final distribution will occur.
(C) If the commodity pool operator will not be able to liquidate the
pool's assets in sufficient time to prepare, file and distribute the
final annual report for the pool within 90 days of the permanent
cessation of trading, the commodity pool operator must provide written
notice to each participant and to National Futures Association
disclosing:
(1) The value of investments remaining to be liquidated, the
timeframe within which liquidation is expected to occur, any impediments
to liquidation, and the nature and amount of any fees and expenses that
will be charged to the pool prior to the final distribution of the
pool's funds;
(2) Which financial reports the commodity pool operator will
continue to provide to pool participants from the time that trading
ceased until the final annual report is distributed, and the frequency
with which such reports will be provided, pursuant to the pool's
operative documents; and
[[Page 191]]
(3) The timeframe within which the commodity pool operator will
provide the final report.
(iii) A report filed pursuant to this paragraph (c)(7) that would
otherwise be required by this paragraph (c) is not required to be
audited in accordance with paragraph (d) of this section if the
commodity pool operator obtains from all participants written waivers of
their rights to receive an audited Annual Report, and at the time of
filing the Annual Report with National Futures Association, certifies
that it has received waivers from all participants. The commodity pool
operator must maintain the waivers in accordance with Sec. 1.31 of this
chapter and must make the waivers available to the Commission or
National Futures Association upon request.
(8) For the purpose of the Annual Report distribution requirement,
including any annual report distributed pursuant to Sec. 4.7(b)(3) or
4.12(b)(2)(iii), the term ``participant'' does not include a commodity
pool operated by a pool operator that is the same as, or that controls,
is controlled by, or is under common control with, the pool operator of
a pool in which the commodity pool has invested; Provided, That the
Annual Report of such investing pool contain financial statements that
include such information as the Commission may specify concerning the
operations of the pool in which the commodity pool has invested.
(d)(1) The financial statements in the Annual Report must be
presented and computed in accordance with generally accepted accounting
principles consistently applied and must be audited by an independent
public accountant. The requirements of Sec. 1.16(g) of this chapter
shall apply with respect to the engagement of such independent public
accountants, except that any related notifications to be made may be
made solely to the National Futures Association, and the certification
must be in accordance with Sec. 1.16 of this chapter, except that the
following requirements of that section shall not apply:
(i) The audit objectives of Sec. 1.16(d)(1) concerning the periodic
computation of minimum capital and property in segregation;
(ii) All other references in Sec. 1.16 to the segregation
requirements; and
(iii) Section 1.16(c)(5), (d)(2), (e)(2), and (f).
(2)(i) The financial statements in the Annual Report required by
this section or by Sec. 4.7(b)(3) may be presented and computed in
accordance with International Financial Reporting Standards issued by
the International Accounting Standards Board if the following conditions
are met:
(A) The pool is organized under the laws of a foreign jurisdiction;
(B) The Annual Report will include a condensed schedule of
investments, or, if required by the alternate accounting standards, a
full schedule of investments;
(C) The preparation of the pool's financial statements under
International Financial Reporting Standards is not inconsistent with
representations set forth in the pool's offering memorandum or other
operative document that is made available to participants;
(D) Special allocations of ownership equity will be reported in
accordance with Sec. 4.22(e)(2); and
(E) In the event that the International Financial Reporting
Standards require consolidated financial statements for the pool, such
as a feeder fund consolidating with its master fund, all applicable
disclosures required by generally accepted accounting principles for the
feeder fund must be presented with the reporting pool's consolidated
financial statements.
(ii) The commodity pool operator of a pool that meets the conditions
specified in this paragraph (d)(2) may claim relief from the requirement
in paragraph (d)(1) of this section by filing a notice with the National
Futures Association, within 90 calendar days after the end of the pool's
fiscal year.
(A) The notice must contain the name, main business address, main
telephone number and the National Futures Association registration
identification number of the commodity pool operator, and name and the
identification number of the commodity pool.
(B) The notice must include representations regarding the pool's
compliance with each of the conditions specified in Sec. 4.22(d)(2)(A)
through (D), and, if applicable, (E); and
[[Page 192]]
(C) The notice must be signed by the commodity pool operator in
accordance with paragraph (h) of this section.
(e)(1) The Statement of Operations required by this section must
itemize brokerage commissions, management fees, advisory fees, incentive
fees, interest income and expense, total realized net gain or loss from
commodity interest trading, and change in unrealized net gain or loss on
commodity interest positions during the pool's fiscal year. Gains and
losses on commodity interests need not be itemized by commodity or by
specific delivery or expiration date.
(2)(i) Any share of a pool's profits or transfer of a pool's equity
which exceeds the general partner's or any other class's share of
profits computed on the general partner's or other class's pro rata
capital contribution are ``special allocations.'' Special allocations of
partnership equity or other interests must be recognized in the pool's
Statement of Operations in the same period as the net income, interest
income, or other basis of computation of the special allocation is
recognized. Special allocations must be recognized and classified either
as an expense of the pool or, if not recognized as an expense of the
pool, presented in the Statement of Operations as a separate, itemized
allocation of the pool's net income to arrive at net income available
for pro rata distribution to all partners.
(ii) Special allocations of ownership interest also must be reported
separately in the Statement of Partners' Equity, in addition to the pro-
rata allocations of net income, as to each class of ownership interest.
(3) Realized gains or losses on regulated commodities transactions
presented in the Statement of Operations of a commodity pool may be
combined with realized gains or losses from trading in non-commodity
interest transactions, provided that the gains or losses to be combined
are part of a related trading strategy. Unrealized gains or losses on
open regulated commodity positions presented in the Statement of
Operations of a commodity pool may be combined with unrealized gains or
losses from open positions in non-commodity positions, provided that the
gains or losses to be combined are part of a related trading strategy.
(f)(1)(i) In the event the commodity pool operator finds that it
cannot distribute the Annual Report for a pool that it operates within
the time specified in paragraph (c) of this section without substantial
undue hardship, it may file with the National Futures Association an
application for extension of time to a specified date not more than 90
calendar days after the date as of which the Annual Report was to have
been distributed. The application must be made by the pool operator and
must:
(A) State the name of the pool for which the application is being
made;
(B) State the reasons for the requested extension;
(C) Indicate that the inability to make a timely filing is due to
circumstances beyond the control of the pool operator, if such is the
case, and describe briefly the nature of such circumstances;
(D) Contain an undertaking to file the Annual Report on or before
the date specified in the application; and
(E) Be filed with the National Futures Association prior to the date
on which the Annual Report is due.
(ii) The application must be accompanied by a letter from the
independent public accountant answering the following questions:
(A) What specifically are the reasons for the extension request?
(B) Do you have any indication from the part of your audit completed
to date that would lead you to believe that the commodity pool operator
was or is not meeting the recordkeeping requirements of this part 4 or
was or is not complying with the Sec. 4.20(c) prohibition on
commingling of property of any pool with the property of any other
person?
(iii) Within ten calendar days after receipt of an application for
an extension of time, the National Futures Association shall:
(A) Notify the commodity pool operator of the grant or denial of the
requested extension, or
(B) Indicate to the pool operator that additional time is required
to analyze
[[Page 193]]
the request, in which case the amount of time needed will be specified.
(2) In the event a commodity pool operator finds that it cannot
obtain information necessary to prepare annual financial statements for
a pool that it operates within the time specified in either paragraph
(c) of this section or Sec. 4.7(b)(3)(i), as a result of the pool
investing in another collective investment vehicle, it may claim an
extension of time under the following conditions:
(i) The commodity pool operator must, within 90 calendar days of the
end of the pool's fiscal year, file a notice with the National Futures
Association, except as provided in paragraph (f)(2)(v) of this section.
(ii) The notice must contain the name, main business address, main
telephone number and the National Futures Association registration
identification number of the commodity pool operator, and name and the
identification number of the commodity pool.
(iii) The notice must state the date by which the Annual Report will
be distributed and filed (the ``Extended Date''), which must be no more
than 180 calendar days after the end of the pool's fiscal year. The
Annual Report must be distributed and filed by the Extended Date.
(iv) The notice must include representations by the commodity pool
operator that:
(A) The pool for which the Annual Report is being prepared has
investments in one or more collective investment vehicles (the
``Investments'');
(B) For all reports prepared under paragraph (c) of this section and
for reports prepared under Sec. 4.7(b)(3)(i) that are audited by an
independent public accountant, the commodity pool operator has been
informed by the independent public accountant engaged to audit the
commodity pool's financial statements that specified information
required to complete the pool's annual report is necessary in order for
the accountant to render an opinion on the commodity pool's financial
statements. The notice must include the name, main business address,
main telephone number, and contact person of the accountant; and
(C) The information specified by the accountant cannot be obtained
in sufficient time for the Annual Report to be prepared, audited, and
distributed before the Extended Date.
(D) For unaudited reports prepared under Sec. 4.7(b)(3)(i), the
commodity pool operator has been informed by the operators of the
Investments that specified information required to complete the pool's
annual report cannot be obtained in sufficient time for the Annual
Report to be prepared and distributed before the Extended Date.
(v) For each fiscal year following the filing of the notice
described in paragraph (f)(2)(i) of this section, for a particular pool,
it shall be presumed that the particular pool continues to invest in
another collective investment vehicle and the commodity pool operator
may claim the extension of time; Provided, however, that if the
particular pool is no longer investing in another collective investment
vehicle, then the commodity pool operator must file electronically with
the National Futures Association an Annual Report within 90 days after
the pool's fiscal year-end accompanied by a notice indicating the change
in the pool's status.
(vi) Any notice or statement filed pursuant to this paragraph (f)(2)
must be signed by the commodity pool operator in accordance with
paragraph (h) of this section.
(g)(1) A commodity pool operator may initially elect any fiscal year
for a pool, but the first fiscal year may not end more than one year
after the pool's formation. For purposes of this section, a pool shall
be deemed to be formed as of the date the pool operator first receives
funds, securities or other property for the purchase of an interest in
the pool.
(2) If a commodity pool operator elects a fiscal year other than the
calendar year, it must give written notice of the election to all
participants and must file the notice with the National Futures
Association within 90 calendar days after the date of the pool's
formation. If this notice is not given, the pool operator will be deemed
to have elected the calendar year as the pool's fiscal year.
(3) The commodity pool operator must continue to use the elected
fiscal
[[Page 194]]
year for the pool unless it provides written notice of any proposed
change to all participants and files such notice with the National
Futures Association at least 90 days before the change and the National
Futures Association does not disapprove the change within 30 days after
the filing of the notice.
(h)(1) Each Account Statement and Annual Report, including an
Account Statement or Annual Report provided pursuant to Sec. 4.7(b) or
4.12(b), must contain an oath or affirmation that, to the best of the
knowledge and belief of the individual making the oath or affirmation,
the information contained in the document is accurate and complete;
Provided, however, That it shall be unlawful for the individual to make
such oath or affirmation if the individual knows or should know that any
of the information in the document is not accurate and complete.
(2) Each oath or affirmation must be made by a representative duly
authorized to bind the pool operator, and
(i) for the copy of a commodity pool's Annual Report submitted to
the National Futures Association, such representative shall satisfy the
required oath or affirmation through compliance with the National
Futures Association's electronic filing procedures, and
(ii) for a commodity pool Account Statement or Annual Report
distributed to participants, a facsimile of the manually signed oath or
affirmation of such representative may be used so long as the manually
signed original is retained in accordance with Sec. 4.23.
(3) For each manually signed oath or affirmation, there must be
typed beneath the signed oath or affirmation:
(i) The name of the individual signing the document;
(ii) The capacity in which he is signing;
(iii) The name of the commodity pool operator for whom he is
signing; and
(iv) The name of the commodity pool for which the document is being
distributed.
(i) The Account Statement or Annual Report may be distributed to a
pool participant by means of electronic media if the participant so
consents; Provided, That prior to the transmission of any Account
Statement or Annual Report by means of electronic media, a commodity
pool operator must disclose to the participant that it intends to
distribute electronically the Account Statement or Annual Report or both
documents, as the case may be, absent objection from the participant,
which objection, if any, the participant must make no later than 10
business days following its receipt of the disclosure.
(Approved by the Office of Management and Budget under control number
3038-0005)
(Secs. 2(a)(1), 4c(a)-(d), 4d, 4f, 4g, 4k, 4m, 4n, 8a, 15 and 17,
Commodity Exchange Act (7 U.S.C. 2, 4, 6c(a)-(d), 6f, 6g, 6k, 6m, 6n,
12a, 19 and 21; 5 U.S.C. 552 and 552b))
[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47
FR 57011, Dec. 22, 1982; 52 FR 41986, Nov. 2, 1987; 65 FR 81334, Dec.
26, 2000; 67 FR 77411, Dec. 18, 2002; 68 FR 47234, Aug. 8, 2003; 68 FR
52837, Sept. 8, 2003; 71 FR 8942, Feb. 22, 2006; 74 FR 57590, Nov. 9,
2009]
Sec. 4.23 Recordkeeping.
Each commodity pool operator registered or required to be registered
under the Act must make and keep the following books and records in an
accurate, current and orderly manner at its main business office and in
accordance with Sec. 1.31. All books and records required by this
section except those required by paragraphs (a)(3), (a)(4), (b)(1),
(b)(2) and (b)(3) must be made available to participants for inspection
and copying during normal business hours at the main business office of
the pool operator. Upon request, copies must be sent by mail to any
participant within five business days if reasonable reproduction and
distribution costs are paid by the pool participant. If the commodity
pool operator's main business office is outside of the United States,
its territories or possessions, then upon the request of a Commission
representative, the pool operator must provide such books and records as
requested at the place in the United States, its territories or
possessions designated by the representative within 72 hours after the
pool operator receives the request.
(a) Concerning the commodity pool:
(1) An itemized daily record of each commodity interest transaction
of the pool, showing the transaction date,
[[Page 195]]
quantity, commodity interest, and, as applicable, price or premium,
delivery month or expiration date, whether a put or a call, strike
price, underlying contract for future delivery or underlying physical,
the futures commission merchant carrying the account and the introducing
broker, if any, whether the commodity interest was purchased, sold,
exercised, or expired, and the gain or loss realized.
(2) A journal of original entry or other equivalent record showing
all receipts and disbursements of money, securities and other property.
(3) The acknowledgement specified by Sec. 4.21(b) for each
participant in the pool.
(4) A subsidiary ledger or other equivalent record for each
participant in the pool showing the participant's name and address and
all funds, securities and other property that the pool received from or
distributed to the participant.
(5) Adjusting entries and any other records of original entry or
their equivalent forming the basis of entries in any ledger.
(6) A general ledger or other equivalent record containing details
of all asset, liability, capital, income and expense accounts.
(7) Copies of each confirmation of a commodity interest transaction
of the pool, each purchase and sale statement and each monthly statement
for the pool received from a futures commission merchant.
(8) Cancelled checks, bank statements, journals, ledgers, invoices,
computer generated records, and all other records, data and memoranda
prepared or received in connection with the operation of the pool.
(9) The original or a copy of each report, letter, circular,
memorandum, publication, writing, advertisement or other literature or
advice (including the texts of standardized oral presentations and of
radio, television, seminar or similar mass media presentations)
distributed or caused to be distributed by the commodity pool operator
to any existing or prospective pool participant or received by the pool
operator from any commodity trading advisor of the pool, showing the
first date of distribution or receipt if not otherwise shown on the
document.
(10) A Statement of Financial Condition as of the close of (i) each
regular monthly period if the pool had net assets of $500,000 or more at
the beginning of the pool's fiscal year, or (ii) each regular quarterly
period for all other pools. The Statement must be completed within 30
days after the end of that period.
(11) A Statement of Income (Loss) for the period between (i) the
later of: (A) the date of the most recent Statement of Financial
Condition furnished to the Commission pursuant to Sec. 4.22(c), (B)
April 1, 1979 or (C) the formation of the pool, and (ii) the date of the
Statement of Financial Condition required by paragraph (a)(10) of this
section. The Statement must be completed within 30 days after the end of
that period.
(12) A manually signed copy of each Account Statement and Annual
Report provided pursuant to Sec. 4.22, 4.7(b) or 4.12(b), and records
of the key financial balances submitted to the National Futures
Association for each commodity pool Annual Report, which records must
clearly demonstrate how the key financial balances were compiled from
the Annual Report.
(b) Concerning the commodity pool operator:
(1) An itemized daily record of each commodity interest transaction
of the commodity pool operator and each principal thereof, showing the
transaction date, quantity, commodity interest, and, as applicable,
price or premium, delivery month or expiration date, whether a put or a
call, strike price, underlying contract for future delivery or
underlying physical, the futures commission merchant carrying the
account and the introducing broker, if any whether the commodity
interest was purchased, sold, exercised, or expired, and the gain or
loss realized.
(2) Each confirmation of a commodity interest transaction, each
purchase and sale statement and each monthly statement furnished by a
futures commission merchant to (i) the commodity pool operator relating
to a personal account of the pool operator,
[[Page 196]]
and (ii) each principal of the pool operator relating to a personal
account of such principal.
(3) Books and records of all other transactions in all other
activities in which the pool operator engages. Those books and records
must include cancelled checks, bank statements, journals, ledgers,
invoices, computer generated records and all other records, data and
memoranda which have been prepared in the course of engaging in those
activities.
(Approved by the Office of Management and Budget under control number
3038-0005)
(Secs. 2(a)(1), 4c(a)-(d), 4d, 4f, 4g, 4k, 4m, 4n, 8a, 15 and 17,
Commodity Exchange Act (7 U.S.C. 2, 4, 6c(a)-(d), 6f, 6g, 6k, 6m, 6n,
12a, 19 and 21; 5 U.S.C. 552 and 552b))
[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47
FR 57011, Dec. 22, 1982; 48 FR 35299, Aug. 3, 1983; 60 FR 38183, July
25, 1995; 71 FR 8943, Feb. 22, 2006]
Sec. 4.24 General disclosures required.
Except as otherwise provided herein, a Disclosure Document must
include the following information.
(a) Cautionary Statement. The following Cautionary Statement must be
prominently displayed on the cover page of the Disclosure Document.
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE
MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON
THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
(b) Risk Disclosure Statement. (1) The following Risk Disclosure
Statement must be prominently displayed immediately following any
disclosures required to appear on the cover page of the Disclosure
Document as provided by the Commission, by any applicable federal or
state securities laws and regulations or by any applicable laws of non-
United States jurisdictions.
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION
PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD
BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE
LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET
ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN
THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR
ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR
MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR
THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL
TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS
DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO
BE CHARGED THIS POOL AT PAGE (insert page number) AND A STATEMENT OF THE
PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE
AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE (insert page number).
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS
NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL.
THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU
SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION
OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE (insert page
number).
(2) If the pool may trade foreign futures or options contracts, the
Risk Disclosure Statement must further state:
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN
FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE
THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES
MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR
DIMINISHED PROTECTION TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED
STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF
THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES
JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE EFFECTED.
(3) If the potential liability of a participant in the pool is
greater than the amount of the participant's contribution for the
purchase of an interest in the pool and the profits earned thereon,
whether distributed or not, the commodity pool operator must make the
following additional statement in
[[Page 197]]
the Risk Disclosure Statement, to be prominently disclosed as the last
paragraph thereof:
ALSO, BEFORE YOU DECIDE TO PARTICIPATE IN THIS POOL, YOU SHOULD NOTE
THAT YOUR POTENTIAL LIABILITY AS A PARTICIPANT IN THIS POOL FOR TRADING
LOSSES AND OTHER EXPENSES OF THE POOL IS NOT LIMITED TO THE AMOUNT OF
YOUR CONTRIBUTION FOR THE PURCHASE OF AN INTEREST IN THE POOL AND ANY
PROFITS EARNED THEREON. A COMPLETE DESCRIPTION OF THE LIABILITY OF A
PARTICIPANT IN THIS POOL IS EXPLAINED MORE FULLY IN THIS DISCLOSURE
DOCUMENT.
(c) Table of contents. A table of contents showing, by subject
matter, the location of the disclosures made in the Disclosure Document
must appear immediately following the Risk Disclosure Statement.
(d) Information required in the forepart of the Disclosure Document.
(1) The name, address of the main business office, main business
telephone number and form of organization of the pool. If the mailing
address of the main business office is a post office box number or is
not within the United States, its territories or possessions, the pool
operator must state where the pool's books and records will be kept and
made available for inspection;
(2) The name, address of the main business office, main business
telephone number and form of organization of the commodity pool
operator. If the mailing address of the main business office is a post
office box number or is not within the United States, its territories or
possessions, the pool operator must state where its books and records
will be kept and made available for inspection;
(3) As applicable, a statement that the pool is:
(i) Privately offered pursuant to section 4(2) of the Securities Act
of 1933, as amended (15 U.S.C. 77d(2)), or pursuant to Regulation D
thereunder (17 CFR 230.501 et seq.);
(ii) A multi-advisor pool as defined in Sec. 4.10(d)(2);
(iii) A principal-protected pool as defined in Sec. 4.10(d)(3); or
(iv) Continuously offered. If the pool is not continuously offered,
the closing date of the offering must be disclosed.
(4) The date when the commodity pool operator first intends to use
the Disclosure Document; and
(5) The break-even point per unit of initial investment, as
specified in Sec. 4.10(j).
(e) Persons to be identified. The names of the following persons:
(1) Each principal of the pool operator;
(2) The pool's trading manager, if any, and each principal thereof;
(3) Each major investee pool, the operator of such investee pool,
and each principal of the operator thereof;
(4) Each major commodity trading advisor and each principal thereof;
(5) Which of the foregoing persons will make trading decisions for
the pool; and
(6) If known, the futures commission merchant through which the pool
will execute its trades, and, if applicable, the introducing broker
through which the pool will introduce its trades to the futures
commission merchant.
(f) Business background. (1) The business background, for the five
years preceding the date of the Disclosure Document, of:
(i) The commodity pool operator;
(ii) The pool's trading manager, if any;
(iii) Each major commodity trading advisor;
(iv) The operator of each major investee pool; and
(v) Each principal of the persons referred to in this paragraph
(f)(1) who participates in making trading or operational decisions for
the pool or who supervises persons so engaged.
(2) The pool operator must include in the description of the
business background of each person identified in Sec. 4.24(f)(1) the
name and main business of that person's employers, business associations
or business ventures and the nature of the duties performed by such
person for such employers or in connection with such business
associations or business ventures. The location in the Disclosure
Document of any required past performance disclosure for such person
must be indicated.
(g) Principal risk factors. A discussion of the principal risk
factors of participation in the offered pool. This discussion must
include, without limitation,
[[Page 198]]
risks relating to volatility, leverage, liquidity, and counterparty
creditworthiness, as applicable to the types of trading programs to be
followed, trading structures to be employed and investment activity
expected to be engaged in by the offered pool.
(h) Investment program and use of proceeds. The pool operator must
disclose the following:
(1) The types of commodity interests and other interests which the
pool will trade, including:
(i) The approximate percentage of the pool's assets that will be
used to trade commodity interests, securities and other types of
interests, categorized by type of commodity or market sector, type of
security (debt, equity, preferred equity), whether traded or listed on a
regulated exchange market, maturity ranges and investment rating, as
applicable;
(ii) The extent to which such interests are subject to state or
federal regulation, regulation by a non-United States jurisdiction or
rules of a self-regulatory organization;
(iii)(A) The custodian or other entity (e.g., bank or broker-dealer)
which will hold such interests; and
(B) If such interests will be held or if pool assets will be
invested in a non-United States jurisdiction, the jurisdiction in which
such interests or assets will be held or invested.
(2) A description of the trading and investment programs and
policies that will be followed by the offered pool, including the method
chosen by the pool operator concerning how futures commission merchants
carrying the pool's accounts shall treat offsetting positions pursuant
to Sec. 1.46 of this chapter, if the method is other than to close out
all offsetting positions or to close out offsetting positions on other
than a first-in, first-out basis, and any material restrictions or
limitations on trading required by the pool's organizational documents
or otherwise. This description must include, if applicable, an
explanation of the systems used to select commodity trading advisors,
investee pools and types of investment activity to which pool assets
will be committed;
(3)(i) A summary description of the pool's major commodity trading
advisors, including their respective percentage allocations of pool
assets, a description of the nature and operation of the trading
programs such advisors will follow, including the types of interests
traded pursuant to such programs, and each advisor's historical
experience trading such program including material information as to
volatility, leverage and rates of return and the length of time during
which the advisor has traded such program;
(ii) A summary description of the pool's major investee pools or
funds, including their respective percentage allocations of pool assets
and a description of the nature and operation of such investee pools and
funds, including for each investee pool or fund the types of interests
traded, material information as to volatility, leverage and rates of
return for such investee pool or fund and the period of its operation;
and
(4)(i) The manner in which the pool will fulfill its margin
requirements and the approximate percentage of the pool's assets that
will be held in segregation pursuant to the Act and the Commission's
regulations thereunder;
(ii) If the pool will fulfill its margin requirements with other
than cash deposits, the nature of such deposits; and
(iii) If assets deposited by the pool as margin generate income, to
whom that income will be paid.
(i) Fees and expenses. (1) The Disclosure Document must include a
complete description of each fee, commission and other expense which the
commodity pool operator knows or should know has been incurred by the
pool for its preceding fiscal year and is expected to be incurred by the
pool in its current fiscal year, including fees or other expenses
incurred in connection with the pool's participation in investee pools
and funds.
(2) This description must include, without limitation:
(i) Management fees;
(ii) Brokerage fees and commissions, including interest income paid
to futures commission merchants;
(iii) Fees and commissions paid in connection with trading advice
provided to the pool;
(iv) Fees and expenses incurred within investments in investee
pools,
[[Page 199]]
investee funds and other collective investment vehicles, which fees and
expenses must be disclosed separately for each investment tier;
(v) Incentive fees;
(vi) Any allocation to the commodity pool operator, or any agreement
or understanding which provides the commodity pool operator with the
right to receive a distribution, where such allocation or distribution
is greater than a pro rata share of the pool's profits based on the
percentage of capital contributions made by the commodity pool operator;
(vii) Commissions or other benefits, including trailing commissions
paid or that may be paid or accrue, directly or indirectly, to any
person in connection with the solicitation of participations in the
pool;
(viii) Professional and general administrative fees and expenses,
including legal and accounting fees and office supplies expenses;
(ix) Organizational and offering expenses;
(x) Clearance fees and fees paid to national exchanges and self-
regulatory organizations;
(xi) For principal-protected pools, any direct or indirect costs to
the pool associated with providing the protection feature, as referred
to in paragraph (o)(3) of this section; and
(xii) Any other direct or indirect cost.
(3) Where any fee, commission or other expense is determined by
reference to a base amount including, but not limited to, ``net
assets,'' ``allocation of assets,'' ``gross profits,'' ``net profits,''
or ``net gains,'' the pool operator must explain how such base amount
will be calculated, in a manner consistent with calculation of the
break-even point.
(4) Where any fee, commission or other expense is based on an
increase in the value of the pool, the pool operator must specify how
the increase is calculated, the period of time during which the increase
is calculated, the fee, commission or other expense to be charged at the
end of that period and the value of the pool at which payment of the
fee, commission or other expense commences.
(5) Where any fee, commission or other expense of the pool has been
paid or is to be paid by a person other than the pool, the pool operator
must disclose the nature and amount thereof and the person who paid or
who is expected to pay it.
(6) The pool operator must provide, in a tabular format, an analysis
setting forth how the break-even point for the pool was calculated. The
analysis must include all fees, commissions and other expenses of the
pool, as set forth in Sec. 4.24(i)(2).
(j) Conflicts of interest. (1) A full description of any actual or
potential conflicts of interest regarding any aspect of the pool on the
part of:
(i) The commodity pool operator;
(ii) The pool's trading manager, if any;
(iii) Any major commodity trading advisor;
(iv) The commodity pool operator of any major investee pool;
(v) Any principal of the persons described in paragraphs (j)(1) (i),
(ii), (iii) and (iv) of this section; and
(vi) Any other person providing services to the pool or soliciting
participants for the pool.
(2) Any other material conflict involving the pool.
(3) Included in the description of such conflicts must be any
arrangement whereby a person may benefit, directly or indirectly, from
the maintenance of the pool's account with the futures commission
merchant or from the introduction of the pool's account to a futures
commission merchant by an introducing broker (such as payment for order
flow or soft dollar arrangements) or from an investment of pool assets
in investee pools or funds or other investments.
(k) Related party transactions. A full description, including a
discussion of the costs thereof to the pool, of any material
transactions or arrangements for which there is no publicly disseminated
price between the pool and any person affiliated with a person providing
services to the pool.
(l) Litigation. (1) Subject to the provisions of Sec. 4.24(l)(2),
any material administrative, civil or criminal action, whether pending
or concluded, within five years preceding the date of the
[[Page 200]]
Document, against any of the following persons; Provided, however, that
a concluded action that resulted in an adjudication on the merits in
favor of such person need not be disclosed:
(i) The commodity pool operator, the pool's trading manager, if any,
the pool's major commodity trading advisors, and the operators of the
pool's major investee pools;
(ii) Any principal of the foregoing; and
(iii) The pool's futures commission merchants and introducing
brokers, if any.
(2) With respect to a futures commission merchant or an introducing
broker, an action will be considered material if:
(i) The action would be required to be disclosed in the notes to the
futures commission merchant's or introducing broker's financial
statements prepared pursuant to generally accepted accounting
principles;
(ii) The action was brought by the Commission; Provided, however,
that a concluded action that did not result in civil monetary penalties
exceeding $50,000 need not be disclosed unless it involved allegations
of fraud or other willful misconduct; or
(iii) The action was brought by any other federal or state
regulatory agency, a non-United States regulatory agency or a self-
regulatory organization and involved allegations of fraud or other
willful misconduct.
(m) Trading for own account. If the commodity pool operator, the
pool's trading manager, any of the pool's commodity trading advisors or
any principal thereof trades or intends to trade commodity interests for
its own account, the pool operator must disclose whether participants
will be permitted to inspect the records of such person's trades and any
written policies related to such trading.
(n) Performance disclosures. Past performance must be disclosed as
set forth in Sec. 4.25.
(o) Principal-protected pools. If the pool is a principal-protected
pool as defined in Sec. 4.10(d)(3), the commodity pool operator must:
(1) Describe the nature of the principal protection feature intended
to be provided, the manner by which such protection will be achieved,
including sources of funding, and what conditions must be satisfied for
participants to receive the benefits of such protection;
(2) Specify when the protection feature becomes operative; and
(3) Disclose, in the break-even analysis required by Sec.
4.24(i)(6), the costs of purchasing and carrying the assets to fund the
principal protection feature or other limitation on risk, expressed as a
percentage of the price of a unit of participation.
(p) Transferability and redemption. (1) A complete description of
any restrictions upon the transferability of a participant's interest in
the pool; and
(2) A complete description of the frequency, timing and manner in
which a participant may redeem interests in the pool. Such description
must specify:
(i) How the redemption value of a participant's interest will be
calculated;
(ii) The conditions under which a participant may redeem its
interest, including the cost associated therewith, the terms of any
notification required and the time between the request for redemption
and payment;
(iii) Any restrictions on the redemption of a participant's
interest, including any restrictions associated with the pool's
investments; and
(iv) Any liquidity risks relative to the pool's redemption
capabilities.
(q) Liability of pool participants. The extent to which a
participant may be held liable for obligations of the pool in excess of
the funds contributed by the participant for the purchase of an interest
in the pool.
(r) Distribution of profits and taxation. (1) The pool's policies
with respect to the payment of distributions from profits or capital and
the frequency of such payments;
(2) The federal income tax effects of such payments for a
participant, including a discussion of the federal income tax laws
applicable to the form of organization of the pool and to such payments
therefrom; and
(3) If a pool is specifically structured to accomplish certain
federal income tax objectives, the commodity pool operator must explain
those objectives, the manner in which they will be
[[Page 201]]
achieved and any risks relative thereto.
(s) Inception of trading and other information. (1) The minimum
aggregate subscriptions that will be necessary for the pool to commence
trading commodity interests;
(2) The minimum and maximum aggregate subscriptions that may be
contributed to the pool;
(3) The maximum period of time the pool will hold funds prior to the
commencement of trading commodity interests;
(4) The disposition of funds received if the pool does not receive
the necessary amount to commence trading, including the period of time
within which the disposition will be made; and
(5) Where the pool operator will deposit funds received prior to the
commencement of trading by the pool, and a statement specifying to whom
any income from such deposits will be paid.
(t) Ownership in pool. The extent of any ownership or beneficial
interest in the pool held by the following:
(1) The commodity pool operator;
(2) The pool's trading manager, if any;
(3) The pool's major commodity trading advisors;
(4) The operators of the pool's major investee pools; and
(5) Any principal of the foregoing.
(u) Reporting to pool participants. A statement that the commodity
pool operator is required to provide all participants with monthly or
quarterly (whichever applies) statements of account and with an annual
report containing financial statements certified by an independent
public accountant.
(v) Supplemental information. If any information, other than that
required by Commission rules, the antifraud provisions of the Act, other
federal or state laws or regulations, rules of a self-regulatory agency
or laws of a non-United States jurisdiction, is provided, such
information:
(1) May not be misleading in content or presentation or inconsistent
with required disclosures;
(2) Is subject to the antifraud provisions of the Act and Commission
rules and to rules regarding the use of promotional material promulgated
by a registered futures association pursuant to section 17(j) of the
Act; and
(3) Must be placed as follows, unless otherwise specified by
Commission rules, provided that where a two-part document is used
pursuant to rules promulgated by a registered futures association
pursuant to Section 17(j) of the Act, all supplemental information must
be provided in the second part of the two-part document:
(i) Supplemental performance information (not including proprietary
trading results as defined in Sec. 4.25(a)(8), or hypothetical,
extracted, pro forma or simulated trading results) must be placed after
all specifically required performance information; Provided, however,
that required volatility disclosure may be included with the related
required performance disclosure;
(ii) Supplemental non-performance information relating to a required
disclosure may be included with the related required disclosure; and
(iii) Other supplemental information may be included after all
required disclosures; Provided, however, that any proprietary trading
results as defined in Sec. 4.25(a)(8), and any hypothetical, extracted,
pro forma or simulated trading results included in the Disclosure
Document must appear as the last disclosure therein following all
required and non-required disclosures.
(w) Material information. Nothing set forth in Sec. Sec. 4.21,
4.24, 4.25 or Sec. 4.26 shall relieve a commodity pool operator from
any obligation under the Act or the regulations thereunder, including
the obligation to disclose all material information to existing or
prospective pool participants even if the information is not
specifically required by such sections.
[60 FR 38183, July 25, 1995, as amended at 63 FR 58303, Oct. 30, 1998;
66 FR 53522, Oct. 23, 2001]
Sec. 4.25 Performance disclosures.
(a) General principles--(1) Capsule performance information--(i) For
pools. Unless otherwise specified, disclosure of the past performance of
a pool must include the following information. Amounts shown must be net
of any fees, expenses or allocations to the commodity pool operator.
(A) The name of the pool;
[[Page 202]]
(B) A statement as to whether the pool is:
(1) Privately offered pursuant to section 4(2) of the Securities Act
of 1933, as amended (15 U.S.C. 77d(2)), or pursuant to Regulation D
thereunder (17 CFR 230.501 et seq.);
(2) A multi-advisor pool as defined in Sec. 4.10(d)(2); and
(3) A principal-protected pool as defined in Sec. 4.10(d)(3);
(C) The date of inception of trading;
(D) The aggregate gross capital subscriptions to the pool;
(E) The pool's current net asset value;
(F) The largest monthly draw-down during the most recent five
calendar years and year-to-date, expressed as a percentage of the pool's
net asset value and indicating the month and year of the draw-down (the
capsule must include a definition of ``draw-down'' that is consistent
with Sec. 4.10(k));
(G) The worst peak-to-valley draw-down during the most recent five
calendar years and year-to-date, expressed as a percentage of the pool's
net asset value and indicating the months and year of the draw-down; and
(H) Subject to Sec. 4.25(a)(2) for the offered pool, the annual and
year-to-date rate of return for the pool for the most recent five
calendar years and year-to-date, computed on a compounded monthly basis;
(ii) For accounts. Disclosure of the past performance of an account
required under this Sec. 4.25 must include the following capsule
performance information:
(A) The name of the commodity trading advisor or other person
trading the account and the name of the trading program;
(B) The date on which the commodity trading advisor or other person
trading the account began trading client accounts and the date when
client funds began being traded pursuant to the trading program;
(C) The number of accounts directed by the commodity trading advisor
or other person trading the account pursuant to the trading program
specified, as of the date of the Disclosure Document;
(D)(1) The total assets under the management of the commodity
trading advisor or other person trading the account, as of the date of
the Disclosure Document; and
(2) The total assets traded pursuant to the trading program
specified, as of the date of the Disclosure Document;
(E) The largest monthly draw-down for the trading program specified
during the most recent five calendar years and year-to-date expressed as
a percentage of client funds, and indicating the month and year of the
draw-down;
(F) The worst peak-to-valley draw-down for the trading program
specified during the most recent five calendar years and year-to-date,
expressed as a percentage of net asset value and indicating the months
and year of the draw-down; and
(G) The annual and year-to-date rate-of-return for the program
specified, computed on a compounded monthly basis.
(H) Partially-funded accounts directed by a commodity trading
advisor may be presented in accordance with Sec. 4.35(a)(7).
(2) Additional requirements with respect to the offered pool. (i)
The performance of the offered pool must be identified as such and
separately presented first;
(ii) The rate of return of the offered pool must be presented on a
monthly basis for the period specified in Sec. 4.25(a)(5), either in a
numerical table or in a bar graph;
(iii) A bar graph used to present monthly rates of return for the
offered pool:
(A) Must show percentage rate of return on the vertical axis and
one-month increments on the horizontal axis;
(B) Must be scaled in such a way as to clearly show month-to-month
differences in rates of return; and
(C) Must separately display numerical percentage annual rates of
return for the period covered by the bar graph; and
(iv) The pool operator must make available upon request to
prospective and existing participants all supporting data necessary to
calculate monthly rates of return for the offered pool as specified in
Sec. 4.25(a)(7), for the period specified in Sec. 4.25(a)(5).
(3) Additional requirements with respect to pools other than the
offered pool. With
[[Page 203]]
respect to pools other than the offered pool for which past performance
is required to be presented under this section:
(i) Performance data for pools of the same class as the offered pool
must be presented following the performance of the offered pool, on a
pool-by-pool basis.
(ii) Pools of a different class than the offered pool must be
presented less prominently and, unless such presentation would be
misleading, may be presented in composite form; Provided, however, that:
(A) The Disclosure Document must disclose how the composite was
developed;
(B) Pools of different classes or pools with materially different
rates of return may not be presented in the same composite.
(iii) For the purpose of Sec. 4.25(a)(3)(ii), the following,
without limitation, shall be considered pools of different classes:
Pools privately offered pursuant to section 4(2) of the Securities Act
of 1933, as amended (15 U.S.C. 77d(2)), or pursuant to Regulation D
thereunder (17 CFR 230.501 et seq.), and public offerings; and
principal-protected and non-principal-protected pools. Multi-advisor
pools as defined in Sec. 4.10(d)(2) will be presumed to have materially
different rates of return from those of non-multi-advisor pools absent
evidence sufficient to demonstrate otherwise.
(iv) Material differences among the pools for which past performance
is disclosed, including, without limitation, differences in leverage and
use of different trading programs, must be described.
(4) Additional requirements with respect to accounts. (i) Unless
such presentation would be misleading, past performance of accounts
required to be presented under this section may be presented in
composite form on a program-by-program basis using the format set forth
in Sec. 4.25(a)(1)(ii).
(ii) Accounts that differ materially with respect to rates of return
may not be presented in the same composite.
(iii) The commodity pool operator must disclose all material
differences among accounts included in a composite.
(5) Time period for required performance. All required performance
information must be presented for the most recent five calendar years
and year-to-date or for the life of the pool, account or trading
program, if less than five years.
(6) Trading programs. If the offered pool will use any of the
trading programs for which past performance is required to be presented,
the Disclosure Document must so indicate.
(7) Calculation of, and recordkeeping concerning, performance
information. (i) All performance information presented in a Disclosure
Document, including performance information contained in any capsule and
performance information not specifically required by Commission rules,
must be current as of a date not more than three months preceding the
date of the Document, and must be supported by the following amounts,
calculated on an accrual basis of accounting in accordance with
generally accepted accounting principles, as specified below or by a
method otherwise approved by the Commission.
(A) The beginning net asset value for the period, which shall be the
same as the previous period's ending net asset value;
(B) All additions, whether voluntary or involuntary, during the
period;
(C) All withdrawals and redemptions, whether voluntary or
involuntary, during the period;
(D) The net performance for the period, which shall represent the
change in the net asset value net of additions, withdrawals, and
redemptions;
(E) The ending net asset value for the period, which shall represent
the beginning net asset value plus or minus additions, withdrawals,
redemptions and net performance;
(F) The rate of return for the period, which shall be calculated by
dividing the net performance by the beginning net asset value or by a
method otherwise approved by the Commission; and
(G) The number of units outstanding at the end of the period, if
applicable.
(ii) All supporting documents necessary to substantiate the
computation of such amounts must be maintained in accordance with Sec.
1.31.
[[Page 204]]
(8) Proprietary trading results. (i) Proprietary trading results may
not be included in a Disclosure Document unless such performance is
prominently labeled as proprietary and is set forth separately after all
disclosures in accordance with Sec. 4.24(v), together with a discussion
of any differences between such performance and the performance of the
offered pool, including, but not limited to, differences in costs,
leverage and trading methodology.
(ii) For the purposes of Sec. 4.24(v) and this Sec. 4.25(a),
proprietary trading results means the performance of any pool or account
in which fifty percent or more of the beneficial interest is owned or
controlled by:
(A) The commodity pool operator, trading manager (if any), commodity
trading advisor or any principal thereof
(B) An affiliate or family member of the commodity pool operator,
trading manager (if any) or commodity trading advisor; or
(C) Any person providing services to the pool.
(9) Required legend. Any past performance presentation, whether or
not required by Commission rules, must be preceded by the following
statement, prominently displayed:
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
(b) Performance disclosure when the offered pool has at least a
three-year operating history. The commodity pool operator must disclose
the performance of the offered pool, in accordance with paragraphs
(a)(1)(i) (A) through (H) and (a)(2) of this Sec. 4.25, where:
(1) The offered pool has traded commodity interests for three years
or more; and
(2) For at least such three-year period, seventy-five percent or
more of the contributions to the pool were made by persons unaffiliated
with the commodity pool operator, the trading manager (if any), the
pool's commodity trading advisors, or the principals of any of the
foregoing.
(c) Performance disclosure when the offered pool has less than a
three-year operating history--(1) Offered pool performance. (i) The
commodity pool operator must disclose the performance of the offered
pool, in accordance with paragraphs (a)(1)(i)(A) through (H) and (a)(2)
of this Sec. 4.25; or
(ii) If the offered pool has no operating history, the pool operator
must prominently display the following statement:
THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE
HISTORY.
(2) Other performance of commodity pool operator. (i)(A) Except as
provided in Sec. 4.25(a)(8), the commodity pool operator must disclose,
for the period specified by Sec. 4.25(a)(5), the performance of each
other pool operated by the pool operator (and by the trading manager if
the offered pool has a trading manager) in accordance with paragraphs
(a)(1)(i) (C) through (H) and (a)(3) of this Sec. 4.25, and the
performance of each other account traded by the pool operator (and by
the trading manager if the offered pool has a trading manager) in
accordance with paragraphs (a)(1)(ii) (C) through (G) of this Sec.
4.25. If the trading manager has been delegated complete authority for
the offered pool's trading, and the trading manager's performance is not
materially different from that of the pool operator, the performance of
the other pools operated by and accounts traded by the pool operator is
not required to be disclosed.
(B) In addition, if the pool operator, or if applicable, the trading
manager, has not operated for at least three years any commodity pool in
which seventy-five percent or more of the contributions to the pool were
made by persons unaffiliated with the commodity pool operator, the
trading manager, the pool's commodity trading advisors or their
respective principals, the pool operator must also disclose the
performance of each other pool operated by and account traded by the
trading principals of the pool operator (and of the trading manager, as
applicable) unless such performance does not differ in any material
respect from the performance of the offered pool and the pool operator
(and trading manager, if any) disclosed in the Disclosure Document.
(ii) If neither the pool operator or trading manager (if any), nor
any of its trading principals has operated any
[[Page 205]]
other pools or traded any other accounts, the pool operator must
prominently display the following statement: NEITHER THIS POOL OPERATOR
(TRADING MANAGER, IF APPLICABLE) NOR ANY OF ITS TRADING PRINCIPALS HAS
PREVIOUSLY OPERATED ANY OTHER POOLS OR TRADED ANY OTHER ACCOUNTS. If the
commodity pool operator or trading manager, if applicable, is a sole
proprietorship, reference to its trading principals may be deleted from
the prescribed statement.
(3) Major commodity trading advisor performance. (i) The commodity
pool operator must disclose the perfor- mance of any accounts (including
pools) directed by a major commodity trading advisor in accordance with
paragraphs (a)(1)(ii) (C) through (G) of this Sec. 4.25.
(ii) If a major commodity trading advisor has not previously traded
accounts, the pool operator must prominently display the following
statement:
(name of the major commodity trading advisor), A COMMODITY TRADING
ADVISOR THAT HAS DISCRETIONARY TRADING AUTHORITY OVER (percentage of the
pool's funds available for commodity interest trading allocated to that
trading advisor) PERCENT OF THE POOL'S FUTURES AND COMMODITY OPTION
TRADING HAS NOT PREVIOUSLY DIRECTED ANY ACCOUNTS.
(4) Major investee pool performance. (i) The commodity pool operator
must disclose the performance of any major investee pool.
(ii) If a major investee pool has not commenced trading, the pool
operator must prominently display the following statement:
(name of the major investee pool), AN INVESTEE POOL THAT IS ALLOCATED
(percentage of the pool assets allocated to that investee pool) PERCENT
OF THE POOL'S ASSETS HAS NOT COMMENCED TRADING.
(5) With respect to commodity trading advisors and investee pools
for which performance is not required to be disclosed pursuant to Sec.
4.25(c) (3) and (4), the pool operator must provide a summary
description of the performance history of each of such advisors and
pools including the following information, provided that where the pool
operator uses a two-part document pursuant to the rules promulgated by a
registered futures association pursuant to Section 17(j) of the Act,
such summary description may be provided in the second part of the two-
part document:
(i) Monthly return parameters (highs and lows);
(ii) Historical volatility and degree of leverage; and
(iii) Any material differences between the performance of such
advisors and pools as compared to that of the offered pool's major
trading advisors and major investee pools.
[60 FR 38186, July 25, 1995, as amended at 63 FR 58303, Oct. 30, 1998;
68 FR 42967, July 21, 2003]
Sec. 4.26 Use, amendment and filing of Disclosure Document.
(a)(1) Subject to paragraph (c) of this section, all information
contained in the Disclosure Document and, where used, profile document,
must be current as of the date of the Document; Provided, however, that
performance information may be current as of a date not more than three
months prior to the date of the Document.
(2) No commodity pool operator may use a Disclosure Document or
profile document dated more than nine months prior to the date of its
use.
(b) The commodity pool operator must attach to the Disclosure
Document the most current Account Statement and Annual Report for the
pool required to be distributed in accordance with Sec. 4.22; provided,
however, that in lieu of the most current Account Statement the
commodity pool operator may provide performance information for the pool
current as of a date not more than sixty days prior to the date on which
the Disclosure Document is distributed and covering the period since the
most recent performance information contained in the Disclosure
Document.
(c)(1) If the commodity pool operator knows or should know that the
Disclosure Document or profile document is materially inaccurate or
incomplete in any respect, it must correct that defect and must
distribute the correction to:
(i) All existing pool participants within 21 calendar days of the
date upon which the pool operator first
[[Page 206]]
knows or has reason to know of the defect; and
(ii) Each previously solicited prospective pool participant prior to
accepting or receiving funds, securities or other property from any such
prospective participant.
(2) The pool operator may furnish the correction by any of the
following means:
(i) An amended Disclosure Document or profile document;
(ii) With respect to a hard copy of the Disclosure Document, a
sticker affixed to the Disclosure Document; or
(iii) Other similar means.
(3) The pool operator may not use the Disclosure Document or profile
document until such correction has been made.
(d) Except as provided by Sec. 4.8:
(1) The commodity pool operator must electronically file with the
National Futures Association, pursuant to the electronic filing
procedures of the National Futures Association, the Disclosure Document
and, where used, profile document for each pool that it operates or that
it intends to operate not less than 21 calendar days prior to the date
the pool operator first intends to deliver such Document or documents to
a prospective participant in the pool; and
(2) The commodity pool operator must electronically file with the
National Futures Association, pursuant to the electronic filing
procedures of the National Futures Association, the subsequent
amendments to the Disclosure Document and, where used, profile document
for each pool that it operates or that it intends to operate within 21
calendar days of the date upon which the pool operator first knows or
has reason to know of the defect requiring the amendment.
[60 FR 38188, July 25, 1995, as amended at 62 FR 18268, Apr. 15, 1997;
65 FR 58649, Oct. 2, 2000; 67 FR 42710, June 25, 2002; 67 FR 77411, Dec.
18, 2002; 68 FR 12584, Mar. 17, 2003; 74 FR 9569, Mar. 5, 2009]
Subpart C_Commodity Trading Advisors
Sec. 4.30 Prohibited activities.
No commodity trading advisor may solicit, accept or receive from an
existing or prospective client funds, securities or other property in
the trading advisor's name (or extend credit in lieu thereof) to
purchase, margin, guarantee or secure any commodity interest of the
client; Provided, however, That this section shall not apply to a future
commission merchant that is registered as such under the Act or to a
leverage transaction merchant that is registered as a commodity trading
advisor under the Act.
(Secs. 2(a)(1), 4c(a)-(d), 4d, 4f, 4g, 4k, 4m, 4n, 8a, 15 and 17,
Commodity Exchange Act (7 U.S.C. 2, 4, 6c(a)-(d), 6f, 6g, 6k, 6m, 6n,
12a, 19 and 21; 5 U.S.C. 552 and 552b))
[47 FR 57011, Dec. 22, 1982]
Sec. 4.31 Required delivery of Disclosure Document to prospective clients.
(a) Each commodity trading advisor registered or required to be
registered under the Act must deliver or cause to be delivered to a
prospective client a Disclosure Document containing the information set
forth in Sec. Sec. 4.34 and 4.35 for the trading program pursuant to
which the trading advisor seeks to direct the client's commodity
interest account or to guide the client's commodity interest trading by
means of a systematic program that recommends specific transactions by
no later than the time the trading advisor delivers to the prospective
client an advisory agreement to direct or guide the client's account;
Provided, That any information distributed in advance of the delivery of
the Disclosure Document to a prospective client is consistent with or
amended by the information contained in the Disclosure Document and with
the obligations of the commodity trading advisor under the Act, the
Commission's regulations issued thereunder, and the laws of any other
applicable federal or state authority; Provided further, That in the
event such previously distributed information is amended by the
Disclosure Document in any material respect, the prospective participant
must be in receipt of the Disclosure Document at least 48 hours prior to
the advisory agreement being accepted by the trading advisor.
(b) The commodity trading advisor may not enter into an agreement
with a prospective client to direct the client's commodity interest
account or to
[[Page 207]]
guide the client's commodity interest trading unless the trading advisor
first receives from the prospective client an acknowledgment signed and
dated by the prospective client stating that the client received a
Disclosure Document for the trading program pursuant to which the
trading advisor will direct his account or will guide his trading. Where
a Disclosure Document is delivered to a prospective client by electronic
means, in lieu of a manually signed and dated acknowledgment the trading
advisor may establish receipt by electronic means that use a unique
identifier to confirm the identity of the recipient of such Disclosure
Document, Provided, however, That the requirement of Sec. 4.33(a)(2) to
retain the acknowledgment specified in this paragraph (b) applies
equally to such substitute evidence of receipt, which must be retained
either in hard copy form or in another form approved by the Commission.
[60 FR 38189, July 25, 1995, as amended at 62 FR 39115, July 22, 1997;
68 FR 47235, Aug. 8, 2003; 68 FR 59114, Oct. 14, 2003]
Sec. 4.32 Trading on a Registered Derivatives Transaction Execution
Facility for Non-Institutional Customers.
(a) A registered commodity trading advisor may enter trades on or
subject to the rules of a registered derivatives transaction execution
facility on behalf of a client who does not qualify as an
``institutional customer'' as defined in Sec. 1.3(g) of this chapter,
provided that the trading advisor:
(1) Directs the client's commodity interest account;
(2) Directs accounts containing total assets of not less than
$25,000,000 at the time the trade is entered; and
(3) Discloses to the client that the trading advisor may enter
trades on or subject to the rules of a registered derivatives
transaction execution facility on the client's behalf.
(b) The commodity interest account of a client described in
paragraph (a) of this section must be carried by a registered futures
commission merchant.
[66 FR 53522, Oct. 23, 2001]
Sec. 4.33 Recordkeeping.
Each commodity trading advisor registered or required to be
registered under the Act must make and keep the following books and
records in an accurate, current and orderly manner at its main business
office and in accordance with Sec. 1.31. If the commodity trading
advisor's main business office is located outside the United States, its
territories or possessions, then upon the request of a Commission
representative the trading advisor must provide such books and records
as requested at the place designated by the representative in the United
States, its territories or possessions within 72 hours after receipt of
the request.
(a) Concerning the clients and subscribers of the commodity trading
advisor:
(1) The name and address of each client and each subscriber.
(2) The acknowledgement specified in Sec. 4.31(b).
(3) All powers of attorney and other documents, or copies thereof,
authorizing the commodity trading advisor to direct the commodity
interest account of a client or subscriber.
(4) All other written agreements, or copies thereof, entered into by
the commodity trading advisor with any client or subscriber.
(5) A list or other record of all commodity interest accounts of
clients directed by the commodity trading advisor and of all
transactions effected therefor.
(6) Copies of each confirmation of a commodity interest transaction,
each purchase and sale statement and each monthly statement received
from a futures commission merchant.
(7) The original or a copy of each report, letter, circular,
memorandum, publication, writing, advertisement or other literature or
advice (including the texts of standardized oral presentations and of
radio, television, seminar or similar mass media presentations)
distributed or caused to be distributed by the commodity trading advisor
to any existing or prospective client or subscriber, showing the first
date of distribution if not otherwise shown on the document.
(b) Concerning the commodity trading advisor:
(1) An itemized daily record of each commodity interest transaction
of the commodity trading advisor, showing
[[Page 208]]
the transaction date, quantity, commodity interest, and, as applicable,
price or premium, delivery month or expiration date, whether a put or a
call, strike price, underlying contract for future delivery or
underlying physical, the futures commission merchant carrying the
account and the introducing broker, if any, whether the commodity
interest was purchased, sold, exercised, or expired, and the gain or
loss realized.
(2) Each confirmation of a commodity interest transaction, each
purchase and sale statement and each monthly statement furnished by a
futures commission merchant to (i) the commodity trading advisor
relating to a personal account of the trading advisor, and (ii) each
principal of the trading advisor relating to a personal account of such
principal.
(3) Books and records of all other transactions in all other
business dealings in trading commodity interests and of all cash market
transactions in which the commodity trading advisor and each principal
thereof engages. Those books and records must include, as applicable,
books and records of the type specified in paragraphs (a)(1) through
(a)(7) of this section and in paragraphs (a)(1) through (a)(8) of Sec.
4.23.
(Approved by the Office of Management and Budget under control number
3038-0005)
(Secs. 2(a)(1), 4c(a)-(d), 4d, 4f, 4g, 4k, 4m, 4n, 8a, 15 and 17,
Commodity Exchange Act (7 U.S.C. 2, 4, 6c(a)-(d), 6f, 6g, 6k, 6m, 6n,
12a, 19 and 21; 5 U.S.C. 552 and 552b))
[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47
FR 57012, Dec. 22, 1982; 48 FR 35299, Aug. 3, 1983. Redesignated and
amended at 60 FR 38189, July 25, 1995]
Sec. 4.34 General disclosures required.
Except as otherwise provided herein, a Disclosure Document must
include the following information.
(a) Cautionary Statement. The following Cautionary Statement must be
prominently displayed on the cover page of the Disclosure Document:
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS
OF PARTICIPATING IN THIS TRADING PROGRAM NOR HAS THE COMMISSION PASSED
ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
(b) Risk Disclosure Statement. (1) The following Risk Disclosure
Statement must be prominently displayed immediately following any
disclosures required to appear on the cover page of the Disclosure
Document as provided by the Commission, by any applicable federal or
state securities laws and regulations or by any applicable laws of non-
United States jurisdictions:
Risk Disclosure Statement
THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU
SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR
YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING WHETHER TO
TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU SHOULD BE AWARE
OF THE FOLLOWING:
IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF
THE PREMIUM AND OF ALL TRANSACTION COSTS.
IF YOU PURCHASE OR SELL A COMMODITY FUTURE OR SELL A COMMODITY
OPTION YOU MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS AND ANY
ADDITIONAL FUNDS THAT YOU DEPOSIT WITH YOUR BROKER TO ESTABLISH OR
MAINTAIN YOUR POSITION. IF THE MARKET MOVES AGAINST YOUR POSITION, YOU
MAY BE CALLED UPON BY YOUR BROKER TO DEPOSIT A SUBSTANTIAL AMOUNT OF
ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN ORDER TO MAINTAIN YOUR
POSITION. IF YOU DO NOT PROVIDE THE REQUESTED FUNDS WITHIN THE
PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT A LOSS, AND YOU WILL
BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR ACCOUNT.
UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR
IMPOSSIBLE TO LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE, WHEN
THE MARKET MAKES A ``LIMIT MOVE.''
THE PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING ADVISOR,
SUCH AS A ``STOP-LOSS'' OR ``STOP-LIMIT'' ORDER, WILL NOT NECESSARILY
LIMIT YOUR LOSSES TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY
MAKE IT IMPOSSIBLE TO EXECUTE SUCH ORDERS.
A ``SPREAD'' POSITION MAY NOT BE LESS RISKY THAN A SIMPLE ``LONG''
OR ``SHORT'' POSITION.
THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY
TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF
[[Page 209]]
LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.
IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL
CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE
ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING
PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS
DISCLOSURE DOCUMENT CONTAINS, AT PAGE (insert page number), A COMPLETE
DESCRIPTION OF EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE COMMODITY
TRADING ADVISOR.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER
SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. YOU SHOULD THEREFORE
CAREFULLY STUDY THIS DISCLOSURE DOCUMENT AND COMMODITY TRADING BEFORE
YOU TRADE, INCLUDING THE DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF
THIS INVESTMENT, AT PAGE (insert page number).
(2) If the commodity trading advisor may trade foreign futures or
options contracts pursuant to the offered trading program, the Risk
Disclosure Statement must further state the following:
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY
ENGAGE IN TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON
MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY
LINKED TO A UNITED STATES MARKET MAY BE SUBJECT TO REGULATIONS WHICH
OFFER DIFFERENT OR DIMINISHED PROTECTION. FURTHER, UNITED STATES
REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE
RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES
JURISDICTIONS WHERE YOUR TRANSACTIONS MAY BE EFFECTED. BEFORE YOU TRADE
YOU SHOULD INQUIRE ABOUT ANY RULES RELEVANT TO YOUR PARTICULAR
CONTEMPLATED TRANSACTIONS AND ASK THE FIRM WITH WHICH YOU INTEND TO
TRADE FOR DETAILS ABOUT THE TYPES OF REDRESS AVAILABLE IN BOTH YOUR
LOCAL AND OTHER RELEVANT JURISDICTIONS.
(3) If the commodity trading advisor is not also a registered
futures commission merchant, the trading advisor must make the
additional following statement in the Risk Disclosure Statement, to be
included as the last paragraph thereof:
THIS COMMODITY TRADING ADVISOR IS PROHIBITED BY LAW FROM ACCEPTING
FUNDS IN THE TRADING ADVISOR'S NAME FROM A CLIENT FOR TRADING COMMODITY
INTERESTS. YOU MUST PLACE ALL FUNDS FOR TRADING IN THIS TRADING PROGRAM
DIRECTLY WITH A FUTURES COMMISSION MERCHANT.
(c) Table of contents. A table of contents showing, by subject
matter, the location of the disclosures made in the Disclosure Document,
must appear immediately following the Risk Disclosure Statement.
(d) Information required in the forepart of the Disclosure Document.
(1) The name, address of the main business office, main business
telephone number and form of organization of the commodity trading
advisor. If the mailing address of the main business office is a post
office box number or is not within the United States, its territories or
possessions, the trading advisor must state where its books and records
will be kept and made available for inspection; and
(2) The date when the commodity trading advisor first intends to use
the Disclosure Document.
(e) Persons to be identified. The names of the following persons:
(1) Each principal of the trading advisor;
(2) The futures commission merchant with which the commodity trading
advisor will require the client to maintain its account or, if the
client is free to choose the futures commission merchant with which it
will maintain its account, the trading advisor must make a statement to
that effect; and
(3) The introducing broker through which the commodity trading
advisor will require the client to introduce its account or, if the
client is free to choose the introducing broker through which it will
introduce its account, the trading advisor must make a statement to that
effect.
(f) Business background. (1) The business background, for the five
years preceding the date of the Disclosure Document, of:
(i) The commodity trading advisor; and
[[Page 210]]
(ii) Each principal of the trading advisor who participates in
making trading or operational decisions for the trading advisor or
supervises persons so engaged.
(2) The trading advisor must include in the description of the
business background of each person identified in Sec. 4.34(f)(1) the
name and main business of that person's employers, business associations
or business ventures and the nature of the duties performed by such
person for such employers or in connection with such business
associations or business ventures. The location in the Disclosure
Document of any required past performance disclosure for such person
must be indicated.
(g) Principal risk factors. A discussion of the principal risk
factors of this trading program. This discussion must include, without
limitation, risks due to volatility, leverage, liquidity, and
counterparty creditworthiness, as applicable to the trading program and
the types of transactions and investment activity expected to be engaged
in pursuant to such program.
(h) Trading program. A description of the trading program, which
must include the method chosen by the commodity trading advisor
concerning how futures commission merchants carrying accounts it manages
shall treat offsetting positions pursuant to Sec. 1.46 of this chapter,
if the method is other than to close out all offsetting positions or to
close out offsetting positions on other than a first-in, first-out
basis, and the types of commodity interests and other interests the
commodity trading advisor intends to trade, with a description of any
restrictions or limitations on such trading established by the trading
advisor or otherwise.
(i) Fees. A complete description of each fee which the commodity
trading advisor will charge the client.
(1) Wherever possible, the trading advisor must specify the dollar
amount of each such fee.
(2) Where any fee is determined by reference to a base amount
including, but not limited to, ``net assets,'' ``gross profits,'' ``net
profits'' or ``net gains,'' the trading advisor must explain how such
base amount will be calculated.
(3) Where any fee is based on an increase in the value of the
client's commodity interest account, the trading advisor must specify
how that increase is calculated, the period of time during which the
increase is calculated, the fee to be charged at the end of that period
and the value of the account at which payment of the fee commences.
(j) Conflicts of interest. (1) A full description of any actual or
potential conflicts of interest regarding any aspect of the trading
program on the part of:
(i) The commodity trading advisor;
(ii) Any futures commission merchant with which the client will be
required to maintain its commodity interest account;
(iii) Any introducing broker through which the client will be
required to introduce its account to a futures commission merchant; and
(iv) Any principal of the foregoing.
(2) Any other material conflict involving any aspect of the offered
trading program.
(3) Included in the description of any such conflict must be any
arrangement whereby the trading advisor or any principal thereof may
benefit, directly or indirectly, from the maintenance of the client's
commodity interest account with a futures commission merchant or the
introduction of such account through an introducing broker (such as
payment for order flow or soft dollar arrangements).
(k) Litigation. (1) Subject to the provisions of Sec. 4.34(k)(2),
any material administrative, civil or criminal action, whether pending
or concluded, within five years preceding the date of the Document,
against any of the following persons; Provided, however, that a
concluded action that resulted in an adjudication on the merits in favor
of such person need not be disclosed:
(i) The commodity trading advisor and any principal thereof:
(ii) Any futures commission merchant with which the client will be
required to maintain its commodity interest account; and
(iii) Any introducing broker through which the client will be
required to introduce its account to the futures commission merchant.
[[Page 211]]
(2) With respect to a futures commission merchant or an introducing
broker, an action will be considered material if:
(i) The action would be required to be disclosed in the notes to the
futures commission merchant's or introducing broker's financial
statements prepared pursuant to generally accepted accounting
principles;
(ii) The action was brought by the Commission; Provided, however,
that a concluded action that did not result in civil monetary penalties
exceeding $50,000 need not be disclosed unless it involved allegations
of fraud or other willful misconduct; or
(iii) The action was brought by any other federal or state
regulatory agency, a non-United States regulatory agency or a self-
regulatory organization and involved allegations of fraud or other
willful misconduct.
(l) Trading for own account. If the commodity trading advisor or any
principal thereof trades or intends to trade commodity interests for its
own account, the trading advisor must disclose whether clients will be
permitted to inspect the records of such person's trading and any
written policies related to such trading.
(m) Performance disclosures. Past performance must be disclosed as
set forth in Sec. 4.35.
(n) Supplemental information. If any information, other than that
required by Commission rules, the antifraud provisions of the Act, other
federal or state laws and regulations, any rules of a self-regulatory
agency or laws of a non-United States jurisdiction, is provided, such
information:
(1) May not be misleading in content or presentation or inconsistent
with the required disclosures;
(2) Is subject to the antifraud provisions of the Act and Commission
rules, and to rules regarding the use of promotional material
promulgated by a registered futures association pursuant to section
17(j) of the Act; and
(3) Must be placed as follows, unless otherwise specified by
Commission rules:
(i) Supplemental performance information (not including proprietary
trading results as defined in Sec. 4.35(a)(7), or hypothetical,
extracted, pro forma or simulated trading results) must be placed after
all required performance information;
(ii) Supplemental non-performance information relating to a required
disclosure may be included with the related required disclosure; and
(iii) Other supplemental information may be included after all
required disclosures; Provided, however, That any proprietary trading
results as defined in Sec. 4.35(a)(7), and any hypothetical, extracted,
pro forma or simulated trading results included in the Disclosure
Document must appear as the last disclosure therein following all
required and non-required disclosures.
(o) Material information. Nothing set forth in Sec. Sec. 4.31,
4.34, 4.35 or Sec. 4.36 shall relieve a commodity trading advisor from
any obligation under the Act or the regulations thereunder, including
the obligation to disclose all material information to existing or
prospective clients even if the information is not specifically required
by such sections.
[60 FR 38189, July 25, 1995, as amended at 66 FR 53522, Oct. 23, 2001]
Sec. 4.35 Performance disclosures.
(a) General principles--(1) Capsule performance information. Unless
otherwise specified, disclosure of the past performance of an account or
trading program required under this Sec. 4.35 must include the
following information:
(i) The name of the commodity trading advisor or other person
trading the account and the name of the trading program;
(ii) The date on which the commodity trading advisor or other person
trading the account began trading client accounts and the date when
client funds began being traded pursuant to the trading program;
(iii) The number of accounts directed by the trading advisor or
other person trading the account pursuant to the trading program
specified, as of the date of the Disclosure Document;
(iv)(A) The total assets under the management of the trading advisor
or other person trading the account, as of the date of the Disclosure
Document; and
(B) The total assets traded pursuant to the trading program
specified, as of the date of the Disclosure Document;
[[Page 212]]
(v) The largest monthly draw-down for the account or trading program
specified during the most recent five calendar year and year-to-date
expressed as a percentage of client funds and indicating the month and
year of the draw-down (the capsule must include a definition of ``draw-
down'' that is consistent with Sec. 4.10(k));
(vi) The worst peak-to-valley draw-down for the trading program
specified during the most recent five calendar year and year-to-date,
expressed as a percentage of net asset value and indicating the months
and year of the draw-down;
(vii) Subject to Sec. 4.35(a)(2) for the offered trading program,
the annual and year-to-date rate-of-return for the program specified for
the five most recent calendar years and year-to-date, computed on a
compounded monthly basis; Provided, however, That performance of the
offered trading program must include monthly rates of return for such
period; and
(viii) In the case of the offered trading program:
(A)(1) The number of accounts traded pursuant to the offered trading
program that were opened and closed during the period specified in Sec.
4.35(a)(5) with a positive net lifetime rate of return as of the date
the account was closed; and
(2) A measure of the variability of returns for accounts that were
both opened and closed during the period specified in Sec. 4.35(a)(5)
and closed with positive net lifetime rates of return; and
(B)(1) The number of accounts traded pursuant to the offered trading
program that were opened and closed during the period specified in Sec.
4.35(a)(5) with negative net lifetime rates of return as of the date the
account was closed; and
(2) A measure of the variability of returns for accounts that were
both opened and closed during the period specified in Sec. 4.35(a)(5)
and closed with negative net lifetime rates of return.
(C) The measure of variability required by Sec. Sec.
4.35(a)(1)(viii)(A)(2) and (B)(2) may be provided as a range of both
positive and negative net lifetime returns, or by any other form of
disclosure that meets the objective of disclosure of the variability of
returns experienced by clients in the trading program whose accounts
were opened and closed during the period specified in Sec. 4.35(a)(5).
The net lifetime rate of return shall be calculated as the compounded
product of the monthly rates of return for each month the account is
open.
(2) Additional requirements with respect to the offered trading
program. (i) The performance of the offered trading program must be
identified as such and separately presented first;
(ii) The rate of return of the offered trading program must be
presented on a monthly basis for the period specified in Sec.
4.35(a)(5), either in a numerical table or in a bar graph;
(iii) A bar graph used to present monthly rates of return for the
offered trading program:
(A) Must show percentage rate of return on the vertical axis and
one-month increments on the horizontal axis;
(B) Must be scaled in such a way as to clearly show month-to-month
differences in rates of return; and
(C) Must separately display numerical percentage annual rates of
return for the period covered by the bar graph; and
(iv) The commodity trading advisor must make available to
prospective and existing clients upon request a table showing at least
quarterly the information required to be calculated pursuant to Sec.
4.35(a)(6).
(3) Composite presentation. (i) Unless such presentation would be
misleading, the performance of accounts traded pursuant to the same
trading program may be presented in composite form on a program-by-
program basis, using the format set forth in Sec. 4.35(a)(1).
(ii) Accounts that differ materially with respect to rates of return
may not be presented in the same composite.
(iii) The commodity trading advisor must discuss all material
differences among the accounts included in a composite.
(4) Current information. All performance information presented in
the Disclosure Document must be current as of a date not more than three
months preceding the date of the Document.
[[Page 213]]
(5) Time period for required performance. All required performance
information must be presented for the most recent five calendar years
and year-to-date or for the life of the trading program or account, if
less than five years.
(6) Calculation of, and recordkeeping concerning, performance
information. (i) All performance information presented in a Disclosure
Document, including performance information contained in any capsule and
performance information not specifically required by Commission rules,
must be current as of a date not more than three months preceding the
date of the Document, and must be supported by the following amounts,
calculated on an accrual basis of accounting in accordance with
generally accepted accounting principles, as specified below or by a
method otherwise approved by the Commission.
(A) The beginning net asset value for the period, which shall
represent the previous period's ending net asset value;
(B) All additions, whether voluntary or involuntary, during the
period;
(C) All withdrawals and redemptions, whether voluntary or
involuntary, during the period;
(D) The net performance for the period, which shall represent the
change in the net asset value net of additions, withdrawals,
redemptions, fees and expenses;
(E) The ending net asset value for the period, which shall represent
the beginning net asset value plus or minus additions, withdrawals and
redemptions, and net performance; and
(F) The rate of return for the period, computed on a compounded
monthly basis, which shall be calculated by dividing the net performance
by the beginning net asset value.
(ii) All supporting documents necessary to substantiate the
computation of such amounts must be maintained in accordance with Sec.
1.31.
(7) Performance of partially-funded accounts. Notwithstanding the
foregoing, a commodity trading advisor will be deemed in compliance with
this Sec. 4.35(a) concerning the performance of partially-funded
accounts if the commodity trading advisor presents the performance of
such accounts in a manner that is balanced and is not in violation of
the antifraud provisions of the Commodity Exchange Act or the
Commission's regulations thereunder.
(8) Proprietary trading results. (i) Proprietary trading results
shall not be included in a Disclosure Document unless such performance
is prominently labeled as proprietary and is set forth separately after
all disclosures in accordance with Sec. 4.34(n), together with a
discussion of any differences between such performance and the
performance of the offered trading program, including, but not limited
to, differences in costs, leverage and trading.
(ii) For the purposes of Sec. 4.34(n) and this Sec. 4.35(a),
proprietary trading results means the performance of any account in
which fifty percent or more of the beneficial interest is owned or
controlled by:
(A) The commodity trading advisor or any of its principals;
(B) An affiliate or family member of the commodity trading advisor;
or
(C) Any person providing services to the account.
(9) Required legend. Any past performance presentation, whether or
not required by Commission rules, must be preceded with the following
statement, prominently displayed:
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
(b) Performance to be disclosed. Except as provided in Sec.
4.35(a)(7), the commodity trading advisor must disclose the actual
performance of all accounts directed by the commodity trading advisor
and by each of its trading principals; Provided, however, that if the
trading advisor or its trading principals previously have not directed
any accounts, the trading advisor must prominently disclose this fact
with one of the following statements, as applicable:
(1) THIS TRADING ADVISOR PREVIOUSLY HAS NOT DIRECTED ANY ACCOUNTS;
or
(2) NONE OF THE TRADING PRINCIPALS OF THIS TRADING ADVISOR HAS
PREVIOUSLY DIRECTED ANY ACCOUNTS; or
(3) NEITHER THIS TRADING ADVISOR NOR ANY OF ITS TRADING
[[Page 214]]
PRINCIPALS HAVE PREVIOUSLY DIRECTED ANY ACCOUNTS.
If the commodity trading advisor is a sole proprietorship, reference to
its trading principals need not be included in the prescribed statement.
[60 FR 38191, July 25, 1995, as amended at 68 FR 42967, July 21, 2003;
68 FR 47235, Aug. 8, 2003]
Sec. 4.36 Use, amendment and filing of Disclosure Document.
(a) Subject to paragraph (c) of this section, all information
contained in the Disclosure Document must be current as of the date of
the Document; Provided, however, that performance information must be
current as of a date not more than three months preceding the date of
the Document.
(b) No commodity trading advisor may use a Disclosure Document dated
more than nine months prior to the date of its use.
(c)(1) If the commodity trading advisor knows or should know that
the Disclosure Document is materially inaccurate or incomplete in any
respect, it must correct that defect and must distribute the correction
to:
(i) All existing clients in the trading program within 21 calendar
days of the date upon which the trading advisor first knows or has
reason to know of the defect; and
(ii) Each previously solicited prospective client for the trading
program prior to entering into an agreement to direct or to guide such
prospective client's commodity interest account pursuant to the program.
The trading advisor may furnish the correction by way of an amended
Disclosure Document, a sticker on the Document, or other similar means.
(2) The trading advisor may not use the Disclosure Document until
such correction is made.
(d)(1) The commodity trading advisor must electronically file with
the National Futures Association, pursuant to the electronic filing
procedures of the National Futures Association, the Disclosure Document
for each trading program that it offers or that it intends to offer not
less than 21 calendar days prior to the date the trading advisor first
intends to deliver the Document to a prospective client in the trading
program; and
(2) The commodity trading advisor must electronically file with the
National Futures Association, pursuant to the electronic filing
procedures of the National Futures Association, the subsequent
amendments to the Disclosure Document for each trading program that it
offers or that it intends to offer within 21 calendar days of the date
upon which the trading advisor first knows or has reason to know of the
defect requiring the amendment.
[60 FR 38192, July 25, 1995, as amended at 62 FR 18268, Apr. 15, 1997;
65 FR 58650, Oct. 2, 2000; 67 FR 77411, Dec. 18, 2002; 74 FR 9569, Mar.
5, 2009]
Subpart D_Advertising
Sec. 4.40 [Reserved]
Sec. 4.41 Advertising by commodity pool operators, commodity trading
advisors, and the principals thereof.
(a) No commodity pool operator, commodity trading advisor, or any
principal thereof, may advertise in a manner which:
(1) Employs any device, scheme or artifice to defraud any
participant or client or prospective participant or client;
(2) Involves any transaction, practice or course of business which
operates as a fraud or deceit upon any participant or client or any
prospective participant or client; or
(3) Refers to any testimonial, unless the advertisement or sales
literature providing the testimonial prominently discloses:
(i) That the testimonial may not be representative of the experience
of other clients;
(ii) That the testimonial is no guarantee of future performance or
success; and
(iii) If, more than a nominal sum is paid, the fact that it is a
paid testimonial.
(b)(1) No person may present the performance of any simulated or
hypothetical commodity interest account, transaction in a commodity
interest or series of transactions in a commodity interest of a
commodity pool operator, commodity trading advisor, or any
[[Page 215]]
principal thereof, unless such performance is accompanied by one of the
following:
(i) The following statement: ``These results are based on simulated
or hypothetical performance results that have certain inherent
limitations. Unlike the results shown in an actual performance record,
these results do not represent actual trading. Also, because these
trades have not actually been executed, these results may have under-or
over-compensated for the impact, if any, of certain market factors, such
as lack of liquidity. Simulated or hypothetical trading programs in
general are also subject to the fact that they are designed with the
benefit of hindsight. No representation is being made that any account
will or is likely to achieve profits or losses similar to these being
shown.'' ; or
(ii) A statement prescribed pursuant to rules promulgated by a
registered futures association pursuant to section 17(j) of the Act.
(2) If the presentation of such simulated or hypothetical
performance is other than oral, the prescribed statement must be
prominently disclosed and in immediate proximity to the simulated or
hypothetical performance being presented.
(c) The provisions of this section shall apply:
(1) To any publication, distribution or broadcast of any report,
letter, circular, memorandum, publication, writing, advertisement or
other literature or advice, whether by electronic media or otherwise,
including information provided via internet or e-mail, the texts of
standardized oral presentations and of radio, television, seminar or
similar mass media presentations; and
(2) Regardless of whether the commodity pool operator or commodity
trading advisor is exempt from registration under the Act.
(Approved by the Office of Management and Budget under control number
3038-0005)
[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 60
FR 38192, July 25, 1995; 72 FR 8109, Feb. 23, 2007]
Sec. Appendix A to Part 4--Guidance on the Application of Rule
4.13(a)(3) in the Fund-of-Funds Context
The following provides guidance on the application of the trading
limits of Rule 4.13(a)(3)(ii) to commodity pool operators (CPOs) who
operate ``fund-of-funds.'' For the purpose of this appendix A, it is
presumed that the CPO can comply with all of the other requirements of
Rule 4.13(a)(3). It also is presumed that where the investor fund CPO is
relying on its own computations, the investor fund is participating in
each investee fund that trades commodity interests as a passive
investor, with limited liability (e.g., as a limited partner of a
limited partnership or a non-managing member of a limited liability
company). Fund-of-funds CPOs who seek to claim exemption from
registration under Rule 4.13(a)(1), (a)(2) or (a)(4) may do so without
regard to the trading engaged in by an investee fund, because none of
the registration exemptions set forth in those rules concerns limits on
or levels of commodity interest trading. Persons whose fact situations
do not fit any of the scenarios below should contact Commission staff to
discuss the applicability of the registration exemption in Rule
4.13(a)(3) to their particular situations.
1. Situation: An investor fund CPO allocates the fund's assets to
one or more investee funds, none of which meets the trading limits of
Rule 4.13(a)(3) and each of which is operated by a registered CPO. It
does not allocate any of the investor fund's assets directly to
commodity interest trading.
Application: The investor fund CPO may claim relief under Rule
4.13(a)(3) provided the investor fund itself meets the trading limits of
Rule 4.13(a)(3)(ii)(A).
2. Situation: An investor fund CPO allocates the fund's assets to
one or more investee funds, each having a CPO who is either: (1) itself
claiming exemption from CPO registration under Rule 4.13(a)(3); or (2) a
registered CPO that is complying with the trading restrictions of Rule
4.13(a)(3). It does not allocate any of the investor fund's assets
directly to commodity interest trading.
Application: The investor fund CPO fund may rely upon the
representations of the investee fund CPOs that they are complying with
the trading limits of Rule 4.13(a)(3).
3. Situation: An investor fund CPO allocates the fund's assets to
investee funds, each of which operates under a percentage restriction on
the amount of margin or option premiums that may be used to establish
its commodity interest positions (whether pursuant to Rule 4.12(b), Rule
4.13(a)(3)(ii)(A) or otherwise), by, e.g., contractual agreement. It
does not allocate any of the investor fund's assets directly to
commodity interest trading.
[[Page 216]]
Application: The CPO of the investor fund may multiply the
percentage restriction applicable to each investee fund by the
percentage of the investor fund's allocation of assets to that investee
fund to determine whether the CPO is operating the investor fund in
compliance with Rule 4.13(a)(3)(ii)(A).
4. Situation: An investor fund CPO allocates the fund's assets to
one or more investee funds, and it has actual knowledge of the trading
limits and commodity interest positions of the investee funds, e.g.,
where the CPO or one or more affiliates of the CPO operate the investee
funds. (For this purpose, an ``affiliate'' is a person who controls, who
is controlled by, or who is under common control with, the CPO.) It does
not allocate any of the investor fund's assets directly to commodity
interest trading.
Application: The investor fund CPO may aggregate commodity interest
positions across investee funds to determine compliance with the trading
restrictions of Rule 4.13(a)(3). For this purpose, the aggregate assets
of the investee funds would be compared to the aggregate of their
commodity interest positions (as to margin or as to net notional value).
The investor fund CPO should use the results of this computation to
determine its compliance with the trading limits of Rule 4.13(a)(3).
5. Situation: An investor fund CPO allocates no more than 50 percent
of the fund's assets to investee funds that trade commodity interests
(without regard to the level of commodity interest trading engaged in by
those investee pools). It does not allocate any of the investor fund's
assets directly to commodity interest trading.
Application: The investor fund CPO may claim relief under Rule
4.13(a)(3).
6. Situation: An investor fund CPO allocates the fund's assets to
both investee funds and direct trading of commodity interests.
Application: The investor fund CPO must treat the amount of investor
fund assets committed to such direct trading as a separate pool for
purposes of determining compliance with Rule 4.13(a)(3)(ii), such that
the commodity interest trading of that pool must meet the criteria of
Rule 4.13(a)(3)(ii) independently of the portion of investor fund assets
allocated to investee funds.
[68 FR 47236, Aug. 8, 2003; 68 FR 52837, Sept. 8, 2003]
Sec. Appendix B to Part 4--Adjustments for Additions and Withdrawals in
the Computation of Rate of Return
This appendix provides guidance concerning alternate methods by
which commodity pool operators and commodity trading advisors may
calculate the rate of return information required by Rules
4.25(a)(7)(i)(F) and 4.35(a)(6)(i)(F). The methods described herein are
illustrative of calculation methods the Commission has reviewed and
determined may be appropriate to address potential material distortions
in the computation of rate of return due to additions and withdrawals
that occur during a performance reporting period. A commodity pool
operator or commodity trading advisor may present to the Commission
proposals regarding any alternative method of addressing the effect of
additions and withdrawals on the rate of return computation, including
documentation supporting the rationale for use of that alternate method.
1. Compounded Rate of Return Method
Rate of return for a period may be calculated by computing the net
performance divided by the beginning net asset value for each trading
day in the period and compounding each daily rate of return to determine
the rate of return for the period. If daily compounding is not
practicable, the rate of return may be compounded on the basis of each
sub-period within which an addition or withdrawal occurs during a month.
For example:
----------------------------------------------------------------------------------------------------------------
Account value Change in value
----------------------------------------------------------------------------------------------------------------
Start of month.................................. $10,000 +10% ($1,000 profit).
End of 1st acct. period......................... 11,000 $4,000 addition.
Start of 2nd acct. period....................... 15,000 -20% ($3,000 loss).
End of 2nd acct. period......................... 12,000 $2,000 withdrawal.
Start of 3rd acct. period....................... 10,000 +25% ($2,500 profit).
End of month.................................... 12,500
----------------------------------------------------------------------------------------------------------------
Compounded ROR = [(1 + .1)(1 - .2)(1 + .25)] - 1 = 10%.
2. Time-weighted method
Time-weighting allows for adjustment to the denominator of the rate
of return calculation for additions and withdrawals, weighted for the
amount of time such funds were available during the period. Several
methods exist for time-weighting, all of which will have the same
arithmetic result. These methods include: dividing the net performance
by the average weighted account sizes for the month; dividing the net
performance by the arithmetic mean of the account sizes for each trading
day during the period; and taking the number of days funds
[[Page 217]]
were available for trading divided by the total number of days in the
period.
[68 FR 47236, Aug. 8, 2003; 68 FR 53430, Sept. 10, 2003]
PART 5 [RESERVED]
PART 7_CONTRACT MARKET RULES ALTERED OR SUPPLEMENTED BY THE
COMMISSION--Table of Contents
Subpart A_General Provisions
Sec.
7.1 Scope of rules.
Subpart B [Reserved]
7.100-7.101 [Reserved]
Subpart C_Board of Trade of the City of Chicago Rules
7.200-7.201 [Reserved]
Authority: 7 U.S.C. 7(a) and 12a(7).
Source: 45 FR 51526, Aug. 1, 1980, unless otherwise noted.
Subpart A_General Provisions
Sec. 7.1 Scope of rules.
This part sets forth contract market rules altered or supplemented
by the Commission pursuant to section 8a(7) of the Act.
Subpart B [Reserved]
Sec. Sec. 7.100-7.101 [Reserved]
Subpart C_Board of Trade of the City of Chicago Rules
Sec. 7.200-7.201 [Reserved]
PART 8_EXCHANGE PROCEDURES FOR DISCIPLINARY, SUMMARY, AND MEMBERSHIP
DENIAL ACTIONS--Table of Contents
Subpart A_General Provisions
Sec.
8.01 Scope of rules.
8.02 Implementing exchange rules.
8.03 Definitions.
Subpart B_Disciplinary Procedure
8.05 Enforcement staff.
8.06 Investigations.
8.07 Investigation reports.
8.08 Disciplinary committee.
8.09 Review of investigation report.
8.10 Predetermined penalties.
8.11 Notice of charges.
8.12 Right to representation.
8.13 Answer to charges.
8.14 Admission or failure to deny charges.
8.15 Denial of charges and right to hearing.
8.16 Settlement offers.
8.17 Hearing.
8.18 Decision.
8.19 Appeal.
8.20 Final decision.
Subpart C_Summary Actions
8.25 Member responsibility actions.
8.26 Procedure for member responsibility actions.
8.27 Violations of rules regarding decorum, submission of records or
other similar activities.
8.28 Final decision.
Authority: 7 U.S.C. 6c, 7a, 12a and 12c, unless otherwise noted.
Source: 43 FR 41950, Sept. 19, 1978, unless otherwise noted.
Subpart A_General Provisions
Sec. 8.01 Scope of rules.
This part sets forth the standards to be followed by an exchange in
establishing procedures for investigating and adjudicating possible rule
violations within the disciplinary jurisdiction of the exchange, for
taking summary action in member responsibility cases and in cases
involving violations of rules regarding decorum, submission of records
or other similar activities, and for adjudicating membership denial
determinations. Nothing in this part shall be construed to prohibit an
exchange from adopting additional rules and practices not inconsistent
with those set forth herein.
Sec. 8.02 Implementing exchange rules.
(a) Each exchange shall submit to the Commission for its approval
rules implementing the following regulations: Sec. Sec. 8.11, 8.13,
8.15, 8.17, 8.18 and 8.20 of subpart B and Sec. Sec. 8.26 and 8.28 of
subpart C. Any such rule not previously submitted to the Commission
shall not be put into effect prior to Commission approval.
(b) An exchange may adopt rules implementing any or all of the
following
[[Page 218]]
regulations: Sec. Sec. 8.10, 8.16 and 8.19 of subpart B and Sec. 8.27
of subpart C. Each rule so adopted and not previously submitted to the
Commission shall be submitted to the Commission for its approval and
shall not be put into effect prior to Commission approval.
Sec. 8.03 Definitions.
For purposes of this part:
(a) Board of appeals means that body provided for in Sec. 8.19.
(b) Charge or charges means any charge or charges contained in the
notice of charges.
(c) Disciplinary committee means that body or bodies provided for in
Sec. 8.08.
(d) Disciplinary procedure means the rules of an exchange governing
the investigation and adjudication of possible rule violations and the
imposition of appropriate penalties under subpart B of this part.
(e) Enforcement staff means that body provided for in Sec. 8.05.
(f) Exchange means any board of trade which has been designated as a
contract market for one or more commodities pursuant to section 5 of the
Act or to trade commodity options pursuant to part 33 of this chapter.
(g) Investigation report means the report required by Sec. 8.07.
(h) Notice of charges means the notice required by Sec. 8.11.
(i) Penalty means any restriction, limitation, censure, fine,
expulsion, suspension, revocation, reprimand, cease and desist order,
sanction or any other disciplinary action for any amount or of any
definite or indefinite period imposed upon any person within the
disciplinary jurisdiction of an exchange upon a finding by the
disciplinary committee that a violation has been committed or pursuant
to the terms of a settlement agreement.
(j) Person(s) within the jurisdiction of an exchange means any
exchange employee, staff member or official, any member or person with
membership privileges or any person employed by or affiliated with a
member or person with membership privileges, including any agent or
associated person, and any other person under the supervision or control
of the exchange or of any member.
(k) Record of the proceeding means all testimony, exhibits, papers
and records produced at or filed in a disciplinary or summary proceeding
or served on a respondent or an exchange.
(l) Respondent means any person named in a notice of charges who has
been served with such notice or who is the subject of a summary action.
(m) Rule(s) of an exchange means any constitutional provision,
article of incorporation, bylaw, rule, regulation, resolution,
interpretation, stated policy or instrument corresponding thereto.
(n) Violation means any violation within the disciplinary
jurisdiction of the exchange.
[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 54525, Nov. 3, 1981]
Subpart B_Disciplinary Procedure
Sec. 8.05 Enforcement staff.
(a) Each exchange shall establish an adequate enforcement staff
which shall be authorized by the exchange to initiate and conduct
investigations, to prepare reports incident to such investigations and
to prosecute possible rule violations within the disciplinary
jurisdiction of the exchange. The enforcement staff shall consist of
employees of the exchange and/or persons hired on a contract basis. It
may not include either members of the exchange or persons whose
interests conflict with enforcement duties. When carrying out any
responsibility under this part 8 or any rule adopted pursuant thereto, a
member of the enforcement staff may not operate under the direction or
control of any person or persons with trading privileges.
(b) Each exchange is responsible for assuring the effective and
diligent enforcement of all rules within its disciplinary jurisdiction,
regardless of whether its enforcement staff consists of employees or
persons hired on a contract basis.
Sec. 8.06 Investigations.
(a) Each exchange shall establish and maintain a disciplinary
procedure which requires the enforcement staff of the exchange to
conduct investigations of possible rule violations within the
[[Page 219]]
disciplinary jurisdiction of the exchange. Such an investigation shall
be commenced:
(1) Upon the receipt of a request from the Commission, its Executive
Director or his delegee, or
(2) Upon the discovery or receipt of information by the exchange
which, in the judgment of the enforcement staff, indicates a possible
basis for finding that a violation has occurred or will occur.
(b) Each enforcement staff investigation shall be completed within
four months, unless there exists significant reason to extend it beyond
such period. If for any reason the enforcement staff closes an
investigation before determining whether a reasonable basis exists for
finding that a violation has occurred, the staff shall fully set forth
the reasons for so closing the investigation in its report.
Sec. 8.07 Investigation reports.
(a) The enforcement staff shall submit a written investigation
report to the disciplinary committee of the exchange in every instance
in which the enforcement staff has determined from surveillance or from
an investigation that a reasonable basis exists for finding a violation.
The investigation report shall include the reason the investigation was
initiated, a summary of the complaint, if any, the relevant facts, the
enforcement staff's conclusions and a recommendation as to whether the
disciplinary committee should proceed with the matter.
(b) If after conducting an investigation the enforcement staff has
determined that no reasonable basis exists for finding a violation, it
shall prepare a written report including the reason the investigation
was initiated, a summary of the complaint, if any, the relevant facts,
the enforcement staff's conclusions and, if applicable, any
recommendation that the disciplinary committee issue a warning letter in
accordance with paragraph (c) of this section. The report shall become
part of the investigation file which thereafter may be closed.
(c) In addition to the action required to be taken under either
paragraph (a) or (b) of this section, the rules of an exchange may
authorize the enforcement staff to issue a warning letter to a person
under investigation or to recommend that the disciplinary committee
issue such a letter. A warning letter issued in accordance with this
section is not a penalty or an indication that a finding of a violation
has been made. A copy of such warning letter issued by the enforcement
staff shall be included in the investigation report required by
paragraph (a) or (b) of this section.
(Approved by the Office of Management and Budget under control number
3038-0022)
[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]
Sec. 8.08 Disciplinary committee.
Each exchange shall establish one or more disciplinary committees
which shall be authorized by the exchange to determine whether
violations have been committed, to accept offers of settlement and to
set and impose appropriate penalties. Each such disciplinary committee
shall consist of one or more members of the exchange or persons on the
staff of the exchange; however, persons on the enforcement staff may not
serve on a disciplinary committee.
Sec. 8.09 Review of investigation report.
The disciplinary committee shall promptly review each investigation
report. In the event the disciplinary committee determines that
additional investigation or evidence is needed, it shall promptly direct
the enforcement staff to conduct its investigation further. Within a
reasonable period of time not to exceed 30 days after the receipt of a
completed investigation report, the disciplinary committee shall take
one of the following actions:
(a) If the disciplinary committee determines that no reasonable
basis exists for finding a violation or that prosecution is otherwise
unwarranted, it may direct that no further action be taken. Such
determination must be in writing and contain a brief statement setting
forth the reasons therefor.
(b) If the disciplinary committee determines that a reasonable basis
exists for finding a violation which should be adjudicated, it shall
direct that the person alleged to have committed the violation be served
with a notice of
[[Page 220]]
charges and shall proceed in accordance with the rules of this subpart.
(Approved by the Office of Management and Budget under control number
3038-0022)
[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]
Sec. 8.10 Predetermined penalties.
An exchange may adopt rules which set specific maximum penalties for
particular violations. If the rules of an exchange establish
predetermined penalties, the disciplinary committee shall have
discretion in each case whether to employ the predetermined penalty. If
the predetermined penalty is employed, it shall be stated in the notice
of charges. In such case, after a hearing on a denied charge where a
respondent is found to have committed the violation charged, the
disciplinary committee shall impose the predetermined penalty or an
appropriate lesser penalty.
Sec. 8.11 Notice of charges.
The notice of charges shall:
(a) State the acts, practices, or conduct in which the person is
alleged to have engaged;
(b) State the rule alleged to have been violated (or about to be
violated);
(c) State the predetermined penalty, if any;
(d) Prescribe the period within which a hearing on the charges may
be requested;
(e) Advise the person charged that:
(1) He is entitled, upon request, to a hearing on the charges;
(2) If the rules of the exchange so provide, failure to request a
hearing within the period prescribed in the notice, except for good
cause, shall be deemed a waiver of the right to a hearing; and
(3) If the rules of the exchange so provide, failure in an answer to
deny expressly a charge shall be deemed to be an admission of such
charge.
(Approved by the Office of Management and Budget under control number
3038-0022)
[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]
Sec. 8.12 Right to representation.
Upon being served with a notice of charges the respondent shall have
the right to be represented by legal counsel or any other representative
of his choosing in all succeeding stages of the disciplinary proceeding.
Sec. 8.13 Answer to charges.
The respondent shall be given a reasonable period of time to file an
answer to the charges. The rules of an exchange may provide that:
(a) The answer must be in writing and include a statement that the
respondent admits, denies or does not have and is unable to obtain
sufficient information to admit or deny each allegation. A statement of
a lack of sufficient information shall have the effect of a denial of an
allegation.
(b) Failure to file an answer on a timely basis shall be deemed an
admission of all allegations contained in the notice of charges.
(c) Failure in an answer to deny expressly a charge shall be deemed
to be an admission of such charge.
Sec. 8.14 Admission or failure to deny charges.
(a) The rules of an exchange may provide that if the respondent
admits or fails to deny any of the charges the disciplinary committee
may find that the rule violation alleged in the notice of charges for
which the respondent admitted or failed to deny any of the charges has
been committed. If the exchange rules so provide, then:
(1) The disciplinary committee shall impose a penalty no greater
than the predetermined penalty, if any, stated in the notice of charges
for the corresponding violation found to have been committed.
(2) If no predetermined penalty was stated, the disciplinary
committee shall impose a penalty for each violation found to have been
committed.
(b) The disciplinary committee shall promptly notify the respondent
in writing of any penalty to be imposed pursuant to paragraph (a) of
this section and shall advise him that he may request a hearing on such
penalty within a reasonable period of time, which shall be stated in the
notice, but that except for good cause shown no hearing shall be
permitted on a penalty imposed pursuant to subparagraph (a)(1) of this
section.
[[Page 221]]
(c) The rules of an exchange may provide that if a respondent fails
to request a hearing within the period of time stated in the notice he
shall be deemed to have accepted the penalty.
(Approved by the Office of Management and Budget under control number
3038-0022)
[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]
Sec. 8.15 Denial of charges and right to hearing.
In every instance where the respondent has requested a hearing on a
charge which is denied, or on a penalty set by the disciplinary
committee under Sec. 8.14(a)(2), he shall be given an opportunity for a
hearing in accordance with the requirements of Sec. 8.17. The exchange
rules may provide that, except for good cause, the hearing shall be
concerned only with those charges denied and/or penalties set by the
disciplinary committee under Sec. 8.14(a)(2) for which a hearing has
been requested.
Sec. 8.16 Settlement offers.
(a) The rules of an exchange may permit a respondent to submit a
written offer of settlement to the disciplinary committee at any time
after the investigation report is completed. The disciplinary committee
may accept the offer of settlement, but may not alter its terms unless
the respondent agrees.
(b) The rules of an exchange may provide that the disciplinary
committee, in its discretion, may permit the respondent to accept a
penalty without either admitting or denying the rule violations upon
which the penalty is based.
(c) If an offer of setlement is accepted by the disciplinary
committee, it shall issue a written decision specifying the rule
violations it has reason to believe were committed and any penalty to be
imposed. Where applicable, the decision shall also include a statement
that the respondent has accepted the penalties imposed without either
admitting or denying the rule violations.
(d) The respondent may withdraw his offer of settlement at any time
before final acceptance by the disciplinary committee. If an offer is
withdrawn after submission, or is rejected by the disciplinary
committee, the respondent shall not be deemed to have made any
admissions by reason of the offer of settlement and shall not be
otherwise prejudiced by having submitted the offer of settlement.
(Approved by the Office of Management and Budget under control number
3038-0022)
[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]
Sec. 8.17 Hearing.
(a) The following minimum requirements shall apply to any hearing
required by this subpart:
(1) The hearing shall be fair and shall be conducted before members
of the disciplinary committee. The hearing may be conducted before all
of the members of the disciplinary committee or a panel thereof, but no
member of the disciplinary committee may serve on the committee or panel
if he or any person or firm with which he is affiliated has a financial,
personal, or other direct interest in the matter under consideration.
(2) The respondent shall be entitled in advance of the hearing to
examine all books, documents, or other tangible evidence in the
possession or under the control of the exchange which are to be relied
upon by the enforcement staff in presenting the charges contained in the
notice of charges or which are relevant to those charges.
(3) The hearing shall be promptly convened after reasonable notice
to the respondent.
(4) The formal rules of evidence need not apply; nevertheless, the
procedures for the hearing may not be so informal as to deny a fair
hearing.
(5) The enforcement staff shall be a party to the hearing and shall
present its case on those charges and penalties which are the subject of
the hearing.
(6) The respondent shall be entitled to appear personally at the
hearing.
(7) The respondent shall be entitled to cross-examine any persons
appearing as witnesses at the hearing.
(8) The respondent shall be entitled to call witnesses and to
present such evidence as may be relevant to the charges.
(9) The exchange shall require persons within its jurisdiction who
are called as witnesses to appear at the hearing and to produce
evidence. It
[[Page 222]]
shall make reasonable efforts to secure the presence of all other
persons called as witnesses whose testimony would be relevant.
(10) If the respondent has requested a hearing, a substantially
verbatim record of the hearing shall be made and shall become a part of
the record of the proceeding. The record must be one that is capable of
being accurately transcribed; however, it need not be transcribed unless
the transcript is requested by Commission staff or the respondent, the
decision is appealed under Sec. 8.19, or is reviewed by the Commission
pursuant to section 8c of the Act or part 9 of this chapter. In all
other instances a summary record of a hearing is permitted.
(i) The rules of an exchange may provide that the cost of
transcribing the record of the hearing shall be borne by a respondent
who requests the transcript, appeals the decision pursuant to Sec.
8.19, or whose application for Commission review of the disciplinary
action has been granted under part 9 of this chapter. In all other
instances, the cost of transcribing the record shall be borne by the
exchange.
(b) The rules of an exchange may provide that a penalty may be
summarily imposed upon any person within its jurisdiction whose actions
impede the progress of a hearing.
(Approved by the Office of Management and Budget under control number
3038-0022)
[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]
Sec. 8.18 Decision.
Promptly following a hearing conducted in accordance with Sec.
8.17, the disciplinary committee shall render a written decision based
upon the weight of the evidence contained in the record of the
proceeding and shall provide a copy to the respondent. The decision
shall include:
(a) The notice of charges or a summary of the charges;
(b) The answer, if any, or a summary of the answer;
(c) A brief summary of the evidence produced at the hearing or,
where appropriate, incorporation by reference of the investigation
report;
(d) A statement of findings and conclusions with respect to each
charge, including the specific rules which the respondent is found to
have violated; and
(e) A declaration of any penalty imposed and the effective date of
such penalty.
(Approved by the Office of Management and Budget under control number
3038-0022)
[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]
Sec. 8.19 Appeal.
The rules of an exchange may permit a respondent to appeal promptly
an adverse decision of a disciplinary committee in all or in certain
classes of cases. Such rules may require a respondent's notice of appeal
to be in writing and to specify the findings, conclusions, and/or
penalty to which objection is taken. If the rules of an exchange permit
appeal, they shall provide for the following:
(a) The exchange shall establish a board of appeals which shall be
authorized to hear appeals of respondents. In addition, the rules of an
exchange may provide that the board of appeals may, on its own
initiative, order review of a decision by the disciplinary committee
within a reasonable period of time after the decision has been rendered.
(b) No member of the board of appeals shall serve on an appeal or
review panel if such member participated in any prior stage of the
disciplinary proceeding or if he or any person or firm with which he is
affiliated has a financial, personal, or other direct interest in the
matter. The rules of an exchange may provide that the appeal or review
proceeding may be conducted before all of the members of the board of
appeals or a panel thereof. Except for good cause shown, the appeal or
review shall be conducted solely on the record before the disciplinary
committee, the written exceptions filed by the parties, and the oral or
written arguments of the parties.
(c) Promptly following the appeal or review proceeding, the board of
appeals shall issue a written decision and shall provide a copy to the
respondent. The decision shall include a statement of findings and
conclusions with respect to each charge or penalty reviewed, including
the specific rules which the respondent was found to have violated by
[[Page 223]]
the disciplinary committee, and a declaration of any penalty imposed and
the effective date of such penalty.
(Approved by the Office of Management and Budget under control number
3038-0022)
[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]
Sec. 8.20 Final decision.
Each exchange shall establish rules setting forth when a decision
rendered pursuant to this subpart B shall become the final decision of
such exchange.
Subpart C_Summary Actions
Sec. 8.25 Member responsibility actions.
An exchange may suspend at any time, or take other summary action
against, a person subject to its jurisdiction upon a reasonable belief
that such immediate action is necessary to protect the best interest of
the marketplace.
Sec. 8.26 Procedure for member responsibility actions.
An action pursuant to Sec. 8.25 shall be taken in accordance with
an exchange procedure which provides for the following:
(a) The respondent shall, whenever practicable, be served with a
notice before the action is taken. If prior notice is not practicable,
the respondent shall be served with a notice at the earliest possible
opportunity. The notice shall:
(1) State the action,
(2) Briefly state the reasons for the action, and
(3) State the effective time and date and the duration of the
action.
(b) The respondent shall have the right to be represented by legal
counsel or any other representative of his choosing in all proceedings
subsequent to the summary action taken pursuant to Sec. 8.25.
(c) The respondent shall promptly be given opportunity for a
subsequent hearing. The hearing shall be fair and shall be held before
one or more persons authorized by the exchange to conduct hearings
pursuant to this section. The hearing shall be conducted in accordance
with the requirements set forth in Sec. Sec. 8.17(a)(4)-(9) and (b).
(d) Promptly following the hearing provided for in paragraph (c) of
this section, the exchange shall render a written decision based upon
the weight of the evidence contained in the record of the proceeding and
shall provide a copy to the respondent. The decision shall include:
(1) A description of the summary action taken,
(2) The reasons for the summary action,
(3) A brief summary of the evidence produced at the hearing,
(4) Findings and conclusions,
(5) A determination that the summary action should be affirmed,
modified or reversed, and
(6) A declaration of any action to be taken pursuant to the
determination specified in paragraph (d)(5) of this section and the
effective date and duration of such action.
(e) The rules of an exchange may permit the respondent to appeal
promptly an adverse decision. Such rules shall be established in
accordance with the requirements set forth in Sec. 8.19.
(Approved by the Office of Management and Budget under control number
3038-0022)
[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]
Sec. 8.27 Violations of rules regarding decorum, submission of
records or other similar activities.
An exchange may adopt rules which permit the enforcement staff or a
designated committee of officials to summarily impose minor penalties
against persons within its jurisdiction for violating rules regarding
decorum, attire, the timely submission of accurate records required for
clearing or verifying each day's transactions or other similar
activities.
Sec. 8.28 Final decision.
Each exchange shall establish rules setting forth when a decision
rendered pursuant to this subpart C shall become the final decision of
such exchange.
[[Page 224]]
PART 9_RULES RELATING TO REVIEW OF EXCHANGE DISCIPLINARY, ACCESS
DENIAL OR OTHER ADVERSE ACTIONS--Table of Contents
Subpart A_General Provisions
Sec.
9.1 Scope of rules.
9.2 Definitions.
9.3 Provisions referenced.
9.4 Filing and service; official docket.
9.5 Motions.
9.6 Sanctions for noncompliance.
9.7 Settlement.
9.8 Practice before the Commission.
9.9 Waiver of rules; delegation of authority.
Subpart B_Notice and Effective Date of Disciplinary Action or Access
Denial Action
9.10 [Reserved]
9.11 Form, contents and delivery of notice of disciplinary or access
denial action.
9.12 Effective date of disciplinary or access denial action.
9.13 Publication of notice.
9.14-9.19 [Reserved]
Subpart C_Initial Procedure With Respect to Appeals
9.20 Notice of appeal.
9.21 Record of exchange proceeding.
9.22 Appeal brief.
9.23 Answering brief.
9.24 Petition for stay pending review.
9.25 Limited participation of interested persons.
9.26 Participation of Commission staff.
9.27-9.29 [Reserved]
Subpart D_Commission Review of Disciplinary, Access Denial or Other
Adverse Action
9.30 Scope of review.
9.31 Commission review of disciplinary or access denial action on its
own motion.
9.32 Oral argument.
9.33 Final decision by the Commission.
Authority: 7 U.S.C. 4a, 6c, 7a, 12a, 12c, 16a, unless otherwise
noted.
Source: 52 FR 25366, July 7, 1987, unless otherwise noted.
Subpart A_General Provisions
Sec. 9.1 Scope of rules.
(a) Matters included. This part governs the review by the
Commission, pursuant to section 8c of the Act, as amended, of any
suspension, expulsion, disciplinary or access denial action, or other
adverse action by an exchange.
(b) Matters excluded. This part does not apply to and the Commission
will not accept notices of appeal, or petitions for stay pending review,
of:
(1) Any arbitration proceeding, regardless of whether the proceeding
was conducted pursuant to the provisions of section 5a(a)(11) of the Act
or involved a controversy between members of an exchange;
(2) Except as provided in Sec. Sec. 9.11(a), 9.11(b)(1)-(5),
9.11(c), 9.12(a) and 9.13 (concerning the notice, effective date and
publication of a disciplinary or access denial action), any summary
action authorized under the provisions of Sec. 8.27 of this chapter
imposing a minor penalty for the violation of exchange rules relating to
decorum or attire, or relating to the timely submission of accurate
records required for clearing or verifying each day's transactions or
other similar activities; and
(3) Any exchange action arising from a claim, grievance, or dispute
involving cash market transactions which are not a part of, or directly
connected with, any transaction for the purchase, sale, delivery or
exercise of a commodity for future delivery or a commodity option.
The Commission will, upon its own motion or upon motion filed pursuant
to Sec. 9.21(b), promptly notify the appellant and the exchange that it
will not accept the notice of appeal or petition for stay of matters
specified in this paragraph. The determination to decline to accept a
notice of appeal will be without prejudice to the appellant's right to
seek alternate forms of relief that may be available in any other forum.
(c) Applicability of these part 9 rules. Unless otherwise ordered,
these rules will apply in their entirety to all appeals, and matters
relating thereto filed on or after August 6, 1987. Any part 9 proceeding
pending before the Commission on August 6, 1987, will continue to be
governed by the Commission's former part 9 rules, 17 CFR part 9 (1987),
except that the parties to any part 9 proceeding pending on August 6,
1987, may, within 30 days after August 6, 1987, by written stipulation
executed by all parties, and filed with the Proceedings Clerk before the
Commission's
[[Page 225]]
final decision is rendered, elect to have the matter governed by the
provisions of this part 9, as amended.
[52 FR 25366, July 7, 1987, as amended at 59 FR 5701, Feb. 8, 1994]
Sec. 9.2 Definitions.
For purposes of this part:
(a) Access denial action means any proceeding other than a
disciplinary action by an exchange that denies or limits the privileges
of membership, but excludes any exchange action that solely limits the
ability of a member of an exchange to participate in the internal
corporate affairs of the exchange.
(b) Disciplinary action means any suspension, expulsion or other
penalty (as defined in Sec. 8.03(i) of this chapter) imposed on a
member of an exchange by that exchange for violations of rules of the
exchange, including summary actions.
(c) Exchange means any board of trade which has been designated as a
contract market.
(d) Exchange proceeding means any formal or informal proceeding by
an exchange which results in a disciplinary action, access denial action
or other adverse action.
(e) Mail means properly addressed and postpaid first class mail, and
includes overnight delivery service.
(f) Member of an exchange means any person who is admitted to
membership or has been granted membership privileges on an exchange, any
employee, officer, partner, director or affiliate of such member or
person with membership privileges including any associated person, and
any other person under the supervision or control of such member or
person with membership privileges.
(g) Other adverse action and adverse action include any exchange
action, other than an access denial action or disciplinary action, that
adversely affects any person, whether or not a member of the exchange,
but exclude any exchange action that solely involves the internal
corporate affairs of the exchange.
(h) Party includes the person filing a notice of appeal or petition
for stay who has been the subject of a disciplinary, access denial or
other adverse action by an exchange; that exchange; any person
participating in a proceeding under this part pursuant to Sec. 9.25;
and the Division of Market Oversight and/or the Division of Clearing and
Intermediary Oversight when participating in a proceeding under this
part pursuant to Sec. 9.26.
(i) Record of the exchange proceeding means all testimony, exhibits,
papers and records produced at or filed in an exchange disciplinary or
access denial proceeding or served on a party to that proceeding; all
documents, minutes or other exchange records serving as a basis for or
reflecting the findings, rationale and conclusions concerning the
adverse action taken by an exchange; a transcript of any proceeding
before any body of the exchange in connection with the exchange
proceeding; and a copy of all exchange rules which form the basis for
the exchange proceeding.
(j) Rules of the exchange means any constitutional provision,
article of incorporation, bylaw, rule, regulation, resolution, or
written and publicly available interpretation or stated policy of the
exchange, or instrument corresponding thereto.
(k) Summary action means a disciplinary action resulting in the
imposition of a penalty on a member of an exchange for violation of
rules of the exchange authorized under the provisions of Sec. 8.17(b)
(penalty for impeding progress of hearing), Sec. 8.25 (member
responsibility action) or Sec. 8.27 (penalty for violation of rules
relating to decorum, attire, submission of records or similar
activities) of this chapter.
[52 FR 25366, July 7, 1987; 52 FR 27286, July 20, 1987, as amended at 67
FR 62352, Oct. 7, 2002]
Sec. 9.3 Provisions referenced.
Except as otherwise provided in this part, the following provisions
of the Commission's rules relating to reparations contained in part 12
of this chapter apply to this part: Sec. 12.3 (Business address;
hours); Sec. 12.5 (Computation of time); Sec. 12.6 (Extensions of
time; adjournments; postponements); Sec. 12.7 (Ex parte
communications); and Sec. 12.12 (Signature).
Sec. 9.4 Filing and service; official docket.
(a) Filing with the Proceedings Clerk; proof of filing; proof of
service. Any document that is required by this part to be
[[Page 226]]
filed with the Proceedings Clerk must be filed by delivering it in
person or by mail to: Proceedings Clerk, Office of Proceedings,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581. To be timely filed under this part, a
document must be delivered or mailed to the Proceedings Clerk within the
time prescribed for filing. A party must use a means of filing which is
at least as expeditious as that used in serving that document upon the
other parties. Proof of filing must be made by attaching to the document
for filing an affidavit of filing executed by any person 18 years of age
or older or a proof of filing executed by an attorney-at-law qualified
to practice before the Commission. The proof of filing must certify that
the attached document was deposited in the mail, with first-class
postage prepaid, addressed to the Proceedings Clerk, Office of
Proceedings, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581, on the date specified in the affidavit. Proof of service of a
document must be made by filing with the Proceedings Clerk,
simultaneously with the filing of the required document, an affidavit of
service executed by any person 18 years of age or older or a
certification of service executed by an attorney-at-law qualified to
practice before the Commission. The proof of service must identify the
persons served, state that service has been made, set forth the date of
service, and recite the manner of service.
(b) Formalities of filing--(1) Number of copies. Unless otherwise
specifically provided, an original and two conformed copies of all
documents filed with the Commission in accordance with the provisions of
this part must be filed with the Proceedings Clerk.
(2) Title page. All documents filed with the Proceedings Clerk must
include at the head thereof, or on a title page, the name of the
Commission, the title of the proceeding, the docket number (if one has
been assigned by the Proceedings Clerk), the subject of the particular
document and the name of the person on whose behalf the document is
being filed.
(3) Paper, spacing, type. All documents filed with the Proceedings
Clerk must be typewritten, must be on one grade of good white paper no
less than 8 or more than 8\1/2\ inches wide and no less than 10\1/2\ or
more than 11\1/2\ inches long, and must be bound on the top only. They
must be double-spaced, except for long quotations (3 or more lines) and
footnotes which should be single-spaced.
(4) Signature. The original copy of all papers must be signed in ink
by the person filing the same or by his duly authorized agent or
attorney.
(c) Service--(1) General requirements. All documents filed with the
Proceedings Clerk must, at or before the time of filing, be served upon
all parties. A party must use a means of service which is at least as
expeditious as that used in filing that document with the Proceedings
Clerk. One copy of all motions, petitions or applications made in the
course of the proceeding, all notices of appeal, all briefs, and letters
to the Commission or an employee thereof must be served by a party upon
all other parties.
(2) Manner of service. Service may be either personal or by mail.
Service by mail is complete upon deposit of the document in the mail.
Where service is effected by mail, the time within which the person
served may respond thereto will be increased by three days.
(3) Designation of person to receive service. The first document
filed in a proceeding by or on behalf of any party must state on the
first page the name and postal address of the person who is authorized
to receive service for the party of all documents filed in the
proceeding. Thereafter, service of documents must be made upon the
person authorized unless service on a different authorized person or on
the party himself is ordered by the Commission, or unless pursuant to
Sec. 9.8 the person authorized is changed by the party upon due notice
to all other parties. Parties must file and serve notification of any
changes in the information provided pursuant to this subparagraph as
soon as practicable after the change occurs.
(4) Service of orders and decisions. A copy of all notices, rulings,
opinions and orders of the Commission will be served on each of the
parties and will be deemed served upon deposit in the mail.
[[Page 227]]
(d) Official docket. Upon receipt of a notice of appeal filed in
accordance with Sec. 9.20, or a petition for stay pending review filed
in accordance with Sec. 9.24, the Proceedings Clerk will establish and
thereafter maintain the official docket of that proceeding and will
assign a docket number to the proceeding.
[52 FR 25366, July 7, 1987, as amended at 60 FR 49334, Sept. 25, 1995]
Sec. 9.5 Motions.
(a) In general. An application for a form of relief not otherwise
specifically provided for in this part must be made by a written motion,
filed with the Proceedings Clerk. The motion must state the relief
sought and the basis for the relief and may set forth the authority
relied upon.
(b) Answer to motions. Any party may serve and file a written
response to a motion within ten days after service of the motion, or
within such longer or shorter period as established by these rules, or
as the Commission may direct.
(c) Motions for procedural orders. Motions for procedural orders,
including motions for extensions of time, may be acted on at any time,
without awaiting a response thereto. Any party adversely affected by
such action may request reconsideration, vacation or modification of the
action.
(d) Dilatory motions. Frivolous or repetitive motions dealing with
the same subject matter will not be permitted and such motions will
summarily be denied.
Sec. 9.6 Sanctions for noncompliance.
In the event that any party fails to file any document or make any
appearance which is required under this part, the Commission may, in its
discretion, and upon its own motion or upon the motion of any party to
the proceeding, dismiss the proceeding before it, or, based on the
record before it, affirm, modify, set aside, or remand for further
proceedings, in whole or in part, the decision of the exchange.
Sec. 9.7 Settlement.
At any time before there has been a final determination by the
Commission with respect to any notice of appeal filed in accordance with
Sec. 9.20, the parties may file a stipulation for dismissal based on a
settlement agreement. Thereupon, the Commission may issue an order
terminating the proceeding before the Commission as to the parties to
the settlement agreement. The entry of such an order does not affect the
Commission's authority under the Act.
Sec. 9.8 Practice before the Commission.
(a) Practice--(1) By non-attorneys. An individual may appear pro se
(on his own behalf); a general partner may represent the partnership; a
bona fide officer of a corporation, trust or association may represent
the corporation, trust or association.
(2) By attorneys. An attorney-at-law who is admitted to practice
before the highest Court in any State or territory, or of the District
of Columbia, who has not been suspended or disbarred from appearance and
practice before the Commission in accordance with provisions of part 14
of this chapter may represent parties as an attorney in proceedings
before the Commission.
(b) Debarment of counsel or representative during the course of a
proceeding. Whenever, while a proceeding is pending before the
Commission, the Commission finds that a person acting as counsel or
representative for any party to the proceeding is guilty of contemptuous
conduct, the Commission may order that such person be precluded from
further acting as counsel or representative in the proceeding. The
proceeding will not be delayed or suspended pending disposition of the
appeal; Provided, That the Commission may suspend the proceedings for a
reasonable time for the purpose of enabling the party to obtain other
counsel or representative.
(c) Withdrawal of representation. Withdrawal from representation of
a party will be only by leave of the Commission. Such leave to withdraw
may be conditioned on the attorney's (or representative's) submission of
an affidavit averring that the party represented has actual knowledge of
the withdrawal, and such affidavit must include the name and address of
a successor counsel (or representative) or a statement that the
represented party
[[Page 228]]
has determined to proceed pro se, in which case, the statement must
include the address where that party can thereafter be served.
Sec. 9.9 Waiver of rules; delegation of authority.
(a) Standards for waiver; notice to parties. To prevent undue
hardship on any party or for other good cause shown the Commission may
waive any rule in this part in a particular case and may order
proceedings in accordance with its direction upon a determination that
no party will be prejudiced thereby and that the ends of justice will be
served. Reasonable notice will be given to all parties of any action
taken pursuant to this paragraph.
(b) Delegation of authority. (1) The Commission hereby delegates,
until the Commission orders otherwise, to the General Counsel, or the
General Counsel's designee, the authority:
(i) To waive or modify any of the requirements of Sec. Sec. 9.20-
9.25 and to waive or modify the requirements of the Commission's rules
relating to reparations incorporated by Sec. 9.3 insofar as such
requirements pertain to changes in time permitted for filing, and to the
form, execution, service and filing of documents;
(ii) To enter orders under Sec. Sec. 9.5, 9.6 and 9.7;
(iii) To decline to accept any notice of appeal, or petition for
stay pending review, of matters excluded from this part by Sec. Sec.
9.1(b), 9.2(a) and 9.2(b), and to so notify the appellant and the
exchange;
(iv) To stay the effective date of a disciplinary action for a
period of time, not to exceed four days, to enable the Commission to
rule on a petition for stay filed under Sec. 9.24;
(v) To decline to accept any document which has not been timely
filed or perfected, as specified in these rules;
(vi) To order the filing of the record of the exchange proceeding
notwithstanding the submission of a motion under Sec. 9.21(b) that the
Commission not accept a notice of appeal; and
(vii) To enter any order which will facilitate or expedite
Commission review.
(2) Within seven days after service of a ruling issued pursuant to
paragraph (b)(1) of this section, a party may file with the Proceedings
Clerk a petition for Commission reconsideration of the ruling. Unless
the Commission orders otherwise, the filing of a petition for
reconsideration will not operate to stay the effective date of such
ruling.
(3) The General Counsel or the General Counsel's designee may submit
to the Commission for its consideration any matter which has been
delegated pursuant to paragraph (b)(1) of this section.
(4) Nothing in this section will be deemed to prohibit the
Commission, at its election, from exercising the authority delegated to
the General Counsel under this section.
[52 FR 25366, July 7, 1987, as amended at 60 FR 54801, Oct. 26, 1995; 64
FR 46270, Aug. 25, 1999]
Subpart B_Notice and Effective Date of Disciplinary Action or Access
Denial Action
Sec. 9.10 [Reserved]
Sec. 9.11 Form, contents and delivery of notice of disciplinary or
access denial action.
(a) When required. Whenever an exchange decision pursuant to which a
disciplinary action or access denial action is to be imposed has become
final, the exchange must, within thirty days thereafter, provide written
notice of such action to the person against whom the action was taken
and to the Commission: Provided, That the exchange is not required to
notify the Commission of any summary action, as authorized under the
provisions of Sec. 8.27 of this chapter, which results in the
imposition of minor penalties for the violation of exchange rules
relating to decorum or attire. No final disciplinary or access denial
action may be made effective by the exchange except as provided in Sec.
9.12.
(b) Contents of notice. For purposes of this part, the written
notice of a disciplinary action or access denial action may be either a
copy of a written decision which accords with Sec. 8.16, Sec. 8.18, or
Sec. 8.19(c) of this chapter (including copies of any materials
incorporated by reference) or other written notice which must include:
[[Page 229]]
(1) The name of the person against whom the disciplinary action or
access denial action was taken;
(2) A statement of the reasons for the disciplinary action or access
denial action together with a listing of any rules which the person who
was the subject of the disciplinary action or access denial action was
charged with having violated or which otherwise serve as the basis of
the exchange action;
(3) A statement of the conclusions and findings made by the exchange
with regard to each rule violation charged or, in the event of
settlement, a statement specifying those rule violations which the
exchange has reason to believe were committed;
(4) The terms of the disciplinary action or access denial action;
(5) The date on which the action was taken and the date the exchange
intends to make the disciplinary or access denial action effective; and
(6) Except as otherwise provided in Sec. 9.1(b), a statement
informing the party subject to the disciplinary action or access denial
action of the availability of Commission review of the exchange action
pursuant to section 8c of the Act and this part.
(c) Delivery and filing of the notice. Delivery of the notice must
be made either personally to the person who was the subject of the
disciplinary action or access denial action or by mail to such person at
that person's last known address. A copy of the notice must be filed on
the same date with the Commission, either in person during normal
business hours or by mail to: Division of Market Oversight, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,
NW., Washington, DC 20581. The notice filed with the Commission must
additionally include the date on which the notice was delivered to the
person disciplined or denied access and state whether delivery was
personal or by mail.
(d) Effect of delivery and filing by mail. Filing by mail to the
Commission and delivery by mail to the person disciplined or denied
access will be complete upon deposit in the mail of a properly addressed
and postpaid document. Where delivery to the person disciplined or
denied access is effected by such mail, the time within which a notice
of appeal or petition for stay may be filed will be increased by three
days.
(e) Certification. Copies of the notice and the submission of any
additional information provided pursuant to this section must be
certified as true and correct by a duly authorized officer, agent or
employee of the exchange.
[52 FR 25366, July 7, 1987, as amended at 60 FR 49334, Sept. 25, 1995;
67 FR 62352, Oct. 7, 2002]
Sec. 9.12 Effective date of disciplinary or access denial action.
(a) Effective date. Any disciplinary or access denial action taken
by an exchange will not become effective until at least fifteen days
after the written notice prescribed by Sec. 9.11 is delivered to the
person disciplined or denied access; Provided, however, That the
exchange may cause a disciplinary action to become effective prior to
that time if:
(1) As authorized by Sec. 8.25 of this chapter, the exchange
reasonably believes, and so states in its written decision, that
immediate action is necessary to protect the best interests of the
marketplace; or
(2) As authorized by Sec. 8.17(b) of this chapter, the exchange
determines, and so states in its written decision, that the actions of a
person who is within the exchange's jurisdiction have impeded the
progress of a disciplinary hearing; or
(3) As authorized by Sec. 8.27 of this chapter, the exchange
determines that a person has violated exchange rules relating to decorum
or attire, or timely submission of accurate records required for
clearing or verifying each day's transactions or other similar
activities; or
(4) The person against whom the action is taken has consented to the
penalty to be imposed and to the timing of its effectiveness.
(b) Notice of early effective date. If the exchange determines in
accordance with paragraph (a)(1) of this section that a disciplinary
action will become effective prior to the expiration of fifteen days
after written notice thereof, it must notify the person disciplined in
[[Page 230]]
writing, either personally or by telegram or other means of written
telecommunication to the person's last known address, stating the
reasons for the determination. The exchange must also by telegram or
other means of written telecommunication immediately notify the
Commission (Attention: Contracts Markets Section, Division of Market
Oversight). Where notice is delivered by telegram or other means of
written telecommunication, the time within which the person so notified
may file a petition for stay pursuant to Sec. 9.24(a)(2) will be
increased by one day.
[52 FR 25366, July 7, 1987; 52 FR 27286, July 20, 1987, as amended at 67
FR 62352, Oct. 7, 2002]
Sec. 9.13 Publication of notice.
Whenever an exchange suspends, expels or otherwise disciplines, or
denies any person access to the exchange, it must make public its
findings by disclosing at least the information contained in the notice
required by Sec. 9.11(b). An exchange must make such findings public as
soon as the disciplinary action or access denial action becomes
effective in accordance with the provisions of Sec. 9.12 by posting a
notice in a conspicuous place on its premises to which its members and
the public regularly have access for a period of five consecutive
business days. Thereafter, the exchange must maintain and make available
for public inspection a record of the information contained in the
disciplinary or access denial notice.
Sec. Sec. 9.14-9.19 [Reserved]
Subpart C_Initial Procedure With Respect to Appeals
Sec. 9.20 Notice of appeal.
(a) Time to file. Except as provided in Sec. 9.1(b), any person who
is the subject of disciplinary or access denial action by an exchange or
any person who is otherwise adversely affected by any other action of an
exchange may, at any time within thirty days after notice of the
disciplinary or access denial action has been delivered to the person
disciplined or denied access in accordance with Sec. 9.11, or within
thirty days after notice of another adverse action, file a notice of
appeal of such disciplinary, access denial or other adverse action. The
Commission may dismiss any appeal for which a notice of appeal is not
timely filed.
(b) Contents. The notice of appeal need consist only of a brief
statement indicating that the party is requesting Commission review of
the exchange action, and must include:
(1) The name and address of the appellant, and any duly authorized
agent or officer of the appellant;
(2) The name and docket number of the exchange proceeding;
(3) The date on which the disciplinary, access denial or other
adverse action was imposed by the exchange or the date on which the
final exchange decision was rendered, and the dates upon which the
exchange action has or will become final and effective;
(4) A copy of the notice provided to the appellant by the exchange
in accordance with the provisions of Sec. 9.11, in the case of a
disciplinary or access denial action, or otherwise, in the case of any
other adverse exchange action;
(5) The relief sought from the action of the exchange;
(6) The appellant's request for a copy of the record of the exchange
proceeding, or portions of the record not in the appellant's possession,
and a representation that the appellant agrees to pay the exchange
reasonable fees, as provided in the rules of the exchange, for printing
that copy; and
(7) A nonrefundable filing fee of $100 remitted by check, bank draft
or money order, payable to the Commodity Futures Trading Commission.
[52 FR 25366, July 7, 1987; 52 FR 27286, July 20, 1987]
Sec. 9.21 Record of exchange proceeding.
(a) Filing of record. Within thirty days after service of the notice
of appeal, the exchange must file two copies of the record of the
exchange proceeding (as defined in Sec. 9.2(i)) with the Proceedings
Clerk, and serve a copy on the appellant and any other party to the
proceeding, provided that such person has agreed to pay the exchange
reasonable fees, as provided in the rules of the exchange, for printing
the copy. The record must be bound as a unit, must be chronologically
indexed and tabbed,
[[Page 231]]
must be certified as correct by a duly authorized official, agent or
employee of the exchange, and must contain a certificate of service on
the appellant or any other party to the proceeding (or waiver of service
for failure to pay costs pursuant to this rule).
(b) Motion that the Commission not accept notice of appeal. Within
fifteen days after service of the notice of appeal, the exchange may
file a motion that the Commission not accept a notice of appeal of any
matter that the exchange contends is excluded from this part by
Sec. Sec. 9.1(b), 9.2(a) and 9.2(g). Such motion must be accompanied by
an affidavit averring facts in support of the motion. The filing of such
motion will operate to stay the filing of the record and subsequent
submissions pending the Commission's ruling on such motion. The
appellant may serve and file a written response to such motion within
ten days after service of the motion.
Sec. 9.22 Appeal brief.
(a) Time to file. Any person who has filed a notice of appeal in
accordance with the provisions of Sec. 9.20 must perfect the appeal by
filing an appeal brief with the Proceedings Clerk within thirty days
after service of the record of the exchange proceeding. The Commission
may dismiss any appeal for which an appeal brief is not timely filed.
(b) Contents. Each appeal brief submitted to the Commission pursuant
to this section must include, in the order indicated:
(1) A statement of the issues presented for review;
(2) A statement of the case. The statement must first indicate
briefly the nature of the case and include a full description of the
disciplinary, access denial or other adverse action. There must follow a
clear and concise statement of all facts relevant to the consideration
of the appeal, including, if known, each alleged act or omission forming
the basis of the exchange action, with appropriate references to the
record of the exchange proceeding;
(3) An argument. The argument may be preceded by a summary. The
argument must contain the contentions of the appellant with respect to
the issues presented, and the reasons therefor, and citations to
relevant authorities and to parts of the record of the exchange
proceeding; and
(4) A conclusion stating the precise relief sought.
(c) Length of appeal brief. Without prior leave of the Commission,
the appeal brief may not exceed thirty-five pages, exclusive of any
table of contents, table of cases, index and appendix containing
transcripts of testimony, exhibits, statutes, rules, regulations or
similar materials.
Sec. 9.23 Answering brief.
(a) Time for filing answering brief. Within thirty days after
service of the appeal brief, the exchange must file with the Commission
an answering brief.
(b) Contents of answering brief. The answering brief generally must
follow the same style as prescribed for the appeal brief but may omit a
statement of the issues or of the case if the exchange does not dispute
the issues or the statement of the case contained in the appeal brief.
(c) Length of answering brief. Without prior leave of the
Commission, the answering brief may not exceed thirty-five pages,
exclusive of any table of contents, table of cases, index and appendix
containing transcripts of testimony, exhibits, statutes, rules,
regulations or similar materials.
Sec. 9.24 Petition for stay pending review.
(a) Time to file. (1) Within ten days after the notice of the
disciplinary or access denial action has been delivered in accordance
with Sec. 9.11 to a person disciplined or denied access, that person
may petition the Commission to stay the disciplinary or access denial
action pending consideration by the Commission of the notice of appeal
and, if granted, the appeal underlying the notice of appeal. The
petition for stay must be accompanied by the notice of appeal.
(2) Within ten days after a notice of summary action has been
delivered in accordance with Sec. 9.12(b) to a person who is the
subject of a summary action authorized by Sec. 8.25 of this chapter,
that person may petition the Commission to stay the effectiveness of the
summary action pending completion of
[[Page 232]]
the exchange proceeding conducted as authorized by Sec. 8.26 of this
chapter.
(3) The Commission may deny any petition for stay which is not
timely filed or which is not otherwise in accord with these rules.
(b) Contents of petition for stay. A petition filed under this
section must state the reasons that the stay is requested and the facts
relied upon, as specified in Sec. 9.20. Averments of the petition must
be supported by affidavits, other sworn statements or copies thereof, or
a stipulation as to those facts which are not in dispute. Based upon the
petition, the Commission, in its discretion, may order a stay of the
disciplinary action or access denial action.
(c) Response to petition. The exchange may serve and file a written
response to any petition for a stay within five days after service of
the petition.
(d) Standards for granting petition for stay. The Commission will
promptly determine whether to grant or deny a petition for stay and may
act upon a petition at any time, without waiting for a response thereto.
In determining whether to grant or deny the petition for stay, the
Commission will consider, among other things, whether the petitioner has
established:
(1) Petitioner's likelihood of success on the merits; and
(2) That denial of the stay would cause irreparable harm to the
petitioner; and
(3) That granting the stay would not endanger orderly trading or
otherwise cause substantial harm to the exchange or market participants;
and
(4) That granting the stay would not be contrary to the Act, and the
rules, regulations and orders of the Commission thereunder or otherwise
contrary to the public interest.
(e) Ex parte stays. The Commission may act upon a petition for stay,
without waiting for the exchange's response thereto only where
petitioner:
(1) Expressly requests an ex parte stay;
(2) Files a proof of service; and
(3) Clearly establishes by affidavit that immediate and irreparable
injury, loss or damage will result to the petitioner before the exchange
can be heard in opposition.
Any order granting a stay prior to the filing of the exchange's reply
will expire by its terms within such time after service of the
Commission's ruling on the petition, not to exceed ten days, as the
Commission fixes, unless within the time so fixed the order, for good
cause shown, is extended for a like period or unless the exchange
consents that it may be extended for a longer period. In any case, the
exchange may move for dissolution or modification of the stay, and the
Commission will proceed to determine such motion as expeditiously as the
ends of justice require.
[52 FR 25366, July 7, 1987; 52 FR 27286, July 20, 1987]
Sec. 9.25 Limited participation of interested persons.
On its own motion or upon motion of any person asserting a direct
and substantial interest in the outcome of a proceeding conducted under
this part, the Commission, in its discretion, may permit the limited
participation by such interested person in the proceeding. A motion for
leave to participate in the proceeding must identify the interest of
that person and must state the reasons why participation in the
proceeding by that person is desirable, and must state whether that
person requests a copy of the record of the exchange proceeding to the
extent permitted by section 8c(a)(2) of the Act and that such person
agrees to pay the exchange reasonable fees, as provided in the rules of
the exchange, for printing the copy.
[52 FR 25366, July 7, 1987, as amended at 59 FR 5701, Feb. 8, 1994]
Sec. 9.26 Participation of Commission staff.
Within twenty days after receipt of the answering brief, the
Division of Market Oversight and/or the Division of Clearing and
Intermediary Oversight may file with the Proceedings Clerk a notice of
intention to participate in the proceedings as amicus curiae. Within
thirty days after filing the notice of intention to participate, the
Division may file a brief as amicus curiae. Without prior leave of the
Commission, the brief may not exceed thirty-five pages. The brief must
be filed and served on
[[Page 233]]
the appellant, exchange and any other parties to the proceeding in the
manner specified by these rules. Within ten days after service of the
Division's brief, any party may file a reply to the Division's brief.
After the filing of the notice of intent to participate, no employee of
the Division(s) filing the notice may thereafter make any communication
relating to the proceeding, other than on the record of the proceeding
before the Commission, to any Commissioner or Commission decisional
employee.
[52 FR 25366, July 7, 1987, as amended at 67 FR 62352, Oct. 7, 2002]
Sec. Sec. 9.27-9.29 [Reserved]
Subpart D_Commission Review of Disciplinary, Access Denial or Other
Adverse Action
Sec. 9.30 Scope of review.
On review, the Commission may, in its discretion, consider sua
sponte any issues arising from the record before it and may base its
determination thereon, or limit the issues to those presented in the
statement of issues in the briefs, treating those issues not raised as
waived. If the Commission determines to consider any issue not raised by
the parties, it may issue an order that notifies the parties of such
determination and provides an opportunity for the parties to address any
issue considered sua sponte by the Commission.
Sec. 9.31 Commission review of disciplinary or access denial action
on its own motion.
(a) Request for additional information. Where a person disciplined
or denied access has not appealed the exchange decision to the
Commission, upon review of the notice specified in Sec. 9.11, the
Division of Market Oversight or the Division Clearing and Intermediary
Oversight may request that the exchange file with the Division the
record of the exchange proceeding, or designated portions of the record,
a brief statement of the evidence and testimony adduced to support the
exchange's findings that a rule or rules of the exchange were violated
and such recordings, transcripts and other documents applicable to the
particular exchange proceeding as the Division may specify. The exchange
must promptly advise the person who is the subject of the disciplinary
or access denial action of the Division's request. Within thirty days
after service of the Division's request, the exchange must file the
information requested with the Division and, upon request, deliver that
information to the person who is the subject of the disciplinary or
access denial action. Delivery and filing must be in the manner
prescribed by Sec. 9.11(c). A person subject to the disciplinary action
or access denial action requesting a copy of the information furnished
to the Division must, if the exchange rules so provide, agree to pay the
exchange reasonable fees for printing the copy.
(b) Review on motion of the Commission. The Commission may institute
review of an exchange disciplinary or access denial action on its own
motion. Other than in extraordinary circumstances, such review will be
initiated within 180 days after the Commission has received the notice
of exchange action provided for in Sec. 9.11. If the Commission should
institute review on its own motion, it will issue an order permitting
the person who is the subject of the disciplinary or access denial
action an opportunity to file an appropriate submission, and the
exchange an opportunity to file a reply thereto.
[52 FR 25366, July 7, 1987, as amended at 67 FR 62352, Oct. 7, 2002]
Sec. 9.32 Oral argument.
(a) On motion of Commission. On its own motion, the Commission may,
in its discretion, hear oral argument by the parties any time before the
decision of the Commission is filed with the Proceedings Clerk.
(b) On request of party. Any party may file with the Proceedings
Clerk a request in writing for the opportunity to present oral argument
before the Commission, which the Commission may, in its discretion,
grant or deny. A request under this paragraph must be filed concurrently
with the party's brief.
(c) Reporting and transcription. Oral argument before the Commission
will be recorded and transcribed unless the
[[Page 234]]
Commission directs otherwise. In the event the Commission affords the
parties the opportunity to present oral argument before the Commission,
the oral argument will proceed in accordance with the provisions of
Sec. 10.103 (b) and (d) of this chapter.
Sec. 9.33 Final decision by the Commission.
(a) Opinion and order. Upon review, the Commission may affirm,
modify, set aside, or remand for further proceedings, in whole or in
part, the decision of the exchange. The Commission's decision will be
contained in its opinion and order which will be based upon the record
before it, including the record of the exchange proceeding, and any oral
argument made in accordance with Sec. 9.32. Except as provided in
paragraph (b) of this section, the opinion and order will constitute the
final decision of the Commission, effective upon service on the parties.
In the event the Commission is equally divided as to its decision, the
Commission will affirm without opinion the decision of the exchange,
which will constitute the Commission's final decision.
(b) Order of summary affirmance. If the Commission finds that the
result reached in the decision of the exchange is substantially correct
and that none of the arguments on appeal made by the appellant raise
important questions of law or policy, the Commission may, by appropriate
order, summarily affirm the decision of the exchange without opinion,
which will constitute the Commission's final decision. Unless the
Commission expressly indicates otherwise in its order, an order of
summary affirmance does not reflect a Commission determination to adopt
the exchange final decision, including any rationale contained therein,
as its opinion and order, and neither the exchange's final decision nor
the Commission's order of summary affirmance will serve as a Commission
precedent in other proceedings.
(c) Standards of review. In reviewing an exchange disciplinary,
access denial or other adverse action, the Commission will consider
whether:
(1) The exchange disciplinary, access denial or other adverse action
was taken in accordance with the rules of the exchange;
(2) Fundamental fairness was observed in the conduct of the
proceeding resulting in the disciplinary, access denial or other adverse
action;
(3)(i) In the case of a disciplinary action, the record contains
substantial evidence of a violation of the rules of the exchange, or
(ii) in the case of an access denial or other adverse action, the record
contains substantial evidence supporting the exchange action; and
(4) The disciplinary, access denial or other adverse action
otherwise accords with the Act and the rules, regulations and orders of
the Commission thereunder.
PART 10_RULES OF PRACTICE--Table of Contents
Subpart A_General Provisions
Sec.
10.1 Scope and applicability of rules of practice.
10.2 Definitions.
10.3 Suspension, amendment, revocation and waiver of rules.
10.4 Business address; hours.
10.5 Computation of time.
10.6 Changes in time permitted for filing.
10.7 Date of entry of orders.
10.8 Presiding officers.
10.9 Separation of functions.
10.10 Ex parte communications.
10.11 Appearance in adjudicatory proceedings.
10.12 Service and filing of documents; form and execution.
Subpart B_Institution of Adjudicatory Proceedings; Pleadings; Motions
10.21 Commencement of the proceeding.
10.22 Complaint and notice of hearing.
10.23 Answer.
10.24 Amendments and supplemental pleadings.
10.25 Form of pleadings.
10.26 Motions and other papers.
Subpart C_Parties and Limited Participation
10.31 Parties.
10.32 Substitution of parties.
10.33 Intervention as a party.
10.34 Limited participation.
10.35 Permission to state views.
[[Page 235]]
10.36 Commission review of rulings.
Subpart D_Prehearing Procedures; Prehearing Conferences; Discovery
Depositions
10.41 Prehearing conferences; procedural matters.
10.42 Discovery.
10.43 Stipulations.
10.44 Depositions and interrogatories.
Subpart E_Hearings
10.61 Time and place of hearing.
10.62 Appearances.
10.63 Consolidation; separate hearings.
10.64 Public hearings.
10.65 Record of hearing.
10.66 Conduct of the hearing.
10.67 Evidence.
10.68 Subpoenas.
10.69 Reopening hearings.
Subpart F_Post Hearing Procedures; Initial Decisions
10.81 Filing the transcript of evidence.
10.82 Proposed findings and conclusions; briefs.
10.83 Oral arguments.
10.84 Initial decision.
Subpart G_Disposition Without Full Hearing
10.91 Summary disposition.
10.92 Shortened procedure.
10.93 Obtaining default order.
10.94 Setting aside of default.
Subpart H_Appeals to the Commission; Settlements
10.101 Interlocutory appeals.
10.102 Review of initial decisions.
10.103 Oral argument before the Commission.
10.104 Scope of review; Commission decision.
10.105 Review by Commission on its own initiative.
10.106 Reconsideration; stay pending judicial review.
10.107 Leave to adduce additional evidence.
10.108 Settlements.
10.109 Delegation of authority to Chief of the Opinions Section.
Subpart I_Restitution Orders
10.110 Basis for issuance of restitution orders.
10.111 Recommendation of procedure for implementing restitution.
10.112 Administration of restitution.
10.113 Right to challenge distribution of funds to customers.
10.114 Acceleration of establishment of restitution procedure.
Appendix A to Part 10--Commission Policy Relating to the Acceptance of
Settlements in Administrative and Civil Proceedings
Authority: Pub. L. 93-463, sec. 101(a)(11), 88 Stat. 1391; 7 U.S.C.
2(a)(12).
Source: 41 FR 2511, Jan. 16, 1976, unless otherwise noted.
Subpart A_General Provisions
Sec. 10.1 Scope and applicability of rules of practice.
These rules of practice are generally applicable to adjudicatory
proceedings before the Commodity Futures Trading Commission under the
Commodity Exchange Act. These include proceedings for:
(a) Denial, suspension, revocation, conditioning, restricting or
modifying of registration as a futures commission merchant, introducing
broker, or associated person, floor broker, floor trader, commodity pool
operator, commodity trading advisor or leverage transaction merchant
pursuant to sections 6(c), 8a(2), 8a(3), 8a(4) and 8a(11) of the Act, 7
U.S.C. 9 and 15, 12a(2), 12a(3), 12a(4) and 12(a)(11), or denial,
suspension, or revocation of designation as a contract market pursuant
to sections 6(a) and 6(b) of the Act, 7 U.S.C. 8;
(b) The issuance of cease and desist orders pursuant to sections 6b
and 6(d) of the Act, 7 U.S.C. 13a and 13b;
(c) Denial of trading privileges pursuant to section 6(c) of the
Act, 7 U.S.C. 9 and 15;
(d) The assessment of civil penalties pursuant to sections 6(c) and
6b of the Act, 7 U.S.C. 9 and 15 and 13a;
(e) The issuance of restitution orders pursuant to section 6(c) of
the Act, 7 U.S.C. 9; and
(f) Any other proceedings where the Commission declares them to be
applicable.
These rules do not apply to:
(g) Investigations conducted pursuant to sections 8 and 16(a) of the
Act, 7 U.S.C. 12 and 20(a), except as specifically made applicable by
the Rules Relating to Investigations set forth in part 11 of this
chapter;
(h) Reparation proceedings under section 14 of the Act, 7 U.S.C. 18,
except as
[[Page 236]]
specifically made applicable by the Rules Relating to Reparation
Proceedings set forth in part 12 of this chapter;
(i) Public rulemaking, except as specifically made applicable by the
Rules Relating to Public Rulemaking Procedures sets forth in part 13 of
this title.
The rules shall be construed to secure the just, speedy and inexpensive
determination of every proceeding with full protection for the rights of
all parties therein.
[41 FR 2511, Jan. 16, 1976, as amended at 49 FR 8225, Mar. 5, 1984; 57
FR 19597, Apr. 15, 1993; 59 FR 5701, Feb. 8, 1994; 63 FR 55791, Oct. 19,
1998; 64 FR 30903, June 9, 1999]
Sec. 10.2 Definitions.
For purposes of this part:
(a) Act means the Commodity Exchange Act, as amended, 7 U.S.C. 1, et
seq.;
(b) Adjudicatory proceeding means a judicial-type proceeding leading
to the formulation of a final order;
(c) Administrative Law Judge means an administrative law judge
appointed pursuant to the provisions of 5 U.S.C. 3105 (provisions of the
rules in this part which refer to Administrative Law Judges may be
applicable to other Presiding Officers as well, as set forth in Sec.
10.8);
(d) Administrative Procedure Act means those provisions of the
Administrative Procedure Act, as codified, which are contained in 5
U.S.C. 551 through 559;
(e) Commission means the Commodity Futures Trading Commission;
(f) Complaint means any document initiating an adjudicatory
proceeding, whether designated a complaint or an order for proceeding or
otherwise;
(g) Division of Enforcement means that office in the Commission that
prosecutes a complaint issued by the Commission;
(h) Hearing means that part of a proceeding which involves the
submission of evidence, either by oral presentation or written
submission;
(i) Proceedings Clerk means that member of the Commission's staff
designated as such in the Commission's Office of Proceedings.
(j) Order means the whole or any part of a final procedural or
substantive disposition of a matter by the Commission or by the
Presiding Officer in a matter other than rulemaking;
(k) Party includes a person or agency named or admitted as a party
to a proceeding;
(l) Person includes an individual, partnership, corporation,
association, exchange or other entity or organization;
(m) Pleading means the complaint, the answer to the complaint, any
supplement or amendment thereto, and any reply that may be permitted to
any answer, supplement or amendment;
(n) Presiding Officer means a member of the Commission, and
Administrative Law Judge, or a hearing officer designated by the
Commission to conduct a hearing on a specific matter, or the Commission
itself, if it is to preside at or accept the introduction of evidence in
a particular proceeding (provisions of the rules in this part which
refer to Administrative Law Judges may be applicable to other Presiding
Officers as well, as set forth in Sec. 10.8);
(o) Respondent means a party to an adjudicatory proceeding against
whom findings may be made or relief or remedial action may be taken.
[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54801, Oct. 26, 1995]
Sec. 10.3 Suspension, amendment, revocation and waiver of rules.
(a) These rules may, from time to time, be suspended, amended or
revoked in whole or in part. Notice of such action will be published in
the Federal Register.
(b) In the interest of expediting decision or to prevent undue
hardship on any party or for other good cause the Commission may order
the adoption of expedited procedures and may waive any rule in subparts
A through H of this part in a particular case and may order proceedings
in accordance with its direction upon a determination that no party will
be prejudiced and that the ends of justice will be served. Reasonable
notice shall be given to all parties of any action taken pursuant to
this provision.
(c) The Presiding Officer, to expedite decision or to prevent undue
hardship on any party, may waive any rule in subparts A through G of
this part when
[[Page 237]]
neither party is prejudiced thereby. Reasonable notice shall be given to
all parties of any action taken pursuant to this provision.
(d) Notwithstanding any provision of this part, the Commission may
in any proceeding commenced pursuant to section 6(c) of the Act require
a respondent to show cause why an order should not be entered against
the respondent and may specify a day and place for the hearing not less
than three days after service upon the respondent of the Commission's
complaint and notice of hearing in such proceeding.
(Secs. 2(a), 6(b) and 8a, 42 Stat. 1001, as amended, 49 Stat. 1498,
1499, as amended 88 Stat.; 49 Stat. 1500, as amended, 88 Stat. 1392; 88
Stat. 1389, 1391; 7 U.S.C. 4a, 9 and 12a)
[41 FR 2511, Jan. 16, 1976, as amended at 44 FR 61327, Oct. 25, 1979; 59
FR 5701, Feb. 8, 1994]
Sec. 10.4 Business address; hours.
The Office of Proceedings is located at Three Lafayette Centre, 1155
21st Street NW., Washington, DC 20581. It is open each day, except
Saturdays, Sundays and legal public holidays from 8:15 a.m. to 4:45
p.m., eastern standard time or eastern daylight savings time, whichever
is currently in effect in Washington, DC. If Commission personnel are
present in the offices after 4:45 p.m., they may, at their discretion,
accept documents for filing and serve the public in other matters within
the scope of this part. Legal holidays include New Year's Day,
Washington's Birthday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day, Christmas Day, and any
other legal holidays recognized by the Federal Government.
[41 FR 2511, Jan. 16, 1976, as amended at 41 FR 28260, July 9, 1976; 60
FR 54801, Oct. 26, 1995]
Sec. 10.5 Computation of time.
In computing any period of time prescribed by these rules or allowed
by the Commission or the Presiding Officer, the day of the act, event,
or default from which the designated period of time begins to run shall
not be included. The last day of the period so computed is to be
included unless it is a Saturday, a Sunday, or a legal holiday; in which
event the period runs until the end of the next day which is not a
Saturday, a Sunday or a legal holiday. Intermediate Saturdays, Sundays,
and legal holidays shall be excluded from the computation only when the
period of time prescribed or allowed is less than seven days.
Sec. 10.6 Changes in time permitted for filing.
Except as otherwise provided by law or by these rules, for good
cause shown the Commission or the Presiding Officer before whom a matter
is then pending, on their own motion or the motion of a party, at any
time may extend or shorten the time limit prescribed by the rules for
filing any document. In any instance in which a time limit is not
prescribed for an action to be taken in a proceeding, the Commission or
the Presiding Officer may set a time limit for that action.
Sec. 10.7 Date of entry of orders.
In computing any period of time involving the date of the entry of
an order the date of entry shall be the date the order is served by the
Proceedings Clerk.
[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54801, Oct. 26, 1995]
Sec. 10.8 Presiding officers.
Unless otherwise determined by the Commission, all proceedings
within the scope of this part shall be assigned to an Administrative Law
Judge for hearing. If the Commission determines that a proceeding within
the scope of this subpart shall be conducted before a Presiding Officer
who is not an Administrative Law Judge, all provisions of this part that
refer to and grant authority to or impose obligations upon an
Administrative Law Judge shall be read as referring to and granting
authority to and imposing obligations upon the designated Presiding
Officer.
(a) Functions and responsibilities of Administrative Law Judge. The
Administrative Law Judge shall be responsible for the fair and orderly
conduct of the proceeding and shall have the authority to:
(1) Administer oaths and affirmations;
(2) Issue subpoenas;
[[Page 238]]
(3) Rule on offers of proof;
(4) Receive relevant evidence;
(5) Examine witnesses;
(6) Regulate the course of the hearing;
(7) Hold prehearing conferences;
(8) Consider and rule upon all motions;
(9) Make decisions in accordance with Sec. 10.84 of these rules;
(10) Certify interlocutory matters to the Commission for its
determination in accordance with Sec. 10.101 of these rules;
(11) Take such action as is just or appropriate, if a party or agent
of a party fails to comply with an order issued by the Administrative
Law Judge;
(12) Take any other action required to give effect to these Rules of
Practice, including but not limited to requesting the parties to file
briefs and statements of position with respect to any issue in the
proceeding.
(b) Disqualification of Administrative Law Judge--(1) At his own
request. An Administrative Law Judge may withdraw from any proceeding
when he considers himself to be disqualified. In such event he
immediately shall notify the Commission and each of the parties of his
withdrawal and of his reason for such action.
(2) Upon the request of a party. Any party or person who has been
granted leave to be heard pursuant to these rules may request an
Administrative Law Judge to disqualify himself on the grounds of
personal bias, conflict or similar bases. Interlocutory review of an
adverse ruling by the Administrative Law Judge may be sought without
certification of the matter by the Administrative Law Judge, in
accordance with the procedures set forth in Sec. 10.101.
Sec. 10.9 Separation of functions.
(a) An Administrative Law Judge will not be responsible to or
subject to the supervision or direction of any officer, employee, or
agent of the Commission engaged in the performance of investigative or
prosecutorial functions for the Commission.
(b) No officer, employee or agent of the Commission who is engaged
in the performance of investigative or prosecuting functions in
connection with any proceeding shall, in that proceeding or any
factually related proceeding, participate or advise in the decision of
the Administrative Law Judge or the Commission except as witness or
counsel in the proceeding, without the express written consent of the
respondents in the proceeding. This provision shall not apply to the
members of the Commission.
[41 FR 2511, Jan. 16, 1976, as amended at 63 FR 55791, Oct. 19, 1998]
Sec. 10.10 Ex parte communications.
(a) Definitions. For purposes of this section:
(1) Commission decisional employee means employees of the Commission
who are or may reasonably be expected to be involved in the
decisionmaking process in any proceeding, including, but not limited to:
(i) Members of the personal staffs of the Commissioners;
(ii) Members of the staffs of the Administrative Law Judges;
(iii) The Deputy General Counsel for Opinions and Review and staff
of the Office of General Counsel.
(iv) Members of the staff of the Office of Proceedings; and
(v) Other Commission employees who may be assigned to hear or to
participate in the decision of a particular matter;
(2) Ex parte communication means an oral or written communication
not on the public record with respect to which reasonable prior notice
to all parties is not given, but does not include requests for status
reports on any matter or proceeding covered by this part;
(3) Interested person includes parties and other persons who might
be adversely affected or aggrieved by the outcome of a proceeding; their
officers, agents, employees, associates, affiliates, attorneys,
accountants or other representatives; and any other person having a
direct or indirect pecuniary or other interest in the outcome of a
proceeding;
(4) Party includes a person or agency named or admitted as a party,
or properly seeking and entitled as of right to be admitted as a party,
to a proceeding, and a person or agency permitted limited participation
or to state views in a proceeding by the Commission.
[[Page 239]]
(b) Prohibitions against ex parte communications. (1) No interested
person outside the Commission shall make or knowingly cause to be made
to any Commissioner, Administrative Law Judge or Commission decisional
employee an ex parte communication relevant to the merits of a
proceeding.
(2) No Commissioner, Administrative Law Judge or Commission
decisional employee shall make or knowingly cause to be made to any
interested person outside the Commission an ex parte communication
relevant to the merits of a proceeding.
(c) Procedures for handling ex parte communications. A Commissioner,
Administrative Law Judge or Commission decisional employee who receives,
or who makes or knowingly causes to be made, an ex parte communication
prohibited by paragraph (b) of this section shall:
(1) Place on the public record of the proceeding:
(i) All such written communications;
(ii) Memoranda stating the substance of all such oral
communications; and
(iii) All written responses, and memoranda stating the substance of
all oral responses, to the materials described in paragraphs (c) (1)(i)
and (1)(ii) of this section; and
(2) Promptly give written notice of such communication and responses
thereto to all parties to the proceedings to which the communication or
responses relate.
(d) Sanctions. (1) Upon receipt of an ex parte communication
knowingly made or knowingly caused to be made by a party in violation of
the prohibition contained in paragraph (b)(1) of this section, the
Commission, Administrative Law Judge or other Commission employee
presiding at the hearing may, to the extent consistent with the
interests of justice and the policy of the Act, require the party to
show cause why his claim or interest in the proceeding should not be
dismissed, denied, disregarded, or otherwise adversely affected on
account of such violation.
(2) Any attorney or accountant who knowingly makes or knowingly
causes to be made, or who knowingly solicits or knowingly causes the
solicitation of, an ex parte communication which violates the
prohibitions contained in paragraph (b) of this section may, on that
basis alone, be deemed to have engaged in unprofessional conduct of the
type proscribed by 17 CFR 14.8(c).
(3) Any Commissioner, Administrative Law Judge or Commission
decisional employee who knowingly makes or knowingly cause to be made,
or who knowingly solicits or knowingly causes the solicitation of, an ex
parte communication which violates the prohibitions contained in
paragraph (b) of this section may, on that basis alone, be deemed to
have engaged in conduct of the type proscribed by 17 CFR 140.735-
3(b)(3).
(e) Applicability of prohibitions and sanctions against ex parte
communications. (1) The prohibitions of this section against ex parte
communications shall apply:
(i) To any person who has actual knowledge that a proceeding has
been or will be commenced by order of the Commission; and
(ii) To all persons after public notice has been given that a
proceeding has been or will be commenced by order of the Commission.
(2) The prohibitions of this section shall remain in effect until a
final order has been entered in the proceeding which is no longer
subject to review or reconsideration by the Commission or to review by
any court.
(3) Nothing in this section shall constitute authority to withhold
information from Congress.
(Sec. 4, Pub. L. 94-409, 90 Stat. 1246, 1247 (5 U.S.C. 551(14), 556(d)
and 557(d)); sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C.
4a(j) (Supp. V, 1975))
[42 FR 13700, Mar. 11, 1977, as amended at 60 FR 54801, Oct. 26, 1995]
Sec. 10.11 Appearance in adjudicatory proceedings.
(a) Appearance--(1) By non-attorneys. An individual may appear pro
se (in his own behalf), a member of a partnership may represent the
partnership, a bona fide officer of a corporation, trust or association
may represent the corporation, trust or association, an officer or
employee of a State Commission or of a department or political
subdivision of a State may represent the State
[[Page 240]]
Commission or the department or political subdivision of the State in
any proceeding.
(2) By attorneys. An attorney-at-law who is admitted to practice
before the highest Court in any State or territory, or of the District
of Columbia, who has not been suspended or disbarred from appearance and
practice before the Commission in accordance with the provisions of part
14 of this title, may represent parties in proceedings before the
Commission.
(b) Debarment of counsel or representative by administrative law
judge during the course of a proceeding. (1) Whenever, while a
proceeding is pending before him, the Administrative Law Judge finds
that a person acting as counsel or representative for any party to the
proceeding is guilty of contemptuous conduct, the Administrative Law
Judge may order that such person be precluded from further acting as
counsel or representative in such proceeding. An immediate appeal to the
Commission may be sought from any such order, pursuant to the terms of
Sec. 10.101, but the proceeding shall not be delayed or suspended
pending disposition of the appeal: Provided, That the Administrative Law
Judge may suspend the proceedings for a reasonable time for the purpose
of enabling the party to obtain other counsel or representative.
(2) Whenever the Administrative Law Judge has issued an order
precluding a person from further acting as counsel for representative in
the proceeding, the Administrative Law Judge within a reasonable time
thereafter, shall submit to the Commission a report of the facts and
circumstances surrounding the issuance of the order and shall recommend
what action the Commission should take respecting the appearance of such
person as counsel or representative in other proceedings before the
Commission.
Sec. 10.12 Service and filing of documents; form and execution.
(a) Service by a party or other participant in a proceeding--(1)
Number of copies; when required. Two copies of all pleadings subsequent
to the complaint, all motions, petitions or applications made in the
course of a proceeding (unless made orally during a hearing), all
proposed findings and conclusions, all petitions for review of any
initial decision, and all briefs shall be served by the party or other
participant upon all parties to the proceeding.
(2) How service is made. Service shall be made by:
(i) Personal service;
(ii) First-class or a more expeditious form of United States mail or
a similar commercial package delivery service;
(iii) Transmitting the documents via facsimile machine (``fax''); or
(iv) Via electronic mail (``e-mail'').
(v) Service shall be complete at the time of personal service; upon
deposit in the mail or with a similar commercial package delivery
service of a properly addressed document for which all postage or
delivery service fees have been paid; or upon transmission by fax or e-
mail. Where a party effects service by mail or similar package delivery
service (but not by fax or e-mail), the time within which the party
being served may respond shall be extended by five (5) days. Service by
fax or e-mail shall be permitted at the discretion of the Presiding
Officer, with the parties' consent. Signed documents that are served by
e-mail must be in PDF or other non-alterable form.
(3) Proof of Service. Proof of service of a document shall be made
by filing with the Proceedings Clerk, simultaneously with the filing of
the required number of copies of the document, an affidavit of service
executed by any person 18 years of age or older or a certificate of
service executed by an attorney-at-law qualified to practice before the
Commission. The proof of service shall identify the persons served,
state that service has been made, set forth the date of service, and
recite the manner of service.
(b) Service of decisions and orders. A copy of all rulings, opinions
and orders of the Administrative Law Judge and the Commission shall be
served by the Proceedings Clerk on each of the parties. The Commission,
in its discretion and with due consideration for the convenience of the
parties, may serve the aforementioned documents to the parties by
electronic means.
(c) Designation of person to receive service. The first document
filed in a proceeding by or on behalf of any party
[[Page 241]]
or participant (including the complaint and notice of hearing, the
answer, and an application for intervention) shall state on the first
page thereof the name and post office address of the person who is
authorized to receive service for him of all documents filed in the
proceeding. Thereafter service of documents shall be made upon the
person authorized unless service on the party himself is ordered by the
Administrative Law Judge or the Commission, or unless no person
authorized to receive service can be found, or unless the person
authorized is changed by the party upon due notice to all other parties.
(d) Filing of documents with the Proceedings Clerk. (1) All
documents which are required to be served upon a party shall be filed
concurrently with the Proceedings Clerk. A document shall be filed by
delivering it in person or by certified or registered mail with return
receipt requested to Proceedings Clerk, Office of Proceedings, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581; or faxing
the document to (202) 418-5532 or e-mailing it to (PROC--
[email protected]) in accordance with the conditions set forth in
paragraph (a)(2) of this section.
(2) To be timely filed, a document must be received by the
Proceedings Clerk within the time prescribed for filing.
(e) Formalities of filing--(1) Number of copies. Unless otherwise
specifically provided, an original and five conformed copies of all
documents shall be filed with the Proceedings Clerk.
(2) Title page. All documents filed with the Proceedings Clerk must
include at the head thereof, or on a title page, the name of the
Commission, the docket number and title of the proceeding, the subject
of the particular document and the name of the person in whose behalf
the document is being filed. In the complaint the title of the action
shall include the names of all the respondents, but in documents
subsequently filed it is sufficient to state the name of the first
respondent named in the complaint with an appropriate indication of
other parties.
(3) Paper, spacing, type. All documents filed under this part shall
be typewritten, mimeographed, printed, or otherwise reproduced by a
process that produces permanent and plainly legible copies, shall be on
one grade of good unglazed white paper no less than 8 or more than 8\1/
2\ inches wide and no less than 10\1/2\ or more than 14 inches long,
with a left-hand margin 1\1/2\ inches wide, and shall be bound on the
top only. They shall be double spaced, except for long quotations (3 or
more lines) and footnotes, which should be single-spaced. If printed,
the documents shall be in either 10- or 12-point type with double-leaded
text and single-leaded quotations and footnotes.
(4) Signatures. The original copy of all papers must be signed in
ink by the person filing the same or by his duly authorized agent or
attorney.
(5) Length and form of briefs. All briefs filed with the Proceedings
Clerk containing more than ten pages shall include an index and a table
of cases and other authorities cited. The date of each brief must appear
on its front cover or title page and on its signature page. No brief
shall exceed 60 pages in length, except with the permission of the
Administrative Law Judge or, by the Commission, to whomever the brief is
directed.
(6) Documents improperly tendered for filing. No document will be
accepted unless it complies with the requirements of this paragraph
concerning form, filing, subscription, service and other similar
matters. A document tendered but not accepted for filing shall not be
entered on the Proceedings Clerk's docket, but a motion may be made to
the Administrative Law Judge for leave to file an otherwise unauthorized
document.
(f) Subscriptions--(1) By whom. Pleadings, petitions, motions and
answers thereto, briefs and other documents filed with the Commission
shall be subscribed:
(i) By the person or persons on whose behalf they are tendered for
filing;
(ii) By a partner, officer or director of a partnership,
corporation, association, or other legal entity; or
(iii) By an attorney-at-law having authority with respect thereto.
The Proceedings Clerk may require appropriate evidence of the authority
of a person subscribing a document on behalf of another person.
[[Page 242]]
(2) Effect. The signature on a document of any person acting either
for himself or as attorney or agent for another constitutes a
certification by him that:
(i) He has read the document subscribed and knows the contents
thereof;
(ii) If executed in any representative capacity, it was done with
full power and authority to do so;
(iii) To the best of his knowledge, information and belief, every
statement contained in the document is true and not misleading; and
(iv) The document is not being interposed for delay.
(3) Sham documents. If a document is not signed or is signed with an
intent to defeat the purpose of this rule, it may be stricken as sham
and false. For a willful violation of this rule an attorney may be
subjected to appropriate disciplinary action pursuant to Sec. 10.11(b).
Similar action may be taken if scandalous matter is inserted.
(g) Official docket. The Proceedings Clerk will maintain the
official docket for each proceeding. The official docket is available
for public inspection in the Commission's Office of Proceedings.
[41 FR 2511, Jan. 16, 1976, as amended at 41 FR 28260, July 9, 1976; 60
FR 54802, Oct. 26, 1995; 63 FR 55791, Oct. 19, 1998; 73 FR 63360, Oct.
24, 2008]
Subpart B_Institution of Adjudica- tory Proceedings; Pleadings; Motions
Sec. 10.21 Commencement of the proceeding.
An adjudicatory proceeding is commenced when a complaint and notice
of hearing is filed with the Office of Proceedings.
[63 FR 55791, Oct. 19, 1998; 63 FR 68829, Dec. 14, 1998]
Sec. 10.22 Complaint and notice of hearing.
(a) Content. The complaint and notice of hearing shall include:
(1) The legal authority and jurisdiction under which the hearing is
held;
(2) The matters of fact and law to be considered and determined.
The complaint shall set forth the matters of fact alleged therein in
such manner as will permit a specific response to each allegation. The
notice shall notify the respondent of his right to a hearing and shall
specify the time required by Sec. 10.23 of these rules for the filing
of an answer and the consequence of failure to file an answer.
(b) Service. The Proceedings Clerk shall give appropriate notice to
each respondent by serving them with a copy of the complaint and notice
of hearing. Service may be made in person, by confirmed telegraphic
notice, or by registered mail or certified mail, addressed to the last
known business or residence address of the person to be served or the
address of his duly authorized agent for service. If a respondent is not
found at his last known business or residence address and no forwarding
address is available, additional service may be made, at the discretion
of the Commission, as follows:
(1) By publishing a notice of the filing of the proceeding and a
summary of the complaint, approved by the Commission or the
Administrative Law Judge, once a week for three consecutive weeks in one
or more newspapers having a general circulation where the respondent's
last known business or residence address was located and, if
ascertainable, where the respondent is believed to reside or be doing
business currently; and
(2) By continuously displaying the complaint on the Commission's
Internet web site during the period referred to in paragraph (b)(1) of
this section.
[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54802, Oct. 26, 1995; 63
FR 55791, Oct. 19, 1998]
Sec. 10.23 Answer.
(a) When required. Following service of a complaint and notice of
hearing as set forth in Sec. 10.22 of these rules, unless otherwise
specified in the notice of hearing, each respondent shall file an answer
with the Proceedings Clerk within 20 days.
(b) Content of answer. The answer shall include:
(1) A statement that the respondent admits, denies, or does not have
and is unable to obtain sufficient information to admit or deny each
allegation; a
[[Page 243]]
statement of a lack of information shall have the effect of a denial;
any allegation not expressly denied shall be deemed to be admitted;
(2) A statement of the facts supporting each affirmative defense.
(c) Effect of failure to file answer. A party who fails to file an
answer within 20 days shall be in default and, pursuant to procedures
set forth in Sec. 10.93 of these rules, the proceeding may be
determined against him by the Administrative Law Judge upon his
consideration of the complaint, the allegations of which shall then be
deemed to be true.
(d) Admission of all allegations of fact. If a respondent's answer
admits the truth of all the material allegations of fact contained in
the complaint, it shall constitute a waiver of hearing on those
allegations. However, the Administrative Law Judge may conduct a
hearing, if so requested, by any of the parties. Following waiver, the
parties may submit proposed findings and conclusions and briefs, as
provided in Sec. 10.82 and may appeal any initial decision to the
Commission as provided in Sec. 10.102 of these rules.
(e) Motion for more definite statement. Where a reasonable showing
is made by a respondent that he cannot frame a responsive answer based
on the allegations in the complaint, he may move for a more definite
statement of the charges against him before filing an answer. A motion
for a more definite statement shall be filed within ten days after
service of the complaint and shall specify the defects complained of and
the particular allegation as to which a more definite statement is
sought.
[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54802, Oct. 26, 1995]